India's withdrawal at what cost?

After attending 28 of the 31 rounds of talks held over a period of six long years, India finally decided to come out of

Update: 2020-11-27 06:23 GMT

Udayan Hazarika

(The writer can be reached at udayanhazarika@hotmail.com)

After attending 28 of the 31 rounds of talks held over a period of six long years, India finally decided to come out of the final leg of negotiation of the proposed Regional Comprehensive Economic Partnership (RCEP) Agreement in Bangkok. India announced its withdrawal, last year in a joint leader's statement issued at the end of the Association of Southeast Asian Nations (ASEAN) summit in Bangkok, stating that India had "significant outstanding issues which remain unresolved." Media reports show PM Modi as saying in the third RECP summit at Bangkok that "When I measure the RCEP agreement with respect to the interests of all Indians, I do not get a positive answer. Therefore, neither the Talisman of Gandhi nor my own conscience permits me to join RCEP." India's manufacturing sector has been ailing and it was not a new thing. At the time India's withdrawal (October 2019) the manufacturing sector was not performing well. In fact, it was a completely awful year for the sector and it could not catch up with the previous year's trend rather started trailing behind from the July quarter of 2019-20 – and it continued for the whole year. There was deceleration of the industrial production to the tune of 1.4 per cent during third quarter (October-December/2019) compared to the same period of previous year (2011-12 base prices). In fact, the three key sectors of industries (namely manufacturing, mining and electricity) have all performed badly. But are these pathetic performances have any bearing with China's trade surplus against India and for that matter the other RCEP countries? Moreover, India's diplomatic relationship with China was also in more or less good shape till that time despite Doklum and then Gallowan conflict and thereafter India's action on territorial division of Jammu and Kashmir in August 2019. There is therefore scope to believe that there are more in the list of reasons of withdrawal from RCEP than what is spelt out already.

India's economy is import driven and not export oriented. India's export therefore lacks competitiveness, especially in case of manufacturing items while China expertise in this sector. It is the fear of being swallowed by Chinese aggression of the manufacturing market against which India cannot put up any defence and hence India is backtracking. This makes it clear that India Still believes in protectionism. It neither takes steps to expertise in particular items of export and go for mass production, nor does it open up out of fear.

RCEP will provide a big business platform and it has generated itself from within the Asia Pacific region. Altogether 15 nations of the region have come together to form this and all have varieties of strength and weaknesses. There are least developed countries like Vietnam, Laos, Myanmar and agriculture driven economy like Cambodia, etc. All these countries have comparative advantages over one another on production of various items and so also weaknesses. But all of them are looking up to the positive side of the forum – to achieve something big. China is playing the role of the big brother while despite being the third largest economy of the region India preferred to leave out. The all fifteen nations have signed the Free Trade Pact (FTP) on 15th November last and thus the treaty comes alive. The RCEP is by far the largest FTP in the world. Statistically speaking the region has trading capacity of 28 per cent of the global trading covering 30 per cent of the world population and 30 per cent of the Gross GDP. Now since the agreement has been signed, in the next step the agreement has to be ratified by the signatory countries before it is coming into effect? This will take time as procedure of ratification is different for different countries. As per the agreement text, any member country may join 18 months after the agreement comes into force but being an initiator India may join the pact at any time. As per the procedure laid down, the Agreement must be ratified by at least six ASEAN countries and three non ASEAN countries who are also signatories of the agreement. Only thereafter it will come into effect.

India's 'No' to RCEP has not been taken easily in the quarters concerned. The reasons shown are not totally baseless yet these are not sufficient too. Moreover, India has not yet spelt out the reasons officially. China's upper hand in the forum appears to be the main reason. India's concern is that its trade deficit will widen in course of time due to the imposition of Forum Clause of 80 per cent reduction in import duties by 2030 i.e. in ten years time in favour of China and 90 per cent reduction in favour of other countries. The zero import duty will lead to a threat to the domestic producers because of the non-competitiveness nature of these producers. Of all these countries, India feels threatened from Chinese market and frequently it is mentioned that India's trade deficit with China is sky rocketing. But in the bilateral front India and China both are good trading partners. China indeed is way ahead of India in the bilateral external sector and the trade deficit against China is also not that too high. As per 2018-19 statistics, India has trade deficit to the tune of 60 billion dollar as against China. In terms of exports in 2018-19, as against India's export of 16.75 billion US dollar, China's volume of export to India was 70.32 Billion dollars.

Many experts are of the opinion that the Agreement will benefit China the most. However, in absence of India's market China's gain out of the agreement will be substantially reduced. As per a calculation, due to India's absence, China's GDP will grow only marginally despite the RECP agreement. A recent joint study conducted by the University of Queensland and Indonesia's Finance Ministry also expressed this view. According to the Study, India's absence in the deal will cost China dearly and it is estimated that its 2030 GDP will not exceed 0.08 per cent. As a reason for this, the study indicates that India normally charges the higher import tariffs than the RCEP countries and therefore reduction of tariff will lead to higher gain for the RCEP countries mainly China as China's trading with India is more than its other RECP countries.

The impact of India's absence will be felt in all ASEAN and other RCEP countries. India believes that since it has separate bilateral agreement with all the ASEAN countries, its loss for not participating in the Agreement will not be a big one. But the fact is that the agreement will provide advantages of free trade to the RCEP nations which they do not enjoy in case of imports from India. This comparative advantage will induce them to gradually move out from Indian market. This will be a big loss for India in the trading in Asia Pacific region. A look at the trading of the ASEAN nations with China will reveal that total volume of trade with China is already much bigger than that of volume of trade with India. Similar is the case with investment. Thus, India's non participation in the FTP will yield no positive results. In fact, it will lead to an overall loss in terms of reduction in volume of trade with the ASEAN nations, Secondly, sooner or later more east Asian countries will join the RCEP. India thinks that it will make agreement with the developed countries and will make up the loss by increasing imports to these developed countries. But it is a misconceived idea. The RCEP block is already doing business more than 44 per cent between themselves. In the process, the business will expand further and the countries will be able to produce more at competitive costs and sale out the same at competitive prices outside RCEP countries. Playing defensive is not always a solution. India must find out a way to be competitive and open up further. The more one is protected move will be the dependency.

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