Is RCEP good for Indian industry?

The country's own history shows that openness to trade builds a competitive industrial sector, boosts exports and promotes growth

The Regional Comprehensive Economic Partnership (RCEP) brings together the 10 countries of the Association of Southeast Asian Nations (Asean), Japan and South Korea, Australia and New Zealand, and China and India.  These 16 countries account for over a third of the world's gross domestic product (GDP) and trade, and are collectively growing at a rate that is double the rest of the world. Negotiations for the RCEP have reached a critical point, with the Ministerial scheduled in Singapore this week. Is the RCEP good for India and for the Indian industry? How much latitude do we have in the remaining RCEP negotiations, and are there any absolutes we require that aren't on offer today?

First, we should be clear about the starting point: The world is full of various regional trade agreements or RTAs (the World Trade Organization recognises well over 400 RTAs, and counting). There are almost as many acronyms as there are agreements. Asean has individual agreements with all the other six countries negotiating the RCEP. India already has a free trade agreement (FTA) with Asean, separate comprehensive economic partnership agreements (CEPAs) with Japan and South Korea, and we are negotiating another CEPA with Australia and New Zealand. Whatever they may be called, such FTAs cover the same ground. All address trade in goods, and often include some combination of trade in services, trade facilitation and classification, non-tariff barriers, intellectual property, competition policy, investment policy, and dispute resolution. The RCEP is ambitious in both scale (the 16 countries combined make up an economic area exceeding the European Union) and scope (going well beyond trade in goods). The only countries in the 16 RCEP negotiators which do not have an RTA in play between them are India and China. As such, our trade with 14 of the 15 other countries in the RCEP is already covered. China is the big exception, and the contours of an agreement which provides less access for China than the other 14 countries and longer adjustment period are already in place.

Second, there is a perception in India that existing FTAs have not benefitted Indian industry. The data used to back up this claim shows that our imports have generally increased more than our exports with such countries. That is true, but as an insightful recent Confederation of Indian Industry (CII) study showed, this applies in a greater measure to our trade with China, with which we have no FTA. In 2017-18, we had a trade deficit of $63 billion with China (imports of $75 billion and exports of $12 billion). This deficit is more than with all of Asean, Japan, South Korea, Australia and New Zealand combined. And the trade deficit with China has grown much more rapidly in the last 10 years than with the remaining 14 RCEP economies. So the cause of our trade deficit is surely not FTAs. A still broader point is that a negative trade balance is not necessarily bad, particularly if imports of intermediates are significant. As Milton Friedman said years ago, you cannot eat exports. You can eat imports. In other words, consumers benefit from the availability of goods much more than they do by their export.

What must we do?

As several have pointed out, in the last four years, the real-effective rate of the rupee (or REER) has appreciated by 20 per cent. That makes imports 20 per cent cheaper, and our exports 20 per cent more expensive. We have tried to compensate as an economy by reversing 25 years of reform and turning protectionist with four rounds of tariff increases in the last eight months. As Shankar Acharya recently reminded us, protecting our industry damages both imports and exports. It leads to a less competitive and a less dynamic industrial sector. For proof, look no further than our own history. The Indian economy — and our industry — in 1991 was a shadow of today. Consumers paid more for shoddier goods (as against what was available in the rest of the world) and our companies were pygmies relative to peers worldwide. We have come a very long way by opening the economy to imports and investment. We might still only account for 1.5 per cent of global trade in 2018, but that is three times the 0.5 per cent we accounted for in 1991. The average Indian is 10 times wealthier in 2018 than in 1991. The message is clear: Openness to trade builds a competitive industrial sector. Exports, and growth in general, will follow. So let the rupee depreciate another 20 per cent against the dollar, and remove the tariffs we have recently imposed on steel, textiles, mobiles, and the rest.

Illustration by Binay Sinha

Second, as firms, we need to invest in technology and in the international market. For various historical reasons, Indian industry is more skill- and capital-intensive than any other country at our level of wealth. The only way we can grow our manufacturing competitiveness is by investing in R&D. Indian industry invests 0.3 per cent of GDP in in-house R&D against a global (and Chinese) average of 1.5 per cent.  We need to scale our R&D investments by a factor of five if we wish to compete effectively. We must also invest internationally, seeing the world as our market. Recent CII missions to Myanmar, Sri Lanka, Vietnam, Indonesia, Iran and Malaysia have all provided the same resonant message: Indian industry is not only welcome around the world, but actively sought. Every country told us they wished to see a much larger presence of Indian firms selling and manufacturing in their countries. This goodwill (the contrast with China could not be greater) is a huge advantage and we must take advantage of it.

Third, our stance towards FTAs, in general, must also change. For too long, our negotiating strategy on FTAs has been to limit access to the Indian market. The objective must change to increase access to others' markets. How can we ensure a level playing field for our world-competitive pharmaceutical products in Vietnam and Myanmar? How do we ensure that our engineering products are given equal access to Indonesia and Iran relative to something from the Organisation for Economic Co-operation and Development (OECD)? How do our software companies get equal treatment to a local player in China? These are the questions that should engage our trade negotiators, and not how best to protect our steel or textile industry. The Indian market is large, but the RCEP market is over eight times the size of the Indian market. All of the other 15 countries in the RCEP have prospered by viewing the world as their market.  We can too.

We have a golden opportunity at the ongoing RCEP negotiations. India is too often perceived in trade negotiations to be the major stumbling block to concluding a deal. So, too, with the RCEP. There is a distinct threat that if a deal including India cannot be concluded by the year-end, a deal that excludes India will be. Fortunately, this is well understood at the highest levels of our government. Finance Minister Arun Jaitley and Commerce Minister Suresh Prabhu have persuasively made the case for the RCEP repeatedly in India. They speak for an India that is confident and outward-looking, an India engaging with the world as others turn their back on it. At a time when the WTO is under threat, the RCEP can secure the future potential of Indian industry.

The writer is a former president, Confederation of India Industry and co-chairman of Forbes Marshall, Pune