By sitting out of RCEP, India does not lose economically

Debatable gains for developing nations from trade deals

Business

November 20, 2020

/ By / New Delhi

By sitting out of RCEP, India does not lose economically

Largely seen as a Chinese initiative RCEP is reflective of the enhanced influence of Beijing in global trade

As Regional Comprehensive Economic Partnership (RCEP) agreement becomes operational, there is pressure on India to join the world’s largest trade grouping. But India needs to stay away from trade deals in general as its gains may not amount to much.

The world’s largest trading bloc was born earlier this week when 15 member nations signed the deal after eight years of negotiations. With one third of the world’s population and 29 pc of global gross domestic product (GDP). These dimensions make RCEP bigger than the European Union as well as the US-Mexico-Canada Agreement, the new version of North American Free Trade Agreement (NAFTA).

The RCEP is largely seen as a Chinese initiative and is reflective of the enhanced influence of Beijing in global trade. Besides China, its members include the 10 member states of Association of South East Asian Nations (ASEAN) as well as Japan, South Korea, Australia and New Zealand.

For years, India had been part of the RCEP negotiations. However, it dropped out last year, partly due to the rising strategic tensions with China, but mainly due to pressure from the Rashtriya Swayamsevak Sangh, parent organisation of the ruling BJP, which believed that the trade deal would be harmful for rural Indian economy as it could see the Indian market flooded with milk and cheese from Australia and New Zealand.

Though the RSS’ fears over Aussie or Kiwi milk in India may have been overblown, they are not far off the mark as far as India’s performance in trade is concerned. Even though it the world’s seventh largest economy and was till a couple of years ago one of the fastest growing major economies, India’s trade figures are hardly complimentary. While traditionally richer countries have run trade deficits with poorer nations, India has almost always had significant trade deficits with most of its developed trading partners and even several emerging economies like China or its south east Asian neighbours.

India is a minnow in many ways in the global trade scenario. For instance, US-China bilateral trade stands at nearly USD 635 billion, with China enjoying a hefty trade surplus of USD 408 billion. Similarly, EU-China trade is almost same at USD 640 billion and China has a surplus of USD 146 billion. India, by contrast has a total trade of USD 120 billion with the EU and enjoys a measly USD 3 billion trade surplus. India’s total trade with US stood at USD 146 billion and it enjoyed a healthier trade surplus of USD 28.6 billion. India’s performance with the ASEAN or other key trading partners such as Japan or South Korea is hardly any better.

It is not just the trade figures that are discouraging for India. The country’s general level of poverty is another major hurdle as it puts bilateral economies ties on an uneven base with most nations, including low to middle income nations. For instance, within the RCEP grouping, India’s per capita GDP is amongst the lowest, bar Myanmar and Cambodia, the poorest members of the group. Vietnam’s GDP per capita is about 50 pc more than India, while Philippines is over double and Malaysia is nearly six times larger.

Despite the boom that India’s economy enjoyed for nearly a decade, it remains one of the poorest nations in the world and an overwhelming majority of its people remain on bare subsistence levels of income. For instance, farming, which is the main source of livelihood for nearly two-thirds of India, is one of the weakest points of the Indian economy. Nearly 90 pc of Indian farmers own less than two2 hectares of land as against farms that can go up to thousands of hectares in key farming nations like Australia, Canada or even the United States.

Struggling between droughts and floods, Indian farmers remain dependent upon nature for their harvest, which has been playing havoc with global farming industry due to climate change stemming from global warming. This has made hundreds of millions of Indian farmers extremely vulnerable to overseas competition and no wonder Indian farm exports have lagged behind even the most mediocre agri-exporting nations.

India’s other exports are not doing much better. Despite attempts by successive governments to boost Indian manufacturing exports, India has been losing ground to a wide variety of nations, starting with the neighbouring Bangladesh for textile exports. The performance of other manufacturing exports in India’s trade basket remain equally tepid. India’s stature as a manufacturing hub for practically any item fades in comparison with practically every nation in the RCEP and definitely most of the nations in the world.

Even in services, which thanks to Information Technology and Business Process Outsourcing has been the stellar performers of Indian economy and exports, India is facing increasing competition from a wide variety of nations including Philippines and Vietnam. India has also been hit by various measures such as curbs on H1B visas imposed by the outgoing President of the United States Donald Trump.

But the biggest worry for India is its poor performance in the domain of innovation, technology, artificial intelligence and machine learning, which are likely to be the main drivers of services industries going forward. Even though Indian ITES industry has for long towered over that of China, India is nowhere near Beijing in these domains and today China stands neck to neck to the US here and holds the key to the future development. Though India has tried to play catch up, the gap remains far too large and it has only been increasing over time. And even now most of the innovation and AI-related projects are either run by the US Big Tech firms or by companies that have significant Chinese investments or are simply subsidiaries of Chinese giants like Alibaba or TenCent.

It is not just the RCEP that India needs to stay away from, New Delhi needs to go easy on other free trade agreements that various partners have been trying to tantalise India into signing. These include India-US free trade agreement or the EU-India or now the India-UK free trade deal.

The tortuous negotiations of these deals are a big indicator of the risks that Indian economy may face should such a deal be signed as none of the key partners of India – US, UK or the EU – have yielded any ground on opening up their markets to Indian goods and services exports, while trying to arm twist India for opening its own lucrative markets to their exports of all kinds.

Take the EU India FTA, or Broad based Trade and Investment Agreement, which after 13 years of painful negotiations, remains at a standstill as the EU is seeking greater access to its farm products, automobiles and even alcohol and spirits exports, while not conceding India’s demands for opening its markets for Indian agri-exports as well as free movement for Indian manpower across EU, a key condition for Indian services exporters to gain a meaningful share of the EU market.

Same has been the story with the US, which has sought and obtained extremely high tariff cuts from India, such as 50 pc reduction in import tariffs for Harley Davidson, as well as seeking India to change its intellectual property rights to allow its Big Pharma firms to gain a foothold in potentially the largest healthcare market. All this while the US continues to limit Indian exports of its own farm or pharma products and putting strict conditions on Indian skilled manpower in the US.

It’s time for India to take a step back from trade deals and conduct a comprehensive review of the gains or losses from the existing trade mechanism. India also needs to up its game in negotiating trade deals to be sure that its own industry gets the best possible outcome instead of the current botched up deals where India ends up making a concession in areas where its own poorest people would end up paying a heavy price. A case in point is when Nirmala Sitharaman, the then trade minister, agreed to a major concession in relation to farming at the World Trade Organisation’s ministerial meeting in Nairobi four years ago. Though Sitharaman tried to defend her slipup, the damage for the Indian farmers was already done and they would continue to pay the price for the bungling long after Sitharaman has disappeared from the political horizon of the country.

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