Source: TW
India imported 31% more from China so far in 2022 while exporting 36% less. Chinese economy is so structurally distorted, it can only produce and not consume. As a recent example, they ran factories during lockdowns but closed shopping malls.
What can India do? If India passively accepts China’s structural distortion, we risk heavily distorting our own economy to consume without producing and that would change our jobs mix towards token distribution jobs whose purpose is to create income to consume imported goods. We must resist. Economists like Prof Panagariya believe in what I call “naive free trade theory” that simply is not even aware that there is such a thing called structural distortion because it is not part of their toy models.
Warren Buffet proposed a simple and elegant solution. Buffet’s solution is to balance trade by requiring importers to buy import credits in the market from exporters. Singapore does this for “certificates of entitlement” (CoE) for cars, where you first acquire the CoE from the market (freely trade in CoEs) and then buy a car. Government can simply auction more import credits at current market prices too, if needed. This will make sure our we external trade balances or at least deficits are manageable.
If we don’t so this, we are letting China determine our deficit & thereby our economic structure.
Not License rAj
Source: TW
One argument advanced against freely tradable import credits whose total quantity is tied to total exports is that it takes us back to License Quota Raj or that it is “socialist”.
In fact, its purpose is to mimic the gold standard so that our foreign debt is kept in check. The gold standard is useful precisely because gold is scarce. Scarcity is the essence of being money. Bitcoin limits the total quantity of Bitcoin that will ever be mined. The essence of the market mechanism is to allocate scarce resources. Import credits work the same way. The only restriction on import credits is that their total quantity is tied to exports. Subject to this scarcity constraint, they trade freely and the market determines the price. Government does not set the price not does it determine who gets to buy the credits. All that an importer has to do is to pay the current market price for a given amount of import credits they need. It is like purchasing any other financial instrument like stocks or bonds and those are also scarce in the sense their total quantities are limited too.
The essence of License Quota Raj is that the government made case by case decisions about every investment or import decision. That led to massive delays, inefficiency, partiality & corruption. Freely traded import credits involve none of that and are in no sense socialist.🙏