Relevance: Mains: G.S paper III: Indian Economy
The government may well be right when it says that most of the FTAs that India has signed so far have resulted in the trade deficit rising. In FY19, India’s trade deficit with Asean was $21.8 bn, $12.1 bn with South Korea, and $7.9 bn with Japan.
It is for this reason that the government is being cautious in signing an agreement with the Regional Comprehensive Economic Partnership (RCEP), whose members include all 10 Asean countries, South Korea, Japan, Australia, New Zealand and China.
The biggest worry here, of course, is what happens to India’s imports if duty levels come down to zero; as it is, India’s trade deficit with China was a high $53.6 bn in FY19.
Evocative as the numbers are, however, they are really just a statement of fact; they don’t really tell you much about whether the deficit is the result of the FTA, or whether it is due to some other reason, like India’s poor trade competitiveness.
India’s deficit with China, after all, is very high even without an FTA; this probably has as much to do with India’s uncompetitiveness as it does with China’s unfair trade practices.
India’s trade negotiators are, at the same time, also arguing that if China does not give India genuine access after the country signs on to RCEP, India would prefer to stay out.
This is shooting India in the foot. The very purpose of the negotiation is to ensure that countries like China give India genuine concessions, and every treaty will have safeguards to prevent its abuse; if, after signing onto RCEP, China doesn’t give India genuine access, there will be a provision to raise duties on Chinese products, or take other action.
So, this cannot be a good enough reason for India not to be a part of RCEP; indeed, it will be unfortunate that, at a time when global trade is increasingly taking place between economic partnership areas/zones, India will not be a member of one of the biggest such zones.
India is, at this point, working on reviewing its Asean FTA, and there is no clarity on how soon, if at all, India will be able to sign such agreements with either the EU or the US since there are points of significant difference between the two areas/nations, like access to agriculture goods, whiskeys/wines and automobiles.
As it happens, in the case of RCEP, several members have asked India to stop dilly-dallying, and to decide on whether it wants to be part of the agreement or not.
The real issue that India needs to deal with is that of its competitiveness; zero-duty access will wipe out large parts of Indian industry if these issues are not fixed, but this has little to do with FTAs, or economic partnerships.
India and the US don’t have an FTA, but that hasn’t stopped President Trump from demanding that India lower its import duties.
So, if, as part of the RCEP, India is able to negotiate a five-year period, say, in which it has to lower its import duties to zero—and it could be a longer period for some goods—the real issue is whether it will be able to fix the competitiveness issues by then.
This requires India to, for instance, ensure that its corporate tax levels are on a par with those in other countries, and not the levels they are right now.
It requires India’s infrastructure deficits to be cured, Indian labour laws to be as flexible as they are in the rest of the world, it requires government permissions to be given as quickly as possible, etc.
At a more fundamental level, India’s reluctance to engage with RCEP is really about it not being certain how long it will take to deal with the issues of competitiveness. It is also worth keeping in mind that if India chooses to walk out of RCEP, its overall exports growth will get hit since global trade is increasingly between FTA areas; and, while high import tariffs will make local industry uncompetitive, these will also encourage smuggling to bypass tariff barriers.