The vision of making India a global manufacturing hub depends on getting access to global and regional production networks. For that, it needs FTAs like RCEP
India’s backing off from RCEP is not surprising. What is surprising is that it took it so long to do so. As a reluctant participator, India hardly had a constructive strategy for the talks. For several years, and most of the early rounds, it relied on the old strategy of lingering the process. But, as other countries started piling up pressure for concluding talks from about a couple of years ago, India realised it was being pushed into a corner. The deal was to be concluded in the last ASEAN Summit itself, in 2018. But, India’s general election, as well as those in other RCEP members like Indonesia, Thailand, and Australia, came to India’s rescue. The group decided to defer the conclusion to this year’s ASEAN Summit at Bangkok.
It is only during the last one year or so that India got serious about RCEP. Elaborate consultations took place in the past few months, along with extensive engagements with other members. The deal, though, was already at a substantially advanced stage. Other countries were not sympathetic to reopening discussions on India’s ‘core’ demands: bringing up the base year for cutting tariffs to 2019 from 2014, automatic safeguard trigger for stopping surge in imports, and the insistence on greater market access for its professionals. At the end, India was left with little choice but to back out.
India’s opportunity to return to RCEP remains. The joint statement of RCEP ministers mentions other members working with India for resolving outstanding issues. But, this would require India being realistic about its ‘own terms,’ and ‘core demands’. It has been excessively reliant on its large economic size, and the hope that size matters so much that it can demand and obtain the impossible. It must note that RCEP is a multi-country, regional trade agreement, where interests of individual members can be accommodated only up to certain extents. It must also note that its paranoia over Chinese imports is not shared by other members. The rest are unlikely to be overtly sympathetic to India’s insistence on special protection against Chinese imports.
Why is the Indian industry, and other stakeholders, so defensive on RCEP? It is interesting that the same defensiveness is hardly visible with respect to efforts of an FTA with the US. The answer is obvious. RCEP includes Southeast Asia, China, Japan, and Korea—countries that are miles ahead of Indian producers on competitiveness in manufacturing. The gaps are so much that even with high customs duties, Indian consumers, in many cases, prefer imports from these countries as opposed to domestic substitutes. The same lack of competitiveness prevents Indian exporters from penetrating deep in Asia-Pacific markets in spite of zero or low tariffs. Exports from Vietnam, Philippines, and Malaysia would be more competitive in larger RCEP consumer markets like Japan, Australia, and Korea, compared with those from India.
The competitiveness problem doesn’t arise for the US. Indian industry is confident of diving deep in the US market. The post-GSP scenario might be different though, since other GSP-receiving competitors from Asia and Africa are getting their act together by reducing business costs. The US imports also don’t threaten Indian manufacturers, except in high-end pharma, and automobiles. The shock, though, will be in dairy and other agricultural products. If Indian dairy producers prefer being hit by American milk imports as opposed to those from Australia and New Zealand, then one needs to see what logic supports such preference!
The overarching sentiment in pulling out of RCEP is Indian industry’s fear of imports. But, will a longer phase-out period, and painfully slower cut in tariffs—as India is demanding—get rid of this fear? It won’t. For most of Indian industry, the urge to become competitive doesn’t exist as long as it is protected. Growth of exports requires being competitive and matching up to better quality standards. From an industry perspective, rather than export, it is better to focus on the protected domestic market, where the miserable Indian consumer will have to accept whatever is cheaply available, regardless of quality and price.
The vision of making India a global manufacturing hub depends on getting access to global and regional production networks. For that, it needs FTAs like RCEP. The logic of engaging in such FTAs only after domestic industry is competitive is fallacious. It will never be competitive unless exposed to competition, which it won’t be.
RCEP members might concede more to India if they really value India’s economic and geo-strategic might. There is talk of India pursuing bilateral FTAs with some RCEP members like Australia. Unfortunately, rubbing shoulders on the security platform of Quad won’t guarantee special visas for Indian professionals through a bilateral FTA with Australia. The dairy sector would need to be stripped of protection, as would more of agriculture. That, though, might be more than a handful to handle. Getting shallow FTAs, as India has done in the past with Bhutan and Sri Lanka on geopolitical grounds, is very different from working out deep, modern, comprehensive FTAs with advanced economies. Even if India gets FTAs with the US and the EU, getting higher shares of these markets would mean competing with beneficiaries of deep non-reciprocal preferences like EBA. Competitiveness would matter there—a parameter where Indian producers would fall short.
The commerce minister’s recent lament on FTAs not needing to create a fear psychosis is unlikely to serve its purpose. However supportive the government is, industry is unlikely to act towards becoming more competitive. Once protected, always protected. No wonder, the relief is so palpable after the pullout from RCEP!
The author is senior research fellow and research lead, NUS
Views are personal