“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
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.
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?
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.
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.
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.
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.
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
But within great crises, lie greater opportunities
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.
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.