Leveraging RCEP and the FTA with the USA

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October 31, 2019 2:01 AM

Decisions to conclude RCEP, and working out a trade deal with the US are examples of India making trade a decisive instrument, for both, economic and foreign policy goals

Exports appear to have become a priority for the government with the realisation that, reviving external demand is essential for lifting overall demand. Exports appear to have become a priority for the government with the realisation that, reviving external demand is essential for lifting overall demand.

The RCEP negotiations are likely to be concluded at the 35th ASEAN Summit in Thailand during October 31 to November 4, 2019. Along with the RCEP, India is also moving close to signing a trade agreement with the US. Both are major developments for India in signaling deep and comprehensive external engagement with major and middle powers, and key regional forums like ASEAN. They are also significant in India’s decision to go ahead, notwithstanding stubborn domestic resistance.

For quite some time, conflicting impressions have gone out regarding India’s seriousness in engaging with the rest of the world. The strongest of these struck at Davos in January 2018. Addressing the gathering at the annual meeting of the World Economic Forum, prime minister Modi highlighted three ‘greatest threats to civilisation’: climate change, terrorism, and backlash against globalisation. On the third, he alluded to ‘forces of protectionism … raising their heads against globalisation’ for ‘reversing’ the process—a trend reflective of countries becoming ‘more and more focused on themselves’, with the impact of such mindsets being no ‘less dangerous than climate change or terrorism’.

The emphasis on protectionism dragging future progress of the world would have rekindled hopes among some of India—traditionally a hesitant and slow trade liberaliser—converting itself to be a new champion of economic globalisation. The hopes were consistent with the robust character of Indian foreign policy witnessed since prime minister Modi’s assuming of office in May 2014. The hopes were dashed when, within a few days of the prime minister’s speech, India’s Union Budget went all-out in raising customs duties on several imports for providing ‘adequate protection to domestic industry’. More contradictions between foreign and trade policies were variously evidenced before and after, particularly India’s studious reluctance to engage in FTAs.

The eventual decisions to conclude RCEP, and working out a trade deal with the US are examples of India making trade a decisive instrument for both, economic and foreign policy goals. The bold attitude of the government is, in spite of domestic economic groups (e.g., the RSS-affiliated Swadeshi Jagran Manch (SJM) that organised a nationwide protest against joining RCEP), domestic industry, and even major government departments and ministries, remaining viciously opposed to India’s joining FTAs and lowering trade barriers. These defensive mindsets are not expected to change. But, what is interesting is the government’s decision to go ahead on two large trade deals in spite of the knowledge that it might end up antagonising several constituencies and stakeholders. However surprising it might seem, the decision reflects an executive mindset that has been seen before in India on implementing politically difficult economic reforms.

The commitment to RCEP and a trade deal with the US come at a time when the Indian economy is not in the best of health. Since returning to office for a second term, the Modi government has been saddled with the challenges of reviving an economy whose GDP growth is slowing and several major sectors moving into a sluggish mode. Over the last three months, the government, led by the finance ministry, has announced a slew of measures for kick-starting growth, and reviving investment.

These include those taken specifically for encouraging exports. Exports appear to have become a priority for the government with the realisation that, reviving external demand is essential for lifting overall demand. Exports can increase significantly if India is able to attract export-oriented FDI from the US, and major RCEP members. Such FDI, apart from triggering fresh economic activity at the ground level, including new jobs, would push Indian products deeper in foreign markets, enabling them to overcome the problem of stagnant domestic demand. The late, but much-needed focus on exports, along with the emphasis on attracting export-stimulating investments, fit well with the goals of joining RCEP, and getting a FTA with the US. Moreover, a generous corporate income tax cut, and a few other notable improvements in doing business indicators, should contribute to greater competitiveness of Indian exports, enabling them to take advantage of these trade agreements.

Nothing comes free though. Both RCEP and the India-US trade deal would irk multiple domestic constituencies. Notable among these are dairy producers, the steel and chemicals industry, and the large number of constituencies opposed to India’s broader trade and investment relations with China and the US on geopolitical and ideological grounds. The current context of economic slowdown, however, offers the government the right opportunity of pushing through the trade deals. This is similar to what past governments have done in identical situations. The history of India’s economic reforms over the last three decades has several examples of the politically ‘difficult’ external sector reforms being implemented during episodes of economic slowdown. Beginning from policies taken by the Narasimha Rao government during the balance of payments crisis in 1991, and those during the later years of the Vajpayee government when GDP growth dropped below 4%, similar context and response were noted during the Manmohan Singh government in September 2012, following stagnating industrial growth and prospects of downgrade in global credit rating.

Crisis produces opportunities. RCEP and India-US trade might be the latest beneficiaries of such opportunities given India’s proclivity of using difficult economic conditions to overlook domestic opposition in pursuing contentious reforms. Ironically, they might not have happened had the Indian economy not got stuck.

The author is Senior research fellow and research lead (trade and economic policy), NUS (Views are personal)

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