INDIA HAS TO CHOOSE ITS OWN TIME TO JOIN RCEP
The last minute paradox, which led India not to join RCEP, was a bolt from the blue to member countries. At the present juncture, the policy makers viewed RCEP as the bane since this will represent India a buying market for the member countries. India’s prominence sparked as a buying country after US-China trade war. USA has been the biggest buyer of RCEP countries. Fears loomed large for trade diversification and India become the dumping ground, had it joined the trade block.
This exhibits that at the current situation RCEP needs India more than India needs it. India fears it a Chinese trade trap, which will damage to Make in India and employment generation. Hit by feisty Trump’s trade war, which downsized China’s export, China is believed to offset the loss by aggressive exports to India through RCEP. In the block, China is the biggest exporter and India is the biggest consuming country.
Prime Minster Narendra Modi deplored that “the present form of RCEP Agreement does not fully reflect the spirits and the agreed guiding principles of RCEP”.
In the current horizon of trade merits and Make in India, India’s joining the block is feared to open Pandora’s Box. None of the block members leveraged trade surplus with India ever. Instead, the trade block will pave the way for snowballing the trade deficit. At present, more than half of India’s total trade deficit is accounted by RCEP members.
China is the biggest stake holder in RCEP. The trade block includes ASEAN 10 + 6 (China, Japan, Australia, South Korea, New Zealand and India). China accounts for more than one-third of total trade of RCEP. In 2018-19, RCEP accounted for 57.14 percent of India’s world trade deficit. China was the main cause for it. Half of trade deficit with RCEP is due to China.
China will be the game changer in the block. Given the China’s predominance in the block, critics cried foul that how can RCEP be a springboard for India’s export buoyancy? With tariff barriers done away, opportunities will be huge for China for larger entry into Indian market. Eventually, India will witness import surge from China.
China was exploring Indian market through backdoor using China-ASEAN FTA and India -ASEAN FTA. These FTAs became easy route for China to push its cheap products to India via ASEAN, while utilizing low or no tariffs. China signed FTA with ASEAN in 2010. Anecdotal evidences showed that since 2010-11, when India signed FTA with ASEAN, India’s import from ASEAN surged double of its exports. India’s imports from ASEAN increased by 93.8 percent in between 2010-11 and 2018-19, against its export increase by 48 percent. This exemplifies China’s aggressiveness to use China-ASEAN FTA to enter India, and not only for ASEAN market
Another evidence to exemplify China’s backdoor entry into India was dramatic changes in the basket of imports from ASEAN. Imports of engineering and plastic goods from ASEAN doubled in between 2009-10 to 2017-18, where China has a bigger propensity to produce cheap goods. These product groups accounted for 27 percent share in total imports from RCEP member countries in 2017-18, against 23 percent in 2009-10.
Nonetheless, the sudden political setback for BJP in the recent state assembly elections in Haryana and Maharashtra could be one of the reasons for not joining RCEP now. Fears loomed large that joining RCEP will give opportunity to the oppositions to raise dust on BJP’s failure in Make in India and employment generation, with the aggravation of imports, had India joined RCEP
Even though industry associations and entrepreneurs rang alarm bell much before the negotiations intensified, there is another side of RCEP, which should bloom, is the foreign direct investment from the long term perspective.
In 2018-19, RCEP accounted for 47 percent of total FDI flow in India. Investment has become the need of the day after the country turns dry for investment. To this end, amidst the bout between trade demerits and FDI opportunities, alienation from RCEP may not hold good from the long term perspective. Surge in FDI flow will hedge the panic bell of trade deficit.
Even though FTA with ASEAN widened trade deficit, it unleashed windfall for FDI flow in India. In between 2011(since when India had FTA with ASEAN) and 2018, FDI from ASEAN surged by 80 percent. It accounted for 37 percent of total FDI in 2018, as compared to 12 percent in 2011. This underpins the benefits of RCEP, beyond trade demerits
The massive cut in corporate tax, bringing India at par with ASEAN and having blessed with low cost production hub, India’s competitiveness will perk up at par with ASEAN countries and China. This ensures India a big challenger to RCEP members for FDI in near future.
With the joining of RCEP later, India will have an added advantage to cut a pie of intra-RCEP investment. Zero trade tariff under RCEP will be an added attraction to induce RCEP members to invest in India.
Nevertheless, RCEP is not closed, says former NITI Aayog Vice – Chairman and Professor of Columbia University Arvind Panagarya. He believed that the Joint Statement by 15 RCEP members was not shutting the door for India and both sides left the room for further negotiations. He said “I have always mentioned that India should bargain hard in RCEP through the intention to join it”. He affirmed India’s stand on the current issues. At the same time, he urged that “India should give up some of its current demand and win concessions on others”.