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Barring a few exceptions, the Modi government’s decision to pull out from RCEP has been welcomed by all, including Opposition parties and India Inc. That is not without reasons.
Post the FTAs (free trade agreements) with ASEAN, Japan and Korea, India’s imports have increased more than its exports. Even without an FTA, India is not able to rein in its large trade deficit with China which has been denying genuine market access to Indian merchandise by resorting to non-tariff barriers. ASEAN countries too have been reluctant to open up their services sector despite signing a deal with India.
Given this backdrop, why would India sign a new FTA that may not help its exports but will certainly lead to more imports, especially from China. However, that doesn’t mean it’s a smart move. Signing a free trade pact is not always about the pull factors. Often, it’s more about push factors.
If a country decides not to join an FTA, it will be subject to tariff disadvantages later on if its major trading partners decide to join it. This is one reason that prompted the previous UPA government to ink a free trade pact with ASEAN. The same logic applies if other 15 members decide to go ahead on RCEP — that is, the relative tariff disadvantages for India will go up. Thus, India will find it even more difficult to export to ASEAN, Japan and South Korea.
Reducing trade deficit
To make matters worse, even without an FTA, there’s limited scope for reducing India’s trade deficit from China. India’s promotion of solar energy, electric vehicles (EV) and digitisation will mean more (and not less) imports from China of solar panels, lithium batteries and electronics.
China remains the most price-competitive supplier of key industrial inputs and equipment, including active pharmaceutical ingredients, electronics and telecom gear for which India doesn’t have adequate domestic capacities or alternative suppliers that can match China either in price or scale. Many service industries from real estate and hospitality to retail are dependent on cheaper Chinese merchandise to offer their services at reasonable prices. These realities cannot be ignored.
No doubt, India is a large and growing economy, but it’s still not large enough to continue growing at 7-8 per cent without further integrating with the larger global economy. Two regional destinations, South-East Asia and Eurasian regions, still remain largely untapped by India. RCEP could be a key to cracking the South-East Asian market amidst waning prospects in India’s traditional export markets, the EU, the US and Middle East, in particular. Where the UPA failed and the Modi government is doing no better, if not worse, is to address the internal impediments to Indian manufacturing and exports. While product markets have been liberalised, factor markets remain restricted, which is keeping the cost of doing business high. Uncertainties on tax and investment protection continue to remain a big deterrent for investors, especially foreign investors and MNCs which could help push India’s exports.
Excessive protection of industrial raw materials such as steel, aluminium, or synthetic fibre is impeding the growth of much more dynamic downstream industries and encouraging import of finished products.
It’s not FTAs but India’s own internal mismanagement that is hurting its exports. Only 20 (out of 99) chapters at two-digits ITC-HS, account for over 80 per cent of our merchandise exports. Thus, we are leaving 80 per cent of the global export pie largely untapped. Again, most of our exports, including those of manufactured goods, are commodities and don’t have pricing power.
Unless we fix these issues, India will continue to lose in trade whether it signs off to RCEP or not. Benefiting from FTAs or otherwise from global export opportunities calls for urgent internal actions and not blocking FTAs that could actually help our exports at a time when consumption (the major driver of growth) is slowing.
Indian industry will become competitive only if it’s exposed to regional and global competition. As of now, most of our industrial sectors starting from airline, cement, steel to tyre and telecom are oligopolistic — dominated by a few sellers. They would be happy operating in protected domestic markets. That will not help our exports but will certainly disadvantage consumers through limited choice, poor quality and high prices. Any free trade pact is always about give and take. RCEP is no exception. The sooner we realise, the better.
The writer, a business economist, is the CEO of Indonomics Consulting Pvt Ltd
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