India needs to re-look at services issue in RCEP: Girija Pande7 min read . Updated: 02 Feb 2018, 01:22 AM IST
If India misses out on joining the proposed RCEP, it will be a big setback to the country's effort to boost exports, says Girija Pande, chairman of Avalon Consulting
If India misses out on joining the proposed Regional Comprehensive Economic Partnership (RCEP), it will be a big setback to the country’s effort to boost exports, Girija Pande, chairman of Singapore-based Avalon Consulting, said in an interview.
India needs to take a re-look at its stance that the pact address its concerns on trade in services, and not hold up an agreement on trade in goods. Edited excerpts:
What is your take on RCEP? Do you think the deadline of 2018-end is feasible for India?
My understanding is that Indian industry don’t appear to be keen on RCEP. The industry feels that they’ve gone through two shocks—demonetisation and GST (goods and services tax)—and then there is a political story that you can’t take such a drastic opening up in 2019—an election year. Looking at it from an Indian perspective, I don’t think it can get signed this year as there is a political calendar to watch. At best, India may sign post-elections in 2019. If the economy picks up by 2019 as expected, when the country starts hitting 8% growth, then the government has much more leeway, and by then, GST impact would subside. Indian industry is not scared of Asean (Association of Southeast Asian Nations), but the China factor. They are worried that with RCEP, the ‘Make in India’ story will be over, and Chinese goods will flood India.
I oppose this pessimism. My view is that if you want ‘Make in India’ manufacturing go global, then you have to be part of the Asian value and supply chain, which either begins or ends in China. If you are not part of the Asian supply chain, ‘Make in India’ may not work because manufacturing just for the domestic market won’t help. Indian industry would not have opened up even in 1991 if India were not on the verge of default! The benefits of RCEP will far outweigh the costs—yes, there will be costs in the short term. Even TPP-11 (Trans-Pacific Partnership) trade pact by 11 Asian countries, without the US now, is being taken up in Asia very boldly, and Trump, surprisingly, mentioned in Davos recently that they (US) could look at it again with modifications. In an interconnected world, you can’t run away from regional trade pacts—if RCEP happens without India, India will be locked out from Asia, until it is opened up again sometime in the future—say five years or so.
There is an Asean view, too—it is that India has been a very reluctant reformer. Even in the Asean-India FTA (free trade agreement), there are many restrictions. Asean has had a frustrating experience with India in the past, and this is the reason that trade between India and Asean is just around 2% of their total trade.
So, while great things are being planned on India-Asean cooperation, trade is still very small—who is responsible for this? I suspect this level of trade could have happened even without the India-Asean FTA that is currently in place. Asean is definitely keen on getting India into RCEP and Singapore can play a major role as Asean chair this year.
India has always maintained that RCEP fails to address its concerns on services, especially related to allowing its professionals and skilled workers undertaking short-term work in member-countries.
Let us analyse the services story. India has done well in services in Europe, the US, UK and Australia. The bulk of this is IT/BPO (information technology/business process outsourcing) and consulting services.
For Indian IT companies, Asia-Pacific is not more than 8-12% of their total business. So what services are we talking about in the context of Asean? The reason is that services are more difficult to execute and are not profitable in Asean to the same extent they are in the US and UK.
Then there are language issues that are very relevant in the services context—most Asean countries have different languages and, often, scripts. So, how are you going to provide services in such diverse countries, many of which are also relatively small?
I built an IT business in this region for TCS (Tata Consultancy Services Ltd) and we had over 10,000 people serving the region—but we were probably an exception.
In China and Japan, we had to do JVs (joint ventures) and, in Australia, we had to make acquisitions.
Indian IT services—and I say IT in the wider sense, including BPOs—have not generally succeeded in non-English-speaking countries. Services issue needs to be re-looked again without holding up the goods agreement.
Now, opening up to China could be an interesting story—will they dump their surplus goods? But, Asean and Chinese companies, while they want to get into the Indian market, also realize that it is not easy—Indian companies are competitive.
Look at Baba Ramdev’s Patanjali—they are giving the MNCs (multinational companies) a run! The Indian auto sector is competing with foreign players. Indian IT competes very well with the likes of IBM/HP (International Business Machines Corp./Hewlett-Packard Co.), etc., ditto Indian pharma or, now, media. Japanese and Korean companies are already in India—so, what is this big worry with Chinese companies coming in?
The Chinese, I believe, understand this reluctance. In the ongoing RCEP discussions, India can opt to permit certain Chinese industries which enjoy global scale to enter much later for India to adjust to Chinese cost structures.
Remember, Chinese cost structure is rising and quite sharply. In fact, this is an opportunity to woo the Chinese companies—small and medium enterprises (SMEs)—to India. If you open up, then some of the Chinese companies moving to Vietnam and Thailand and Malaysia will come to India.
That is the way you will reduce your trade deficit with China and not just via exports. Currently, exports to China are commodities mainly as Indian manufacturing is still domestically focused.
In our book, The Silk Road Rediscovered, we have argued for more opening to Chinese investments in manufacturing in India. Assume one gives the Chinese five or 10 years of delayed entry in some sectors, and even post that, then if you can’t compete, then you need to seriously review why Indian manufacturing is not competitive at all.
How important is the fact that Singapore is the Asean chair this year and is seen as an honest broker-coordinator? Will that help in getting Asean together and try and work out an arrangement which will command consensus?
Singapore and India have close relationships—be it trade, economics, security…Singapore is India’s closest partner in Asean, and there is no debate on that. Indian companies are very comfortable with Singapore, and India sees it as a neutral party.
Singapore wants India to join RCEP and engage more with Asean. Look at it—when TPP (Trans-Pacific Partnership) did not happen, the American industry suddenly felt knocked out of Asia; the American industry is concerned that they will be disadvantaged in Asia, which is where a bulk of global growth will happen. When will this realization hit India?
So, if by 2019, and if PM (Narendra) Modi returns as PM, by then we may be hitting 7.5% to 8% growth rate, then RCEP will be much easier to negotiate.
Services won’t make much difference to India in Asean. For services, it should look at it on a deal-by-deal basis, or get into country-specific deals like the FTA in Singapore because immigration is a big challenge everywhere.
Not just Asia, look at what is happening in the UK and US. Services involve free movement of people, and that is a political hot potato. Plan separate deals with Australia and Japan for services because that is where it would be profitable. But doing business in Japan is not easy.
My take is that if you miss RCEP, the loss is bigger than anything else you will see in the next couple of years—you can say goodbye to buoyant exports-led growth.
Indian industry must be more positive and ‘Act East’, as the PM said, and take a leap confidently. They are quite effective when they put their energy behind a task.
During Singapore PM Lee’s visit to India last week, he also pushed for an Asean-India air transport agreement. How critical is this?
It is important, but not critical. There was a suggestion in the last PBD (Pravasi Bharatiya Divas) event that India could on an experimental basis open one centre or city—where airlines are not bound (by bilaterals) and test it.
Indian private airlines can compete and some, like IndiGo, have achieved global scale—they are currently competing with the Middle Eastern carriers—and will do well. I think they are waiting for Air India to be divested out because it is the only airline that may not be able to compete.
All right-thinking people say Air India should have been sold a decade ago. Once this is settled, opening air links to Asean can be addressed. The big benefit would be a rapid increase in India of tourism—especially from China and Japan.