Q Despite initiatives like Make in India and production-linked incentives, India’s trade deficit with China has been widening. What should we do about it?
A The bilateral deficit with the Chinese is growing, but do note that we are providing various schemes to win away investments and insert ourselves into the supply chain. We cannot wish away the Chinese in the short run. They are part of the global economy and they are an important source of all kinds of inputs into things that we want to do. So, for the time being, we have to be willing to trade with them. Even in the long run, we have to accept them as part of the supply chain. However, at the same time, we are making sure that we are creating capacities for various things in India. For example, India has now emerged as a serious player in manufacturing Apple phones. We are the second largest producer after China and we will catch up with them in the next two years. Samsung has its largest smartphone manufacturing facility in Noida. We are now working with Taiwanese companies to create fab plants in India. We are already a major supplier of pharmaceuticals.
We are finally entering a new field, which is defence and space. We had a sector, but we were not into export of these. But we are now building capacities to be able to export these things. And, of course, our services export is doing well. People don’t realise we export now as many services as we do merchandise goods. And, our services exports are growing robustly even now.
Q Many states have decided to switch to the old pension scheme. What are the problems you see in this move?
A The issue with the old pension scheme was that it was unfunded. I have no problem with people giving pensions, but the question is whether it is funded. And, the issue here is not the Centre-state issue at all. Because, the real issue is intergenerational, not intergovernmental. The problem is if you do not have a funded pension scheme then effectively you are setting up a tax for future generations. Because, after all, somebody will have to pay for those pensions. So, the issue that we have to tackle is intergenerational equity. If you do not have intergenerational equity, what will happen is that current generations will create liabilities and debt, which future generations have to pay. So, we need to be careful that we do not leave behind unfunded liabilities for future generations.
Q Some states say the Union government is undermining fiscal federalism.
A I do want to want to get into the political debate. But there is an important principle here that everybody should be aware of: the states do not borrow on their own steam, they borrow essentially with the implicit guarantee of the Central government. Since the states benefit from the sovereign guarantee of the Central government, the Central government quite correctly puts limits on this. Otherwise, every state government will borrow as they wish. So, some tight limits have to be retained. Otherwise, you will end up losing control of the borrowings in the country. There are different regimens. For example, the US allows default by local governments. So, for example, the city of Detroit defaulted. That is not a possibility here in India because there is an implicit guarantee from the Central government. If you look at the spreads, irrespective of the quality of the fiscal management of the state, the spreads of the states are almost the same. If they are almost the same, then you see there is no incentive for any state to maintain fiscal control. So, it has to be done top-down.