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Wednesday, Nov 20, 2019

Global or local: India’s dilemma on the RCEP

Delhi will have to sign the trade pact but must zealously guard its interests

editorials Updated: Oct 08, 2019 18:59 IST

The possible benefits include a potential entry into global supply chains, making manufacturing in India attractive for both domestic and foreign companies, and increased foreign direct investment flows.
The possible benefits include a potential entry into global supply chains, making manufacturing in India attractive for both domestic and foreign companies, and increased foreign direct investment flows. (Bloomberg)
         

That India will likely sign the Regional Comprehensive Economic Partnership (RCEP) agreement is a given. It is also a given that there is significant divergence of views, even within the government, on the wisdom of doing so. This is understandable.

At one level, India cannot afford to not be part of RCEP. Multilateralism is dead (well, almost). The best way a country can protect its own interests is by being part of a regional trade bloc. RCEP is just that — an agreement between the 10 Asean countries and their six Free Trade Agreement (FTA) partners, India, China, New Zealand, Australia, North Korea, and Japan. The possible benefits include a potential entry into global supply chains, making manufacturing in India attractive for both domestic and foreign companies, and increased foreign direct investment flows. All of these are sound “for” arguments.

But, on the other side, there is the fact that India hasn’t benefited from past FTAs, either in terms of trade balance or becoming a better destination for manufacturing. There is the threat to several sectors in India from imports — tariffs on around a fourth of products will have to be removed immediately, and on eight out of every 10 categories eventually. And it won’t be completely addressed by the so-called trigger mechanism that is being suggested as a solution for this. There is China, with its manufacturing prowess, and on the wrong side of the trade equation with India. And finally, there is a real question mark over the actual competitiveness of the majority of Indian industry at this point in time. Sure, the tax cuts recently announced for industry will help on this front, but there are other aspects of competitiveness — hard and soft infrastructure, talent, technology. This explains the government’s dilemma. There is really no option but to sign RCEP. But India would do well to zealously protect its own interests. It must negotiate more efficient ways to deal with a rush of imports and protect domestic producers, even as it makes Indian industry more competitive.