India’s RCEP dilemma

Struggling to compete freely with Chinese merchandise, the movers and shakers of India Inc are strongly opposed to any free #trade pact with #China. Our policy makers remain clueless about how to deal with its large untamed trade deficit with the middle kingdom. To make matters worse, China has been denying India a genuine market access by resorting to non-tariff barriers such as cumbersome compliance requirements. That may help explain why New Delhi has been reluctant to sign on #RCEP - a 16-member free trade bloc that accounts for roughly one-third of global #GDP and merchandise #trade. Yet, China and RCEP makes both commercial and strategic sense for India. 

With the US turning protectionist, the EU struggling with #Brexit and slowing growth and political turmoil in Middle East, India has got no option but look beyond these traditional markets. Largely untapped #SouthEastAsia and Eurasian region could be those fall-back options. And, RCEP could be a vehicle to push India’s export to South East Asia. However, that doesn’t mean there won’t be any challenges. 

But any free trade pact is always about give and take. RCEP would be no exception. While agriculture, cotton textile and apparel, copper, pharmaceutical and software may benefit from increased market access in China, but steel, radial tyres and power equipment makers may face intense competition from cheaper imports. Synthetic textile value chain and dairy industries are also likely to be adversely affected. 

However, indigenous businesses shouldn’t lose hope. India is likely to get a longer time period (according to leaked media reports, it could be 20 years) for reducing import duties in phases, and only about 28% of the tariff lines are likely to witness immediate duty reduction or removal. Besides, India could avail trade remedial measures such as anti-dumping investigations to deal with unfair trade practices. To deal with sudden import surge, India is likely to get auto trigger mechanism - restoration of #MFN duty if import of a sensitive item breach a threshold. And roughly 15% of the vulnerable tariff lines will see no duty cuts at all. Besides, India will not be committing for #IPR protection beyond #WTO TRIPS. 

However, despite these precautions, cutting our trade deficit with China won’t be easy unless we aim to compensate for it by having more Chinese investment that is increasingly being boycotted by the EU and the US, hence it’d be looking for alternative deployment opportunities. India with its huge capital requirements offer that opportunity. Further, India given its diverse geography and rich cultural heritage, can realistically aim for 10% (i.e. $26 billion or so) of Chinese outbound tourism spending. 

Nevertheless, over-protected industries such as steel will need to gear up for increased competition from competitively priced imports from China and South Korea. But their loss will be made up for by gains for much more dynamic and job-intensive industries such automobile and auto components, construction and infrastructure, engineering goods, electrical equipment and machineries.

On its part, Indian government needs to address internal impediments such as poor basic infrastructure, trade unfriendly border and customs procedures, cumber compliance burden associated with GST and bad regulations such as price control or cotton bias in the fibre policy that has been keeping manufacturing sector uncompetitive as reducing corporate tax rates, though positive, is not enough. China and RCEP are both an opportunity and a challenge, and their net impact on India will depend upon how effectively it minimises the cost and maximises the gains.

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A shorter version of this op-ed piece was first published by The Deccan Herald here