India's RCEP foray may prove disastrous for domestic industry: Expert

Illustration by Ajay Mohanty
At a time when exports continue to struggle with an economic slowdown and a global trade war, India's foray into the Regional Comprehensive Economic Partnership (RCEP) deal may prove disastrous for domestic industry, says senior trade policy expert and Professor at Jawaharlal Nehru University, Biswajit Dhar. Involved in crafting multiple trade deals over the past two-decades, he tells Subhayan Chakraborty that India has tried the same concept earlier, with little result. Edited excerpts:

How different is RCEP from any of the earlier bilateral or multilateral trade deals India has signed till now?

Firstly, India already has trade agreements with 12 of the 15 countries that are part of the RCEP grouping. When these agreements were signed back in 2004-05 as part of the mega India-Asean Free Trade Agreement (FTA), there was a lot of expectations backed by the Look East Policy and India's increasing closeness with the East Asian region that had become the center of gravity of the global economy. India's economic growth was at historically high rates, and there was hope that integration with these other rapidly expanding nations, would help continue that. All the estimates forecast by the feasibility studies, of trade and investment flows picking up, and India being able to compete with the Chinese, never actually materialised. The narrative remains the same now, with the only exceptions being economic slowdown at home and a global trade war. The timing is horrible.

So, people should be concerned about history repeating itself?

Not only average people, but even members of the current government had expressed concern about India's FTAs with the Asean bloc, Japan and South Korea before coming to power. As an Opposition party, the Bharatiya Janata Party (BJP) had criticised these for not leading to export growth even as imports skyrocketed. This ate into the earnings of domestic industry that ultimately led to job losses. Even after coming to power, this government gave signals to show they were reluctant participants in the RCEP process. The fact that in 2015, India offered to reduce import duties on only 42.5 per cent of the Chinese goods shows that. On the contentious issue of investor state dispute resolution, the government gave momentum to a review process on investment policy that led to a new model bilateral investment treaty by the end of 2015. So, the government itself had accepted at the beginning that RCEP, which includes both these issues, was contentious.

What do you think tipped the government's views on RCEP?

With regards to India's earlier FTA's, it was Manmohan Singh's concern about India's image globally. Subsequently, as India got closer to its neighbours, the dynamics started changing, which the current government inherited. When the current government took over RCEP negotiations in 2014-15, the GDP was growing at seven and a half per cent. I feel India could have secured a better deal more so because China's economic growth had started to slow down. Also, India has an important bargaining chip - a large, domestic market which the RCEP needs.

How beneficial is the deal as talks stand? 

The trouble is that India is being asked to eliminate import duties on 90 per cent of all traded goods with very little safeguards for domestic industry. Then you have to worry about what goods to keep in the other 10 per cent list, on which tariffs may also go down later. Also, there are goods in both agricultural and industrial sectors that should be a part of the sensitive list on which countries reserve the right to not reduce duties. Exposing all these sectors to the international market at a time when the economy is not in a good shape will lead to severe adjustment pangs, in the form of job losses. Also, we just came to know that the unemployment rate is among the highest in decades. Finally, you can't negotiate away all your instruments, especially with a group of nations who account for a lion's share of your trade.

But experts are now batting for lower tariffs. The government appointed high-level advisory group on trade has suggested duties be lowered soon to make India competitive.

You don't have a single case anywhere in the world where without systematic intervention by the government, the industry has been able to become efficient. The majority of industry doesn't have deep pockets. In the South-East Asian economies of RCEP, the government provided the optimum measures for growth and expected the private sector to perform. Here, the government doesn't have the authority to ask the industry for growth. 

So, what’s the solution?

Liberalisation alone is not a prescription for growth. That requires sustained labour reforms to reduce costs and cutting of red tape. As of now, the most important thing is to find ways of reviving both agriculture and industry. This includes manufacturing as well as services, in which India's edge has reduced. To do a revival package, the centre needs policy space that typically requires a mix of tariff protection, facilitating development finance for enterprises to maximise employment and investments in infrastructure. For the medium term, there's a need for innovation policy. All of these are yet to be done.

How valid are concerns of Chinese dumping at a time when China is moving into high value manufacturing?

Very. With a fast-changing demography, China may be moving into relatively high value manufacturing but they are looking for new markets. With China's export lines under severe strain due to the ongoing trade war with the US, it will need to find a way to push out it's huge inventory of products. RCEP will provide it that opportunity with India lying just next door.

What about the industries who actually want to join RCEP?

The limited number of industries that have called for India to join RCEP need to address their own structural issues. Downstream industries who use steel have called for cheaper steel from outside but there isn't a single precedent of any country experiencing serious economic growth on the back of imported steel. The loss of capital goods manufacturing has cost the US economy significant growth. The pharma industry, which imports an estimated 70 per cent of raw materials from China is also in support of RCEP. But China is also entering into the manufacture of formulations, which India dominates. Finally, have we been able to crack into the Asean market despite having an agreement? The industries hoping to get into China also have to deal with non-tariff barriers, which the Asean economies are also known for."

Moving beyond manufacturing, how do you think the farming sector will be affected?

Till now, in all the trade agreements done by India, the agricultural sector has remained a holy cow that hasn't been touched. So, the government has been deeply aware of the problem in agriculture. And, it's also the social problems that would be created if farmhands - already underemployed -- become unemployed. Now, we still don't know to what degree core agricultural products like cereals would be kept out of the deal. The domestic dairy industry sees a real danger in foreign companies like New Zealand-based Fonterra already setting up in India. Items like dairy provide stability to farmers who otherwise repeatedly face volatile prices. On the other hand, farmers also worry that high value plantation crops like pepper from Vietnam may flood the domestic market. Interestingly, India had provided pepper seeds to Vietnam as part of reconstruction efforts after the US invasion and now their productivity is better than India.

Given the prevailing political mood on FTA's, do you think the RCEP deal - if agreed on - will be ratified by Parliament?

The government may not face an issue there. It has full mandate to negotiate an international agreement. The previous FTAs with the Asean bloc, Japan or South Korea were not put to votes in parliament.

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