General Studies Paper 2 (International Affairs): Impact of RCEP on India’s economy

Regional Comprehensive Economic Partnership (RCEP)

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Syllabus: General Studies Paper 2 (International Affairs)

 

India has to be selective in opening its markets in age of new protectionism. In light of this statement analyse the impact of RCEP on India’s economy? Do you think it is misguided given the large trade deficits India faces with participating members? (15M)

 

Introduction

RCEP is proposed between the ten member states of the Association of Southeast Asian Nations (ASEAN) (Brunei, Burma (Myanmar), Cambodia, Indonesia, Laos, Malaysia, the Philippines, Singapore, Thailand, Vietnam) and the six states with which ASEAN has existing FTAs (Australia, China, India, Japan, South Korea and New Zealand). RCEP aims to boost goods trade by eliminating most tariff and non-tariff barriers — a move that is expected to provide the region’s consumers greater choice of quality products at affordable rates. It also seeks to liberalise investment norms and do away with services trade restrictions.

Body:

Why India has to be selective in opening its markets in age of new protectionism.

Trade protectionism is a type of policy that limits unfair competition from foreign industries. It’s a politically motivated defensive measure. In the short run, it works. But it is very destructive in the long term. It makes the country and its industries less competitive in international trade.

  • Tariffs :Countries use a variety of strategies to protect their trade. One way is to enact tariffsthat tax imports. That immediately raises the price of imported goods. They become less competitive when compared to local goods. This method works the best for countries with a lot of imports
    • It was to be expected that given the tariff levels in the important RCEP markets are already low, the negotiated tariff reductions from the Indian side will be relatively greater.
  • Subsidies: when the government subsidizes local industries. Subsidies come in the form of tax credits or even direct payments. That allows producers to lower the price of local goods and services. This makes the products cheaper even when shipped overseas. Subsidies work even better than tariffs. This method works best for countries that rely mainly on exports.
    • The huge concessions being sought by Australia in agricultural products can be an extremely sensitive issue for India’s farmers. Indian farmers need support from the government in view of their low productivity and low income levels.
  • Quotas on imported goods: This method is more effective No matter how low a foreign country sets the price through subsidies, it can’t ship more goods.
    • RCEP members want India to eliminate or significantly reduce customs duties on maximum number of goods it traded with them. India’s huge domestic market provides immense opportunity of exports for RCEP countries.
  • Lowering currency value: It is a deliberate attempt by a country to lower its currency value. This would make its exports cheaper and more competitive. This method can result in retaliation and start a currency war. 
  • However, the biggest challenge India is facing in RCEP arises from its trade deficit with ten of the RCEP countries, particularly with China with whom India has a huge trade imbalance.
  • China has clubbed with the ASEAN+1, ASEAN+3 and ASEAN+6, India is clubbed only under the ASEAN+6 framework. Compared with India, the Chinese have always enjoyed closer contact with the ASEAN through a versatile engagement policy that includes building up a variety of economic, political and cultural linkages.

 

Impact of RCEP on Indian economy:

Given the difficulty of getting Indian negotiators to the table for bilateral trade deals, the RCEP remains the best chance to incorporate India into a genuinely open trading bloc.

When inked, it would become the world’s biggest free trade pact. This is because the 16 nations account for a total GDP of about $50 trillion and house close to 3.5 billion people. India (GDP-PPP worth $9.5 trillion and population of 1.3 billion) and China (GDP-PPP of $23.2 trillion and population of 1.4 billion) together comprise the RCEP’s biggest component in terms of market size.

  • RCEP is the world’s largest economic bloc, covering nearly half of the global economy.
  • RCEP will provide a framework aimed at lowering trade barriers and securing improved market access for goods and services for businesses in the region.
  • RCEP’s share of the global economy could account for half of the estimated $0.5 quadrillion global GDP (PPP) by 2050.
  • The grouping envisages regional economic integration, leading to the creation of the largest regional trading bloc in the world.
  • The strategy is also aligned to India’s Act East Policy which builds on the Look East Policy for closer partnership with the Asian region.
  • Changing geopolitics and growing focus on the Asia-Pacific region influenced India’s decision to join RCEP.
  • Standardization of product lines at par with developing countries without tight scrutiny of western regulations
  • Cultural synthesis of products such as market for handicrafts, Agricultural products etc.
  • RCEP recognises the importance of being inclusive, especially to enable SMEs leverage on the agreement and cope with challenges arising from globalisation and trade liberalisation.
  • Analysts suggest that there are enormous export gains that could accrue to India from RCEP under varying scenarios. This assumes even greater importance since our focus has been on products with favourable terms of trade for India.
  • India endeavours to integrate with a region, which has been the most successful region of the world in terms of thriving regional value chains (RVCs). These RVCs necessitate freer movement of professionals across countries in the region.
  • This is especially crucial in a scenario when the vector of India’s demographic dividend is concomitant to the vector of the “aging” population in most RCEP countries.

 

Negative impact

  • The current account deficit (CAD) touched 8 per cent of GDP, and the agreement in the present state of negotiations would mean forgoing a substantial part of the revenues.
  • Greater access to Chinese goods may have impact on the Indian manufacturing sector. India has got massive trade deficit with China. In fiscal year 2017-18, the trade deficit with China was $63 billion.
  • Under these circumstances, India proposed differential market access strategy for China.
  • Exports from ASEAN into India have grown far quicker than Indian exports to the bloc, which they attribute to the fact that India is a “services economy.”
  • There are demands by other RCEP countries for lowering customs duties on a number of products and greater access to the market than India has been willing to provide.
  • Apart from China, India is also losing out to financial and technological hub of Singapore, agriculture and dairy majors Australia and New Zealand, plantations of South East Asian countries, and pharmaceutical trade with China and the US.
  • With e-commerce as part of the discussion, the Indian resistance at WTO of not letting the discussion on digital trade will weaken.
  • The free movement of investments will benefit investors in the US, Singapore, Japan and China, but very few Indians will be taking advantage of this.
  • New Delhi is also worried that the RCEP will open backdoor negotiations and may lead to the country losing out on TRIPS agreements. This may result in giving way to global majors in agriculture seed and pharmaceutical manufacturing.

 

Way forward:

  1. India should Champion the cause of globalization as movement of labour, goods, and services is critical for India’s growth.
  2. Retain flexibility in terms of alignment:  India should be open to larger partnerships and global projects, as well as unilateral action.
  3. Partner with middle powers: Partner with other middle powers, especially those concerned by G2 dominance.
  4. India should align politically with the US, and economically with China. G20 guarantees should be used to secure peace and trade in the neighbourhood. India should strategically liberalize some sectors of the economy, and be receptive to trade and FDI, using its market power to get the best possible deals. Strong macroeconomic fundamentals are a must.
  5. There should also be a push for domestic consumption and import substitution. India can also focus on building charter cities and creating SEZs to create employment.

 

Conclusion:

Bilateral talks between India and China are crucial for an early conclusion of RCEP negotaiations as agreed by other members. Indian policymakers need to be mindful of domestic sectors’ concerns before agreeing on terms of deal. Simultaneously, there is a necessity to improve our competitiveness in the economy. India must play its due role to get its due place in the regional economic configurations. There are more compelling trade and economic reasons for RCEP to become India-led in future, than otherwise. India would get greater market access in other countries not only in terms of goods, but in services and investments also.

 

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