Thursday 14 November 2019

How to craft an RCEP to India’s advantage Editorial 13th Nov'19 EconomicTimes

Headline : How to craft an RCEP to India’s advantage Editorial 13th Nov'19 EconomicTimes
Details :
RCEP negotiations:
  • The Regional Comprehensive Economic Partnership (RCEP) negotiations to create a Free Trade Agreement (FTA) between the ten member states of Asean and six other trade partners (Australia, China, India, Japan, New Zealand and South Korea) have been going on since 2012.
  • Whenever India signs RCEP, it will have to commit to tariff elimination for about 90% of items from the Asean, Japan and South Korea, and 74% from Australia, China, and New Zealand.
  • There were differing opinions in India on whether or not India should join RCEP.

India decided not to join RCEP:
  • As several of India’s objections raised in self-interest are yet not fully addressed, India has decided to not sign the deal at the recently concluded negotiations in Thailand.
  • PM Modi issued a statement on India’s stance highlighting the lack of satisfactory resolution for its trade, investment, national security and intellectual property concerns.
  • Also, our experience with free trade agreement (FTAs) isn’t very satisfactory as reflected in stagnant exports and widening trade deficit.
Any FTA India signs must be beneficial also for India:
  • While India's joining of RCEP would have been lauded by many across the world, India must resist the temptation of giving away valuable access for empty global praise.

FTAs should cover following aspects for creating a mutually beneficial deal
Reciprocal opening of Services & Labour market:
  • Countries which have surplus capacity want tariff free access for their goods to India's vast domestic market.
  • On the other hand, India is surplus in labour and competitive in services.
    • Services: In services like technology, tourism, research & development, consulting, BPO / KPO Indiais pretty competitive. With reciprocation, we can breach language and cultural barriers.
    • Labour: We can provide white collar officers as well as blue collar workers to any country in whatever quantity they desire. Middle East is a shining example of how Indian knowledge and perspiration can create a miracle.
  • So, India must link access to our domestic market to reciprocal access for our services and labour.
  • Countries preaching us to open our domestic market for their goods must reciprocate by opening their services and labour market for us.
  • The reciprocation between tariff free goods market, unrestricted labour and services market will ensure mutually beneficial outcome from FTAs.
Foreign Exchange (FX) Neutrality in Trade Balance:
  • India should link access to tariff free domestic goods market to foreign exchange (FX) neutral / marginal trade balance outcome.
  • Lack of such though process in signing FTAs meant, India has built up huge trade deficits against Asean countries since the India-ASEAN FTA.
  • An FX neutral FTA will ensure that we don’t run large trade deficits. FX neutrality should not be difficult to achieve considering that other countries are getting exclusive access to a large and growing Indian market.
  • How FX neutrality can be achieved:
    • FX neutrality should not come by routing of existing exports or buying of gold jewellery. It should come through genuine value add.
    • For example, if country X wants to sell their goods in India, they should encourage their citizens to spend equal money on tourism in India or they should set up a unit in India to manufacture and export to balance their FX outflow.
  • Such FX neutrality will ensure mutually beneficial outcome from FTA.
Special obligation to manage impacted sectors:
  • India must negotiate for mutually beneficial outcomes for our vulnerable sections.
  • For example, if a country wants to sell their excess milk in India, they must help our milk producers to export valueadded items like butter and cheese for an equal amount.
  • If a country wants to export electronics to India, it must reciprocate by helping our manufacturers export components of equal amount.
  • Case of Maruti Suzuki helping Indian auto industry:
    • For example, Maruti Suzuki has done this in the automobile sector without being asked to do so.
    • Auto sector today contributes more than 40 % of our manufacturing GDP.
    • Our trade surplus in auto and auto components was about $ 13 billion last year.
    • In fact it is the only manufactured product where we have trade surplus of this scale.
  • Mutually beneficial: While India has benefited by presence of Maruti, Suzuki has also benefited with Maruti producing more cars than Suzuki and having higher market capitalisation than Suzuki.
  • If we market the Maruti example appropriately, many companies will be willing to trade and invest in India despite seemingly tough conditions of supporting vulnerable sections of society.
Settlement of Trade Surplus in Rupee:
  • India also must seek settlement of trade surplus in rupee.
  • The burden of running trade deficit financed in rupee would be been far lower than financed in hard dollars.
  • Only for trade surplus, not all trade:
    • It won't be easy for countries to agree to this as rupee is not a reserve currency like the US dollar.
    • However, we must remind that we are negotiating only for the trade surplus and not for the entire trade.
  • In a large country like India, countries with trade surplus will always be able to find an opportunity to invest or trade with their rupee surplus.
  • It isn’t going to be an easy negotiation but if we begin the journey some day we will reach the destination.

Conclusion:
  • If we negotiate on above points, we will be able to create a win-win situation not only for a India but also for all for the other countries.
  • At the same time we must remember that access to a large market isn't the only leverage to attract investors.
  • We must encourage entrepreneurship by liberating factors of production like land, labour and capital along with rule of law.

Importance:
GS Paper III: Indian Economy
Section : Editorial Analysis