21 Nov 2020 13:34 IST

India’s trade winds need to change direction

In the post-Covid era, ‘self reliance’ may prove costly on the economic front for India

The mega trade deal — the Regional Comprehensive Economic Partnership (RCEP) — the biggest so far globally, was signed last Sunday amid much fan fare. The deal was signed between 15 nations — the 10-nation ASEAN bloc and Japan, China, South Korea, Australia and New Zealand.

The most conspicuous absentee was of course India. India after years of negotiations pulled out of the deal in November 2019. India’s fears that the grouping would be dominated by China, a country with which it has a huge trade deficit, are not entirely unfounded. There was a perception in New Delhi that its concerns about China flooding India with cheap imports, on services trade (where India has an advantage) and the vexatious ‘rules of origin’ issues were not being adequately addressed.

India steps back

When India pulled out of RCEP negotiations, there was widespread relief within the country. Dairy farmers and certain sections of the Indian industry were particularly relieved. Interestingly, the Modi government even received support from the opposition Congress Party on this issue. Also ironically, it was during the ten-year Congress-led UPA regime that India signed 15 free trade agreements, including pacts with ASEAN and Japan.

There is no doubt that the RCEP is a mega deal — it accounts for close to 30 per cent of the GDP and a third of world population. But the perception both within the government and in the industry was that India did not gain from these free trade pacts and that they needed a thorough re-evaluation. This perception also gained currency as India’s trade deficit with China ballooned in the last decade from $37.2 billion in 2011-12 to $48.66 billion in 2019-20, peaking in 2017-18 at $63 billion.

More to what meets the eye

Negotiations with China to bring down the deficit were often exasperating from the Indian point of view. India felt China was paying lip service and was not opening up its markets for India pharmaceuticals, software and farm exports.

Close on the heels of the RCEP signing, External Affairs Minister S Jaishankar mounted a scathing attack on free trade agreements and globalisation. He said, “In the name of openness we have allowed subsidised products and unfair production advantage from abroad to prevail. And all the while this was justified in the mantra of an open and globalised economy.” He went on to add, “The effect of past trade agreements have been to deindustrialise some sectors.… Those who argue stressing openness and efficiency do not present the full picture.”

This attack is an unambiguous indication of where the Modi government stands on the issue of international trade now. ‘Atmanirbhartha’ is clearly the flavour of the season. But there is also a growing sense of alarm over India’s sudden “inward” shift. The prominent among those who have voiced their concern are Shyam Saran, former Foreign Secretary, and Arvind Subramanian, former Chief Economic Advisor.

Saran has been critical of the Modi government’s stand and goes so far as to say that leaving the RCEP talks last year was a “short-sighted move” in a recent print interview. He feels that India would have been better off addressing its concerns by being a part of the grouping than by walking away from it.

Saran says that it is not true to say India did not benefit from the various FTAs it signed in the past as they led to a substantial increase in trade and exports. He also says that, India may not have gained from the FTAs as much as it expected because of some sections of the Indian industry for not leveraging the provisions of the FTAs to its advantage.   

Plot twist  

In a recent interview, Former Chief Economic Adviser Arvind Subramanian, and Shoumitro Chatterjee, Professor of Economics at Penn State University, US, in a slightly different context, however, argue that India turning its back on global trade will hurt the country. They argue that the export growth played a key role in India’s impressive growth record in the early 2000s. Their study shows that India’s export growth in this period was almost on par with that of China and Vietnam — the top two performers. So turning “inwards” especially in the current pandemic times will hurt growth and is hardly advisable.

Interestingly, many of the RCEP signatories — Japan, South Korea, Vietnam, the Philippines and Australia, to name a few — have serious political and territorial disputes with China. Yet they were able put that aside and forge a trade pact in a world that is getting increasing politically and economically fragmented. These countries would have certainly liked India joining the group and be a bulwark to China’s ambitions.

Battered by the Covid pandemic, India’s economy needs more global trade, not less. The RCEP members have crucially given India the option rejoin the trade bloc. India in the recent future must move ahead and not only keep its options open on joining the RCEP but also sign free trade deals with the EU and the US, which have been stuck for several years now. But in the short-to-medium term, things are unlikely to change.

In the post-Galwan scenario, sentiments against China are running high and India has turned towards “self reliance” and “strengthening itself” with a vengeance.