Research & Analysis

Out of RCEP: Need for synergising the domestic and the international

The author identifies the core domestic factors inhibiting economic growth that India must comprehensively address in order to benefit robustly from free trade agreements such as the RCEP.

Indian Prime Minister Narendra Modi’s ‘bold decision’ to not join the Regional Comprehensive Economic Partnership (RCEP) has been projected positively by the Indian government and others, with India’s Home Minister, Amit Shah, terming the decision as “New India’s new self-confidence.” However, does this decision indeed reflect “self confidence” or was it yet another consequence of decades of structural incapability, inadequate economic decision-making, and poor management of the economy which in turn caused unpreparedness for integration into global markets?

As noted by several analysts, it is imperative to note that not joining the RCEP in its current form is a prudent move. India’s trade experience with its major Free Trade Agreement (FTA) partners has not been very encouraging, and benefiting from agreements like the RCEP will always remain a farfetched goal until domestic challenges are addressed.

Structural Shortcomings, and Inadequate Decision-making and Implementation
The RCEP bloc comprises 10 ASEAN members (Brunei, Cambodia, Indonesia, Malaysia, Myanmar, Singapore, Thailand, the Philippines, Laos and Vietnam) and their six FTA partners (India, China, Japan, South Korea, Australia and New Zealand). As of 2018-19, India has trade deficits with as many as 11 RCEP member countries—including China, South Korea and Australia—of the grouping of 16 countries which are negotiating the mega trade pact since November 2012. The worst trade deficit is with China—US$ 53.6 billion—and concessions under the RCEP would have undoubtedly exacerbated the existing deficit. That being said, external factors alone are not responsible for the trade deficit.

India’s export story itself is not encouraging, and as economist Surjit Bhalla pointed out, “90 per cent of our bad export story is domestic challenges, 10 per cent external environment.” India’s export sector has always been fraught with problems of cost disadvantage due to logistics, labour, and inverted duties structure, and substandard quality of products. Various committees, working groups, inter-ministerial panels such the Khullar Panel on Manufacturing Exports (2011), the Gujral Panel on MSME Exports (2013), and the Debroy Panel on Logistics (2018) have made recommendations towards addressing structural hurdles such as logistics costs, inflexible labour laws and inverted/distorted duty structures. However, inadequate implementation of these recommendations has restricted India’s export.

For example, until recently, labour law reforms had been limited to mere announcements of reforms. However, there seems to be some forward movement on this front. India’s Ministry of Labour and Employment has taken steps to codify the existing central labour laws into four codes—Labour Code on Wages, Labour Code on Industrial Relations, Labour Code on Social Security and Welfare, and Labour Code on Occupational Safety, Health and Working Conditions. Recently, the Labour Code on Industrial Relations, 2019, bill was introduced in the Lok Sabha. It remains to be seen how these reforms are implemented and managed.

Another sector that awaits reform is agriculture. That India is facing severe agrarian distress is evident. However, the government has consistently failed to provide better markets to farmers; develop and implement policies and incentives to link technological innovation with agriculture and trade; enable enhancement of skill sets to match trade requirements in terms of size and scale; and provide a holistic approach to infrastructure development.

Furthermore, inverted duties—i.e. higher duties on raw materials and zero on finished goods—are a bane in several sectors such as textiles. When the import duty on raw materials is high, it is naturally more difficult to produce relevant goods domestically at a competitive price. Several industries depend on imported raw materials and components. High tax on the raw materials compels them to raise prices. On the other hand, foreign-made finished goods are becoming available at lower prices due to the low tax advantage. Consequently, goods manufactured by domestic industry are rendered uncompetitive.

Meanwhile, India’s struggle to upgrade its production processes and product quality as per international standards has always been a concern for the export industry. India’s slow/no progress on developing an institution to develop quality standards, set up globally accredited testing laboratories, and sign Mutual Recognition Agreements with partner countries has kept the exports under pressure. In this regard, Indian Finance Minister Nirmala Sitharaman’s recent announcement of a booster package for exports is an approach that tackles the problem superficially, without addressing the core problems of the sector.

Management Inefficiency
Recently, Moody’s Investors Service cut India’s gross domestic product (GDP) growth forecast for 2019-20 to 5.8 per cent, from the earlier estimate of 6.2 per cent, attributing the deceleration to an investment-led slowdown “that has broadened into consumption, driven by financial stress among rural households and weak job creation.” The current economic slowdown and the government’s management of the economy over the past few years, combined with the damaging effects of demonetisation and the Goods and Services Tax, have dented the confidence of farmers and the manufacturing sector.

Joining the RCEP would have made the Indian economy more vulnerable and exacerbated prevailing un-competitiveness. Resultantly, New Delhi opted to take a protectionist approach towards its industries and farmers, and refrained from joining the RCEP. While this choice was logical in the current circumstances, in the long run, protectionism will lead to economic isolation in the region and inhibit growth. Lack of competition will eventually make industries more unfit for global markets and wary of competition, leading to a deepening of the export crisis and acceleration of economic slowdown. At this juncture, New Delhi must get the economy back on track and re-build the confidence of the industries and other stakeholders as priority.

Looking Ahead
At a time when India is looking to become a “5 trillion US $ economy by 2025” as stated by the prime minister, it cannot afford to isolate itself from the global markets. RCEP or not, India must ensure structural reforms are undertaken simultaneously with educational reforms to create skilled employment. Unless we develop and manage our markets and economy, increase the scope for exports, and become more competitive, not only will our position remain axiomatically defensive in trade agreements, we will not reap much benefits from such engagements.

 

The author is Senior Researcher, Centre for Internal and Regional Security (IReS), and Manager, Operations and Outreach

 

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