RCEP: Boon or Bane to Indian Economy

“RCEP will be the third largest jolt to the Indian Economy by PM Modi” – Jairam Ramesh

There has been a lot of buzz recently from farmers and other business associations regarding RCEP that it would destroy them economically. Although it was Prime Minister Manmohan Singh who decided to negotiate RCEP way back in 2012, Congress now opposes the RCEP. Nevertheless, keeping aside political gains, let us dive deep into RCEP to understand the scenario.

Regional Comprehensive Economic Partnership (RCEP) is a proposed free trade agreement between participating countries where they agree to reduce or eliminate the tariffs levied by each country on imports and exports of goods and services. There are 16 countries which are part of this agreement, 10 member states of ASEAN and 6 FTA partners namely China, Japan, South Korea, Australia and New Zealand. Upon implementation, this will tend to create a new comprehensive free trade area which is bigger than the European Union. This will help countries embrace economic integration and provide a platform to gain access to the global arena.

There are a number of multilateral trade agreements and FTAs between various countries, but why is RCEP particularly gaining so much importance. Let’s review some facts – the 16 Asia-Pacific (APAC) countries together account for:

  • 25% of global GDP
  • 26% of Foreign Direct Investment flows
  • 30% of global trade
  • 45% of world population

Hence, this holds much significance in the global economic context, especially, when the global balance is shifting towards the APAC region. This deal will reinforce the leadership of the region in global trade. This is the first-ever deal which will encompass China, India, South Korea and Japan providing a commitment in WTO.

The negotiations formally began in 2012 and is nowhere close to reaching a conclusion. This deal consists of 21 chapters of which only a few have been concluded. With rising protectionism and uncertainty in the global economic scenario owing to US-China Trade War & the Brexit cliff-hanger, the negotiations are facing a lot of frictions. However, China is firm to reach on a conclusion soon as it wants to present this as a response to the erstwhile Trans-Pacific Partnership (now known as Comprehensive & Progressive Agreement for Trans-Pacific Partnership), without the US being a part of it. This deal will make China’s position formidable in the ongoing trade war as it implicitly signifies the stance of the countries in it.

All the member nation representatives met on September 08th this year in Bangkok to arrive at tangible conclusion in order to proceed with the final ratification in the ASEAN summit this November. The meeting was delayed for more than 5 hours and everyone was busy in persuading one nation: India. India, a key player in the APAC region is sceptical with some of the terms of the deal. On the other side, there are a lot of protests emerging from the various domestic trade associations within the country. What is the significance of this deal for India? Why is there such a huge negative sentiment over this deal and what are the concerns of the Indian policymakers with regards to this deal?

This deal has a potential impact on the Indian economy as RCEP countries account for almost 27% of India’s total trade, about 20% of total exports and 35% of total imports. Upon implementation of this deal, it will open the Indian markets further by easing the tariff barriers and hence making India more vulnerable to huge imports which will further put pressure on the industries. The scepticism over the free trade agreement is not something driven by fear but has a rationale behind it. India’s previous experience of FTAs has been a sour one as it was always on the receiving end. Out of the 16 nations, India has trade deficit with 11 nations as of 2018-19. India already has FTAs with ASEAN, Japan and South Korea and its trade deficit has widened after signing these deals. India’s trade deficit with RCEP countries increased from $5 billion in 2005 to $105 billion in 2018. Of this, China alone accounts for $53 billion deficit, which is also under criticism due to the sudden jump in imports from Hong Kong. A report by NITI Aayog published a couple of years back noted that the utilisation rate of the FTAs by India is between 5% and 25%, one of the lowest in APAC region. The Asia Development Bank found that the complex origin rule criteria, lack of information about FTAs, higher compliance costs and administrative delays act as a hindrance for Indian exporters to pursue the preferential routes.

India has offered to relax tariffs on 86% of goods traded with ASEAN and upto 74% of goods traded with China, New Zealand & Australia. This proposal was also rejected by the nations, which stated it as “too little, too late”. India is also worried that the items on which duty cuts have not been provided to China can also end up in India through different routes. As a matter of fact, India has the lowest tariff barriers in the proposed RCEP region while China has the highest. Based on these concerns, India wants an ATSM (Auto trigger safety mechanism) provision, which will automatically increase the levies and tariffs beyond a particular threshold. India also wants the right to determine the differential pricing for specific products.

The Indian economic scenario is particularly gloomy right now, as there is a risk of slowdown posed upon it. The unemployment rates are at all-time high and the growth forecasts for India are continuously nosediving. The banking and financial sector is already stressed with the looming liquidity crisis and NPA problems. The Indian Automobile industry is also facing the heat with sales volumes continuously falling in 2019. At this point, Indian industries and workforce are not skilled and efficient enough to compete with manufacturing powerhouses like China and Japan. This deal will further deteriorate the situation as these countries will export more and more consumer durables, electronics, agricultural and dairy products which will further aggravate the situation of the farmer.

The cons of RCEP most certainly seem to outweigh the pros at this point of time, but the scenario could be completely different in the long run. While we know that India wants to become a $5 trillion economy by 2025, it would certainly not be possible without developing ties and gaining access to international markets. It is high time that our government starts looking inwards and focuses on the hindrances. When the global workforce is aging, India has tremendous opportunity in terms of its young population. This can be leveraged only when the human capital improves. In the recent WEF report, India slipped 10 places in the Global Competitiveness Index. This is worse than all BRICS nations except Brazil. The parameters should be analysed on where India fares badly. To gain and sustain high growth rates, technological adoption and skills play a key role. Indian economists and leaders should relentlessly work on these key issues as doing so would help in both the short term and the long term development of the country. This would certainly have the end result of helping India establish itself among other economies and make a mark on the world map.

Bharadwaj K A
Co-Managing Editor

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