India’s decision to officially ‘exit’ from the Regional Comprehensive Economic Partnership (RCEP), at least for the time being, seems to have been the best course of action under the circumstances. The Prime Minister was right in observing that “opening the vast Indian market must be matched by openings in some areas where our businesses can also benefit.” Indeed, as a NITI Aayog report and Economic Survey 2015-16 have pointed out, India’s free trade pacts with ASEAN have widened the trade imbalance with these countries.
Since India has FTAs going with almost all RCEP nations (the government has rightly agreed to review the ASEAN deal), signing RCEP would, in effect, have meant entering into an FTA with China, with some added benefits thrown in for the rest. A July 2018 Parliamentary Standing Committee Report on the impact of Chinese imports on Indian industry identifies unorganised retail, textiles, pharmaceuticals, solar panels, bicycles and firecrackers as badly hit sectors. Lax rules of origin (ROO) have led to Chinese imports through third countries, as a result of which the $90 billion or so trade deficit (which is 40 per cent of India’s total trade deficit), may seem an underestimate. India’s demand at RCEP that auto-triggers in terms of higher tariffs kick in after a certain threshold, and that ROO be tightened did not cut ice at the RCEP meets. It was under pressure to loosen its data localisation laws, while not being promised anything concrete on the services front. For a country with a huge market to offer, the terms ought to have been more attractive. An exit could prompt the RCEP countries, keen to tap into India’s market, to reshape their offer.
The argument that free trade is a ‘win-win’ is true, provided the countries operate on an equal footing. As Surjit Bhalla (who led a panel that recently submitted its report on trade policy) has observed, India’s economy needs to be competitive before it can take on the rest. A Make in India policy that promotes areas of excellence needs to be put in place, besides improving the business ecosystem. Logistics, contract enforcement and harassment by the State machinery are huge concerns. As for dealing with RCEP and others, India should seek investment in greenfield projects, replicating the automobiles success story.
However. the government could have managed its RCEP talks better. From offering a three-tier tariff structure, with 42.5 per cent of free tariff lines for China and above 80 per cent to ASEAN, and the rest in the region of 65-70 per cent, India inexplicably promised 80 per cent plus free tariff lines to all less than two years back. It did not help that the Centre remained wedded to secrecy all along, when it could have held all-party consultations. That would have led to a more consistent articulation of its position, saving the country this embarrassing about-turn on the global stage.