At the recently concluded ASEAN [Association of South East Asian Nations] Summit in Singapore [November 11-15, 2018], prime minister, N Modi called for early conclusion of the Regional Comprehensive Economic Partnership [RCEP] agreement to facilitate signing of the deal by early 2019.
The RCEP is a conglomeration of the 10 members of ASEAN [Malaysia, Indonesia, Thailand, Vietnam, Singapore, Philippines, Myanmar, Brunei, Laos and Cambodia] plus 6 countries outside the group viz. Australia, New Zealand, Japan, South Korea, China and India. This will be a giant grouping covering a population of 3.6 billion or 50% of the world and GDP at US$ 25 trillion or nearly one-third of the global.
Under Modi’s Act East policy with focus on promoting economic cooperation and building infrastructure connectivity [rail/road/waterways] in the region, the RCEP is on top priority. It is therefore, not surprising that he is very keen to get this deal concluded promptly.
Even as other members of the group have claimed substantial progress, the Indian negotiating team has reservations in the key areas of trade in goods and services and one wonders whether it would be possible to sort out these so soon as to enable achieving the goal by the early next year deadline.
In regard to trade in goods, India will be expected to eliminate customs duty on 90% of tariff lines on imports from all members except China. In case of China, the expectation level is slightly lower i.e. duty elimination on 80% of the lines. This is keeping in view the fact that India has huge trade deficit with that country.
The Indian industry is worried that duty elimination on such a massive scale would have a serious debilitating effect on its ability to compete with imports from those countries. Its fear is exacerbated by the fact that already under the extant free trade agreement [FTA] with ASEAN, imports from the group have surged and that under RCEP which embraces five more members [other than India], the situation will further deteriorate.
There is also a perception that the proposals are out of sync with the much trumpeted ‘Make in India’ whose success hinges among others, on hike in import duties. In fact, only a few months ago, it had increased the duty on dozens of items including refrigerators, air-conditioners, telecomm equipment etc purportedly to protect domestic manufacturers from low cost imports. The bureaucrats have also flagged a concern on account of substantial loss of revenue [estimated to be about Rs 25,000-30,000 crore] in a scenario of eliminating duties on 90%/80% of the tariff lines.
In this backdrop and continuous pressure mounted by the domestic industry, the current tough stance taken by our negotiators is understandable. In case, India sticks to it, it would have missed a golden opportunity offered by this gigantic grouping.
The government’s stance needs to be based on an objective assessment of the opportunities offered by external demand leading to surge in exports on one hand and the perceived risk that increase in imports could pose to domestic manufacturers on the other. At the same time, the industry needs to come out of an age-old syndrome whereby it is overdependent on import duties/export subsidies to stay competitive in the domestic/foreign market.
The reform measures implemented by Team Modi such as GST, building infrastructure viz. roads/highways/expressways, rails, waterways, ports, airports, handling and storage on a fast pace, simplifying procedures/eliminating bureaucratic red tape and improving the ease of doing business have helped the industry in reducing their cost of operations. This will help them compete with imports even duty-free.
The government is also pursuing reforms in the power sector which aim at eliminating cross-subsidy [a euphemism for charging higher tariff from industry to enable sale to farmers/households at lower rate or even free] and reducing theft. This will result in substantial reduction in electricity cost to the manufacturers.
The industry needs to take note [the sector associations as also national level federations such as CII, FICCI, ASSOCHAM can help in creating better awareness] and accordingly modulate its influence on the policy makers. This will help the government bring in necessary flexibility in its approach to negotiation on the table. It should not be be bogged down by revenue loss [due to duty-free import] as reform measures like GST and demonetization are already boosting tax revenue.
In services, India already enjoys an inherent advantage not just because of its nearly 2/3rd share in the GDP but also the vast global presence of Indian companies [especially in the IT and IT enabled services] on the strength of their capabilities. It needs to vigorously pursue conclusion of a deal on this as an integral part of the comprehensive economic partnership.
This will call for proactive moves for harmonization of rules and regulations and may involve some compromise [e.g. India may have to forego insistence on data localization from companies in the internet and payment space]. But, that should not deter us from making fruitful partnership. Even so, security concerns can be addressed even if data is not stored locally.
Indeed, a discussion on both goods and services in a holistic framework will yield maximum mileage for India from the deal. From a national perspective, even if there is some loss in the manufacturing segment [though with the reforms in place, such a possibility is minimal], the same will be more than offset by the potential gains accruing in services.
In a scenario whereby the effectiveness and utility of WTO [World Trade Organization] is being seriously undermined [the 11th WTO ministerial held in Buenos Aires during December 10-13, 2017 collapsed primarily due to the belligerence of USA and other developed countries] and the world is moving towards plurilateral/bilateral/unilateral pacts, India should leave no stone un-turned in being a part of this mega partnership.
India must not miss the RCEP bus.