India is having second thoughts on whether to join the 16-nation Regional Comprehensive Economic Partnership (RCEP) that includes China with which it has the largest merchandise trade deficit. Amid growing domestic resistance that pervades not only industry but also several key economic ministries, India has set up a panel of ministers, headed by commerce and industry minister Suresh Prabhu, to see if the mega trade deal is in the country’s best interests.
Apart from Prabhu, the panel comprises interim finance minister Piyush Goyal, defence minister (former commerce minister) Nirmala Sitharaman and housing and urban affairs minister Hardeep Singh Puri, sources told FE. Puri has been chosen for his earlier experience in trade diplomacy as an IFS officer. The panel will hold its first meeting on August 10. “Not just industry, certain ministries are also opposing RCEP,” said one of the sources.
The move comes amid pressure from other potential RCEP members to show substantial progress in negotiations by the end of this year. India, however, feels while most RCEP members want New Delhi to commit more to further liberalise its goods trade, they are reluctant to offer anything substantial in return in services trade, especially on unrestricted movement of skilled professionals that is of immense interest to India. As such, domestic industries — from steel to pharmaceuticals — have been criticising our various existing trade agreements with Asean, Japan and South Korea on the grounds that India’s trade deficit with these countries have only widened after these pacts came into force and there was little for domestic industry to benefit from.
Also, India had a record $63-billion goods trade deficit with China in 2017-18. If, on top of this, a free trade agreement with China is effected through the RCEP (of which Beijing is a key member), cheap products will flood the market, they have argued. The steel ministry, for instance, argues that without any FTA, India has a trade deficit (in steel) of 2 million tonnes with China and “considering the trend, it’s imperative that pursuant to signing of RCEP, the trade deficit will
The pharma industry, too, fears that cheap Chinese products will have unrestricted entry to India.
Moreover, according to a 2016 estimate by the finance ministry, India could lose tax revenue of Rs 75,733 crore a year if it scraps tariff on merchandise imports entirely, if it were emulate zero duty model over a period of time.
Although the urgency of concluding the RCEP at the earliest considerably eased after the US pulled out of a competing, mega trade deal — the Trans-Pacific Partnership. Still, members believe that the RCEP be concluded fast to counter the trade war initiated by the US more effectively. Already, Asean foreign ministers held meetings last week with their counterparts from India, South Korea and Australia, aimed at expediting RCEP talks.
For its part, India has proposed to eliminate tariffs on 80% of products with a margin of 6%, depending on the level of development of the other country as part of the RCEP negotiations. This means India may have to scrap duties on 74% of goods from China in the long run. However, many RCEP members want India to commit to abolish duties on 92% of its goods.
India has already made it clear that it’s opposed to an “early harvest”. This means it wants agreements on all the three pillars of negotiations — goods, services and investment — be implemented only as a package, not one at a time. So even if a consensus is reached early on goods (which is what most nations want), India feels it shouldn’t be enforced in isolation.
India has already sweetened its offer considerably, without much commitment from others in services. Initially, India had offered to abolish 80% of tariff lines for 10 Asean members, 65% of tariff lines for Japan and South Korea and 42.5% for China, Australia and New Zealand. In return, while South Korea and Japan were willing to offer 80% tariff elimination for Indian goods, China was ready to remove only 42.5% tariff lines. Australia and New Zealand offered to abolish 80% and 65%, respectively, of tariff lines for merchandise imports from India.
Industry executives feel that if implemented, India’s latest concession will benefit China the most (India already has an FTA with Asean, Japan and Korea, though the RCEP is more ambitious in terms of tariff liberalisation). Already, even without an FTA, India had a massive merchandise trade deficit of almost $53 billion with China in 2015-16. The neighbour was the biggest contributor to India’s $104-billion goods trade deficit with all the RCEP partners in 2017-18. The scrapping of tariff lines means import duties on specified items would be cut to zero over a mutually agreed-upon time frame.
Apart from the Asean members, China, Japan, South Korea, Australia and New Zealand are engaged in talks for the RCEP agreement.