India's challenge is competitiveness

India’s decision to stay out of the Regional Comprehensive Economic Partnership (RCEP) will not isolate India from the global or regional economy. The fact is that India is already quite isolated — its share of global merchandise exports is minuscule, at around 1.8 per cent (China’s is around 13 per cent) and for all the talk about competitiveness in services its global share is just 3.5 per cent, lower than China’s 4 per cent. It is the Indian economy’s lack of competitiveness which is the isolating factor.  

RCEP was not going to solve that problem. If trade liberalisation alone was sufficient to improve or enforce competitiveness, India should have emerged as an export powerhouse in the aftermath of the WTO agreement in the 1990s or at least after the FTAs signed with ASEAN, Japan, and Korea (which consist of 12 of the 15 non-India RCEP countries) in the 2000s. Evidence suggests that the outcome of those FTAs over a decade has been a faster rise in merchandise imports than merchandise exports. India’s trade deficit with China, sans any free trade agreement, has risen from around $1 billion at the turn of the millennium to over $60 billion in less than two decades.

It is well known, but often under-acknowledged, that India’s half-hearted attempts at liberalisation since 1991 led to a considerable deregulation of product markets (with the exception of agriculture) without any (or enough) accompanying reform in the three crucial factor markets: land, labour and capital. Today, all three are bottlenecks in even domestic consumption-driven growth, never mind exports. Unreformed factor markets are also responsible for the perception of “jobless growth”. In truth, jobs are being created but largely in the informal sector because of the complexity in rules and regulations. 

A low-growth scenario coupled with a lack of good quality jobs is hardly conducive for signing on to a free trade agreement, not least with the most competitive economy in the world — China. That agriculture was not even subject to limited market reform means that it is totally unprepared to compete internationally. No government could possibly risk exposing 40 per cent of the total workforce (under-) employed in agriculture to global market forces. In sum, the sins of the past, in terms of reform left incomplete, continue to haunt the economy.

But it is not just the old problems. The consequences of the political economy of the last seven years — a backlash against the perception and, indeed, the reality of cronyism, corruption and an “unfair” system — have added new dimensions to the competitiveness challenge. Acquiring land for industry is not only lengthy but also expensive with buyers legally bound to pay a big multiple of the market price. In other competitor countries, particularly China, land is given free. Similarly, critical natural resources required for sectors as diverse as power and telecom can now only be acquired through an auction mechanism designed to maximise revenue for the government. In other countries, these are allocated on a first come, first served basis. The cost structures of industries dependent on natural resources have gone up, irrevocably. 

Commercial lending decisions are now taken under the over-eager eyes of the four Cs — CAG, CVC, CBI, Courts — with the result that many businesses are finding it difficult to finance themselves. Small businesses may be forced to pay more to access finance form non-banking sources. This is not an argument against transparency and rooting out corruption and cronyism but, at some point, policy-makers need to assess whether some policy measures are raising the Cost of Doing Business to an unreasonably high level even as the government strives to improve the Ease of Doing Business. China and other East Asian countries in RCEP offer cheap land, cheap power, cheap labour, low taxes and cheap finance to businesses. India has bitten the bullet on taxes, but businesses pay a premium on the rest.

The pity about RCEP is not that India did not sign it. Instead, it is about the missed opportunity on carrying out some difficult reforms domestically. The negotiations on RCEP lasted more than seven years. Perhaps, if the government had invested as much time in negotiating within its line ministries on implementing the necessary reforms to make India’s economy fundamentally competitive, the outcome in 2019 would have been different. Prime Minister Modi is a believer in excellence and no half-measures. He must insist that all ministries adopt a proactive approach to reform. The decision to opt out of RCEP has bought India time to get its house in order but, in the long term, prosperity will not come behind closed doors.

Until India becomes a real market economy, it is unlikely to have the confidence to integrate with, and compete in, the global market economy.

The author is chief economist, Vedanta