RCEP: If India wants to be a developed country, then does it have a choice?

International diplomacy is not a zero-sum game. The principle holds equally good for geo-economics. It is now acknowledged by national finance ministers and central bank heads that ‘trade tensions’ are holding back growth.  In the midst of dramatic deceleration, Indian policy makers find themselves in a dilemma to address impact of global slowdown, internal growth challenges, having used most of the monetary and fiscal fire power to stoke demand. The attention is now on India’s approach towards FTA’s in general and, RCEP in particular. 

Can India set the agenda

The incumbent government - since the beginning of its first term - has sought to exemplify the entrepreneurial spirit with its flagship 'Make-in-India' campaign. On fiscal policy front, customs duties were realigned to incentivize domestic manufacturing by addressing the inverted duty structure and disincentivizing import of finished (labelled as non-essential) goods. At the same time India put execution of new Free Trade Agreements (FTAs) on the back-burner, allowing older FTAs to expire. The outcome of earlier FTA’s didn’t work to India’s advantage as it was felt that ‘India gave way too much’. The fear of past FTA’s forced policy makers to swing the pendulum and push a model FTA, for which India has no takers. Nevertheless the Modi administration's approach was to gradually offset imports in favour of local production. Propagation of liberal export incentives under the Foreign Trade Policy and impetus to globally positioning ‘Make-in-India’ complemented this trend. Results could have been better though. Two recent measures (i) 15% corporate tax option for new manufacturing entities, and (ii) 100% FDI for contract-manufacturing, is further evidence of India’s policy-intent. There can be no two views on the soundness of this approach as manufacturing has a higher potential for trickle-down benefits in contrast to the service sector.

Viewed critically, India’s approach is labelled by the world as protectionist, particularly in light of recent WTO ruling (in favour of the U.S) against export schemes and frowned upon by proponents of ‘comparative advantage’ theory. Propounded in the 19th century by David Ricardo, the theory postulates that a country should invest in manufacturing only those products in which it has, over other countries, comparative advantage, be it in pricing, qualitative or other parameters and which have export potential. Other products should be imported from countries in which they have comparative advantage. In a perfectly competitive world, all the countries will be relatively better-off instead of all attempting to achieve self-sufficiency. 

RCEP: Reasons for concerns

The Regional Comprehensive Economic Partnership (RCEP) is a proposed FTA between 16 countries i.e. 10 ASEAN nations and six others which includes China, Japan, India, South Korea, Australia and New Zealand. The negotiations, which have lingered on since 2012, are complex given that its conclusion could lead to the world’s largest economic block with almost half of the global economy and the biggest change in international trade after WTO.

China and India put together will constitute three-fourth of the combined economies of RCEP leave alone the future potential! This is the core decision-making fulcrum for India. A steady open market for India-manufactured goods ought to be the key driver for India to join RCEP. Though, a vivid nightmare that unregulated entry of Chinese goods will create havoc for domestic manufacturers is making us think twice.

Testing the credibility of fear

India witnessed a somewhat similar situation in the early 1990’s at the time of joining the WTO though, circumstances were different in terms of size of its economy and political muscle. Two reasons were cited to oppose entry: (a) ceding of sovereignty and, (b) Indian industry’s challenge to survive global forces, the latter being postulated by India Inc. More than two decades of India’s tryst with WTO has shown that both the concerns were largely unfounded. In today’s world, despite trade barriers, a nation’s economy is vigorously intertwined with global and external forces; sovereignty argument is a non-starter. 

India’s immediate concerns cannot be a reason to change forward looking outlook. Perhaps a few businesses may be impacted with free flow of goods of other RCEP member nations. The membership of  FTA, conversely, will give opportunities to Indian MSMEs to expand in RCEP territories and equip them to explore export markets, leading to our competitiveness and integration with global supply chains. The current woes of MSMEs ought to be dealt with interest rate mechanism.

If we believe it’s time for India to transform itself into to a developed country, with the aspiration of a $ 5 trillion economy, then we ought to get over this protectionist mindset. The High Powered Advisory Groups report on FTA and RCEP is forward looking and can’t be ignored. India has a lot to offer and a 'let's meet halfway' approach with the Chinese coupled with a hard bargain on schedule of commitments ought to be the way forward. In any case, if India declines the RCEP membership, the world will not wait for India to change. Instead, if the administration indeed believes that it has to recover from the ‘lost decade’, it must act bold and not risk travelling the old path, which appears to be plagued more by fear psychosis than rational considerations. Let’s see if PM Modi’s Bangkok visit springs a pleasant surprise!

The authors are Partners with BMR Legal, Advocates & views are personal.