India Can Be Part of RCEP If Its Issues are Addressed
Despite India’s willingness to join RCEP and its perceived benefits over the long term, members’ aversion to address its chief concerns forced its hand.
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India will be part of RCEP, but only if issues are addressed
Over the years, India has been a willing partner in expanding trade amongst its emerging economic peers, most notably in it’s ‘Look East Policy”. But unlike in the past, the government has stood firm in its position on the conditions for joining RCEP. It has been consistent throughout on its stance, and when it became clear that the domestic interests could be compromised, India had no other option but to opt out. But given the importance of such a major regional trade agreement, India quite rightly has kept the door open to join at a later date, provided unresolved issues are duly addressed.
Government’s concern is right
Amongst RCEP members, India already has a FTA with ASEAN, Japan and Korea. If we look at only merchandise trade, India’s trade deficit with the bloc has doubled from $55 billion in 2010-11 to over $105 billion in current fiscal, which is almost 60% of India’s overall deficit. With ASEAN it has increased over 4-fold. This is without other RCEP partners - China, Australia and New Zealand being part of any trade deal with India. Any move to lower tariffs post-RCEP could worsen India’s trade balance, at least under the current terms, where many crucial concerns of India remained unresolved.
Were India’s concerns justified?
China quite obviously was the elephant in the room, as it already accounted for over half of this trade deficit with RCEP bloc, and that too without current offers on the table. As per the deal, India had to reduce duties on 80-90% of trade items for all member countries, including China. Even if that entailed a phased reduction over 25 years from China, less than stringent rules of origin could have allowed Chinese manufactured goods to be routed via other countries to India. This could have led to a surge in imports, hurting interests of domestic industry. India also faced a big threat to its dairy industry from New Zealand, as over 90% of dairy products from that country are exported. India, world’s largest milk producer is already quite self-sufficient in its dairy needs, and any surge in imports could have led to a supply glut, which would pull down prices, much to the detriment of around 100 million farmers engaged in dairy business.
Despite the current growth slowdown in India, the fundamentals remain strong. IMF estimates show global growth would increasingly come from India – its contribution would increase to 15.5% in the next five years vis-à-vis falling share from others, including China and other Asia-Pacific. Hence, the current juncture was not conducive to join the bloc, as there was strong apprehension of dumping across sectors, arising from excess capacities in other countries. India’s concerns are therefore not entirely unreasonable.
India’s concerns were not duly addressed
Till the last moment India had hoped to be part of RCEP, provided its concerns were adequately addressed. India wanted to safeguard interests of domestic industry, and not jeopardise its ‘Make In India’ program. Under this program, Government had revised its customs duties for certain products, e.g., electronics, and thus rightly wanted the base year for tariff reduction to be moved to 2019. But members insisted on 2014, which essentially meant India had to move duties back to 2014 levels. This would have jeopardised the investments already made and the desire to encourage domestic manufacturing in these industries. India also wanted an auto-trigger mechanism, which would have allowed raising tariffs against any surge in imports beyond a threshold. Another issue was exemptions from ‘Ratchet obligations’, which prevents signatories from going back from accepted offers, if in future the situation demands so. As these issues remained unfulfilled, it forced India’s hand.
Indian FTA utilization also constrained by non-tariff barriers/ measures
Studies have shown that India had benefitted little from the FTAs, most notably with the ASEAN. According to recent review by an Inter-ministerial group, India has utilised only 6% of its current FTA with ASEAN as against 36.3% utilisation by ASEAN countries. In other words, ASEAN countries have utilized the FTA 6 times more than India. While decline in average tariffs by India was from over 11% to only 4.3%, corresponding tariff reduction by trading partners was only 200 bps for India’s exports. Such lowering of import duty by India is an important reason for rising trade deficit. For example, only 9% of India's auto components' export goes to ASEAN while ASEAN corners 15% of India's auto-component imports. Any further lowering of tariffs would severely impact the trade balance in the sector. Besides lowering of import duty has resulted in inverted duty structure which has caused it to lose share in the domestic market.
The tariff liberalization for ASEAN has affected agri-trade too, specifically spices, where import of poor quality of pepper from Vietnam is severely affecting Indian pepper market since pepper from Vietnam has high pesticide residues. There are many examples from other sectors too – steel, textiles, paper, tyres, pharmaceuticals etc.
Non-tariff barriers/ measures (NTMs) is a major factor constraining India’s exports to the region. In fact NTMs have become more restrictive than existing tariffs, inflicting higher transaction costs and thus negating the effect of periodic reduction in applied tariffs. China leads the way with 1 in every 10 NTM imposed globally and one-third coming from other RCEP members. NTMs imposed by ASEAN countries has adversely impacted India’s agri-trade, as over 83% of agri trade is covered by at least one NTM, and an average product facing 7-8 separate NTMs. No wonder more than one-third of India’s imports are from RCEP bloc, while India’s exports were only 20% to this region. NTMs were one of the reasons India was unable to gain ground in exports despite the rupee depreciating by over 55% during the past decade. This also explains that even after 8 years of Indo-ASEAN FTA, India has not been able to significantly increase exports to this region, including CLMV countries. Any improvement in exports during this period, thereby, can be attributed to product and destination diversification rather than trade agreements.
The Way Forward
Despite India’s willingness to join RCEP and its perceived benefits over the long term, members’ aversion to address its chief concerns forced its hand. It must be emphasized that Indian industry is not afraid of a lower tariff regime. However it faces an uneven playing field due to various factors such as higher cost of capital, logistics costs, inflexibility of labour, higher, time taken for land acquisition and environmental clearances, higher compliance costs etc. While improving India’s competitiveness remains a top priority, we must also engage with our trading partners to lower trade costs owing to NTMs, for which NTMs must also be part of trade agreements. It is also important for industry to improve its standards, as on an average only 10% of imported products follow BIS regulations, whereas the compliance is 70% in Europe. For India this needs to be increased to at least 40%. In fact international standards must be used wherever possible instead of importing countries’ own discretion. Moreover the government could also make it mandatory for importers to register as it has done for steel imports with the Steel Import Monitoring System for some specified steel products (where there is increasing threat of import surge). Nonetheless India remains committed to its stance of free trade and has kept it options open to join RCEP at a later date, as soon as its legitimate concerns are duly addressed by other members.
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