What is the issue?
- To be or not to be a part of the Regional Comprehensive Economic Partnership (RCEP) is a question for India.
- This seems to be the best way of describing India’s engagement in the negotiations for adopting the RCEP.
What is RCEP?
- The RCEP is a mega-regional free trade agreement (FTA).
- It is being negotiated since 2012 between the 10 ASEAN (Association of South-East Asian Nations) countries.
- It includes 10 ASEAN members and 6 FTA partners of ASEAN (India, China, Japan, South Korea, Australia and New Zealand).
- ASEAN member countries - Thailand, Indonesia, Malaysia, Singapore, Philippines, Vietnam, Brunei, Myanmar (Burma), Cambodia, Laos.
What is the Indian government’s stance?
- More recently, the government has shown signs of a rethink whether it needs to join the RCEP; it appears that the government would continue to engage in the RCEP negotiations.
- This is a critical phase for the RCEP, as almost all countries are pushing to conclude the negotiations before the end of 2019.
- The government’s stance on the RCEP comes even as a large segment of India’s manufacturing and diary sectors has consistently spoken against joining this agreement, arguing that import competition would adversely affect them.
- It is difficult to objectively assess the claims of Indian enterprises because the RCEP negotiations are held in complete secrecy.
Why is there an import surge?
- The likely outcomes of the RCEP can be assessed in two indirect ways which would rely on information provided by the government:
- The first assessment considers India’s initial negotiating position on eliminating import tariffs on goods prepared in 2015.
- The second one takes a cue from a NITI Aayog note, which pointed to the disquieting trend of growing trade deficit with the ASEAN after India began implementing the India-ASEAN FTA.
- In fact, India signed Comprehensive Economic Partnership Agreements (CEPAs) with Korea and Japan, and with both these countries, India’s trade balance has steadily deteriorated.
- India’s initial tariff offers in the RCEP negotiations showed that it was unwilling to offer the same levels of market access to all RPCs.
- India was willing to eliminate tariffs on nearly 80% of its products imported from the ASEAN and Australia (over 10 years), 42.5% of Chinese products.
- This conservative stance with regard to China reflected India’s growing trade deficit with it, which was caused by a steep increase in India’s imports from about $4 billion in 2003-04 to $60.4 billion in 2014-15.
- Since then, imports from China increased to a record level of $76 billion in 2017-18, before declining to $70 billion in 2018-19.
- Thus, while making initial tariff offers in RCEP negotiations, the Government of India seemed to have expressed its concern about,
- The steep increase in imports from China
- Protecting domestic firms from further import surges resulting from substantial tariff elimination on Chinese imports.
- However, India’s initial offers were not accepted by the RPCs.
- It is now well-known that most RPCs are seeking higher levels of tariff elimination than what India had proposed.
- This implies that India could eventually eliminate a much larger share of import tariffs than it was originally intending to.
What does the trade deficit point out?
- The government has recently expressed its concern about the rising trade deficit with ASEAN (Four-fold increase) and is now seeking to review its FTA with the 10-member ASEAN body.
- In the two other agreements, with Korea and Japan, India finds itself in an equally acutely adverse situation.
- The trade deficit with Japan and Korea has doubled after the two CEPAs were implemented.
- India’s trade deficits with its RCEP partners have grown by such magnitudes and so the consequences of eliminating tariffs further can well be imagined.
- Since 2018, the government has recognised that low levels of tariffs are hurting India’s manufacturing in two ways:
- Discourages domestic manufacturing and hurts the ‘Make in India’ initiative.
- Major industries, including textiles and clothing, have struggled to face import competition.
- Consequently, tariffs have been increased on a range of manufacturing sectors, resulting in an increase in average tariffs on industrial products.
- Trade liberalisation via the RCEP militates against the government’s policies of promoting and protecting manufacturing industries.
Does this mean that India should turn its back from the global markets completely?
- This scenario can be avoided, provided the government takes proactive steps to make domestic producers globally competitive.
- The government should improve the competitiveness of the manufacturing sector and the share of the sector in the GDP should be increased from 17% to about 25%
- The government should address the Indian agriculture’s burden of mounting inefficiencies.
- India’s policymakers never paused to think that growing inefficiencies wouldn’t allow agriculture to survive in an open economy, which the RCEP promises to usher in.
What could be done further?
- The government must recognise that unless Indian agriculture and manufacturing sectors emerge strong and efficient, participation in the RCEP process could be regressive for the economy.
- The ASEAN-India FTA, and the CEPAs with Korea and Japan didn’t work in India’s favour almost entirely because lack of competitiveness of Indian products has held India’s exports back.
- Thus, joining the RCEP could result in far worse outcomes if the government doesn’t take prompt measures to reverse the existing inefficiencies of Indian producers.
- Finally, the proactive governments that are driving the RCEP process have consistently adopted effective policy instruments to improve the competitiveness of their domestic enterprises.
- India’s policymakers need to take a cue from these forward-looking policies and adopt them for preparing the domestic producers to take up the RCEP challenge.
