DOES INDIA NEED TO RETHINK ITS DECISION?
INTRODUCTION – THE RCEP DEAL
On 4th November 2019, the Indian Government decided not to be a part of the Regional Comprehensive Economic Partnership deal (RCEP), as it failed to assuage India’s “outstanding issues and concerns.” The mega free trade-pact would have included 16 nations and would have covered 45% of the world’s population and nearly 40% of global G.D.P. It promised the creation of the world’s largest free trade area and was poised to be the biggest trade-agreement, post the creation of the World Trade Organization (W.T.O.). Yet, India chose to walk away from seven-year-old negotiations and the prospect of a unified free trade agreement (F.T.A.) with as many as 15 countries. Were we, as a country, right in opting out of it? Or do we need to re-think our decision?
The RCEP is a maze of F.T.A.s, protection clauses, and tariff eliminations. A proper evaluation of its merits and demerits is needed, both from an economic, and a political perspective, if any re-thinking of the decision is on the horizon.
The good things first, true the RCEP would have created the world’s largest free-trade zone, with India being an integral member of this partnership, having tariff-free access to nearly half the world’s population. India’s struggling export sector was expected to receive a much-needed boost in terms of volume of trade, both in goods and services.
It would complement the existing F.T.A.s with countries such as Japan and Korea, along with creating new F.T.A.s with other non-ASEAN partners, such as China and Australia. This would have off-set any potential negative impacts that the Transpacific Partnership (T.P.P.) or the Tran- Atlantic Trade and Investment Partnership (TTIP) would have had on the Indian economy.
WHAT DOES IT MEAN FOR INDIA?
RCEP could have made India a part of the regional “production” networks, which rely on substantial manufacturing capabilities to make Asia the world’s factory. With our manufacturing sector contracting by -1% in the recent quarter, one may feel that we have missed a golden opportunity. Internal reforms such as “Make in India” can have only limited impact, until we provide clarity on “Make in India, but for whom?”. Being part of such global networks brings not only access to markets, but also technology, investment, and skilled human resource. The RCEP would be a stepping stone to India’s “Act East Policy,” as a natural extension to the economic, cultural and strategic ties the Government has been forging.
Such integrated markets provide another massive opportunity for India’s famed services sector. With manufacturing activities becoming increasingly complex and layered in these Asian countries, “servicification” of manufacturing has occurred. This could very well be the opportunity for the Indian services sector to look for its next round of growth.
Apart from mere economic benefits, this move has significant political complications, as well. One might have felt that by opting out of the RCEP, India has managed to exercise its international political clout, even in the presence of unified ASEAN pressure. Domestically, with the economic slowdown already being termed as “India’s Great Slowdown,” and comparisons being made to pre-1991 situations, opting out of RCEP seems like a decision motivated by domestic political pressure and blind nationalistic pride, rather than based on sound economic rationale. But is that all? Are we penny-wise and pound-foolish?
A closer look at the factors that were behind the Modi Government’s refusal to join RCEP, uncover the superficiality and trickery of the international political economy. A clear unfavourable trade-off between market access and export-growth is visible.
To begin with, despite import-tariffs reducing, and Indian goods becoming cheaper in foreign markets, previous research has shown that the demand for Indian products is more sensitive to the income-levels of consumer-countries, rather than the prices of the products themselves. Blame this on our inverted duty structure, which makes our exports uncompetitive, but the fact remains - India would have gained very little in terms of export-growth by joining the RCEP. Trade barriers would have been lowered only with three countries - China, Australia, and New- Zealand. The opening up of our country for China, under RCEP, does not necessarily translate into China opening up their economy for Indian Companies. China has long been infamous for covert protectionist policies, all the while driving a hard bargain over F.T.A.s with other countries.
Agreeing to the current terms of RCEP would have allowed the possibility of productdumping by Chinese subsidized companies and state-owned enterprises (S.O.E.s). Cases of dumping have increased recently with most being from our Asian neighbours, with, of course, China taking the lead.
The Chinese economic system has long discouraged Indian imports, with our globally renowned services, pharmaceuticals, and even Bollywood films, severely disadvantaged in the Chinese economy. Concerns over quality, based on which Indian exports are discouraged, are frequently raised by the Chinese authorities. But the fact remains that our goods (e.g., pharmaceuticals) find high acceptance worldwide, by meeting stringent quality standards (e.g., USFDA approval).
Our export promotion structure being lack-lustrous, and our inability to compete with Chinese state-subsidization and manufacturing clout raises serious concerns over any agreement that preaches F.T.A.s. India currently has 15 bilateral, regional trade agreements, with NITI Aayog reports showing an increase in bilateral trade in everyone, but with imports increasing much more than exports.
India’s trade deficit with China is already at an unsustainable level and is expected to be exacerbated under RCEP. Even with other RCEP countries, we run huge trade deficits. Allowing their manufactured goods into our markets, with no clarity on how our prime exports (services, pharmaceuticals, B.P.O., etc.) would benefit from RCEP, is bound to aggravate our trade deficit even further.
Under such macro-economic situations, opening up our economy to a country which does not open up to us and is known for product-dumping globally, can potentially destroy our already fledgling manufacturing sector and export-units.
Any talk of benefits due to integration into the regional production networks gets neutralized simply because we lack the infrastructure as well as the policies to take advantage of such synergies. Our industries lack efficient technologies, while inflexible labour laws disincentivize firms to grow beyond a limited size and thus complete globally.
By opting out of the agreement, we have sent out a strong message which will resonate in the international political corridors for a long time to come. The Government has effectively resisted the temptation of trading valuable access, for empty global praise. It has continued its image of a strong emerging superpower, by acting independently in the face of international pressure, and in a very un-Trump-like way, put its interests first.
By opting out, we have ensured that our industries will continue to run, although serious policy changes are needed for them to survive.
Ranging but not limited to, second-generation reforms in the factor markets, labour-laws, financial liquidity, land acquisition, core-infrastructure such as logistics, electricity as well as sustainability concerns, need to be introduced if we aim to see Indian exports compete at a global level. Such internal reforms have become all the more necessary, not just because we are facing the worst slowdown in years, or we turned down RCEP, but in an overly protective world, where trade and commerce have become restrictive as well as expensive, “Survival of the Fittest” is the only truth.
The decision to opt-out of the RCEP brings in more benefits for the Indian economy than it harms it. Despite all the hue and cry about non-agreement to RCEP being a protectionist move, one cannot be blind to the harm caused to domestic units, by agreeing to a halfbaked proposition, that gains us little, but costs us a lot. The definitions of globalization are changing as quickly as globalization itself, and a country like India does not harm anyone by protecting its interests, based on tangible, valid, and comprehensive concerns.
CONCLUDING ARGUMENTS & FUTURE SCOPE
In order to balance China’s growing influence, India can respond by increasing the number of trade routes in the South-East region. This has been achieved, in part, by the Act East Policy, 2014. This policy seeks to further India’s economic integration with South-East Asia. As an example, the India-Myanmar-Thailand Trilateral Highway, part of the EastWest Economic Corridor, seeks to boost trade across the three nations. It might even be extended to include Vietnam, Laos and Cambodia.
To increase connectivity and ease trade, India’s strategical geographical location can be used to establish more maritime and air routes, an example of which is BIMSTEC (Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation). Further, India’s relations with Japan are at an all-time high.
The benefits of adopting this strategy will be manifold, both, in relative, as well as absolute terms. Increasing trade will lead to higher FDI, which in turn could lead to higher economic growth. Additionally, it will improve India’s relations with many ASEAN nations, which could open doors for a future trade agreement that has safeguards against competition. On a relative scale, such a situation would also lead to a decrease in China’s trade with the ASEAN nations.
This would uplift India’s position in Asia as an economic power and allow it to displace China as the leader in trade in Asia.
The world could be witnessing a shift of power. Initially, it was the British that ruled the world and exercised unilateral control. This system was then replaced by a bilateral division of power between the USA and USSR. After the Cold War, the dichotomy gave way to an absolute exercise of power by the USA. Now, China is succeeding this role as the market leader in trade. In the near future, it could be India that takes on this role and becomes the trade centre of the global economy.
Therefore, it is not India who needs to re-think its decision of opting out of the RCEP, but the other RCEP members, who need to reflect on how they have failed to address the genuine concerns of the largest democracy and the largest emerging market. India, on the other hand, must focus on its internal macros and become globally competitive as soon as possible, if it wishes to achieve the fabled goal of a $5 trillion economy by 2025.
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