A trade pact that could hit India hard

There was clearly huge pressure on India to conclude negotiations this year and to make major concessions in goods, services and investment at the ministerial of the Regional Comprehensive Economic Partnershipin Hanoi (May 21-22).

Minister of Commerce and Industry Nirmala Sitharaman said at a press briefing that India has not yet conceded ground, though she outlined several challenges India faces. Clearly there are problems.

RCEP is being negotiated between India and 15 other countries including the 10-member Asean, Japan, South Korea, New Zealand, Australia and China. With a high rate of poverty, a large rural population consisting mainly of small and marginal farmers and landless labourers, an immature industrial sector, a growing but narrow service sector and vulnerable health and education sectors, India had very rightly maintained a cautious approach in its FTAs on goods, intellectual property rights, and many new issues such as investment, government procurement and competition policy.

India’s cautious approach faces a major paradigm-shift given the current negotiations in RCEP. It has the potential to overthrow India’s policies of rural development and industrialisation especially ‘Make in India’, and the promise of the Prime Minister to provide accessible healthcare and medicines to all. Most important, it threatens the policy flexibility and sovereignty to pursue independent economic, social and environmental policies.

In goods trade, India has already agreed to give up the three-tier tariff reduction proposal that offered different coverage for Asean, Japan and South Korea, and a much lower level of tariff reduction coverage for New Zealand, Australia and China. Currently, it is believed to be under pressure to agree to uniform and very high product coverage of around 92 per cent for all partners. According to Commerce Ministry officials, India has offered 80 per cent coverage with 5 per cent margin (lower) for more developed partners. It has also asked for a longer implementation period for China. While 92 per cent coverage is inconceivable, even 80 per cent will have serious implications for both agriculture and industrial products.

In agriculture and allied products, the plantation sector is already reeling from the impact of the India-Asean FTA even with relatively high protection of agriculture and a tariff-coverage of 73-80 per cent. If tariff cuts cover 92-80 per cent of products, the impact will be huge. On the other hand, New Zealand’s export-oriented dairy products will decimate India’s growing dairy sector, which is still largely small-scale.

If India offers to reduce/eliminate import tariffs on a larger number of industrial products than already committed to Asean, Japan and South Korea, its industrial sector could be under stress. Even without an FTA, India faces a total trade deficit of ₹3.45 lakh crore in 2015-16 with China. If India has to cut duties on 92 per cent of goods in RCEP, India will face threats from both Asean and China.

But manufacturing woes will not end there. E-commerce commitments, if any, will allow companies such as Alibaba from China to displace Indian manufacturing especially in the SME segment. Further, India is being asked to eliminate export restrictions on minerals and raw material by Japan and South Korea; this may threaten domestic raw material availability for industrialisation and encourage over-mining.

India is openly pitching services as its offensive area of interest and may be willing to sacrifice goods tariffs for gains in services. This can be the most dangerous of India’s current trade policy stance and can backfire very easily. India has demands for both Mode 3 (investment) and Mode 4 (movement of people) with a proposal for a RCEP business visa for professionals. India’s demand for Mode 4 is unlikely to be granted. What India hopes to gain in Mode 3 for its outward FDI is not clear as it is not competitive in most services except for IT and ITES.

In spite of placing the new Model Bilateral Investment Treaty (BIT) text as a basis for investment protection negotiations and already facing 20 BITs cases, India is under heavy pressure to agree to the investor state dispute settlement provision in RCEP without the safeguards provided in the Model BIT. The investment chapter in RCEP is also pitching for strong provisions on IPRs. This framework will increase India’s liability and severely limit its policy space to implement any policy reform that is seen as detrimental to investors’ profits.

In the area of intellectual property rights, several members have been pushing provisions that go beyond TRIPS, with serious adverse consequences for access to generic medicines manufactured in India. The minister denied having agreed to any so far. Agreeing to data exclusivity, extending patent terms and unduly strong enforcement measures will weaken the entire generic medicine sector and take away several health safeguards in India’s Patent Act, notably section 3(d). This will make medicines inaccessible not only for Indian patients but for those in the entire developing world. In addition, since India has rightly fought against ‘TRIPS plus’ provisions in its FTA negotiations with EU and European Free Trade Association, there is no rationale for it to change its stance in RCEP.

Finally, it seems India may agree to binding e-commerce rules in RCEP. This will have several implications including compromising government revenues by losing potential customs duties, compromising regulation and control over the new and emerging trading space, threatening data privacy and security not only of individuals but also of the government, and compromising regulation across a number of government ministries including that of the finance, commerce and industry, health and education, labour and so on. For example, by giving away control over data, the Government may compromise potential future industrial policy and lose control over financial policy.

India seems to have resisted the pressure to agree to specific commitments in goods, services, and investment and other areas in Hanoi. But a push for negotiations to be concluded by this year seems to have been agreed, even if not in very specific terms. Conclusion this year will be highly premature. India needs to assess its own choices and weigh the impact on its whole policy space vis-a-vis the narrow base of the advantages that RCEP may offer.

The writer is a senior researcher at Third World Network