For all bilateral agreements that India has, such as with Japan, Korea, etc, this fell from 12.6% to 7.5%. Interestingly, the sharpest deterioration in India’s deficit is with China, a country with which it has no FTA.
All the 10 members of the Asean, along with China, Korea, Japan, Australia and New Zealand, finally signing the Regional Comprehensive Economic Partnership (RCEP) is bad news for India, more so since this is the second major multilateral trade deal in recent years; after the US pulled out of the TransPacific Partnership (TPP) in 2017, a TPP minus the US was signed in 2018 and, as it happens, seven of the 15 RCEP members belong to the TPP-minus-US. RCEP accounts for 30% of global GDP and, given the dynamism of the region, this will rise to 50% by the end of the decade. If India is not part of trade pacts with major countries, and the WTO process is in trouble, it will quite quickly run out of countries to trade with. Sure, India can continue to export to these countries, but it will suffer a disadvantage since, with the pact-countries, there will be no/low import duties on most goods traded while this will not hold for India.
The traditional government response to this has been two-fold. One, India is better served by concluding FTAs with the US and the EU and two, RCEP is nothing but a legal way for low-cost Chinese goods to flood the Indian market and destroy large swathes of local industry. The latter, as it happens, is part of the larger BJP narrative against FTAs/RTAs since 2014; the party has argued that India has suffered from such pacts and that they need to be reviewed.
While this may be correct for one or two countries, and a lot depends on which years are taken for the analysis, the Economic Survey did an analysis for the 1993 to 2018 period and debunked the argument. For one, it pointed out that India’s goods exports had benefited from the pacts with Asean etc. On the whole, it said India’s exports of manufactured goods with FTA/RTA countries had grown by 13.4% per year while imports had grown by 12.7% in this period.
Analysis by Pravin Krishna of Johns Hopkins University, for the period 2007 to 2018, shows that India’s trade deficit—as a share of its total trade deficit—with the Asean fell from 9.9% to 6.6%. For all bilateral agreements that India has, such as with Japan, Korea, etc, this fell from 12.6% to 7.5%. Interestingly, the sharpest deterioration in India’s deficit is with China, a country with which it has no FTA.
Indeed, the real issue that comes out is that of India’s poor competitiveness, and that has little to do with FTAs. To understand this better, let’s keep India out of the equation, just look at the overall exports of various countries. In the last 20 years (see graphic), India’s exports grew 9 times while those of China rose 13 times—on a base that is 5.5 times India’s—and Vietnam’s rose 23 times; as a result, from a mere 32% of India’s in 1999, Vietnam’s exports are 81.5% of India’s today. In other words, whether or not we sign a trade pact with these countries, chances are their exports will grow faster than India’s; the fact that their exports are growing faster than ours means they are more competitive.
The same result, of lack of competitiveness, as it happens, is visible from India’s overall exports. From 16.8% of GDP in FY12, India’s exports fell to 10.9% in FY20; and while imports fell from 26.8% to 16.5%, imports are significantly higher than exports.
Indeed, the production linked incentive (PLI) scheme that the government has finalised for mobile phones—and plans to do for 10 other sectors soon—is itself recognition of this reality since the PLI offered are meant to offset a part of the disadvantage of producing in India. One of the studies on the disadvantage in the case of mobile phones put this at 9.4-12.5% versus manufacturing in Vietnam; the cost of electricity (based on the amount used for production) added one per cent to the cost of production of a phone in India, expensive bank loans added 1.5-2% to the costs, logistics 0.5%, land one per cent, etc.
What makes an exports push all the more critical, especially at a time when India is raising import duties and talking of atmanirbharta, is that India’s high GDP growth in the past has been directly related to exports growth, not that of local consumption. In the boom years of 2003-08, JP Morgan chief India economist Sajjid Chinoy points out, India’s real exports growth averaged 17.8% annually while (public and private) consumption grew just 7.2%; a similar point has also been made by former chief economic advisor Arvind Subramanian.
While it is theoretically possible India’s exports can grow faster should there be an FTA with both the US and EU—even so, China and Vietnam’s higher competitiveness is an issue—it is by no means a given that such an FTA can be signed quickly. Indeed, for decades, India has resisted opening up sectors that the US and EU have been interested in. That something like the import duties on Harley Davidson motorcycles was allowed to become a friction point between India and the US despite no serious manufacture of these motorcycles in India indicates just how inflexible India has been; imagine its ability to open up sectors or reduce duties in sectors where there are a large number of local producers who will be hit.