As the deadline to reach consensus on Regional Comprehensive Economic Partnership (RCEP) is fast approaching, pressure is mounting on government to abort the accord, if not delay it. Those who oppose RCEP see China as an elephant in the room. They fear the pact will allow China to get access to the Indian market, especially because 90 per cent of the products are expected to have tariff free movement in the region over the next 15 years.
RCEP is a mega free trade agreement among 10 ASEAN countries and their six trading partners - Australia, China, India, Japan, South Korea and New Zealand.
Those who advocate India should stay in RCEP see this as an opportunity to integrate the country with the global value chain (GVC) of manufacturing. However, India did not get much benefit from free trade agreement (FTA), comprehensive economic partnership agreement (CEPA) and other similar agreements. "If these FTAs could not bring the desired integration with GVC, there is no guarantee that RCEP will facilitate the same," points out Ranja Sengupta of Third World Network.
India is looking at increasing the share of manufacturing from 15 per cent of GDP to 20 per cent over the next five years. In this period, the country not only wants to double the size of the GDP, but also to expand its exports basket. The GVC manufacturing is seen as a must-do for the same because the cost of manufacturing is increasing in China especially due to a rise in the human capital cost. Most units in textiles and capital goods are moving to ASEAN countries in quest for lowering the input cost.
Ironically, the negotiations so far at RCEP will undo many initiatives that the prime minister Narendra Modi-led government had taken to push Make in India. For example, the gradual increase in the tariff over the last three years saw a surge in mobile SKD manufacturing and its further backward integration.
Trade experts say FTAs bring in the legal predictability in areas of tariffs, rules of origin and investment services. Therefore, it may allow movement of goods and services at ease. "This would facilitate GVC players to choose the location easily," says Sengupta.
The ministry of commerce officials quote that roughly 70 per cent of the global trade is structured within GVC of various multinational corporations. India is looking at opportunities to get into this GVC segment for manufacturing of telecommunication equipments, mobile phones and textile. In the GVC segment, the contribution of each participating country in the making of the product is miniscule and limited to the value add.
India is a market of 1.32 billion people. It is considered a big destination for consumption of various products. The existing trade composition suggests that the Chinese companies come at the top of the value chain and Indians end up importing finished goods. The trade deficit at $53 billion with China indicates the same. Out of 15 other countries in the RCEP fold, India is already running deficit with 11 of them amounting to more than $105 billion. The GVC manufacturing will only increase this deficit, and may legitimise the 'dumping', as 74 per cent of the products being traded in the region will attract zero tariff over the next 15 years if RCEP is agreed upon (40 per cent of them are already dumped in India by various Chinese players).
Can RCEP turn around things for India in the GVC manufacturing? At present, the answer is in negative. If Indian companies were ready to absorb the opportunity, existing FTAs with ASEAN countries and CEPAs with Japan, Korea and Singapore would have easily accommodated those scenarios. The challenge for Indian players is not in integration, but competition. India is dealing with expensive cost of capital, complications in land acquisition laws, cost of logistics and lack of quality electricity. RCEP cannot find solutions to these challenges overnight. India is already a part of the GVC to manufacture automobile and aerospace thanks to its domestic policies. It did not have to concede to tariff policies.
After the ongoing consultations conclude on Tuesday, the spotlight will be on leaders' summit scheduled for November 4 where PM Modi will articulate India's views on RCEP.
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