The Indian government, rather surprisingly, exited the RCEP trade talks in Bangkok on Monday as it felt that its concerns were not being adequately addressed. The RCEP is a 16-member trade bloc that includes the 10-nation Asean and its FTA partners China, Japan, South Korea, Australia, New Zealand and India, before it exited.
India got on board these trade talks in 2013. The other RCEP nations were keen to wrap up the talks in Bangkok and sign the deal by the end of this year.
Though India has been cutting tariffs on most products for some time as it is a WTO member, it was, under the RCEP, required to make much bigger tariff cuts, slashing tariffs to zero for most products. The WTO allows its members to have some ‘safeguards’ to help their domestic industry and farmers against import surges.
There has been growing anger against this deal in India for a while now. But the protests gathered steam in the last few months. The Opposition Congress Party, in a press conference just last week, vehemently opposed the deal and urged the Modi government to walk away from it. Senior Congress leader Jairam Ramesh said that India would be committing suicide if it went ahead and signed the mega trade deal.
After Monday’s decision, a rather predictable war of words broke out between the BJP and the Congress, which blamed each other for the current impasse.
It was during the UPA regime that India got into free trade agreements with the Asean, Japan and South Korea. The general consensus in India was that, in these deals, India conceded more than it gained. Under these agreements, Indian exports did not seem to benefit as much as had been hoped.
India’s free trade agreement talks with the European Union have been hanging fire for over a decade now. The EU wants India to slash tariffs on wines and luxury cars, while India has been demanding more concessions in the services sector, especially for its software professionals to work in the EU.
In India, the farmers and the dairy sector were at the forefront of the protests, though several industry groups had also expressed their anguish, especially the metals sector. For the dairy sector, the biggest threat was Australia and New Zealand, whose dairy industries are much larger than India’s. New Zealand is the world’s second largest exporter of dairy products and Fonterra, a dairy major, is a major player in the global market.
Prof R Ramkumar of the Tata Institute of Social Sciences in a recent column in The Hindu mentions that even the US was wary of Fonterra’s size and reach and wanted its monopoly to be broken during the now-aborted TPP trade talks.
In contrast to New Zealand, India’s dairy sector consists largely of small farmers who are grouped in cooperatives — Amul, for example — and the RCEP deal, under which tariffs were supposed to be slashed to zero, was a very serious threat to their livelihoods.
The RCEP is a China-dominated grouping, and India is already bearing the brunt of the massive trade imbalances with its larger neighbour. India’s trade deficit with China has been only soaring over the years. Despite Delhi’s repeated protests, Beijing has done precious little to open up the Middle Kingdom’s markets and allay India’s concerns.
Give the current state of the economy, with slowing growth, a weak investment climate and falling aggregate demand, the Modi government did the wise thing by walking away from the RCEP and has been justifiably applauded by all.
The issue has, however, brought to the forefront some of the structural weaknesses in the economy. Despite the 1991 reforms and the surging growth over the years, which helped lift millions out of poverty, India could not quite manage to replicate the East Asian model.
India has not been able to shift a major part of its labour force from agriculture to low-cost, labour-intensive, export-led manufacturing the way China and many East Asian countries have managed to, successfully. The fact that over 90 per cent of India’s workers are engaged in the informal sector, of which a good number are self-employed, is a pointer towards this.
India’s economy is a unique blend of capital-intensive, high-tech manufacturing and services. That the major success story of India’s reforms era is its IT sector is proof of this ‘skewed’ development. But given how suspiciously free trade is being viewed in today’s world, India’s chances of replicating the East Asian model in manufacturing appear slim.
Another major pain point for India is the lack of competitiveness in its manufacturing practices. Though we have made rapid strides in ease of doing business, there’s a long way to go to match China and East Asian manufacturing competitiveness. As economist Surjit Bhalla said in a recent interview, India has to get its house in order before signing these mega trade deals.
Exports will have to play a major part for India to become a $5-trillion economy by 2025. For that the manufacturing sector has to raise its competitveness and the government, on its part, has to create a more conducive policy environment, while improving infrastructure and the overall investment climate.