Our country’s trade policy needs a rethink 

India’s decision not to join the Regional Comprehensive Economic Partnership (RCEP) in November 2020 has been welcomed in most quarters.
NITI Aayog. (File Photo | PTI)
NITI Aayog. (File Photo | PTI)

India’s decision not to join the Regional Comprehensive Economic Partnership (RCEP) in November 2020 has been welcomed in most quarters. The move has been seen as one of rejecting a deal that has been perceived as hurting ‘India’s interests’. It is also seen as one that is in keeping with the recent call for an ‘Atmanirbhar Bharat’. 

“When I measure the RCEP Agreement with respect to the interests of all Indians, I do not get a positive answer. Therefore, neither the talisman of Gandhiji nor my own conscience permit me to join RCEP,” Prime Minister Narendra Modi had said when rejecting the trade deal.  Writing on this decision, the authors of a paper put out by NITI Aayog titled “India’s FTAs and Its Costs” state, “Make no mistake, India had no option but to exit the pact.

RCEP in its present form would have not served any purpose for the country.” The reasons cited by the authors for not joining the RCEP include a general poor experience with Free Trade Agreements (FTAs). These include: exports to FTAs not surpassing those to non-FTA countries or to the rest of the world, greater imports as a result of such agreements than exports, widening of the trade deficit after such trade deals, relative unresponsiveness of India’s exports to price as compared to income changes, and very low utilisation rates of FTAs by Indian exporters of between 5-25%.

Besides, geopolitical issues including rising border disputes with China have also been used to justify India’s staying out of the RCEP deal. India has pulled out of a deal that allows free trade among the 15 signatories and which promises to be the world’s largest free trade agreement. We would do well to ask ourselves two questions: One, whose interests are we safeguarding and why? Two, where does India go from here in terms of its trade policy?

Citing the upholding of the interests of ‘all’ Indians as an argument against FTAs is misleading. Barriers to free trade have a skewed impact on various interest groups, benefitting inefficient domestic producers who can continue to produce and sell at high prices, and the government by earning for it tariff revenues. However, such barriers would affect the consumers badly, as they would have diminished access to cheaper and better products and also would have to pay higher prices for these imports.

This is particularly important when India simply does not have the ability to produce a range of products. Thus, for instance, it was found that after the increase in customs duties on a range of products in September 2018, as many as eight out of 13 product segments witnessed a rise in imports between October 2018 and the lockdown. A rise in import duties together with an increase in imports would have disastrous consequences for both India’s trade deficit and inflation.

In fact, it is imports of cheap rice bran oil from countries such as Bangladesh under the South Asian Free Trade Agreement (SAFTA) that have helped tackle the volatility in edible oil prices, benefitting the consumers. However, the rice bran processors in Eastern India, who have been unable to compete, have complained against such imports. The government will need to balance out these competing interests.

Most MSMEs are not aware of the duty benefits under the various FTAs, resulting in poor utilisation of such agreements. In fact, in September 2019, the government set up a ‘FTA Utilisation Mission’ to enhance awareness of preferential duty benefits among MSMEs. Such poor utilisation rates may in fact be responsible for the trend witnessed of higher imports as compared to exports under the FTAs.

As the world moves towards a new order after the pandemic, India can ill-afford to overlook the new global supply chains that are being built. The withdrawal from the RCEP has been estimated to result in a loss of 1.2% of the nation’s projected GDP in 2030. It is clear that China, without the counter-balancing impact of an India in the largest trading bloc, is likely to get even stronger.

This is expected to happen even as the trading bloc itself becomes more attractive to various sectors, as common rules of origin and access to a large market take precedence in determining trade destinations.
Even as India has rejected the RCEP and argues against FTAs, paradoxically, it seeks to sign free trade deals with its top exporting destination countries—the EU, UK and the US—as part of its evolving trade policy. However, trade policy will need to be shaped by greater certainty for exporters from our partner trading nations.

Currently, not only has protectionism been increasing, as witnessed in the steep rise in import duties since 2014, India also has a complex and opaque system of customs tariffs and fees. The rising trade-weighted average tariff rates, together with the huge disparities between the maximum permissible (World Trade Organization, WTO) bound rates and the actual applied (Most Favoured nation, MFN) tariff rates create uncertainty and discomfort for exporters, since India possesses considerable flexibility to change tariff rates at any time. India should work at a more realistic tariff policy, even as it seeks greener pastures after rejecting free trade agreements.

Tulsi Jayakumar  (Views are personal) (tulsi.jayakumar@spjimr.org)
Professor, Economics & Chairperson, Family Managed Business at Bhavans SPJIMR

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