India has opted for a status quo by refusing to join the Regional Comprehensive Economic Partnership (RCEP). While the fears of cheap import surges hurting our dairy and agriculture sectors have been abated for the time being, the decision does nothing to enhance the competitiveness of our domestic industries or to make them ready for global competition.
The decision will also not boost domestic demand or consumption, something the economy urgently needs at this stage. This could have been made possible if our consumers had access to better quality low-cost products from RCEP countries. Unfortunately, they will have to continue to make do with low-quality but high-priced domestic products.
The hopes of micro, small and medium enterprises (MSMEs), longing to be part of global value chains by accessing intermediate products at globally competitive prices from RCEP countries, have also been dashed. The decision, unfortunately, does not ease the running of business for MSMEs, or foster their growth. To the contrary, once the RCEP comes into force among 15 nations, the trade diversion effects on India are likely to be substantial.
The decision to not join RCEP also does nothing to bolster our ‘Act East’ and ‘Act Far East’ policies. Instead, our status quoist approach has provided a fillip to a growing rhetoric of protectionism.
In short, we have turned our back on the opportunity to support trade liberalisation, acknowledge its gains and contribute to the efforts to fix countervailing issues which thwart liberalisation and consequent growth.
It is true that India had some valid concerns with respect to RCEP. These include a lack of clarity on rules of origin, the ability of members, particularly China, to erect non-tariff barriers, and the need for tighter integration of services trade into the agreement among others. Given that India will continue to trade with RCEP countries despite not being part of the agreement, most of these concerns will continue to persist.
What comes next? The government will firstly require some innovative ideas to discuss bilaterally with each of the RCEP members to address such concerns. Being part of the partnership would have offered an opportunity to deliberate such issues at a multilateral forum and arrive at a consensus with support from members experiencing similar issues. This would have saved a lot of time and energy. Now we stand isolated.
It has been argued that the opportunity to negotiate a better deal still exists, as India has a year to negotiate and be part of RCEP. Once the trade pact sans India is enforced, with 15 countries lowering tariffs amongst them, and experiencing the benefits of free trade, they will have little incentive to accommodate India’s concerns. Experience has taught us that we have gained very little from sitting out of multilateral negotiations in the past and had to confront unfavourable terms when we felt ready to join. There is nothing to suggest that the story will unfold differently this time.
Prime Minister Narendra Modi has pointed out that neither Gandhi’s talisman nor his own conscience permitted him to join RCEP, which in its current form, does not take into account the interests of all Indians. While one wonders how free trade offering quality products at reasonable prices does not meet Gandhi’s test or Deendayal Upadhayay’s antyodaya philosophy of improving the lives of poorest, it appears that the prime minister has recently started the use of these yardsticks.
Had these been utilised in the past, he would have experienced similar difficulties in going ahead with demonetisation and Goods and Services Tax decisions. Without such unprecedented shocks, the economy would have been in a much better shape and perhaps more amenable to RCEP. Hopefully, the prime minister will measure all his future decisions on these yardsticks.
While lauding Modi’s decision to not join RCEP, commerce and industry minister Piyush Goyal said it will boost the Make in India initiative. One is not sure how this is going to happen. Boosting manufacturing in India requires a number of difficult structural reforms, requiring immense political boldness and courage. In the 2019 Lok Sabha elections, the prime minister was handed a mandate for this reason. The necessity to join the world’s largest free trade partnership would have offered a perfect pretext to unleash structural reforms. Unfortunately, we have given it a miss. One is not certain if and when we will be presented with such an opportunity in the future.
The RCEP negotiation still offers a few important lessons for India. The assumption that the world will bend to our demands given the size of our market doesn’t hold good any more. We need to put our house in order to take on global competition and benefit from export opportunities that external markets offer, and such multilateral agreements create. No country has grown without strong export performance and thus it is important for India to understand this simple fact. This is also vital for our aspirations to become a $5-trillion economy by 2024.
The refusal to join RCEP is an acknowledgment to ourselves and the world that our house is not in order. Acknowledgment of a problem is the first step in addressing it. At the same time though, the refusal is not enough to boost domestic productivity, and needs to be complemented with reforms to reduce input costs such as finance, power and logistics, remove bureaucratic hindrances and encourage active cooperative federalism. Only then will we be able to overcome our limitations, confidently enter into such multilateral agreements, compete effectively in global markets and realise our potential.
Pradeep S. Mehta and Amol Kulkarni work for CUTS International, a global public policy research and advocacy group.