India must take a leaf out of China's book and prepare its economy for RCEP

The economy needs changes that can't be made overnight; without them, it will continue to under-perform, whether India signs up for RCEP or not. Work should have started 7 years ago, writes T N Ninan

Shimon Peres, the late Israeli leader who signed the Oslo accords, once said that as soon as you begin negotiating with the enemy, you realise that you first have to negotiate with your own people. Trade negotiations are not with any enemy, for trade is supposed to be win-win. Still, as the tortuous talks over the Regional Comprehensive Economic Partnership (RCEP) have dragged on, it has become increasingly clear that the real negotiations that the government has to conduct are with Indian business, which, with almost no exceptions, is wary of yet another free trade agreement.
 
Signing up for the RCEP, or refusing to do so, will be one of the most important decisions that the government will take in the coming months. Staying out of the grouping, which will include every economy in East Asia and Australasia, will come at a cost. The region has become the world’s leading economic powerhouse (accounting for 40 per cent of global GDP), with the largest share of trade and the highest economic growth rates. Staying out will mean that Indian exporters to this crucial market will have to cope with tariff walls and non-tariff barriers. Joining later is a risky bet, because China will almost certainly try to prevent a subsequent Indian entry.

 
Wouldn’t staying out come with a smaller price tag than having domestic producers destroyed by a flood of unrestricted imports from China and other regional players? The government response to that tricky question is to try and have its cake and eat it too. It wants to sign up, but with safeguards to prevent a flood of imports knocking out domestic producers. Whether it will get such safeguards remains to be seen. The acid test will be if it is asked to sign up without such safeguards.
 

In truth, though, the real issue goes beyond the binary choice that is usually postulated: Sign up or stay out. Rather, it is how to ensure that the country benefits even as it signs up for RCEP membership. In other words, the domestic economy has to be made ready for increased imported competition — through greater efficiencies (in transport, for instance); rational pricing of electricity (don’t tax industrial consumers to subsidise farmers); step up productivity (if domestic dairying can’t face up to competition from New Zealand, then raise milk output per head of cattle); improve standards and certification so as to get past non-tariff trade barriers; and lower the cost of finance, which remains unconscionably high. Finally, get rid of a currency policy that over-prices the rupee and thereby taxes all exports while making imports cheaper.

 
As should be obvious, these involve systemic changes and can’t be done overnight. Indeed, work on these should have started seven years ago, when RCEP negotiations first began. After all, if every other economy in the region — whether Vietnam or Cambodia, the Philippines or Myanmar — can live with an open regional trading environment, the problem is not the RCEP, or any of the other free-trade agreements that the country has already signed, but the infirmities of the domestic economy. So India has to change — and the most important safeguard to negotiate just now is the time needed to make the necessary domestic changes. This is what China did when it was negotiating to join the World Trade Organization at the turn of the century — with spectacular successes to show in the subsequent years. India should take a leaf out of China’s book.

 
The really worrying aspect of the negotiations, therefore, is that one hears nothing at all about getting the economy ready for a more open trading environment. No reform of electricity pricing so as to end pernicious cross-subsidies has been proposed; amid the business of cow protection, no one is talking of more efficient dairying; too many influential people in government seem unaware of the costs imposed by an over-priced rupee; and the Reserve Bank’s interest rate cuts remain ineffective. If all this does not change, it matters little whether India signs up for the RCEP or not. Either way the economy will continue to under-perform.