Once bitten, twice shy
Rising trade deficit and poor outcomes from other trade pacts involving India have led PM Modi to reject RCEP.
● When Indian Prime Minister Narendra Modi walked away from the Regional Comprehensive Economic Partnership (RCEP) last week in Bangkok, it was just the latest in a long line of disappointing Indian experiences with free trade.
“Neither the talisman of Gandhiji nor my own conscience permits me to join the RCEP,” Mr Modi declared, invoking the leader of the struggle for Indian independence.
The RCEP will still go ahead, and India will be encouraged to join if and when it feels ready, supporters of the pact said as negotiators prepared to depart after the Asean summit in the Thai capital. The remaining 15 countries — the 10 Asean states plus China, Japan, South Korea, Australia and New Zealand — hope to have a deal ready to sign by early next year.
In making his decision, Mr Modi may have had in mind a recent report by the National Institution for Transforming India (NITI) Commission, which showed that past trade deals have done little to increase Indian exports.
The commission in 2017 analysed multiple free trade agreements (FTAs) that India had signed over the past decade, involving Sri Lanka, Malaysia, Asean and South Korea. It noted that FTA utilisation by Indian businesses was abysmally low at between 5% and 25% of the goods eligible for preferential tariffs. The report found that imports from FTA partners increased significantly while exports from India did not grow in the same proportion.
It’s no wonder that India has a trade deficit with almost every other member of the RCEP barring Singapore. The gap with China alone is over US$53 billion, almost half of the country’s total trade deficit. China is also the only RCEP country with which India does not have a bilateral FTA. New Delhi has repeatedly asked Beijing to help shore up Indian exports and has also talked of reviewing the FTA with Asean.
Mr Modi feared that signing the RCEP would result in India being swamped by imports from China, while Australia and New Zealand would seize a huge opportunity to market their dairy products. New Delhi had this in mind when it asked for an “auto-trigger” mechanism, under which tariffs would rise as a shield against excessive imports. After other RCEP members declined to accept the proposal, India felt it had no option but to walk away.
The NITI Commission report found that exports to FTA countries between 2007 and 2017 did not even outperform India’s overall export growth. Between 2014 and 2019, the trade deficit with RCEP members has almost doubled, from $54 billion to $105 billion.
Indian industry, particularly telecoms hardware including mobile handsets, has been under immense pressure from Chinese imports. Major Indian brands including Micromax, Intel, HTC, Lava and Karbonn have lost out to Chinese brands including Xiaomi, Oppo, Vivo and Realme.
In recent years, India has raised import duties on several Chinese products to protect its industries. Mr Modi raised the deficit issue with Chinese President Xi Jinping when the two met recently in Mahabaleshwar, a tourist destination near Chennai in southern India. Mr Xi offered some encouraging words, to the effect that China would see what it could do to narrow the gap, but it remains to be seen what will happen.
It is no secret that the Indian economy is currently facing a serious slowdown with almost all sectors — manufacturing, agriculture and automobiles among them — having contracted in recent months. Gross domestic product (GDP) growth has been slowing since the start of 2018.
The economy has still not recovered from the twin blows dealt in the form of demonetisation in late 2016 and the introduction of the Goods and Services Tax (GST) a few months later. Signing of RCEP under such a scenario would have precipitated further trouble.
The Modi government has been under attack for months for even considering joining the RCEP, from within the ruling party and from the opposition.
Sonia Gandhi, the president of Congress, the principal opposition party, declared on Nov 2, two days before Mr Modi withdrew from the RCEP, that joining the pact would deal a “body blow” to the Indian economy which was “under siege”.
Later Congress claimed credit for the withdrawal, with spokesman Randeep Singh Surjewala tweeting that the party’s forceful opposition had made Modi “back down”.
Hours before Mr Modi announced the withdrawal, 13 opposition parties had gathered in New Delhi to pass a resolution against the RCEP.
The Modi government also faced huge opposition from within the Hindu nationalist family that it is a part of. Swadeshi Jagran Manch (SJM), loosely translated as indigenous awakening platform, brought together hundreds of farmers’ and labour organisations to stage protests throughout the country in recent months. Farmers’ groups were also preparing to call a nationwide strike on Nov 8 if the RCEP went ahead.
Mohan Bhagwat, head of the Rashtriya Swayam Sewak Sangh (RSS) or National Volunteer Organisation, cautioned Mr Modi against signing the deal.
SJM convenor Ashwani Mahajan said he believes FTAs only make self-reliant India dependent on imports. He cites the example of edible oil imports from Asean to buttress his argument.
Another major contributor to India’s stance against the RCEP was the rejection of all its demands. Besides proposing an auto-trigger mechanism against a surge of imports, Delhi wanted concessions in the services sector, its strong area. As well, the RCEP negotiators rejected India’s demand that 2019 be kept as the base year for tariff reductions. The negotiators insisted on 2014 as the base year.
With the RCEP withdrawal, Mr Modi has hit several targets with one decision. Not only has he neutralised the opposition for now, but also he has consolidated his position as a strongman who withstands global pressure and resolutely sticks up for national interests.
The RCEP decision came on the back of the move to end special status for Jammu & Kashmir, a move condemned internationally and in the restive Muslim-majority region itself, but cheered throughout most of the rest of Hindu-majority India.
Withdrawing from the RCEP also calls to mind the approach used by US President Donald Trump, who pulled out of the Trans Pacific Partnership because he said he wanted to protect American workers.
“Mr Modi and his ministers are now selling his refusal to join the RCEP as a victory for India’s poor,” two Bloomberg commentators wrote last week.
Exports to countries with which India had free trade agreements between 2007 and 2017 did not even outperform the country’s overall export growth