India, on Nov 4th
2019, withdrew from the mega regional trade deal, the RCEP (Regional
Comprehensive Economic Partnership) that would potentially account for about
30% of world trade & 50% of population. Its consisted of 16 members, the 10
Member ASEAN Association of South East Asian nations)-Myanmar, Thailand, Laos,
Vietnam, Cambodia, Singapore, Indonesia, Malaysia, Brunei & Philippines-
& its 6 trading partners-India, China, Japan, South Korea, Australia &
New Zealand. India’s existing Free Trade
Agreements (FTAs) with 12 countries – 10 countries of ASEAN, Korea & Japan-
of the 15 likely RCEP members, is a risk mitigation strategy. Surely, the Indian decision was based on a sound
cost benefit analysis; the conciliatory joint statement released that said that
RCEP members shall start formal work to ink the pact by 2020 but shall try to
resolve India’s issues, perhaps, indicates that the door is not completely shut
yet.
Voices in favour of joining RCEP
The industry body, Confederation
of Indian Industry (CII), strongly advocated India joining RCEP. A high level
advisory group headed by Surjit Bhalla, the former member of the Prime Minister
economic advisory council (PMEAC), claimed that the rupee is not over valued &
argued for a reduction in custom duties-both the upper range & number of
tariffs rates over a 5 year period- to double exports form $500 billion in 2018
to $1 trillion in 2025(CAGR of about 10%).
Pradeep Mehta, Ex Shell chief &
Secretary General of CUTS International, avers that the share of intermediate
goods in global Merchandise trade is 60-70%(World Trade Organization 2013
Report) which despite coming down to 50% now (World bank’s World Development
report WDR 2020), due to increased protectionism globally, is till substantial
& hence suggests joining RCEP to access Global Value Chains (GVCs) & to
resuscitate a rules based international trading order. Furthermore, import of
high quality & less costly intermediate “goods has multiple benefits:
Cheaper access to end consumers, positive effect on productivity of firms,
raised export growth, expanded employment & increased domestic income”. While,
globally, import content in exports has risen from 20% in 1970s to 40% in 2013,
in India’s case it increased from 19% in 2005 to 25% in 2011 & dropped to
16% in 2016. WDR report estimates that a 1% increase in GVC participation
boosts per capita income by more than 1% higher than a 0.2% income gain from
standard trade. He advocates joining RCEP along with domestic factor market
reforms, power, logistics, reducing red tape & encouraging co-operative
federalism as a strategic way forward.
Former NITI Ayog chief, Arvind
Panagariya holds that if “we are sitting outside, no multinational would want
to come here”; joining RCEP & duty free access thereof to a large Asian
market would be an added incentive to entice multinational investors he reasons.
Voices against joining RCEP
Puja Mehra, shared the following data
on Livemint, 4th Nov issue, indicating a widening of India’s trade
deficits post conclusion of FTA’s with the prospective RCEP nations. Contrast
that with India having a trade surplus with SAARC nations, under SAFTA,
essentially meaning that we are tigers only in South Asia alone; as per Asian
Development Bank, India’s FTA utilization rate of 25% is amongst the lowest in
Asia due to faulty commitments, high logistics cost & strict rules of
origin.
|
FTA implemented from
|
Trade Deficit($ billion)
|
|
2008-09
|
2018-19
|
ASEAN
|
1st Jan 2010
|
8
|
22
|
Japan
|
1st Jan 2010
|
3
|
6
|
Korea
|
1st Aug 2011
|
5
|
12
|
|
|
2003-04
|
2018-19
|
China
|
No FTA
|
1
|
53
|
|
|
Trade Surplus($ billion)
|
|
|
2005-06
|
2018-19
|
SAFTA*
|
1st Jan 2006
|
4
|
21
|
|
|
|
|
*SAPTA : South Asian Free Trade Organization
|
|
|
|
Unfortunately, many in industry
have been lobbying for protectionism – including but not restricted to a relook/abrogation
of existing FTAs - & export incentives including currency depreciation
instead of enhancing competitiveness. At a US-India spat at the WTO (World
Trade Organization), the latter has ruled that Indian export incentives violated
the trade body norms vide a subsidy of about $7 billion helping steel, pharma, chemicals,
IT products, textiles & Apparel ; this could lead to withdrawal of Merchandise
Exports from India Scheme(MEIS), Export Oriented Units Scheme (EOU), Duty free
imports for Exporters Scheme & other sector specific schemes like –
Electronic Hardware Technology Park Scheme, Bio Technology Park Scheme, Export
Promotion of Capital Goods Scheme. This is clarion call to Indian industry to work
on long term competitiveness.
The Swadeshi Jagaran Manch – part
of the RSS family – to which the ruling part of India, BJP, also belongs has
for long been opposed to the RCEP & that, perhaps, has tilted the scales of
the decision.
Indian manufacturing accounts for
15% of GDP & 49% of manufacturing is contributed by the Auto sector.
Industry body, SIAM (Society of Indian Automobile Manufacturers) has advocated
& secured high import tariffs up to 100% on Completely Build Units (CBUs)
& 125% on second hand vehicles to help “Make in India” local value addition
& job creation tariff; it has been consistently demanding that CBUs &
engine imports should be kept in the negative list when India concludes any
FTA.
With about 50% of Indian
population dependent on agriculture & the small land holdings-67% of
farmers hold less than a hectare & 85% less than 2 hectares- & India’s
attempts at increasing manufacturing to 25% of GDP by 2022-to shift farmers in
higher productive jobs & reduce underemployment- proceeding at a tepid
pace, keeping tariffs high was a logical corollary to protect farmers from the likely
destabilization caused to livelihoods due to an import deluge. Ex. Huge dairy
products imports from New Zealand if RCEP was concluded.
Indian Offer
Thus the initial Indian offer –
to protect agriculture - was as follows
|
Overall offer
|
Offer for agricultural products
|
Offer for Non-agricultural products
|
ASEAN
|
65% of tariff lines to be eliminated immediately
& 15% more in 10 years adding up to 80%
|
35% of tariff lines to be eliminated immediately
& 5% more in 10 years adding up to 40%
|
75% of tariff lines eliminated in 10 years but
backloaded
|
Japan & Korea
|
65% of tariff lines to be eliminated in 10 years
|
|
86% of tariff lines eliminated in 10 years
|
China, Australia & New Zealand
|
80% of tariff lines for Australia, 62.5% for New Zealand &
42.5% for China to be eliminated over 10 years
|
Tariffs to be eliminated for 15 products from
China over 10 years
|
50% of tariff lines eliminated in 10 years
|
The offer was rejected by other
nations & the subsequent Indian offers are not in the public domain.
Indian Thinking
Biswajit Dhar, of JNU, on 16th
Nov issue of Economic & Political Weekly, writes that Indian trade balance
across product categories is as listed below
|
Trade Balance($ billion) as per WITS
|
|
Capital Goods
|
Consumer Goods
|
Intermediate Goods
|
Raw Materials
|
|
2010
|
2017
|
2010
|
2017
|
2010
|
2017
|
2010
|
2017
|
ASEAN
|
-2.3
|
-3.5
|
3.8
|
6.1
|
-3.9
|
-8
|
-5
|
-4.7
|
Japan
|
-4.2
|
-4.5
|
1.4
|
0.4
|
-1
|
-2.4
|
0.6
|
0.8
|
Korea
|
-4
|
-5.6
|
-0.1
|
-2.1
|
-1.9
|
-3.9
|
0
|
0
|
China
|
-18.3
|
-39.1
|
-4.2
|
-8.6
|
-6.2
|
-12.5
|
8.2
|
1.9
|
Takeaways:
(a)India-China deficit exploding
without a FTA till date & joining RCEP could potentially expand it further;
even raw material trade balance has dropped from $8.2billion, in 2010, to $1.9
billion, in 2017, due to NTB (Non- tariff barriers).
(b)Indian markets are easily
exploited by FTA partners while Indian exporters are unable to leverage the lower
tariffs offered.
©India is a net importer of
finished & intermediate goods & a net exporter of raw materials (except
ASEAN due to coal imports) indicating the low share of value addition for India
as a consequence of trade; India has little presence amongst GVCs in these countries.
Consequent to the US-China trade
war & to prevent dumping of steel products, India enhanced steel tariffs (2017)
& followed it up by increasing tariffs on electronic components including mobile
phones & TV components(Union Budget 2018), textiles(July-Aug 2018), auto
parts, synthetic rubbers, electronic components(Budget 2019).India faces a twin
balance sheet problem – a $260 NPA(Non-performing Assets) crisis of banks &
bloated debts on corporate balance sheets & utilization trending between
72-76%. Protectionism apart from IBC (Insolvency & Bankruptcy Code)
resolution twin vectors employed to increase utilization &move targeted industries
into the green to be able to pay off banks.
Further, India, faced with an
economic slowdown, announced a reduction in corporate tax rates, in Sept 2019, to 17.17% (15%
basic tax+10% surcharge+4% cess) – amongst the lowest rate in the world - for
all manufacturing firms established on or after 1st Oct 2019 &
starting production before 31st Mar 2022. Govt. would have reasoned
that while joining the RCEP would help us with supply chain integration in the
region, value addition in the IT, Mobile etc. industries thus far has merely
left us as assemblers even while critical technologies & products like
printed circuit boards, TV panels, solar panels etc. get produced elsewhere; it
might be a better alternative to attract companies with the lower corporate tax
to set up an entire ecosystem in India – which is viable considering the large
domestic market availability.
India with an advantage in
services was seeking labour mobility which was denied, perhaps, because ASEAN
does not allow labour mobility even amongst its member countries. India wary of
Chinese dumping was seeking stricter “country of origin” clause & auto
trigger of tariff protection if imports cross a certain threshold which was not
palatable to China. India has terminated 58 of the 83 Bilateral Investment
treaties (BIT) - it had entered into earlier - but the “Protection of Foreign
Investors” clause in RCEP would have negated the move. India’s concerns on the
lack of “Electronic commerce” definition remained especially with regard to “data
protection”. Furthermore, India wanted
tariff reduction from 2019 peaks while other countries wanted a 2014 cut off - when
Indian tariffs were lower. India did not get any credible assurances on market
access & Non-Tariff barriers (NTBs). Thus India’s decision not to join RCEP
appears more of a fait accompli.
Way Forward
Since India is the largest
domestic market after China & having seen the tremendous growth achieved by
China over the last 30 years, investors are likely to be enthused by the new
corporate tax norms to relocate entire supply chain ecosystem to India. Prudent
that the commerce minister & Defense Minister be tasked with laying out a
Red carpet to investors & achieve targets on relocation.
India unable to take advantage of
FTAs signed is a sign of manufacturing incompetence & time for Industry to
initiate corrective measures. As an example, the Auto sector, if competitive,
should have been a huge exporter. Protectionism, needless to say is a
disservice as it adds costs to the consumers & hence must only be a short
term measure.
Decontrol agriculture exports so
that Indian farmers gain advantage of international prices even while
maintaining control on imports for protection. Indian overproduction in crops
like rice, wheat, sugar etc. & the likelihood of India’s aggressive entry
into export markets likely to depress prices, it is time for India to rethink
its MSP (Minimum Support Price) strategy. Since removal of MSP for these 3
products could lead to a political hullaballoo, de-market the growth of these
water guzzling crops, through anaemic MSP rise even while increasing MSP sharply
for coarser cereals like jowar, bajra etc. - that use lesser water - & nudging change
in food habits the same way the “Swatch Bharat” campaign succeeded in making
behavioural changes in cleanliness. Likewise, prudent to have an export thrust on
fruits, enjoys more margin than cereals. In short, it is time for agriculture
apart from Finance to contribute more towards export growth.
FTA with EU to regain loss in
garment share to Vietnam/Bangladesh crucial; further woo global top 5-10 firms to set up labour intensive set ups
in textiles, leather & toys for both job creation & shifting excess
manpower from agriculture to manufacturing. Doubling of farmer incomes is more
likely to happen by reducing the denominator by 50%.
Industry has certain legitimate
concerns. Indian power tariffs are high since industrial tariffs cross
subsidize retail customers; since the proportion of cheaper non-renewable power
in the overall mix is on the rise, time to pass on the lower costs to the
industry. Likewise, Indian logistics costs 12-14% unlike China at 8-10%; time
to convert all ports into SPVs, sell stake & convince the labour unions
that the entire proceeds of sale shall be used for development of their port
alone. While removal of cross subsidy on Railway freight by increasing passenger
fares is an option to reduce logistics costs, it is unlikely to be implemented.
Furthermore, zero rating of exports to prevent money getting locked up in GST
& creating cash flow issues for the industry.
Conclusion
India, by not joining RCEP, has
done well to prevent Chinese dumping in the short term but if both the govt.
& industry do not pull up their socks to improve competitiveness the hurrah
shall be short-lived.
