With India sitting out of the RCEP deal, opinion cops have cautioned against protectionist sentiments. But if you look closely, India’s experience with trade pacts so far has been mixed. Consider the overall merchandise exports. A majority of the trade agreements in force have had no effect whatsoever until now, concluded none other than the 2020 Economic Survey. The Survey had madesimilar observations in its past editions including 2017-18.
India is believed to be underutilizing its existing Free Trade Agreements (FTA) and evidence came from ADB a few years ago, which pointed out that the utilisation rate of India’s FTAs varies between 5 and 25 per cent— one of the lowest across Asia. Besides, it added, our exports to FTA countries didn’t outperform overall export growth or exports to the rest of the world.
Buttressing the same, a Niti Aayog paper, too, in the past had noted that recent FTAs suggest unfavourable gains to trade partners and that worsening of trade imbalances merits attention. It underscored how India’s trade deficit with ASEAN, Korea and Japan widened post-FTAs. Predictably, India didn’t sign any new agreements in nearly a decade and has only 14 FTAs till date. Analyzing the four key FTAs India signed with ASEAN, Korea, Sri Lanka and Japan, the paper found that bilateral trade increased post signing of all the above FTAs.
Imports from these FTA partners into India increased more than exports, but as imports shot up, India’s trade deficit with these countries increased since then. Only exports to Sri Lanka rose more than imports into India. For instance, the overall trade deficit with ASEAN, Korea and Japan doubled to $25 billion in FY17 from $15 billion in FY11 and $5 billion in FY10. Similarly, the trade deficit with Korea widened from $5 billion to $8 billion, while with Japan and ASEAN, it doubled between FY10 and FY17.
Analysts feel higher logistics costs were also a major impediment to export growth. Estimates peg logistics cost in India to be about twice of that in developed countries. Average logistics costs in India are about 15 per cent of GDP, while such costs in developed countries are about 8 per cent. The Economic Survey 2017-18 showed how improved logistics can have huge implications on increasing exports, as a 10 per cent decrease in indirect logistics cost can contribute to about 5-8 per cent of extra exports.
Meanwhile, the Economic Survey 2020 also noted that other than merchandise exports, categories like manufactured products saw moderate trade surplus with four trade agreements (with Mercosur, Nepal, Singapore and Chile) showing a positive impact. Even as some of the agreements led to increase in imports, for most of the cases, the percentage increase in exports is higher than the percentage increase in imports, it stated.
However, Korea, Japan and Sri Lanka were an exception with the percentage increase in imports being higher than exports.The International Trade Center (ITC) estimates India’s untapped export potential at $201.4 billion with a corresponding import potential pegged at $181.8 billion.