Beyond RCEP, India needs to push trade

Sushma Ramachandran
Senior Financial Journalist

India’s withdrawal from the Regional Comprehensive Economic Partnership (RECP) has to be seen in the context of the state of world trade today. The old paradigm of multilateralism has been left behind as the World Trade Organisation (WTO) struggles to remain relevant in the new world order where regional trade pacts are playing a dominant role. 

Every summit of the WTO is left somewhat unfinished as the very nature of its rules demand that each member has to agree for any decision to be taken. As a result, even smaller and less developed countries are able to make their views count on major issues. There are groupings of less developed countries which ensure that they are able to weigh in on key matters. On the flip side, powerful developed countries have still held sway on many key issues, except when emerging economies like India or Brazil dig in their heels on sectors like agriculture and issues of farmers’ livelihood. Even so, the glacial pace of negotiations at the WTO has prompted many countries to move away from this apex organisation to enter into regional agreements which enable easier and quicker access to markets.

This country, however, is not yet in any major regional trade pact, barring the free trade agreement with ASEAN countries that was concluded in 2010. The lowering of tariffs with these countries has led to a trade deficit with the group nearly tripling from $8 billion to $22 billion. Even in the case of FTAs with Korea and Japan, imports have been rising faster than exports, leading to a bigger trade deficit with these countries. It is the experience gained from these FTAs that has prompted the caution over entering the giant RCEP which includes 15 countries, covering about one-third of the world’s GDP.

The biggest fear, as many have pointed out, is that China will flood the Indian market with cheap imports via the route of lowered tariffs. It is no doubt true that this country cannot compete with the huge subsidised factories in China that churn out products cheaply, taking advantage of the economies of scale. At the same time, India cannot keep its market protected in the medium and long term from the winds of competition in the rest of the world. High tariff walls can only be a temporary phase. 

In this context, the government’s role is crucial as it must help the manufacturing sector to gear up to meet the challenge from other countries. One of the key much-needed policy changes, that has long been talked about, is labour reforms. The freedom to hire and fire workers needs to go along with social security policies ensuring a safety net for the labour force. Other issues are delays in acquiring land and poor infrastructure. In the absence of better policies, smaller countries like Vietnam and Taiwan have gained the advantage as it is possible to open units rapidly here. They are meeting the needs of companies looking for new production bases following the US-China trade war. Optimistic analysts had earlier suggested that India would reap the benefits of this trade dispute but this has yet to happen.

The other requirement is for consistency in policy and a withdrawal from the punitive approach to industry that seems to have characterised the present regime. The Modi government has been viewed as less than welcoming to industry, even in the booming e-commerce arena where laying down restrictive regulations may cause even this sector to shrink rather than grow. There is a fear psychosis in industry over regulatory over-reach. Finance Minister Nirmala Sitharaman has lately tried to bring about an air of cordiality in interactions with industry leaders, but this needs to percolate down to the ground level. Enabling business to function without roadblocks needs to be the mantra of the government.

In addition, protecting industry needs to be kept to a minimum. Tariffs which had been brought down drastically through economic liberalisation are now gradually going higher and higher. This seems to be due to the influence of the RSS-backed Swadeshi Jagran Manch, though it would inevitably be cheered by Leftist parties as well. High protectionist tariffs only encourage inefficient industry to thrive and will make India even less capable of meeting the competition from its Asian neighbours.

At the same time, the country needs to continue its strong defence of agricultural and dairy products on the world stage to protect farmers’ livelihoods. This is an issue over which India has fought diligently at the WTO and needs to continue addressing as developed countries seek to unload their farm and dairy products in this country’s big market. Even in the RCEP negotiations, reduced tariffs on dairy products were being viewed with concern as India sought to protect its dairy industry from giant exporters like New Zealand and Australia.

For India, the way forward now is not to withdraw from the process of entering into FTAs. Instead, it needs to speed up such agreements with countries with which it has a trade surplus, like the US and the European Union. In fact, there needs to be a proactive approach to trade agreements because this country cannot afford to be excluded from trade pacts which can provide great benefits in the long run. One of the lacunae in using FTAs has been the lack of knowledge by industry on ways to use the available concessions. Here, the government needs to step in and provide constructive help to exporters to enable them to use these facilities.

Ultimately, the test of a successful global economy is its ability to trade among the commonwealth of nations. China is striding like a colossus on the world stage purely on its strength as a trading nation. India is far behind right now. But it can catch up if policies are restructured to enable indigenous industry to become much more competitive. Businesses too need to play their role by embracing innovation and excellence in production. The withdrawal from RCEP needs to become a wake-up call for the country to recognise the importance of becoming a serious player in global trade.