Photo: ANI
Photo: ANI

Opinion | India’s real trade battle begins now that RCEP is behind us

The biggest challenge we face is to gain the scale and efficiency needed to be competitive globally

Prime Minister Narendra Modi’s decision to walk out of the Regional Comprehensive Economic Partnership (RCEP) is the right one. Walking away from a bad deal is always better than accepting one merely out of fear of isolation. There is no strength in a unity based on fear.

The numbers tell the whole story. India has a negative trade balance with almost all RCEP members (a $105 billion trade deficit), especially China. To join a grouping where you are already the biggest loser is not just self-defeating, but also foolish.

The problem with the RCEP is that it is neither regional (Australia and New Zealand are in the southern hemisphere), nor comprehensive (it is mostly about merchandise, not services), nor fully economic (the driving impulse is geopolitical in a post-Trump, deglobalizing world), nor a partnership, which, by definition, ought to find ways to compensate the weak at the cost of the strong. It may make sense for the other 15 members, but not for India. It will ultimately be dominated by China, which makes it very political.

However, walking away is the easy part. The question is whether we will have the same gumption to walk back to a more receptive RCEP in future, after doing all the things that are necessary to build our competitive capabilities in primary and manufactured goods.

We have two challenges. The smaller one is to forge bilateral trade deals that are more equitable, both with partners outside the RCEP and some within (for example, Australia and New Zealand). We must lose no time in ensuring that we do deals that are more balanced and beneficial to both partners. In an era when the World Trade Organization is becoming irrelevant, this has to be our short-term focus. We could start with our own region, by doing deals with Sri Lanka, Bangladesh and Indonesia, apart from countries in southern and northern Africa. The US, post-Brexit UK, Russia and France are other countries with which bilateral trade deals could be struck.

However, the bigger challenges are internal. Our real problem is that we do not have the scale and competitive strengths internally to compete abroad in goods. Even in textiles, we find that Bangladesh has stolen a march over India. In manufacturing, the rejigging of global supply chains necessitated by rising Chinese wages is favouring Vietnam rather than India. The sole exception is mobile phone assembly, where value-addition is low and customs tariffs offer a degree of protection.

The one area in which we do have a global advantage is petroleum products. The complex and massive coast-based refineries set up by private players such as Reliance and Essar Oil are globally competitive, given their choice of technology and locational logistics. In almost every other area of logistics, we are losers. The Economic Survey 2016-17, for example, suggested that the logistics cost per kilometre of road transport was $7 in India, versus $3.9 in Bangladesh, $3 in Sri Lanka, and $2.4-2.5 in China.

Add finance costs and poor infrastructure and an extractive state machinery, which knows how to fleece exporters and businessmen, and we are clearly in no position to compete in sectors involving physical merchandise. Where we are competitive is largely in digital products and services, in which states cannot easily become obstructive and rent-seeking. However, these are precisely the areas where the RCEP does not want Indian competition. Barring Australia to some extent, each of them is anti-immigration and against the free entry and exit of “natural persons" who are vital for the provision of software services based on labour cost arbitrage. This is unlikely to change till India shifts its focus to providing software products and not just services, in which case physical barriers and resistance to people movements are minimal. Thus, even in services, India will not get a good deal till it becomes a big player in branded products and platforms.

The RCEP is actually a closed club of manufacturing powers that turn mercantilist when it comes to trade in services. Most RCEP countries are racially and culturally homogeneous—from China to Japan, South Korea, Thailand and Indonesia. Many are openly hostile to immigrants and acutely xenophobic. The only seriously diverse states in the Asiatic part of RCEP are Singapore and Malaysia, but one is an authoritarian city-state with a meritocratic bureaucracy, and the other is an Islamist state, whose policies are skewed towards locals within the context of an open economy. All these countries have benefited from authoritarian governments that could get the right things done for their people at an early stage in their development journey. They invested in education and health and put export-oriented policies in place.

India has a steep mountain to climb in terms of making itself competitive—not only in merchandise trade, but also in software platforms and products. Our battles, given our federal structure, extreme diversities, and inability to find a consensus on most policies, are internal. When we find answers to these issues, which must involve more economic power devolution to the states, and especially cities, we can consider knocking on RCEP doors again.

R. Jagannathan is editorial director, ‘Swarajya’ magazine