By Mani Bhushan* and Noel Therattil**
India’s decision to quit the Regional Comprehensive Economic Partnership (RCEP) last November has evoked a bag of mixed reactions. The sigh of relief from its political and business class is now accompanied by apprehension towards its economic trajectory. It was unexpected when Prime Minister Narendra Modi, who enjoys a comfortable majority in parliament, a high approval rating, and a history of taking bold decisions, quit the RCEP. Indian industries, primarily the MSME sector which accounts for the largest share of exports, will be saved from a death blow after two consecutive disruptive reforms: demonetization and the implementation of a goods and services tax. India’s dairy and agriculture industry will have time to reform, and its heavy and steel industries have got a wakeup call, albeit at the cost of denying foreign markets to the valuable Indian service and the pharmaceutical industries.
Since 2012 India’s trade deficit with ASEAN has grown by $12 Billion notwithstanding the fact that in 2014 the two parties signed the Services and Investments Agreement. As with most Free Trade Agreements (FTA) that India has signed, the deal has widened India’s trade deficit, most notably with Japan and South Korea. India’s hesitancy to promote competition, primarily in its manufacturing and its dairy sectors, is to be blamed. Despite ensuring that these industries remain on the exclusion list of FTAs for almost two decades, India acted lethargically in promoting these potentially valuable industries.
Meanwhile, China poses a threat to Indian industries even without an FTA. China’s exports to India ballooned from $4 Billion to $61 Billion between the fiscal years 2004 and 2017. At the same time, India’s exports to China only increased by $7 Billion. Out of the $102 billion trade deficit India has with the RCEP nations, China alone accounts for $54 Billion.
This also points to the inability of the Indian industry to achieve an economy of scale. For instance, the MSM Enterprises, which account for 40% of the country’s exports, are simply not large enough to sustain an economy of scale. The lack of capital and the economic slowdown per se have contributed to a further decline of the MSME sector. Yet India cannot afford to neglect this sector in favor of larger industries due to its significant contribution to employment generation and GDP.
Similarly, a look at the dairy industry paints a grim picture of what could potentially happen if India does not protect it since it is often the only sustenance for farmers and especially considering that 70 million households depend on it. According to the UN’s Food and Agriculture Organization, one dairy cow in New Zealand produces as much milk as five Indian dairy cows. Not to mention the disparity in herd sizes. It is estimated that if India were to allow cheap dairy to enter India without any auto-trigger mechanism, the prices received by an average dairy farmer would fall from $ 0.42 to $ 0.27 per liter.
Had India agreed to sign the RCEP agreement in its current form, India’s trade deficit with China would have increased even further. Overall, India’s diplomatic image may have taken the brunt of the initial fallout, especially considering the ‘Act East’ policy it is championing. As for the RCEP, it’s in the interest of other member countries that India becomes an active member, without it, a partnership of this nature in the Indo-Pacific region cannot truly succeed. Japan has already stated that it is considering not signing RCEP without India. India should wait for a few more countries to express the same before considering its position.
EU-India trade and the FTA
“We should engage in an FTA with the EU,” said Mr. Piyush Goyal. It is necessary for India to engage in FTA talks with groupings like the European Union, where India’s trade deficit is relatively lower. The Broad-based Trade and Investment Agreement (BTIA), initiated in 2007, was deferred after the Brussels negotiations in 2013. Recently, many EU member states aggressively attempted to enhance their trade relationship with India. The EU is India’s largest trading partner accounting for €92 billion worth of trade in goods in 2018. The EU single market is a huge opportunity to increase Indian exports in the region, which accounts for 18% of India’s total exports. Another factor is Brexit and Indian investments in the EU. Uncertainty has forced Indian companies to look to other EU nations hoping for a trade deal to facilitate investment and trade flows.
BTIA has stalled in the past due to some non-agreeable terms from both sides. Tariffs on certain sensitive items have not been accepted by the EU. Drug patents, agriculture, services, rules of origin regulations are other contentious issues. The EU wants stronger intellectual property regulations and a sustainable development chapter with social and environmental clauses. It insists on a uniform dispute settlement mechanism between the investors and the state but India favors domestic mechanisms. Meanwhile, India wants an easy visa for skilled workers. Some EU member states like Germany are in desperate need of skilled IT workers and their new visa strategy will be implemented later this year. This can be a good opportunity for India’s service sector.
Despite these challenges, it is in the interest of both parties to work towards an FTA. With the China-U.S. trade war that is ongoing, many export-based European markets have been affected. Indian markets can provide good alternative options. The Indian economy, which is in a slowdown, would also get a major boost via the European market. Further, India will benefit from the EU’s investment and technology. The India-EU partnership is one of mutual benefit and this can be taken to new heights once the FTA comes into force.
A growing debate in the geopolitical forum lately is the shape of the global order in a post corona world. Opinions are divided but one of the common themes surfacing is that many countries around the world will start rethinking their relations with China. Japan and South Korea have already taken initiatives to shift their businesses out of China. Countries like Germany, Australia, India, and others have changed their FDI policies to stop predatory takeovers by Chinese firms in this vulnerable situation. In light of this, changes in the RCEP agreement will come. Many countries who acquiesced to join the major trade bloc may see COVID-19 as an opportunity to dismiss it now. It would also be interesting to see how China takes advantage of being the first major country to recover in the post corona world. It is also likely that economically and geopolitically China will take the lead on global production and would theoretically strengthen its economical position, uninhibited by a weakened United States. The situation is evolving and for now, assumptions are the norm.
“The views represented in this opinion piece do not necessarily represent those of the Willy Brandt School of Public Policy.”
* Mani Bhushan is a Public Policy professional currently enrolled at Willy Brandt School of Public Policy.
** Noel Therattil is a Delhi based Advocate and a former LAMP Fellow