India’s RCEP folly

Opting out of the China led trade pact may yield electoral dividends for now, but extract a bigger economic price in the long run

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By P.K. Balachandran

COLOMBO – India has opted out of the Regional Comprehensive Economic Partnership (RCEP) agreement signed last Sunday (15), saying that while the pact may open up economic opportunities, it does not give sufficient protection and/or encouragement to its industrial, agricultural and service sectors.

This follows the rejection of multiple requests, demands and suggestions, including country-specific tariff schedules, an auto-trigger mechanism to check a sudden surge in imports from particular member countries (principally China), stricter rules of origin and the movement of professionals.

However, the RCEP group comprising China, Japan, South Korea, Australia, New Zealand and the 10-state ASEAN grouping, has said its doors will remain open to India. The group is keen on using India’s capacities and accessing its giant market.

While protectionism does have a wide measure of popular support in India, especially now since China is a visible bogeyman, it could actually do India more harm than good. It will promote inefficiency and smother the innovative spirit in a world which is innovating and globalizing rapidly both in thought and deed. Over time, the shoe will start pinching in India and there will be a popular clamour for liberalization. But that would catch Indian entrepreneurs, long used to serving a captive market, on the wrong foot. Industry will again appeal for the continuation of protectionism.

India hopes to capture alternative markets in European and Africa not part of RCEP. It is reported India may also look to a new version of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) free trade pact if the US decides to join the agreement, which President Donald Trump had earlier abandoned. The CPTPP is a free-trade agreement (FTA) between 11 countries around the Pacific Rim: Canada, Mexico, Peru, Chile, New Zealand, Australia, Brunei, Singapore, Malaysia, Vietnam and Japan. But here too, the demand will be for quality goods and not the shoddy ones made for a captive Indian market.

Commenting on India’s decision to opt out of RCEP, The Hindu says: “With global trade and the economy foundering on the shoals of the COVID-19 pandemic, especially as new infections in Europe and the US prompt fresh restrictions there, the pre-eminence of the east Asian and Pacific countries including China, South Korea, Vietnam, Australia and New Zealand serving as a bulwark in containing the pandemic and re-energizing economic activity can hardly be understated. Add to this the heightened tariff uncertainty generated by the deadlocked Brexit negotiations between Britain and the EU, and it becomes evident that India may have missed a vital opportunity (by opting out of RCEP).”

It points out that several concerns voiced by India have been addressed and advices New Delhi to approach the pact with an open mind.

“The summary of the final agreement shows that the pact does cover and attempts to address issues that India had flagged including rules of origin, trade in services, movement of persons and, crucially, remedies and safeguards. It would be in India’s interest to dispassionately review its position and embrace openness rather than protectionism,” it adds, noting that among the ASEAN signatories are several small countries, including Vietnam and the Philippines, which not only have disputes with China but also have significant trade imbalances with it. Japan, South Korea and Australia are at odds with China on multiple fronts.

India wants to be a part of the global supply chain but, strangely, it is refusing to be part of a supply chain grouping at its very doorstep. Blind faith in the West, blind opposition to China or any China-led organization and the prospect of winning votes in domestic elections have led Indian leaders to take the decision to pull out.  However, this mind-set is not peculiar to the ruling Bharatiya Janata Party (BJP). It is evident across the political board.

Be that as it may, the recipe for India’s survival is in enabling its industry to grow up to face global competition and to get the best out of bilateral or multilateral agreements. India’s industry accounts for a mere 15% of its GDP now. It has to touch at least 25%.  Its agriculture has to be more productive and competitive to face any competition in the future. Furthermore, India has to be part of global supply chains and for this, tariff barriers have to be reduced.

And the best way to balance the effect of rising imports is by promoting exports and not by raising tariff walls. At any rate, tariff walls cannot be a permanent solution.

India’s plan for now and the future hinges on the success of its ‘Make in India’ project launched by the BJP government in 2014. But has it succeeded? According to UNTAD, India got US$ 49 billion FDI in 2019. But that figure includes inflows into the capital markets, which accounts for the lion’s share of capital flows into the country. FDI in manufacturing was around US$ 8 billion in 2018-19, accounting for less than a quarter of the total inflows. E-commerce, which has nothing to do with either manufacturing or ‘Make in India’, is one of the key sectors for FDI. Making manufacturing sector be 25% of GDP (and not 15% as now) to create a 100 million additional jobs in the manufacturing sector by 2022 is certainly not achievable looking at the current situation.

‘Make in India’ is not working because suitable conditions for setting up industries are not there, though India has gone up in the ladder in terms of ease of doing business. Land acquisition is a major hitch. The second difficulty is in acquiring technology. The third difficulty is in acquiring talent. Indians should enter industry. Presently they study engineering but look for business management or administrative jobs. The visa rules of global recruitment are too stringent, which makes global recruitment impossible. The fourth difficulty is in securing raw materials and intermediate goods. For getting these goods at reasonable prices, import restrictions will have to be eased. Protectionism doesn’t fit here.

Protectionism as a general rule may actually prevent domestic industry from growing. India has to shed its fear of the world and reasonable competition if it is serious about becoming an engine of growth in the region and a power, however modest the latter ambition may be.

 -P K. Balachandran is a senior Colombo-based journalist who in the past two decades, has reported for The Hindustan Times, The New Indian Express and the Economist

 

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