Yr-end deadline for India-EU deal a 'little unwise': Bruegel's Zettlemeyer

Zettlemeyer says India should embrace trade, private investment, and reforms for faster growth, while navigating US protectionism and climate finance challenges

India may be restricting the speed of its development by closing itself too much and should allow more trade for faster growth, Jeronim Zettlemeyer, director of Brussels-based think tank Bruegel, says. In conversation with Ruchika Chitravanshi and Asit Ranjan Mishra, Zettlemeyer says the European Union (EU) putting secondary sanctions on India doesn’t strike him as being politically or economically plausible. Edited excerpts.

 

The international order is crumbling under the Trump administration. What is the future of international rulemaking? 

 

It doesn’t look good. The middle path, which is most likely one, is the one where we keep some form of multilateralism or plurilateralism, except for the United States (US) and a few others. The World Trade Organization (WTO) may continue to exist and work. And the standard of success of this sort of diminished WTO would be that it basically prevents trade wars among the group of countries excluding the US. So you have some trade wars with the US, but the rest of the world is essentially peaceful and maybe some of the arbitration and dispute settlement mechanisms would still work.

 

 

Not much has happened on the proposed reforms at multilateral development banks. What is your view?

 

This has to be addressed, and so does the (manner of appointing the) managing director of the International Monetary Fund. It is embarrassing that India has a smaller share than small European countries. In this day and age, the political willingness to do this in Europe has gone up because we need India more. The big roadblock is the China-US rivalry. You cannot do this without giving China a bigger share. 

 

Many countries expected the EU would resist before yielding to the US on tariff negotiations. But it didn’t happen. Any comments?

 

It’s because we depend on the US military. The EU is effectively in a hybrid war with Russia because of Ukraine. If we were militarily stronger, we would have taken a tougher position on these negotiations.

 

So US President Donald Trump is putting pressure on Europe to put secondary sanctions on countries like India and China. What do you think will happen? 

 

I’m not close enough to it. Putting secondary sanctions on India doesn't strike me as being politically or economically plausible. 

 

What do you think of the challenges to climate financing? 

 

We need bigger solutions. Developing countries cannot be expected to decarbonise at a great cost to their own development. The social cost of carbon is largely felt by large countries. Now, India is also a large country, but on a per capita basis, it’s still a small social cost. And so emissions reduction benefits primarily the rich world disproportionately. 

 

India has concerns over the Carbon Border Adjustment Mechanism (CBAM), hurting its domestic industry. 

 

The CBAM is a good idea. It needs to be complemented with much bigger carbon finance, which involves physical transfers.  MDBs cannot do it alone. You need to essentially create an asset class and have more blended finance. There needs to be a coalition of willing industrial countries, advanced countries, which can put together a significant pot of money and use this to subsidise private investment in countries like India. It is urgent and we need to do this without the US.

 

Do you think India should align itself with the wave of protectionism across the world? 

 

Even with a big internal market, US tariffs still hurt. Even India cannot just isolate itself. Isolation is inefficient. You do want to allow more trade for faster growth. India should allow a higher current account deficit, while it is investing a lot to industrialise, build infrastructure. And if you’re going to do that, then you will need to pay it off somehow in the future with exports. By closing itself too much, India is restricting the speed of its development. 

 

When the world is going in one direction with the US becoming protectionist, how can India look the other way?

 

You have to deal with the US. But the US so far is a bit on its own with this approach. We haven’t seen an explosion of little Trumps around the world. 

 

China has been doing this. That makes it two largest economies that are being protectionist. 

 

Yes, but you are used to dealing with China and you have a lot of protection against China already in place. I would not advise India to shut itself off even more. The answer is to collaborate with us and with other developing countries. 

 

What do you think of prospects of the India-EU free-trade agreement?

 

Ursula Gertrud von der Leyen (European Commission president) has put so much political capital in this that, I think, she would have to resign if she doesn't get it done. They all mentioned the year-end deadline, which is probably unwise. The last month is always the hardest. There is a lot of political commitment in Europe. 

 

Any particular reforms that you would like India to undertake urgently? 

 

In a broad sense it has to be the business environment. Firm entry and exit will have to become much easier. The deregulation commission is a good start. Manufacturing is not picking up fast enough. It could have to do with skills. Skilling is a problem. India basically generated developing economics as a field. And still, we are struggling with this basic question of how the skills gap can be reduced. 

   

On debt sustainability, India spends 20 per cent of its receipts on interest payments. What is your view on that?

 

It is clear that this cannot be state-led demand growth. You have maxed out on that. It has to be private sector-led. Apart from supply-side factors like skills, regulation, and the internal markets, the cost of financing private investment must be one reason why it’s hard to grow. And if that’s true, you would rather have a little less capital sucked into the government than is the case. 

   

Many think that because private investment is not happening, the government is pushing capex.  

 

You can generate a private sector-led investment pool if the cost of capital comes down, and the government sucks up a smaller portion of private savings in India. But then there’s still the issue of who’s going to find the infrastructure. Obviously the government has to play a role and for that maybe you have to tap into the global savings pool. But it will raise the current-account deficit. And so the key idea is how one can engineer a bigger current-account deficit while making sure that it goes to the right users and doesn’t create financial vulnerabilities. You have the policy tools to do that. 

   

Do you think India should be completely open to Chinese investment or have some guardrails?

 

You should be open to Chinese investment with conditions. And you probably can learn from China on how to set those conditions. But in Europe, there is now almost a consensus that in some areas we are at this point technologically behind China. We have to be open to Chinese foreign direct investment, but make sure that this is not just assembly, but also there is technology transfer.