Pulling out of RCEP not just an economic decision

Topics RCEP | Narendra Modi | Modi 2.0

Prime Minister Narendra Modi exercised sound political judgement in deciding to keep India out of the Regional Comprehensive Economic Partnership or RCEP, right in the middle of the Bangkok meet called to seal the seven-year old negotiations.

This was a big decision. The RCEP is no ordinary free trade agreement. This could be the largest regional trade agreement in the world involving 16 countries from Southeast Asia and East Asia, as well as China, Australia and New Zealand. If India had joined the pact, the RCEP would have encompassed half of the world’s population and 35 per cent of the global GDP. This was not just a free trade agreement about import and export of commodities; it covered goods, services, investment and intellectual property rights. This would have affected crores of Indians involved in primary, secondary and tertiary sectors of the economy over a very long period.

It was a tough decision. There were good arguments on both sides. It is not an easy call to keep off from such a large agreement with potentially huge volumes of trade and investment. You don’t need to know the principle of comparative advantage to understand the simple economic rationale for international trade. Keeping away from zero or low tariff trade is to deny yourself the possibility of cheap goods and services from outside and bigger markets for your own products. The decision is bound to invite serious and credible criticism. Shekhar Gupta, the Editor-in-Chief of ThePrint is also among the critics of this decision. The general image of India turning “protectionist” might hurt in global fora.

This must have been a personal decision. With the departure of Arun Jaitley, now Narendra Modi has no one whose judgement he can trust on matters economic. Nirmala Sitharaman has not covered herself in glory in her stint so far as the finance minister. His Commerce Minister Piyush Goyal is a proverbial bin-pendi-ka-lota (rolling stone), unless he is speaking on grave matters of gravity. Until last week, Goyal was singing praises of the RCEP and calling out sceptics. As for expert advice, barring a few exceptions, Prime Minister Modi has managed to surround himself with advisers who cannot tell him anything other than what they think he wants to hear. So, there was a made-to-order expert group report advocating the RCEP.

This was a super complex decision. The calculus of expected gains and losses was hard to sum up. There were many genuine advantages — IT sector, health professionals and teachers were eyeing additional jobs. The Indian pharmaceutical industry looked forward to bigger markets. Industry wanted cheaper steel. And of course, the consumers could benefit from cheaper goods, and not just from China.

All these potential gains had to be weighed against serious possible losses. Indian manufacturers feared an onslaught of cheap Chinese goods. Retailers feared big investment in e-commerce, further marginalising their business. Some of the local industry and trade may have been seeking protection to hide their inefficiencies, but there was an underlying, and legitimate, need for state support against predatory trade. And the timing was just plain bad, what with the economic slowdown, falling revenue, rising trade deficit and growing unemployment at home.

The biggest anxiety concerned the producers of primary goods. The partial experience of earlier free trade agreements and the losses to rubber, coffee, coconut, cardamom and pepper farmers had served a warning to Indian agriculture. A similar fate awaited wheat, cotton and oilseed farmers if India embraced the RCEP. All the major farmers’ groupings — from the All India Kisan Sangharsh Samiti (AIKSCC) and the Indian Coordination Committee of Farmers Movement (ICCFM) to RSS-backed Swadeshi Jagaran Manch — stood in staunch opposition to the deal. The dairy sector faced a near-certain disruption as RCEP was bound to open the doors for cheap and subsidised milk powder from New Zealand. Cooperative dairies were up in arms, led by no less than R S Sodhi, the managing director of Amul. This is why India had so far kept agriculture more or less off the FTAs.

So, the calculus of RCEP worked out to intangible gains in the long-run versus tangible and immediate losses, forcing the domestic industry to face competition now versus later, consumer versus producers, a few corporates versus a vast number of small manufacturers, traders and farmers.

This was not just an economic decision. This involved taking a call not just on India’s foreign policy but also on India’s role in the evolving world. This has been a weak spot for PM Modi, even though he has abler assistance now. It is one thing to organise NRI spectacles abroad, and quite another to engage in hard-core global diplomacy. The RCEP was seen as an opportunity to tap into the China-US trade war. The informal Mamallapuram summit with President Xi Jinping was mainly an attempt to open the doors for that. Apparently, it did not work. Meanwhile, the PM has had better success with US President Donald Trump. At least he thinks he has. So, there is a temptation to balance China with the US with the help of an FTA with the latter.

Finally, this was a political decision. Signing the RCEP would have invited consolidation of opposition against him, from movements to political parties. This would have lent strength to accusations of an anti-farmer and anti-small trader government. Significantly, the Congress had at last woken up and had taken an anti-RCEP position, reversing its earlier posture. The evocative statement by Jairam Ramesh, likening the RCEP to the third jhatka after demonetisation and the GST, could become the war cry of opposition. This was the last thing Narendra Modi needed just when Haryana and Maharashtra election had reminded the BJP that economic woes have not disappeared from the voters’ mind.

Hence the sudden recall of Gandhiji’s talisman. You might call it a cover-up. You might say that the reference to farmers’ interest is in bad faith. The breaking point of the negotiation was not agriculture or dairy, but the Indian government’s demand for assured market access in export of goods and services and an import cap on China. You could call it a case of sour grapes after the failure of the Mamallapuram summit. You could call it a hasty retreat, making a virtue of political necessity. Yes, it is all that. But it is much more than that.

I call it political judgment. Don’t sneeze at it. It’s a scarce commodity these days.

By special arrangement with ThePrint
The author is the national president of Swaraj India. Views are personal

Business Standard is now on Telegram.
For insightful reports and views on business, markets, politics and other issues, subscribe to our official Telegram channel