RCEP and India: Difficult partners, but not estranged
As 2019 enters its last quarter, anxiety persists over the 16 country Regional Comprehensive Economic Partnership (RCEP). For once, though, in the seven years over which it has been negotiated since being announced in 2012, hopes of conclusion accompany anxiety in nearly equal measure.
The vision of RCEP talks concluding by the end of the year is a distinct possibility. It is so notwithstanding the reservations India – one of the largest economies in RCEP – continues to have on multiple issues. India’s reservations have been largely responsible for holding back RCEP.
Indian industry has been a stumbling block for RCEP. It is heavily opposed to lowering trade protection and engaging in FTAs. This is due to its inherent lack of competitiveness stemming from inefficient business conditions at home. Such inefficiencies make home-grown products uncompetitive against imports, making high tariffs necessary. The same inefficiencies prevent several Indian exports from being competitive in regional markets, despite preferential access. Indian exports are also unable to overcome ‘creative’ protectionism by China and regional economies like Philippines through non-tariff barriers (NTBs) in form of restrictions on health, environment and ecological grounds.
China is another major reason for India fighting shy of RCEP. RCEP is visualized by most in India as an FTA with China – a prospect hardly appealing for a country having a large trade deficit with China, apart from historical dispute over a contentious border. The notion of being in a FTA, whose rules and systems will be driven by China – described so by none other than US President Barrack Obama in his efforts to salvage the TPP ( https://www.washingtonpost.com/opinions/president-obama-the-tpp-would-let-america-not-china-lead-the-way-on-global-trade/2016/05/02/680540e4-0fd0-11e6-93ae-50921721165d_story.html) – reinforces India’s reservations on RCEP.
After much dithering, however, India finally looks willing to go ahead with RCEP, even if with considerable reluctance. After being returned to office in May 2019 with a mandate larger than in its first term, the BJP government led by Prime Minister Modi, can afford to be less apprehensive about adverse domestic reactions to joining RCEP. Indeed, the Indian Commerce and Industry Minister’s extensive consultations with various stakeholders, followed by his recent remarks on opportunities for India from RCEP (https://www.livemint.com/) reflect a cautious but noticeably optimistic perspective towards the deal.
Other policy actions also point to India’s growing preparedness for RCEP. These include incentivising exporters through access to easier export finance and faster refund of input taxes. India has slashed corporate tax to 25 per cent from more than 30 per cent earlier, bringing tax burden on its business on par with most other RCEP members. The ostensible objective of these policies is to make Indian exporters more competitive. India has also reportedly agreed to changes in domestic policies on transfer of technology and royalty payments, in line with investment rules likely to feature in RCEP.
Its evident though that the final RCEP deal would require accommodation of some of India’s specific demands. These include allowing greater access to Indian exports, particularly pharmaceuticals, by China in its domestic market; a phased programme of reduction for ‘sensitive’ domestic industries, where India has agreed to deeper tariff cuts; and reasonably liberal commitments for movement of its skilled professionals to other RCEP economies, particularly in Southeast Asia.
India’s dragging its feet over various issues at RCEP had given rise to the speculation over whether other members might wish to conclude the deal without India. Without India, however, RCEP gets significantly limited in size, much like the CPTPP has without the US. Without India, RCEP can’t be the largest FTA in the world encompassing almost half of the world’s population and more than a third of the global GDP. Along with China, India remains one of the most formidable economic actors in RCEP and its long-term prospects. Dropping India would mean cutting RCEP to a suboptimal size.
Perhaps India is also aware of its significance within the RCEP bloc and is therefore persistent with its demands. On the other hand, it is also conscious of the importance of staying engaged with RCEP. By being part of RCEP, India elevates itself to a position of greater prominence in regional affairs. It becomes both more visible – as well as audible – in its posturings on the region, which is one of the major goals of the Modi government’s action-oriented ‘Act East’ policy.
At a time when US-China trade tensions are forcing repositioning of global supply chains running through Asia, RCEP becomes critical. Its common rules for cross-border trade in goods and services, investment and technology, over a humongous economic geography, can lead to vast reorganizations of production and business networks. The resultant would not just be fresh economic opportunities; but also, emergence of new trade-based strategic coalitions and alliances.
India is conscious of these opportunities. It is very unlikely to drop out of RCEP. For the rest of RCEP, it is essential to look at India as a prickly package with considerable business and strategic prospects.
(The author is Senior Research Fellow and Research Lead (trade and economic policy) in the Institute of South Asian Studies in the National University of Singapore. He can be reached at [email protected],com and [email protected])