In India’s abnegation to join the RCEP, lies its resistance to undertake domestic reform

By Satyajit Mohanan

On November 4, Indian Prime Minister Narendra Modi announced that India would not join the Regional Comprehensive Economic Partnership (RCEP) agreement. Prime Minister Modi while reaffirming India’s commitment to free trade and a rules-based international order stated that India would not join the RCEP as it does not, “address satisfactorily India’s outstanding issues and concerns”.  India’s decision can be attributed to the fact that the agreement did not provide safeguards to India’s domestic sectors, the lack of trade concessions to India and the fear of a rising trade deficit. Central to these reasons, is the lack of domestic reform in India. Economists such as Mihir S Sharma states that by not joining this trade bloc, India will lose out on major economic benefits which would alter the geopolitics in the region. PM Modi has hailed this decision as a move that was taken to protect India’s “national interests”. But in reality, this move was an outcome of an Indian economy which was uncompetitive in nature, owing to India’s resistance to undertake domestic reform.

What is the RCEP?

The Regional Comprehensive Economic Partnership (RCEP) is a free trade agreement in the Asia-Pacific region. RCEP was proposed to bring together the ten members of the Association of Southeast Asian Nations (ASEAN) and their six FTA partners (China, Japan, South Korea, Australia, New Zealand and India). It is said to be the largest free-trade agreement (FTA) in the world. The countries together comprised of a population of 3.4 billion with a Gross Domestic Product (GDP) of $49.5 trillion. ASEAN leaders originally proposed the idea of RCEP in 2012, and the talks began in 2013.

National Interest or Gargantuan Mismanagement of the Economy?

India believed that the deal would harm its domestic sectors including agriculture and manufacturing. It feared that there would be a sudden surge in cheap Chinese imports and agricultural products from Australia and New Zealand. India also did not make great progress in trade in services, which meant that professionals such as engineers and doctors would not gain access into the markets of other member countries. The Government was also under enormous pressure from the domestic industries and the opposition parties to opt out of the deal. Hence, it was logical and politically beneficial for the government to opt out of the deal keeping in mind India’s ‘national interests’.

However, the problematic part with this move was, the uncompetitive nature of the economy which caused the government to take such a decision. To say that, India is not ready to compete twenty eight years after it embraced the liberalisation reforms is deeply disappointing in the economic and political context. The 1991 reforms were undertaken with an aim to make India globally competitive. One could possibly fault the previous regimes for the state of the economy. However, having not undertaken certain structural reforms, the previous UPA governments despite the financial crisis of 2008 were able to foster a healthy economy and produce an average growth rate of 8% over ten years. In fact, it was Dr Manmohan Singh’s government which negotiated the RCEP in 2013. India then found it beneficial to sign this deal owing to a healthy economic environment. However, its decision to now opt out could be attributed to the present dismal state its economy.

The Modi years witnessed disastrous economic reforms such as demonetisation (the withdrawal of 86% of the currency in circulation), hasty implementation of the Goods and Services Tax (GST) and the sheer reluctance on part of the state to enact structural domestic reforms.

According to the World Economic Forums 2019 Global Competitiveness Report India has been placed at the 68th position, well behind most of the RCEP countries. India’s producers face higher costs of productions, red tape and relatively high taxes. India suffers from a cost advantage in terms of energy, capital and credit. Most of its Industries suffer from inverted duty structures whereby raw materials are subjected to higher duties and the finished goods come in at a lower duty or sometimes at zero duty. Hence, goods manufactured by domestic industries become uncompetitive against foreign goods. The current structure of the Goods and Services Tax (GST) does not provide for any refund of credit accumulation with regard to differential tax rates. India has inflexible and complex land and labor laws. To top it all, an overvalued Rupee.

Domestic Reform as an Outcome of This Missed Opportunity:

India had the chance to be further integrated into global value chains which would have resulted in an increased employment rate, higher growth, reduction in poverty and greater economic and political clout. This move has left India bereft of pursuing its ambition as a global manufacturing hub, something which PM Modi had highlighted in his first term. It also is a setback to India’s look East policy and reduces its geopolitical clout in the region.

India can no longer depend upon its export subsidy schemes to enhance competition after its recent lose in a WTO case, which ruled that most of India’s export subsidy schemes as illegal on the US’s complaint. The WTO’s dispute settlement panel rejected India’s claim, that it was exempted from the prohibition on export subsidies under the provisions of the WTO’s agreement on Subsidies and Countervailing Measures (SCM). India now will have to withdraw certain export subsidies which will have a dire impact on its traders whose companies are currently receiving billions in the form subsidies on an annual basis.

India’s GDP growth rate has slipped to over a six-year low of 4.5% in the September quarter. The former ‘fastest growing economy’ is now witnessing a major economic slowdown. It is now felicitous for India to undertake structural domestic reforms, both for the current and future prosperity of the nation. But will the government wake up from its deep slumber? Time will only tell.

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