India has opted out of the Regional Comprehensive Economic Partnership (RCEP). However, the country’s deep commitment to free trade policies, which provide equal opportunity to gain from trade for all countries, is undisputable.
If it materialises, RCEP will be the world’s largest regional free trade bloc, accounting for a third of the world’s GDP and about half of the world population. It is also home to some of the most competitive countries like China, Japan, Korea, Australia and New Zealand. It comprises both poor and rich countries ranging from Cambodia with a per capita income as low as $1,308 to Australia with $55,215. Although huge size offers market opportunities, it is also a potential threat due to unequal partners within the region.
India already has Free Trade Agreements (FTAs) with each country in the RCEP bloc, barring the more competitive China, Australia and New Zealand. By opting out of RCEP, India had avoided the threat of surge in imports from these three economies.
India had a huge trade deficit with these countries, especially with China (up to $53.5 billion) in 2018-19. Under the current situation, the move will not only protect our industry from cheap Chinese imports but also protect farmers from low-priced agricultural imports from Australia and New Zealand. However, India needs to prepare to open sooner than later to take advantage of the huge RCEP market.
India needs to enlarge its export market to realise the dream of a $5-trillion economy in the near future. For this, it ought to identify and nurture at least a few goods and services where it can compete with China, as it eventually has to cash in on the huge Chinese market or compete with China to export to other RCEP countries.
In the scenario of slow progress under the WTO, India has to go for selective bilateral FTAs to enlarge its markets. WTO member countries are free to enter into regional and bilateral trade agreements as they are also aimed at expanding free trade. Principle of complementarity and reciprocity should be the basis for the selection of trade partners so that all the partner countries gain from trade.
All the 10 ASEAN countries, along with other five RCEP countries, are global leaders, competitive in manufacturing and have ambitions to take a large pie in India’s huge markets. However, most of these countries are weak in services. India has a competitive edge here. Hence, India should insist on including services like information technology, education and health sectors in trade negotiations.
India is becoming a global hub for these services, as revealed from swelling health tourism, foreign students and success of Indian software companies across the world. Besides, the demand for services would enlarge much faster than manufacturing products.
Hence, in the long run, India will gain more than the other countries, if the service sector is included in the RCEP-FTA. Additionally, RCEP may not make any sense without India, given its huge $2.72 trillion economy. All RCEP countries are desperate to welcome India not only for its huge domestic market but also to contain China’s dominance in the region. Given that the benefits outweigh losses in the long run, India should prepare to join RCEP at a later stage to take advantage of the booming export market for the service industry, pharmaceuticals and cotton yarn.
Only competitiveness will determine losers and winners as markets do not have any religion, ideology or morality. Before joining trade agreements, industry and citizens need to be informed well in time about the possible opportunities arising in the service sector.
India has more than 50% of its population below the age of 25 and over 65% below the age of 35. It is expected that, in 2020, the average age of an Indian will be 29 years, compared with 37 for China and 48 for Japan. This demographic dividend is a huge plus for India to establish itself as a world leader in the booming service sector. The government, in collaboration with industry, must prepare a strategy to maximise gains and minimise losses by taking stock of competitive advantage in various sectors.
Although our service sector is competitive internationally, industry and agriculture sectors need to improve their competitiveness to take advantage of free trade. Our farmers and small and medium scale industries need to adopt latest technologies available globally to reduce costs and increase quality to compete in new markets.
For example, farmers in many developed and some developing countries are using remote sensing, drones, artificial intelligence, blockchains and internet of things in the day-to-day management of farm operations. The average yield of rice in China is 6.5 tonnes per hectare as against India’s 2.6 tonnes. India is far behind in technology adoption. Our administrative procedures need to be further simplified to eliminate unnecessary hurdles, although the country improved in global rankings in the Ease of Doing Business recently.
These cannot be done overnight. We need years of hard work to reach the level of developed countries. Although there is no urgency to join RCEP, all-out efforts are needed to prepare Indian industry and agriculture to maximise gains from RCEP or other FTAs. We must learn from China, which prepared for 15 years to join the WTO in 2001 to enhance competitiveness and benefits from the eventual free trade. China experienced explosive export growth after joining the WTO.
Many economists projected the 21st century will be the “Asian Century.” The Asian economies are on track to becoming larger than the rest of the world combined in 2020. With or without RCEP, India has to enhance trade linkages with the ASIAN countries and possibly with other RCEP member countries. It also fits well into India’s ‘Look East Policy’ as it may put northeast India on the centrestage of trade and development.
(The author is Principal Economist, ICAR-Central Research Institute for Dryland Agriculture, Hyderabad)