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The Nutgraf : The RCEP Backflip

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Welcome to The Nutgraf, your weekly walkthrough for the biggest news emerging from India’s business and tech scene.
 
After three issues in a row, I hand over the reins to PGK next week. This transition of power is completely voluntary; Masayoshi Son and the good folks at SoftBank had nothing to do with it. 
 
I hope you’ll remember 26 October—9 November as the Rohin Era at The Nutgraf. I know I will. Let’s jump in.

India steps back…to the precipice
“The 19th century was the European century. The 20th century was the American century. The 21st century will be the Asian century without a shadow of doubt,” said Singaporean academic and former diplomat Kishore Mahbubani to FT’s Gideon Rachman on his podcast last week.
And if the 21st century belongs to Asia, the trade agreement you’d want to bet your money on would be the Regional Comprehensive Economic Partnership, or RCEP.
The multilateral trade agreement—think TPP, NAFTA, ASEAN, etc.—was meant to substantially reduce inter-country tariffs on nearly 90% of traded goods across 16 countries that collectively represented:
 
  • Nearly half the world’s population
  • Nearly one-fourth the world’s GDP
  • 40% share of world trade
  • The fastest growing economies in the world
RCEP would simultaneously become the world’s largest free trade agreement and its most promising one.

It would’ve been a big f**king deal. India got it.

 
Starting with the government led by former Prime Minister Manmohan Singh, India has been closely involved in RCEP deliberations since 2013.
Its interest was only magnified under current Prime Minister Narendra Modi, who upgraded an informal “Look East” policy (all of the countries in the RCEP lie to India’s east) to an “Act East” policy.
The Indian government even set up a high-level advisory group to advise it on “boosting India’s share and importance in global merchandise and services trade; managing pressing bilateral trade relations; and mainstreaming new age policy making.”
It duly produced a 253-page tome, which was released and tweeted by India’s minister for Commerce and Industry on 30 October
 
The report’s authors studied 6 different simulations of how India’s GDP would be affected in a world dominated by the US-China trade war. The last two—5 and 6—represented India “India joining an RCEP-like free trade agreement”, with a key difference being the absence (5) or presence (6) of a US-China trade war in the background.
The following graph represents the simulations for scenarios 5 and 6.
 
Yes, the tallest bars represent India.

Like I said, India got it. Which is why India’s Prime Minister even went to Thailand to attend the final RCEP summit.
“Modi has long sought to portray himself as both a reformer and a global statesman. A bold decision in Bangkok would not only shore up his reputation on both fronts — it would point India in the direction of recovery,” said Bloomberg’s Editorial Board.
 
But then, the bomb. India declined to join the RCEP
 
It was quite inexplicable, said A K Bhattacharya in the Business Standard.
The prime minister was present in Bangkok to take part in the deliberations during the third RCEP Summit and India seemed set to join the new trading bloc. But almost at the eleventh hour, India pulled out of it saying that the terms of the new group would adversely affect its national interest. What went wrong at the last minute? […] That it was a surprise last-minute decision was obvious from the fact that Mr Modi had attended the Summit. Rarely do heads of government attend a Summit and pull out of a deal at the eleventh hour.
 
[…]
 
What, therefore, happened in Bangkok that the government decided to back out of the deal? Had the RCEP member-countries become less accommodative of the Indian concerns? Was it because of the growing China influence? And did India’s bargaining ability take a hit after the global mood and the reaction of some international leaders turned less friendly in the wake of recent developments in Kashmir?
 
 
In choosing to negotiate till the end and at the level of heads of State and government, Modi has chosen to politicise what could easily have been defined as a purely economic decision. It should, therefore, not surprise anyone if commentators around the world view India’s decision not simply as a trade and economic policy decision but in wider geopolitical terms. The RCEP decision could now be interpreted as a failure of India’s ‘Act East Policy’ with questions raised about the lack of an economic dimension to the Indo-Pacific strategy.
 
Of course, there were the usual intellectual gymnastics
Economist Surjit Bhalla, the lead author of the high level advisory group that recommended India join the RCEP, now said joining the RCEP “was neither necessary nor sufficient for (India) to achieve (its) export targets.”
And here are the pre- and post-RCEP views of the CII, India’s leading industry association.
 
  • Before: “Not being part of the bloc is tantamount to not having an even footing in terms of preferential access and losing export competitiveness. This will only harm India’s export and investment flow in the future.” 
  • After: “I support government’s decision to opt out of the RCEP and commend Prime Minister Narendra Modi on his bold decision for keeping the national interest paramount.”
But why did India step back? Was it because of China?
 
While RCEP is a trade agreement, it is also China’s hedge against an increasingly protectionist west, led by America. China dominates the RCEP from within, by any metric. 
At the heart of RCEP is not free trade but South Asian countries’, especially China’s, keenness to safeguard their economic growth by accessing newer markets in face of growing US and European protectionism.
India already runs an annual deficit of $53 billion when trading with China (India imports roughly 3.5 times from China what it exports to it). That is the largest deficit India runs with any country it trades with.
TCA Srinivasa-Raghavan explains India’s fears in the Business Standard:
 
It must also be kept in mind that China isn’t a trading country. It’s a selling country. It prefers to sell rather than buy. This is reflected in its trade account. It runs a trade surplus with every country that took part in the RCEP negotiations.
 
India told China, please buy more from us. China said no. It says no to everyone. That’s because of its political imperative to keep employment high. Otherwise it could face Hong Kong type problems.
 
The second reason is the difference in attitude and appreciation. China, as a matter of policy, is focused on selling and not trading. India, as a matter of attitude and structure, is focused on trading, and not selling.
 
In sector after sector, Chinese goods and brands are increasingly dominant in India. Chinese brands control 66% of India’s smartphone market. Huawei is the dominant telecom equipment provider. Bytedance’s TikTok is scaring the pants off everyone, with a large audience monetised via ads, ranging from Facebook to the Times Group. Chinese internet giants like Tencent and Alibaba have stakes worth billions of dollars in India’s internet ecosystem.
 

Or was it because the RCEP was merchandise-focused, and not services?
 
Many economists, especially those in India, once believed that it had “leapfrogged” from agriculture to services, skipping manufacturing altogether. 
 
China and India are both racing ahead economically. But the manner in which they are growing is dramatically different. Whereas China is a formidable exporter of manufactured goods, India has acquired a global reputation for exporting modern services. Indeed, India has leapfrogged over the manufacturing sector, going straight from agriculture into services.
 
But the RCEP countries aren’t too hot for services, explained R.Jagannathan in Mint.
Where (India is) competitive is largely in digital products and services, in which states cannot easily become obstructive and rent-seeking. However, these are precisely the areas where the RCEP does not want Indian competition. Barring Australia to some extent, each of them is anti-immigration and against the free entry and exit of “natural persons” who are vital for the provision of software services based on labour cost arbitrage. This is unlikely to change till India shifts its focus to providing software products and not just services, in which case physical barriers and resistance to people movements are minimal. Thus, even in services, India will not get a good deal till it becomes a big player in branded products and platforms.
 
The RCEP is actually a closed club of manufacturing powers that turn mercantilist when it comes to trade in services.
 
There were even more reasons trotted out
 
A deluge of dairy products from New Zealand. Cheap and high-quality agricultural produce and food products from Australia and Japan. Chinese imports being routed to India via other countries.
 

Individually, none of these were new. Collectively, they held a mirror to India
 
Of how uncompetitive India was.
 
Economist Ajit Ranade said it first.
 
Most of (India’s) competitive disadvantage stems not from tariff or non-tariff barriers in destination countries, but from lack of domestic reforms. (Its) producers face higher cost of energy and electricity, credit and capital, and logistics. […] Many parts of industry still suffer from inverted duty structures, in which the raw material is subject to higher import duty, and the finished product can come in at zero duty.
 
Then Dhiraj Nayyar, also an economist.
 
India’s decision to stay out of the Regional Comprehensive Economic Partnership (RCEP) will not isolate India from the global or regional economy. The fact is that India is already quite isolated — its share of global merchandise exports is minuscule, at around 1.8 per cent (China’s is around 13 per cent) and for all the talk about competitiveness in services its global share is just 3.5 per cent, lower than China’s 4 per cent. It is the Indian economy’s lack of competitiveness which is the isolating factor.
 
[…]
 
Until India becomes a real market economy, it is unlikely to have the confidence to integrate with, and compete in, the global market economy.
 
And the consistently on-point Pratap Bhanu Mehta.
 
For supporters of the RCEP, the decision not to join it seems like an admission of defeat, an acknowledgement that India is simply not in a position to compete strongly in the global economy, without risking serious trade imbalances and domestic economic disruption. Those opposing it are also, for the most part, saying the same thing: India is not ready. The price of joining will be too high.
 
 
Sure, all trade under every condition is not necessarily good, but India’s manufacturing industry needs the pressure of external competition to get its act together and secure the global competitiveness it sorely lacks. Without access to trading blocs, into which the world is being divided, given the ongoing slow collapse of the World Trade Organisation and its rules-based multilateralism, Indian industry would be limited to India’s home market, denying Indian workers the jobs they could have, producing for global markets.
 
So, to avoid the hard task of fixing its uncompetitive sectors…
 
India chose the easy solution—protectionism
But here’s the thing about masking lack of competitiveness with protectionism —it often begets inefficiencies, higher prices and more protectionism.
 
In a world that’s carved up between various multilateral and bilateral free trade agreements, India risks retreating into a cocoon of its own making. One where its businesses and workers can pretend they’ve successfully weathered the relentless global storm of competitiveness, while all they’ve done it is to close their eyes and ears to it for some more time.
 
All the while, the storm continues to gather pace. And ends up affecting not just India’s domestic competitiveness, but its export competitiveness too.
 
India does not have trade agreements with the EU or the US. The exports category of T-shirts and singlets demonstrates how staying out of trade pacts is not sustainable. The US, a key market for India, imposes 32% tariff rate on India’s exports in this category, but nothing on exports from South Korea, as it enjoys zero tariffs under the US-Korea FTA. South Korea, a key competitor of Indian apparel exports, also enjoys zero tariffs under the EU-Korea FTA. So does Turkey. Not having trade agreements, thus, puts India at a disadvantage by impacting price competitiveness of its exports.
 
Protectionism is a vicious circle 
 
It may start with domestic markets, but will end up with exports too.
To grow at 7-8% annually, India needs exports. And it was international trade that helped created India’s exports powerhouses, says Swaminathan Aiyar.
 
In the 2000s, India created three world-class exporters: software/business process outsourcing (BPO), pharma and auto. None of these was foreseen as a champion in the 1990s. Software became significant only with the Y2K scare of 2000. The pharma sector fought the Uruguay Round that created the World Trade Organisation (WTO), saying tough WTO patent protection would wipe out Indian firms. In fact, WTO proved a boon. The Indian auto industry was totally uncompetitive in the 1990s. But, then, foreign investors interacted with the auto component industry to make small cars and two-wheelers world class. Thus, unanticipated effects of liberalisation created these export champions in the 2000s.
 
Not a single new champion has been created in the 2010s.
 
But India’s exports are slowing. 
 
Indian exports have grown very little since 2013. No economy in the world has had GDP growth of 7% for a long period — the definition of a miracle economy — without double-digit export growth. Hence, the recent fall in India’s GDP growth — just 5% in the April-June quarter — may become the new normal unless exports rise dramatically.
 
Slowing exports and GDP have the makings of a crisis
 
Yesterday, Moody’s cut India’s rating from “stable” to “negative”, citing slowing economic growth as the reason.
 
The ratings agency said its action partly reflected government and policy ineffectiveness in addressing economic weakness, which in turn led to an increase in debt burden from already high levels.
 
But crises are also the best times to reform and modernise economics. Each of the last major reform cycles in India can be traced back to economic crises or reckonings:
 
  • 1991: A balance of payments crisis led to a bailout by the IMF and World Bank, transforming India from a planned economy to a market-driven one.
  • 1995: India joins the WTO after major protests. 
  • 1999: India does away with import restrictions on thousands of agricultural, textile and industrial products after losing a case at the WTO
  • 2019?
 
But within great crises, lie greater opportunities

Walking away from the RCEP is no virtue.
But opponents of the RCEP should acknowledge the truth. The RCEP has been stopped not because there is a coherent alternative vision of India’s development in place. It has been stopped because the whole range of interests, from agriculture to industry, that have made domestic reform difficult have also come out against the RCEP. Don’t convert India’s global weakness into an ideological virtue. 
 
But the real worry in Modi’s climbdown is not that he turned his back on the RCEP. It is that he is sending a clear signal that India’s economy and politics is so fragile that we should not expect effective reform anytime soon.
 
But it is an opportunity. An opportunity to reform.
 
The pity about RCEP is not that India did not sign it. Instead, it is about the missed opportunity on carrying out some difficult reforms domestically. The negotiations on RCEP lasted more than seven years.
 
Perhaps, if the government had invested as much time in negotiating within its line ministries on implementing the necessary reforms to make India’s economy fundamentally competitive, the outcome in 2019 would have been different.
 
An opportunity to modernise and reconstruct.
 
Rather than play the RCEP decision as a bold move and an act of great leadership — ‘Modi hai to mumkin hai’ (Modi makes it possible), said commerce and industries minister Piyush Goyal — it would be wiser to use it as an opportunity to hold a mirror to the nation and unveil a bold strategy of economic reconstruction and modernisation that would help make the economy more globally competitive. 

Infosys versus Infosys
The original poster child of India’s IT services leadership has been going through a tough, conflicting time. 
 
  • Infosys CEO versus its board: A group of whistleblowers alleged that its current senior management, including the CEO, window dressed financials, discounted large deals and, well, didn’t think much of its board

    “No one in the board understands these things, they are happy as long as the share price is up. Those two Madrasis (Sundaram and Prahalad) and Diva (Kiran) make silly points, you just nod and ignore them,” said the Infosys CEO, according to the whistleblowers (who also claimed to have a recording of it.)
     

  • God versus Infosys: Even God can’t change the earnings of Infosys, said its chairman Nandan Nilekani (he was also its co-founder and CEO). This was in response to the whistleblowers’ allegations. 
  • Former Infosys board versus current Infosys board: A former Infosys board member said the company has mismanaged how the whistleblowers’ complaint was handled, even though he didn’t think there are/were any accounting issues. “The casual manner in which they handled this, how they didn’t respond to the media and investors is what upsets me. The board has to step in and ensure that such issues are handled properly… also the board and management have to work in tandem.”
  • Whistleblowers versus Infosys: There have been a few.
  • Founder versus Infosys: N.R Narayana Murthy has at times been at odds with the company he founded and led (like Nilekani, Murthy is also a former CEO).
  • Founder versus founder: This is crazy
    People at the top echelons of Infosys believe that a cofounder of the company and a former senior executive conspired with the whistleblowers who have made allegations of corporate governance failures involving Chief Executive Officer Salil Parekh. “This was a terrorist attack involving a mastermind (with) a link to the company and those who executed the attack,” a source aware of the deliberations at Infosys said.
 
If Infosys were a human, it would be 38 years old. A 38-year-old man still staying with his estranged parents in their home.

Whatsapp‘s Victim Shaming
I never thought I’d say the words “Poor Facebook”, but here I am. Poor Facebook.
 
It sued Israeli surveillance firm NSO Group in the US for hacking 1,400 of its users across the world. Users who were largely diplomats, political dissidents, journalists and senior government officials. NSO Group promptly denied the allegations, saying, “The sole purpose of NSO is to provide technology to licensed government intelligence and law enforcement agencies to help them fight terrorism and serious crime.”
 
Assuming both Facebook and the NSO Group won’t blatantly lie on the record in a legal case, the only logical conclusion is this—multiple government intelligence and law enforcement agencies around the world contracted NSO Group to hack into the phones of 1,400 diplomats, political dissidents, journalists and senior government officials.
 
Around two dozen Indians were victims of NSO’s hacking, too.
 
But here’s the kicker. In India instead of the government being asked to clarify who engaged NSO to spy on Indian citizens (since NSO says it does not work with private companies or people), the government is asking Whatsapp to explain its breach.
 
Not hack, but breach. Facebook, which in the US sued NSO Group for hacking it, is being asked in India to explain why it suffered a breach.
 
Here’s India’s senior minister for Law & Justice and Communications, Ravi Shankar Prasad:
 
 
And behind the scenes, this incident is being turned into a stick to beat Facebook with commercially. Here’s a few of the articles from last week.
 
Privacy is a fundamental right in India
 
  • “I am extremely alarmed. If the reports are true, we may be sliding into an Orwellian State with Big Brother snooping on us, as depicted in the novel 1984.” – retired Justice B.N Srikrishna, the person who drafted India’s privacy and data protection act.
  • ““No privacy left for anyone. What is happening in the country?” – India’s Supreme Court

WeChat and Alipay go for the tourists – by Jon Russell

You’ve heard the phrase “take my money”—well, China’s two largest mobile payments are finally doing that for the 140 million-plus tourists who visit the country each year.
 

WeChat and Alipay—which together process well over a billion transactions each day—revealed plans to give non-Chinese users full access to their services. Now, though, Alibaba’s Alipay and Tencent’s WeChat Pay will add support for Visa, MasterCard and other international payment methods. Previously, a Chinese bank was required, which restricted tourists from services like ride-hailing.
 

It is also a big deal offline because mobile payments are the norm in urban China—to the point where paying by card (if supported), or cash (if you dare), gets you dirty looks for holding other customers up at the checkout.
 

Paying on your phone is, of course, quick and convenient, but the privacy conscious among us are all too aware that our data is used by companies. Alipay and WeChat offer other financial products to Chinese users, there’s no word on whether that will extend to tourists. Their overseas work to date has focused on reaching Chinese tourists when they travel, but now the rest of us are in, too.

 

Last Week in SoftBank

SoftBank declared its earnings. It lost $6.5 billion.
 

“There was a problem with my own judgment, that’s something I have to reflect on,” said founder Masayoshi Son.
 

  • It’s done bailing out unicorns.

  • Son’s done with making decisions about investing into OYO.

    In the latest round, announced in October, the Vision Fund led an $800 million investment that raised its stake in Oyo to 48% from 45%. But SoftBank’s chairman, Masayoshi Son, gave the company an additional boost by backing a loan to its 25-year-old founder, who used the money to invest $2 billion into Oyo, including buying stakes of $1.3 billion from venture-capital investors including Sequoia Capital and Lightspeed Venture Partners, according to people familiar with the deal. Representatives for Sequoia and Lightspeed declined to comment. Mr. Son has since recused himself from decisions regarding future investments in Oyo, says a person familiar with the matter. Oyo, through a spokesman, declined to comment on questions about Mr. Son’s loan guarantee.
     

  • There was not a single mention of OYO in Softbank’s 90-page earnings slide deck
There are 25 tweets in this great thread on Softbank. Here’s #1.
The first $100 billion will always have issues, we knew that. It’s the second $100 billion that will be amazing.
Tim Culpan reached the same conclusion too, but in a different direction. “Masa Son Desperately Needs That Second $100 Billion

That’s all for this week. Join us—or should I say, PGK—next week.