After seven years, the Regional Comprehensive Economic Partnership (RCEP) negotiations, started by leaders from the ASEAN countries and their free trade agreement (FTA) partners in November 2012, have concluded in Bangkok. The good thing is that India still has some unresolved issues, and this has resulted in it holding back its decision to join the RCEP. In fact, India has decided to maintain a consistent stand throughout the negotiations, and it is not reneging on any of the demands of its trading partners. It has decided to keep its self-interest at the forefront.
With many mature economies struggling to regain ground lost because of the global financial crisis in 2008, emerging economies are in focus for growth opportunities. The international trade focus has clearly shifted from the West towards developing economies in Asia and other regions. The developing markets’ share of global trade has doubled from 16 per cent in 1991 to 32 per cent in 2011, an average increase of 0.8 percentage points a year. This was accelerated by the global recession. Since 2008, the rise has been almost twice as fast, at 1.5 percentage points a year. This significant increase in South-South trade is turning established trade patterns and practices on their head, and thus, the importance of India being a part of RCEP, but on its own terms, has never been so crucial. Interestingly, India has been vigorously pushing for such South-South trade through policies like “Look East” unveiled in recent times.
Coming back to the specifics of RCEP, when we look at the goods trade dynamic, India ran a merchandise trade deficit with 11 out of the 15 other members of RCEP in 2018-19, totaling $107.28 billion. India’s overall merchandise trade deficit was $184.00 billion in 2018-19. In 2018-19, 34 per cent of India’s imports were from this region, while only 21 per cent of India’s exports went to this region. China is the biggest trade partner amongst these countries and the major concerns that India had throughout the negotiations were with regard to China.
China is a trade behemoth whose growth is built on the way it captured the world’s manufacturing space. There is a fear that the imports of cheaper electronic and engineering goods from China could increase further post the signing of RCEP which in turn could have a negative impact on the manufacturing sector. Therefore, Indian negotiators have taken steps to ensure that domestic manufacturing is effectively protected from unfair competition.
For example, certain issues such as the move towards 2014 as the base year for tariff reduction, an automatic trigger mechanism to curb sudden surges in imports and the decision on which products it doesn’t want to offer the same tariff concessions to all countries, need to be sorted out. India’s electronics and mobile industry, for instance, is moving towards self-sufficiency, and a move towards 2014 rates could mean a huge step backwards.
Another area of hard bargaining for India is our unfulfilled want for exemptions from the Ratchet obligations. As per the Ratchet mechanism, if a country signs a trade agreement with another country where it relaxes tariffs and quotas on merchandise exports and imports, it cannot go back on them and bring in measures that are more restrictive. India wants a clear exemption from the Ratchet obligations, so that in the future, to protect the interests of exporters and importers, it can bring restrictive measures, if required.
This apart, across the country, many farmers and milk cooperatives have raised their concern on RCEP. In India, several small and marginal farmers are dependent on milk for their daily expenses as income from crops is seasonal. If India signs the RCEP, without exemptions for dairy and its products, it would allow the dairy industry of Australia and New Zealand to unfairly target its huge market. It is notable that New Zealand exports 93.4 per cent of its milk powder, 94.5 per cent of its butter and 83.6 per cent of its cheese produce. However, the government has given its assurance that it would protect the interests of homegrown milk cooperatives through adequate safeguards.
So far, India has proceeded with extreme caution as just entering into agreements and focusing on tariff reduction has not helped the country, as it has seen in the mixed experience of its FTAs. The merchandise trade data shows that over the years, the merchandise trade deficit has widened with the ASEAN countries.
India’s main requirement is that of a balanced outlook which is a win-win for all. India is running a services trade surplus with the world. Therefore, it is trying to push for a strong agreement on the services trade, including a deal on easier movement of skilled manpower. Even the IMF has said that services trade could be a substantial engine of growth for India and other south Asian economies. As per ILO data, around 58 per cent of India’s workforce is medium-skilled and 16 per cent is high skilled, and to protect their interest is of paramount importance.
All these factors need to be kept in mind before India enters the RCEP. India commands around 1.7 per cent share of the world’s total goods exports ranking 20th as per the WTO 2018 data. For achieving a 5 per cent share in world exports (the government targets $1 trillion exports out of total global exports of $20 trillion), India must build its manufacturing capabilities, and the recent steps by the government are in that direction. How India manoeuvres the geo-political space will determine how successful it is in becoming an export behemoth (in its quest towards a $5 trillion economy). To this end India’s current tough posturing is perfectly justified.
This article first appeared in the print edition on November 5, 2019 under the title ‘No pact for India’. The writer is Group Chief Economic Advisor, State Bank of India. Views are personal.
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