India in no shape to benefit from RCEP

17/09/2019    16

Joining the RCEP could be counter-productive given the existing inefficiencies of Indian producers. These need to be fixed first

To be or not to be, that is the question … This seems to be the best way of describing India’s engagement in the negotiations for adopting the Regional Comprehensive Economic Partnership (RCEP), the mega regional trade agreement of 16 East Asian countries. When the Bangkok round of the RCEP participating countries (RPCs) was held about six weeks ago, there were indications that the government had serious doubts about joining the RCEP. More recently, it has shown signs of a re-think; 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 changed 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, especially because the negotiations are held in complete secrecy and the terms of engagement in the RCEP are not known. This is the most confounding aspect of all FTAs, including the RCEP. Each participating government claims, without exception, that these agreements enhance the economic welfare of its citizens; and yet, the citizens are deprived of an opportunity to independently assess benefits of FTAs.

Import surge

However, the likely outcomes of the RCEP can be assessed in two indirect ways. These assessments would rely on information provided by the government. The first of these considers India’s initial negotiating position on eliminating import tariffs on goods prepared by the present government in 2015. A second assessment 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, too, India’s trade balance has steadily deteriorated (See Chart).

India’s initial tariff offers in the RCEP negotiations showed that the government was unwilling to offer the same levels of market access to all RPCs. Thus, while India was willing to eliminate tariffs on nearly 80 per cent of its products imported from the ASEAN and Australia (over 10 years), for China, the corresponding figure was only 42.5 per cent.

This conservative stance vis-a-vis China reflected India’s growing trade deficit with its northern neighbour, which increased from about $1.5 billion in 2004-05 to nearly $49 billion a decade later. This trade deficit 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 and, perhaps more importantly, about 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, and although the revised offers were not made public, it is now well-known that most RPCs are seeking substantial higher levels of tariff elimination than what India had initially proposed. This implies that India could eventually eliminate a much larger share of import tariffs than it was originally intending to, especially on imports from China.

Trade deficit

The government has recently expressed its concern about the rising trade deficit with ASEAN and is now seeking to review its FTA with the 10-member group. But, the trade deficit with ASEAN is only a part of the problem; in the two other agreements, with Korea and Japan, India finds itself in an equally acutely adverse situation. While trade deficit with ASEAN has grown four-fold during the implementation of ASEAN-India FTA, deficits with Japan and Korea have roughly doubled after the two CEPAs were implemented (Chart).

When India’s trade deficits with 13 of its 15 potential RCEP partners have growing by such magnitudes, the consequences of eliminating tariffs further can well be imagined. In fact, since 2018, the government has recognised that low levels of tariffs are hurting India’s manufacturing in two ways: one, they are discouraging domestic manufacturing and hurting the ‘Make in India’ initiative, and two, 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 from 10.8 per cent in 2017 to 13.6 per cent in 2018. Thus, 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 has been aware that the competitiveness of the manufacturing sector had to be improved at least since the middle of the previous decade and that the share of the sector in the GDP should be increased from about 17 per cent to about 25 per cent. However, even after several policy pronouncements, including the National Manufacturing Policy in 2011 and the Make in India in 2014, the share of the sector slipped to 16 per cent in 2018-19.

For decades, Indian agriculture has been burdened by mounting inefficiencies and instead of addressing this problem, every government opted for the low hanging fruit to compensate the farmers, namely, by increasing the volume of subsidies. India’s policymakers never paused to think that growing inefficiencies would not allow a sector as important as agriculture to survive in an open economy, which the RCEP promises to usher in.

Improving competitiveness

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 did not work in India’s favour almost entirely because lack of competitiveness of Indian products have held India’s exports back. Thus, joining the RCEP could result in far worse outcomes if the government does not take prompt measures to reverse the existing inefficiencies of Indian producers.

Finally, it may be pointed out that proactive governments, especially in countries that are driving the RCEP process, have consistently adopted effective policy instruments to improve 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.

Source: The Hindu Business Line