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Thursday, October 28, 2021

India should join RCEP, but negotiate a better deal to safeguard its interests

The recent drastic reduction effected in corporate tax rates, particularly for new manufacturing units, is a very timely and huge step. These need to be supplemented with other domestic reforms, particularly to facilitate labour intensive manufacturing.

Written by VS Seshadri |
Updated: September 28, 2019 11:47:07 am
exports, Indian exports, Total exports, trade deficit, Commerce Ministry, economy slowdown, Piyush Goyal, Indian Express Commerce Minister Piyush Goyal recently said that while the government would strive to protect the interests of a majority of industries, the overall discussion cannot be hijacked by one or two sectors. (PTI File Photo)

The RCEP negotiations have entered the final phase. A ministerial-level meeting earlier this month in Bangkok, following similar consultations last month in Beijing and a trade negotiating committee meeting currently in progress in Vietnam, all signal a quickening pace. Within India too, intensive stakeholder consultations have taken place. A track 1.5 consultation among RCEP countries held in Delhi on September 13 also saw many of the RCEP lead negotiators and their back-up think tanks interacting with their counterparts in India and industry bodies. Will the deal be finalised in time for the ASEAN summit meetings in Bangkok in November? And will India remain a part of it? Mixed signals continue.

Commerce Minister Piyush Goyal recently said that while the government would strive to protect the interests of a majority of industries, the overall discussion cannot be hijacked by one or two sectors. This is widely seen as declaring an intention to remain in RCEP and make it work for us. RCEP negotiations have been underway since 2013. Its significance for regional integration, even if most of the participating countries are already connected by bilateral FTAs, cannot be understated. At a time when global trade and the global economy are facing huge uncertainties, it could be a booster shot.

But will it work for India? That depends on what has already been negotiated and what can be achieved in the remaining time. But some essential points merit mention. And since India will bring significant additionality to RCEP, it should negotiate hard.

On the export front, India’s export capacities and competitiveness in relation to the RCEP region are presently limited. Where they exist, duty reductions by partners require front-loading. This includes textiles, gems and jewellery, pharma, autos, some engineering and chemical items and certain agricultural and marine products. Export consolidation in them can take place in RCEP markets not covered by FTAs now. Even with existing FTA partners, if we can improve market access with deeper concessions such as in cotton yarn with Korea or on easier rules of origin with Japan for shrimps or for cut and polished diamonds, these would help.

More important will be the easing of non-tariff barriers. Side letters assuring fast track consideration for evaluation and access for our generics, already having approvals from USFDA or EMA, on the lines we have with Singapore, would be extremely important. While our exports of pharma items worldwide were $13.28 billion in 2018-19, bulk of it were to advanced markets like the US (39 per cent) and EU (13 per cent). Exports to RCEP countries like Korea (0.1 per cent), Japan (0.4 per cent) and China (0.4 per cent) were paltry. If RCEP is promoting regional integration, these should rapidly rise.

It would be critical to seek time-bound approvals on safety for auto and other engineering items and certification of farm products on sanitary and phytosanitary grounds without delay. Here again, the wide divergence between acceptance of our products in other advanced markets and East Asia stands out. It is also essential to have an institutional consultative process on NTBs. An aggrieved member should be able to get NTB issues faced by it in any market peer reviewed and have the opportunity to persuade the RCEP collegium.

On imports, there is an unease about RCEP among several segments of Indian industry. They need time to face more intense competition. China has market dominance in several sectors even without an FTA. Tariff phase-outs for imports, therefore, need to be longer than in the earlier FTAs and be extended to 15-20 years. Back-loading reductions would also be needed in certain areas. Strategic sectors like steel or non-ferrous metals, where RCEP countries like China have significant over-capacity, need to be carefully handled. Agriculture, sheltered in earlier FTAs, needs calibrated opening through use of tariff rate quotas on sensitive products as several RCEP countries are strong agricultural exporters.

A reassuring safeguard mechanism in RCEP against import surges will be crucial. To be effective, it would be necessary to have tailored safeguard measures; one for agriculture, second for strategic sectors like ferrous and non-ferrous products having over-capacity and third for the remaining. Several FTAs globally do have separate safeguards including for autos and farm items.

It can be asked, why enter RCEP with so many caveats? If we are not ready, why not stay out? First, an initiative like RCEP which offers us the opportunity to economically integrate more closely with this dynamic region happens rarely and may not wait for us indefinitely. Even if quickly concluded, legal scrubbing and ratifications may lead to RCEP not being operational before 2021.

Second, the rest of RCEP (barring perhaps CLM countries) is relatively more integrated than India. Only through such closer association can mechanisms like mutual recognition arrangements (MRAs) in professional services or equivalence of product standards can be developed.

Third, Commerce Minister Piyush Goyal recently said that on the export front, the government is willing to take bold decisions and a trillion dollar of exports in the next five years is eminently doable. He added that this was essential if the target of a $5-trillion economy has to be reached by 2025. If so, India needs easier market access that can be provided by FTAs like RCEP.

Fourth, when a country signs a major FTA, more suitors line up not wanting to disadvantage their exports. If India can use this FTA dynamics to get candidates like the EU to show more flexibility, it should be welcome.

Fifth, domestic export capacities alone will not be adequate even as they require scaling up to double our exports. Foreign investments, including in value chains will be needed and those relocating from China may show interest. Investors will be more persuaded if India has a wider FTA portfolio. World trade is increasingly routed through preferential arrangements.

Foreign investors also look for ease of doing business and a predictable and stable environment. Otherwise, they will go and invest in other RCEP countries and target their exports to India. The recent drastic reduction effected in corporate tax rates, particularly for new manufacturing units, is a very timely and huge step. These need to be supplemented with other domestic reforms, particularly to facilitate labour intensive manufacturing. We should not be looking to alight from the RCEP bus, but to negotiate hard for a comfortable seat.

This article was first published on September 28, 2019 in the print edition under the title ‘Look east, act fast’. The writer is former Indian ambassador to Myanmar

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