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RCEP & India- Dodging Competition

In a surprise move, Indian ‘Act East’ policy did a volte-face when India opted out of the Regional Comprehensive Economic Partnership (RCEP) raising questions about the competitiveness of Indian industry.

Background

In a world being bifurcated into trade zones to protect regional commercial interests, the ASEAN was the solitary such bloc in Asia Pacific.  But its 10 members are relatively small economies that are struggling to find markets for their increasing surplus manufactured goods.  RCEP was launched in 2012 to bridge the gap between ASEAN and the five most large economies of Asia Pacific- China, Japan, Australia, South Korea, New Zealand and India.  China, being the largest manufacturer would stand to gain the most by lowering tariffs and other trade barriers. RCEP is being projected as the world’s largest trading bloc with a market of 3.4. billion people, almost 50% of world population and GDP totalling $49 .5 trillion.

Usually, trade deals are signed by junior ministers or functionaries and seldom by Indian Prime Minister who are reluctant to put their political imprimatur on trade treaties, let alone be in personal attendance for the ratification of one. That Prime Minister Narendra Modi chose to travel to Bangkok in the hope of achieving a breakthrough and eventually put his signature on the RCEP is illustrative of the importance he assigned it. India’s last-minute decision to walk away from the talking table—reportedly taken by the PM himself- was a surprise.

Analysis

The RCEP had many detractors in the Indian Industry who warned of being swamped by a deluge of cheap foreign imports in manufacturing and agri products. The weak opposition was also ready to use it to embarrass the government just before more of the impending assembly elections. It is not surprising that the walkout has found a great deal of domestic support, which cuts across the political divide between the left and the right. Even Modi’s sharpest critics and political adversaries, have welcomed it. So has an overwhelming section of Indian industry, farmers organisations, and economists aligned to RSS.    

Despite opening up its markets in a limited manner, India’s rejection of RCEP is in keeping with its image cultivated over the past fifty or so years, as a sovereignty-hawk and fierce protector of its self-interests. The only dissenting voice was a  small band of pro-free-market economists and analysts. 

The Indian government felt that RCEP was not giving a good deal on tariffs, and little upside for our strengths in the services sector. A reluctance to reduce its own tariffs, while seeking greater services market access from other countries has pretty much been India’s position on all trade deals, not just RCEP.

The reluctance to take the final plunge in joining an FTA,  is a symptom of Indian Industry’s deep-seated fear of competition and is a reality check for a country that aspires to become an economic powerhouse with a 5 trillion economy by 2024. Despite 30 years since economic liberalization, Indian economy by and large, and its agriculture and industry specifically are far short of the levels of efficiency required to be competitive at international levels. It is primarily India’s large domestic consumption that keeps it attractive for global capital.

The fears of the Indian farmers and industrialists are very real. In the absence of tariff protection, inevitably, the country is swamped by cheaper imports that local manufacturers just cannot match whether on price or quality. We already have a serious debit trade balance in all our bilateral trade- almost $ 58 billion with China In 2018. As a member of the ASEAN free trade agreement, India runs a deficit with almost every member country. Therefore, India an already reluctant trader and instinctively protectionist may have developed a further distaste for FTAs given the ever-widening deficit with its eastern trading partners. 

The only silver lining in the whole episode is the possibility of this move being viewed as being in congruence with the US perspective on RCEP which the US has viewed  as a bloc dominated by China. Trump administration has been urging Asian nations to stay away from Chinese infrastructure loans and 5G technology. Some in India hope that the US approval of India staying out of Chinese sphere of influence will result in faster ironing out of the wrinkles in the US India trade talks including the GSP issue  However, there is a catch- if India cites  a large trade deficit as a reason to walk away from RCEP, it needs to bear in mind that it enjoys a trade surplus when it comes to the US and European Union. There are already rumblings in US and EU against India’s protectionist measures. The same logic can be applied by our Western trade partners if we harp too much on this issue. 

The failure to address the question of competitiveness could consign India as a timid, inward-looking economy for a long time to come.

Assessment

    • The inability of the domestic industry to stand up to world-class competition despite being protected for over five decades,  calls for serious introspection on India’s part on the success and sustainability of much-vaunted schemes such as ‘Make In India’, and at a larger geostrategic level its “Act-East” policy
    • Given all this, where is India headed?  If India wants to push its Make in India agenda but without integrating with the global supply chain, there will be little incentive for foreign brands to set up manufacturing in India. Also, by staying out of a regional trade pact, India runs the risk of missing out on trade with those inside RCEP which represents about a third of the global GDP. 
    • RCEP is not a completely lost opportunity as China has said that India is welcome back whenever it feels comfortable. There are other trade deals to be inked for India. But the key issue here is one of competitiveness. Can the Indian government swallow the bitter pill and gird up for more economic reforms? While the recent cuts bring India’s corporate tax regime closer to that of South East Asia, business is still harder to conduct in India. 
    • Even with two consecutive majorities for the BJP, it finds it politically difficult to carry out labour reforms and bring modernity to India’s moribund agriculture. India proudly claims to be one of the largest producers of several farm commodities such as milk, rice, cotton and sugar, its agricultural yields are substantially lower than global averages. Therefore, without a transformation of the farm sector, Indian farmers will forever be vulnerable to cheaper cheese and milk powder from faraway New Zealand flooding the market.

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