As RCEP Negotiations Hit Final Stretch, India’s Domestic Misgivings Continue

With the world’s largest free trade bloc moving closer to reality, many stakeholders still harbour doubts, particularly as FTAs signed earlier by India have not yielded the desired results.

Even as clouds of uncertainty hang over the World Trade Organisation (WTO)-supervised multilateral trading system due to growing US unilateralism, the idea of Regional Comprehensive Economic Partnership (RCEP), the world’s largest free trade bloc, is moving closer to reality.

The RCEP would cover nearly 50% of the global population, 32% of the world GDP and 29% of the international trade and 26% of foreign direct investment (FDI) flows.

Trade ministers from RCEP countries, at the end of their meeting in Singapore on August 30-31, have vowed to come out with a package of deliverables by December end, even if, as Indian trade minister Suresh Prabhu recently put it, it is unlikely to be signed this year.

This has given a new hope to proponents of trade liberalisation.

The uncertainties at hand

But after negotiating for over six years, there remain serious misgivings from various stakeholders within India about joining this upcoming trade block. This, sources tell The Wire, includes concerns raised by domestic industry and a handful of government departments including the ministries of steel, agriculture and chemicals.

India Inc feels that FTAs signed by India with Japan and Korea have not yielded desired results for it. On the contrary, exporters from these countries have used concessional tariffs to push their products into India, hurting the domestic industry.

Various industry associations, in multiple petitions and in closed-door sessions with government officials, have cited the bilateral trade deficit with these countries to make its point.

However, India’s biggest trade deficit is not with countries that it has signed FTA with but with China, with whom it has not entered into any free trade pact. Moreover, trade deficit with China has increased rapidly – from $16 billion in 2007-08 to nearly $63 billion in 2017-18.

In comparison, India’s trade deficit with Korea and Japan stood at the relatively modest levels of $12 billion and $6.24 billion in 2017-18, respectively.

Yet another example is US-India trade relations. India has the highest trade surplus with the US, though there is no FTA between the two countries.

So the argument that FTAs are responsible for India’s burgeoning trade deficit does not hold water. Naushad Forbes, former president, Confederation of Indian Industry, has also tried to dispel this misperception in an article published in Business Standard recently.

Trade experts emphasise the problem lies in low competitiveness of the Indian manufacturing sector, which can be improved through higher investment in research and development (R&D). Indian companies invest just 0.3% of GDP in in-house R&D compared with 1.5% their peers in developed countries, show data. Looking inward, therefore, is no solution.

The RCEP has envisaged including ten ASEAN group members (Brunei, Cambodia, Indonesia, Malaysia, Myanmar, Singapore, Thailand, the Philippines, Laos and Vietnam) and their six FTA partners – India, China, Japan, South Korea, Australia and New Zealand.

The proposed agreement, for which negotiations started in Cambodian capital Phnom Penh in November 2012, aims to cover goods, services, investments, economic and technical cooperation, competition and intellectual property rights.

Trade ministers pose for a photo during a Regional Comprehensive Economic Partnership ministerial meeting in Hanoi, Vietnam, on May 22, 2017. Credit: Reuters

Giving up on tariffs

Another source of unease for India is what it has to give up on tariff line elimination. Tariff lines, put simply, are sets of goods and products defined at highly detailed levels for the purpose of setting import duties.

RCEP countries want India to commit duty cuts on at least 92% of tariff lines.

Fearing that it would cede too much ground to China, India’s initial proposal during negotiations was a three-tier tariff reduction plan. Countries that came under the third tier, which would include China, would only be offered 42.5% liberalisation.

Under pressure from other countries, and hoping perhaps to gain something on the services front, India back-tracked and took back its three-tier proposal. The problem now is that India’s new offer (tariff liberalisation on 74% of goods for China and a few other countries and up to 86% for all other RCEP members) is not being viewed favourably either.

After missing the previous meet, an Indian delegation led by commerce minister Suresh Prabhu did participate in the Singapore ministerial last week. However, it is not clear if it is ready to play ball with other RCEP countries over tariff reductions.

What will it get back?

In return for tariff liberalisation on goods, India has sought greater commitment from RCEP members on liberalisation of the services sector, especially easy movement of its professionals to other countries in the proposed trade bloc.

It has pushed for adopting Asean-Australia-New Zealand FTA as the template. However, its demand has failed to find traction with other RCEP members, resulting in a lowering of its ambitions.

In remarks to the media, Prabhu reportedly stated that the Singapore meet resulted in concessions made to India on the service sector, but did not clarify on what shape or form they would take.

“We have emphasised on the inclusion of services under goods in the economic agreement,” Suresh Prabhu, minister of commerce & industries and civil aviation, told The Week magazine on Tuesday.

“Our argument has been accepted and now services would also be included under the ambit of RCEP,” Prabhu added. India had earlier faced criticism for stalling the RCEP talks by insisting on services to be included.

According to commerce ministry sources, India is looking to take a final call by November, when Prime Minister Narendra Modi is expected to visit Singapore for the 33rd ASEAN Summit.

Open or closed?

India’s experiment with the command economy in the pre-liberalisation era has been nothing short of disastrous. Inflation was hovering at a peak of 16.7% in August 1991, while foreign currency assets were depleted to the level hardly enough to cover two weeks’ imports. The 1990 Gulf crisis triggered by the US invasion of Iraq forced India to abandon the command economy structure and set out on the path of economic liberalisation.

Starting in 1991, India has progressively liberalised its economic and trade policies, reaping benefits in terms of increased share in world trade, higher per capita income and stable forex reserves.

India’s GDP increased from $278.4 billion in 1991 to $2.85 trillion in 2017-18, registering more than tenfold growth. During the same period, per capita GDP increased by more than six times – from $310 to $1977.

In 1991, India accounted for just 0.5% of the global trade, which has increased to 1.5% in 2018.

Prior to 1991 liberalisation, foreign direct investment was negligible.  It has progressively increased since then and reached nearly $62 billion in 2017-18.

But in a reversal of the trend, the Modi government has increased import duty on several items including mobile handsets, purportedly to support its flagship Make in India programme. The Centre’s alternatively hot-and-cold stance on RCEP is also being as a return to protectionist policies.  

US and WTO

US President Donald Trump last week threatened to withdraw the US from the WTO, saying it treats his country unfairly.

“If they don’t shape up, I would withdraw from the WTO,” Trump said in an interview to Bloomberg News.

The United States has also been blocking appointment to the WTO’s appellate body, in a move that experts said could render it incapable of hearing and resolving disputes arising out of America’s unilateral tariff hikes on steel and aluminium and other protectionist measures.