Without structural reforms back home, India to remain on back foot in RCEP like negotiations

Regional Comprehensive Economic Partnership status of India

India walked out of the recently concluded Regional Comprehensive Economic Partnership (RCEP) citing unfavourable terms that would harm the domestic industries. While its concerns cannot be wished-away, especially at a time when the economy is in a perilous state and small business are already in the red, the country itself needs to do better by creating an ecosystem which allows the industries to unleash their animal spirits.

If India wants to have any realistic chance of striking deals with countries or blocks in future, it first needs to undertake big-bang reforms to make the domestic industries competitive, otherwise RCEP like deals are likely to meet the same fate amid pressure from within the country. It is no secret now that there was immense pressure on the government from within the country not to go ahead with the RCEP.

The fear among Indian business was that Indian markets would be flooded with cheaper goods from Asean (Association of Southeast Asian Nations) countries, Japan and South Korea. Dairy sector in India will also suffer due to the onslaught of imports from New Zealand –the largest dairy exporter in the world.

Data suggests that the imports from RCEP countries go up to 35% of the country’s total imports while exports to RCEP countries account for just 15% of India’s total exports.

India’s experience with free trade agreements (FTA) has also not been very encouraging. Its trade deficit with RCEP countries stands at a staggering USD 105 billion with China alone accounting for a lion share at USD 60 billion. The gap would have widened further, had the deal gone through.

However, its response to the rising imports has largely been through levy of tariffs. It has the highest weighted average tariff for most favoured nations (MFN) among all the RCEP countries.

A media report quoting a World Trade Organization (WTO) data, suggests that the average tariff on imports into India went up between 2010 and 2015. Tariff for all imports during the financial year 2014-15 (April-March) was 13%, which is one of the highest in the world, according to this report. India also has only about 3% of tariff lines at zero duty, which is lowest among its peers.

Items like cereals & preparations (50%), farm products (36%), oilseeds & fats (33%) and transport equipment (32%) and fruits & vegetables (29%) invited highest levies.

This defensive approach, at best, has been able to deliver some short term reliefs instead of making our industries more competitive and self-sufficient.

On the table

At present, India is negotiating as many as 15 FTAs (including the ones with Australia and New Zealand) while another 12 FTAs are proposed/under consultation and study.

Ongoing bilateral discussions with the US have gathered a lot of headlines with India looking at two separate agreements – an interim one and a broader FTA that is likely to touch upon issues related to e-commerce, intellectual property rights (IPR) and the overall investment scenario.

In the interim agreement, the US could likely press for lowering tariffs on ICT items, agricultural products and medical devices, which could make the domestic companies anxious.

Indian and European trade negotiators have not been able to come on an agreement despite years of negotiations.

Problems Aplenty

Cost of essentials like capital, labour and land in India are highest among the world. Domestic companies have over the years been complaining about inadequate ecosystem that has forced them to work below their capacities. Infrastructure and power problems still being the biggest nemeses.

India has significantly improved its standing in the ease of doing business but companies often complain of unpredictableregulatory environment.

Its taxation regime continue to remain burdensome. The biggest indirect tax reform – the Goods and Services Tax (GST) has been in place since the last two years, but its complexity has been its biggest criticism. (Liquidity)

Another pain point is the legal system where cases drag for years. The Insolvency and Bankruptcy Code is still to show the desired results, it ought to have shown.

Many important bills have become hostage to political tug-of-war, including the most contentious The Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement (Amendment) Second Bill, 2015.

While there are contentious amendments in the proposed bill that need to get sorted, political parties have not been able to resolve the issue among themselves. Industries need land to set-up businesses and in time.

The country also awaits labour reforms. The Occupational Safety, Health and Working Conditions Code, 2019, which was introduced by labour minister Santosh Gangwar in the Lok Sabha this year, is currently being scrutinised by the parliamentary standing committee on labour.

The bill proposes to subsume 44 labour-related laws into just four laws viz on wages, health, industrial relations and social security. Among other things, the bill also proposes to empower companies with hundred or more employees, to let go-off staff or dismantle units without seeking government permission.

Tough labour laws have often been blamed for keeping manufacturing businesses small and hindering growth and competitiveness of industries.

The Micro, Small and Medium Enterprises Development (Amendment) Bill, 2015 has also been pending since 2015, when it was first introduced in the Lok Sabha.

The bill could give significant advantage to micro, small and medium enterprises once it becomes a law as they would be entitled to government aids and exemptions despite new classification under the bill.The Bill proposes classification of micro, tiny or village enterprises as small enterprises by amending Micro, Small and Medium Enterprises Act, 2006.

The government has listed the bill for discussion in both houses of the parliament during the ongoing winter session. Both houses will also be debating The Industrial Relations Code Bill, 2019 and The Personal data Protection Bill, 2019 in this session.

The government will also have to be mindful of the prevailing economic situation in the country while preparing/finalising the contours of any trade negotiations.

The GDP growth for the June quarter was at a six-year low of 5% and country’s largest lender State Bank of India (SBI) forecasts the September quarter GDP growth to be even lower, at 4.2%. Experts have been arguing that the decline has still not bottomed out and the growth could slip even further for next couple of quarters.

Several media reports have suggested that the overall consumption has dropped significantly, which is hitting the manufacturing sector. Though the government slashed the corporate rate to bring it at par with other countries and make the domestic companies more competitive, the latter have been withholding expansion because of the existing consumption scenario.

It also slashed effective tax rates for new businesses to 17% from an earlier over 27%, which is a great step, but its effects on businesses are unlikely to come before a year or so.

Though RCEP countries-in their final declaration have left a window open for India to return by February 2020, it will be a miracle if the country makes any headway into the logjam.

Leave a Reply

Your email address will not be published.