RCEP: Two futures for India and its industry

Our poor trade performance reflects poor industrial competitiveness. The sooner industry addresses this, the better for India

The Regional Comprehensive Economic Partnership (RCEP) aims to bring together the 10 countries of Asean in Southeast Asia, Japan, South Korea, Australia, New Zealand, China and —until this month — India.  These 16 countries account for almost half the world’s population, a third of world GDP and trade, and are collectively growing at a rate that is double the rest of the world. After protracted negotiations that began in 2012, the 15 RCEP members (minus India) have committed to signing an agreement next year.  

RCEP is good for India

Our negotiators had obtained a good deal for us in the RCEP.  Agricultural products, including milk, were largely excluded from the agreement providing protection to the Indian farmer. For industrial products, less access was provided for China than the other 14 countries together with a longer adjustment period.  For example, the RCEP covered 90 per cent of all traded items (tariff lines, in trade negotiator jargon) for Asean, but only 74 per cent of all traded items for China. For Asean, most items had zero duty from now, but for China there was a long adjustment period of 5, 10, 15, 20 and even 25 years.  Finally, India asked for an automatic safeguard against a sudden surge in imports for any item from China, a unique provision. China had agreed for some 60 of our most sensitive items — we wanted more, but surely this can also be negotiated to an acceptable conclusion.

Certainly, there are things to negotiate, interests to protect and advance, and domestic political concerns to satisfy.  But if a decisive prime minister who has emerged as a world leader, heading a government with a strong majority, can’t address these issues, then who can?

Illustration: Binay Sinha

I wish to focus in this article on industrial competitiveness — and two futures for Indian firms. The voices we hear on trade issues are the ones moaning in all the coverage of RCEP in our media — for example, food processing firms worried about competing with the import of cheese from New Zealand, and steel and chemical firms concerned about China.  They have argued for, and obtained, either exclusion of their items from the free trade agreement, or highly extended adjustment periods. If we cannot be confident of competing effectively with China in even 10, 15 or 25 years, do we deserve to be in business?

What it will take to compete

Let us start with costs. Material costs are largely similar around the world — unless one has to buy the item at a higher price from a protected domestic firm.  If we protect our steel producers, we spread costs and inefficiency throughout our engineering sector. Low or no tariffs are the best way to ensure our firms get competitive inputs — and our consumers get products at world-competitive prices.  This ball is squarely in the government’s court — and they have fumbled badly with nine rounds of tariff increases in the last three years.  

Labour costs are a big variable between countries.  As China has grown into a mid-income country, its wages have risen dramatically.  Higher wages must be matched by higher productivity, or one will be uncompetitive. We may look to the government for a better educated and skilled workforce, but the primary responsibility for training and productivity lies within each firm.  

The rupee is also overvalued — its real effective exchange rate has appreciated by 20 per cent over the last five years.  A rupee at 80 to the dollar would set things right. Other things add to our cost of doing business in the country.  We can be justifiably proud of our jump in the World Bank’s Ease of Doing Business rank, but if you ask the average Indian firm whether it is easier  for them to do business today than five years ago, the answer would be no.  

The buck stops with industry

Ultimately, it is the choice we make in industry that will determine our future.  One alternative is to accept that after 72 years of independence, 28 years since reforms began, and another 10 to 25 year adjustment period, we still will not be able to compete with the best in the world.  We can then lobby against free-trade agreements, demand protection from the government, and build a moat to keep the world out of India. This policy, which we followed for decades, protected incumbents and kept us poor.  The second alternative is to continue what we began 28 years ago — to open up to the world, let the best in, and encourage our best to go out and build businesses that lead the world.  Many Indian companies have been doing just this — but are still not typical.  Competition from imports is the best way of ensuring that it is this type of firm that predominates.  

A 10-year project

Let us set ourselves a project.  In 10 years, every Indian company must either be able to compete with the best in the world, or fold up.  There are three types of Indian firms. There are those, mainly in commodity businesses with thin margins and little product differentiation, which are most affected by the cost of doing business in India.  They need to turn from growling at free-trade agreements to growling at anything that adds to our costs — exchange rates, power tariffs, export  paperwork, port congestion, fickle policies, and a new regulation from company affairs every other week. Then, there are the Indian firms which are today happily doing business around the world — software companies, of course, but also motorcycle companies like Bajaj Auto exporting 40 per cent of their output, specialty chemical companies like Aarti Industries exporting over 50 per cent of theirs, and infrastructure companies like TVS Logistics acquiring companies around the world.  They need to articulate their interests in free-trade agreements — such as the RCEP — so our government is encouraged to pursue them.  And lastly are those firms which have built world-beating businesses that are today domestically focused — our private banks and non-banking financial companies.  They need to state their interests in access to world markets.  In 10 years, the Indian market will be too small for them, and they will need the RCEP Asian market that is eight times larger than we are.  

In other words, it is a question of confidence for Indian industry.  Do we seek to hide from the world, secure and protected in our own fortress?  Or do we have the confidence to let the world in and ourselves go out and compete with the world on its terms?  The RCEP provides us with the stepping stones to integrate with the best in the world — a long adjustment period, graduated tariff reduction, hundreds of excluded items, friends like Japan and Singapore that support our negotiating position.  The prosperity of future generations depends on India joining the RCEP before the deal is concluded early next year.  

The writer is co-chairman Forbes Marshall, past president CII, chairman of Centre for Technology Innovation and Economic Research and Ananta Aspen Centre.  ndforbes@forbesmarshall.com.