The key to benefiting from a trade deal
Prime Minister Narendra Modi’s recent push for India to be in the Regional Comprehensive Economic Partnership (RCEP), despite opposition from his ministries and industry, is a good sign that he realises that India needs to strengthen its global integration, especially with respect to the buoyant Asian economies. The PM also made efforts to improve our bilateral trade relations with key partners, highlighted by his recent visit to the US to strike a trade deal with President Donald Trump. These are all steps in the right direction to boost exports and sustain high and inclusive growth.
But India cannot benefit from any trade deal — bilateral or plurilateral— without first putting its domestic house in order with urgent unilateral trade liberalisation that began in 1991 and was further strengthened under Atal Bihari Vajpayee. Since the United Progressive Alliance-ii, and continuing till now, exports have stagnated as we did not continue with tariff rationalisation, a realistic exchange rate management, and moving away from an archaic trade negotiating strategy that is reactive. Trade and logistics facilitation reforms are another big constraint to rapid growth of exports and foreign direct investment (FDI). But to the credit of PM Modi, considerable reforms were undertaken during his tenure in this particular area, which are reflected in sharp improvements in the rankings of World Bank’s Ease of Doing Business, Trading Across Borders and Logistics Performance indicators. Also, the PM’S Economic Advisory Council (PMEAC) had brought out a report in October 2018, outlining a clear road map for further reforms in these areas. This is what we need to do immediately:
Tariff rationalisation: This is the first reform we need to maintain international competitiveness and make industry fully integrated into the global economy. To achieve this, we must have a two-year plan to bring our average tariff levels to single-digit ASEAN levels. Average tariff level in India for non-agriculture sectors is 13.6 per cent, a bit higher with tariff hike in the recent Budget, compared to 5.3 per cent in Malaysia, 7.3 per cent in Thailand and 8.4 per cent in Vietnam. This reduction is a must for not only promoting exports, but to also benefit from RCEP, or any bilateral freetrade agreement (FTA).
Realistic exchange rate: We need to immediately correct the overvaluation of exchange rate over the past few years. This is crucial for reviving the export momentum. I am most surprised that this does not receive as much attention as the push for interest rate cuts.
Trade and logistics facilitation reforms: To the credit of the Central Board of Indirect Taxes and Customs (CBIC), our cargo dwell time in ports and airports has been considerably reduced through adoption of modern risk management systems and automation. So has logistics development under the special wing created in the Ministry of Commerce and Industry. We now just need to complete the reforms clearly outlined in PMEAC report on logistics development.
Trade negotiating strategy: We need to behave like a major global player and take a proactive stance in trade in services, removal of subsidies and non-tariff barriers by not consistently pushing for temporary relocation of labour (Mode 4 of the General Agreement on Trade in Services) and Special and Differential Treatment (S&D). It is high time that we didn’t hide behind the logic that we need these because we house the largest number of poor people in the world. This also does not go well with our flagging that we will be a $5 trillion economy by 2025.
Connecting with the largest global value chain: A good way to carry forward unilateral trade liberalisation to next generation trade reforms is to start preparing to join the Comprehensive and Progressive Agreement for Trans-pacific Partnership (CPTPP) comprising the 11 original members of TPP, excluding the US. They are: Japan, Australia, New Zealand, Brunei, Singapore, Malaysia, Canada, Peru, Chile, Mexico, and Vietnam. The CPTPP will incorporate the original TPP agreement, with suspension of a limited number of provisions. Membership in CPTPP will require achieving gold standard trade policy in elimination of tariffs and other barriers to trade and investment, a WTO + IPR regime and trade in services, adherence to competition policy, trade facilitation, reform of state-owned enterprises, investment policy, and government procurement. Labour and environment policies are also on the agenda, though how far these will be enforced is not yet clear. India does need to move swiftly on most of these policies on its own to fulfill its objective of closely integrating with the largest global value chain to boost exports and create jobs.
Along with the unilateral trade liberalisation policies outlined earlier, these are also the policies the government needs to undertake to fully benefit from RCEP, and other ongoing and proposed bilateral and plurilateral trade deals.