RCEP Retreat and Detained Reforms
The blame for India’s inability to board the RCEP ship is best explained by the cliche — the existence of a strong political consensus for weak reforms.
By Shankkar Aiyar | Published: 11th November 2019 04:00 AM |
To be or not to be! This week India pulled out of the Regional Comprehensive Economic Partnership aka RCEP trade bloc. The question, post facto, is not whether India should or should not have joined RCEP. The question that needs to be debated is why India could not afford to be part of the trade deal.
The idea of RCEP was formulated in November 2011 at the ASEAN Summit and formalised at the Phnom Penh Summit in November 2012. The trade bloc was curated to create a market spanning 16 countries with a population of over 3 billion, a quarter of global trade and over a third of global GDP.
India’s pause — or exit — is simply the price of the systemic flaws that have rendered the economy less than competitive. RCEP offered India the opportunity to expand its footprint in global marts so as to not get stranded in the neither-low-nor-middle-income trap. India signed on to be on RCEP in 2012 under the Manmohan Singh regime. The question is: Did India follow up on the opportunity with a strategy?
Consider the facts. In 2012–13 India’s imports from China stood at $52.8 billion — electricals and electronics topping the chart at $13.9 billion. In 2017–18 imports from China touched $76.3 billion — electricals and electronics accounted for $28.6 billion.
Theory says an economy adding millions of mobile subscribers and manning the tech support of the world should leverage domestic market scale for global market share. India did not. In 2018–19 India imported electricals and electronics worth $52 billion.
It is not just electronics. India’s competitiveness is challenged across a spectrum of products.
India now imports $15 billion worth plastics, $9 billion worth optical instruments, $1.8 billion worth furnishings and mattresses, $1.3 billion worth glassware and $650 million worth toys of which $451 million is from China. The stench of systemic sloth is best represented by the fact that incense sticks (agarbatti) need to be imported.
There has been much talk about India benefiting from the migration of manufacturing from China due to wages, etc. The fact is China is proactively shifting production facilities, predominantly to Vietnam, Taiwan and Thailand who designed policies — special zones, lower tax regimes and input concessions — to grab a place on the global supply chain. The payoff is revealing. Vietnam’s exports to India trebled from $2.3 billion in 2012–13 to over $7.2 billion in 2018–19 piggybacking on electrical and electronics demand.
Global competitiveness rests on economic efficiency at home. Managing the economy is akin to solving the Rubik’s cube puzzle. Just as colours must be aligned on the cube, a host of factors need smart alignment — from opening up sectors to FDI to induct technology and capital, to low interest rates and liberation of the factors of productivity.
The Indian experience shows FDI policy changes arrive often in the wake of crises and are aimed at propping up the currency. Access and affordability of capital are tied to the apron strings of the nanny state. Rising government borrowing has pushed up interest rates and crowded out private investment. Liberation of land and labour from archaic laws awaits enlightenment at state capitals.
Yes, FDI into India has risen but is riding on mergers and acquisitions, and mostly in services. Despite the inflows its competitiveness hasn’t quite moved apace. On the World Bank rankings India has moved up on the ease of doing business, from 132 in 2012 to 63 in 2019, but there is a wide gap between the optics and the experiential anecdotes .
The big bugbears in the hurdles to do business include the permission regime, inspector raj and retrospective amendments to tax laws. Such is the magnitude of regulatory cholesterol that entrepreneurs are forced to spend more time on managing regulation and environment than the business.
There has been no dearth of committees and reports. The constants are: enforcement of contracts, property registration, rigid labour laws, regulatory cholesterol and cost of capital. The latest, a report by the High Level Advisory Group, shows India has slipped between 2012 and 2017 in every sector — agriculture, manufacturing goods, merchandise, services and all trade. HLAG recommendations range from export funding to data analytics to skill upgradation and lower interest rates.
Success though demands more than mere recommendations — it needs a plan and implementation. It would seem joining RCEP would have impacted farmers and small businesses. Yet their cries for corrective action is scarcely attended to.
Agriculture suffers from lack of access to inputs and markets. MSMEs, major exporters, are burdened with labour law rigidities. And yet the Agricultural Produce and Livestock Marketing Act, the model contract farming act and the model labour code are all languishing.
The blame for India’s inability to board the RCEP ship is best explained by the cliche — the existence of a strong political consensus for weak reforms. India’s retreat from the RCEP deal is the consequence of detained change.
Shankkar Aiyar, political economy analyst and Visiting Fellow at IDFC Institute, is author of Aadhaar: A Biometric History of India’s 12 Digit Revolution&Accidental India. You can email him at email@example.com and follow him on Twitter @ShankkarAiyar. His previous columns can be found here. This column was first published here.