India can’t have a prominent voice in regional affairs by distancing from trade

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Updated: September 27, 2019 8:31:31 AM

India needs to import bulk consumer goods, and intermediates because of their insufficient availability, and higher prices. Even after tariffs, these imports remain competitive vis-à-vis domestic products.

There’s no denying that between the WTO’s rules-based global trade order, of which India has been a member since the beginning, and any other FTA, however large in scope, the former is the superior choice. (Representational image)There’s no denying that between the WTO’s rules-based global trade order, of which India has been a member since the beginning, and any other FTA, however large in scope, the former is the superior choice. (Representational image)

India seems close to agreeing to conclude the RCEP after more than seven years of prolonged negotiations. While this will bring relief to some quarters, it is likely to disappoint several more, particularly those who feel India should have stayed away from RCEP.

Many arguing that India should not join RCEP are also of the view that India should not be part of trade agreements—regional or bilateral. Some of these views argue that only the WTO is worth joining, and no other trade agreement is worth the effort. Others suggesting that India should back off from RCEP are generally anti-trade. There’s no denying that between the WTO’s rules-based global trade order, of which India has been a member since the beginning, and any other FTA, however large in scope, the former is the superior choice. Global rules are always preferable to selective regional rules. However, the two are not mutually exclusive. Belonging to the WTO doesn’t mean disengaging from FTAs, particularly since WTO itself encourages these FTAs, if they can obtain greater trade liberalisation. The latter can be significant for a large FTA, like RCEP, which includes some of the world’s largest economies. Thus, commitment to WTO can’t be a reason for not joining RCEP. However, if engaging in trade itself is considered a wrong priority, then, rather than backing out of RCEP, India should, ideally, quit WTO, of which it is a founding member.

One of the most trenchant criticisms of the RCEP is the adverse effect it will have on India’s domestic markets through a deluge of imports. India’s FTAs with SE Asia, Japan, and Korea are cited as examples for driving home the point. These criticisms fail to note a simple point: why would imports be necessary if the products were available at home at the same prices? Even if they were available at slightly higher prices, imports would’ve been much less required.

India needs to import bulk consumer goods, and intermediates because of their insufficient availability, and higher prices. Even after tariffs, these imports remain competitive vis-à-vis domestic products. This is because of the inherently high costs of domestic production in India. Such costs make imports necessary, both for producers and consumers. In many cases, producers find intermediate inputs costlier at home than abroad, and are forced to import the same. It is hardly surprising, therefore, that imports have been high, particularly from SE Asia and Asia-Pacific, as these regions enjoy greater competitiveness in manufacturing.

Is India’s lack of success in bringing down costs of production a good enough reason for not engaging in trade, and running away from RCEP? In the entire tirade over RCEP, while a lot has been written and spoken on the deluge of imports, there has hardly been much mention of the gains that RCEP can bring for Indian exports. Exporters themselves, ironically, have been reticent to RCEP. Perhaps, as producers, they continue to suffer from high costs, and harbour the fear of not being able to penetrate other markets, notwithstanding preferential tariffs. The fear is genuine, but not a good enough reason for avoiding RCEP. More so, at a time when the government is trying to incentivise exporters through various measures, the most notable being reduction in corporate tax rates, which puts tax liabilities of Indian businesses on par with those in the region.

The most unfortunate part about the negative discourse on RCEP in India has been the fact that India’s inefficiencies, and limitations have been taken as grounds for avoiding RCEP. If manufacturer-exporters had lobbied with the government for a positive agenda in RCEP, with the precondition of obtaining incentives through lower taxes and access to credit, India could have looked at RCEP differently. It is sad that no such efforts were made by industry. It is equally sad that state governments in India have also refrained from looking positively at RCEP. Indeed, several states, particularly India’s coastal states, should have been at the forefront of negotiations on RCEP through positive efforts. On the contrary, they have been conspicuously quiet.

India’s trade engagement has traditionally suffered from absence of ‘pro-trade’ constituencies. This is unfortunate. Trade doesn’t simultaneously benefit everybody. But, eventually, open trade, facilitated by enabling trade agreements, brings numerous benefits that are difficult to visualise at one go. Apart from getting cheap imports for both consumers, and producer-exporters, trade deals are great facilitators for investment. Coming at a time when the trade war is ripe, supply chains are fragmenting to scatter across the Asia-Pacific, and India is looking to revive export demand for coming out of an economic slump, RCEP can be a great instrument for attracting trade-inducing investments. Recent Indian policies, like liberalising sourcing norms in single-brand retail, backed by RCEP, create right conditions for drawing more manufacturer-retailer investments to India, like Apple and Samsung. Much of these investments would also be export-oriented, particularly to the rest of South Asia, as well as West Asia. The grand aspiration of India being a global player, with a prominent voice in regional affairs, cannot be realised by distancing itself from trade. Trade is a great confidence and strategic trust builder, a fact that India—shifting from non-alignment to multi-alignment—can ignore only at its own peril.

The author is Research Lead, Trade and Economic Policy, Institute of South Asian Studies, NUS

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