Business Today - 16 August 2019
BT Buzz: Why India should not ignore RCEP free trade mega deal
By Joe C Mathew
Are mega free trade agreements (FTAs) beneficial for Indian economy? Majority of Indian industry may say no, but a research policy paper written (in individual capacity) by former Commerce Secretary Rajeev Kher and Ram Upendra Das, head of Centre for Regional Trade, an autonomous body promoted by the Commerce ministry, attempts to offer a slightly contrarian view.
The research paper becomes important, as India is actively engaged with the ten member states of the Association of Southeast Asian Nations (ASEAN) - Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, Vietnam - and its six FTA partners - China, Japan, India, South Korea, Australia and New Zealand - for a mega regional trade agreement, the Regional Comprehensive Economic Partnership (RCEP), that covers 40 per cent of the global trade and 45 per cent of world’s population. The arguments are meant to generate wider debate on the pros and cons of RCEP and help Commerce Minister Piyush Goyal take an informed decision on India’s participation in RCEP in coming months.
In ’An Untold Story of India’s FTAs: An Alternative Narrative,’ Kher and Das analyses India’s trade with its five major FTA partners in a pre-FTA and post-FTA period and concludes that the growth of trade in 2010-2018 period is more in comparison to the pre-FTA period, that is, 1991-2009. "This greater growth rate in the overall period reflects the role of FTAs in infusing the growth in total trade," they say.
India has 16 free trade agreements in force, of which the most comprehensive ones - India-Singapore Comprehensive Economic Cooperation Agreement (CECA), India-ASEAN Trade in Goods Agreement, India-Japan Comprehensive Economic Partnership Agreement (CEPA), India-South Korea Comprehensive Economic Partnership Agreement (CEPA), India-Malaysia Comprehensive Economic Cooperation Agreement (CECA) - have been reviewed here.
The paper acknowledges that the pace of growth in imports has been greater than the increase in exports (resulting in a greater trade deficit, generally highlighted as a cause of concern for India). But, it argues that growth in imports must not be seen in isolation but as a proportion of total trade in both pre-FTA and post-FTA scenario. "Though, India’s trade deficit as a percentage of total trade has increased, India’s total trade has also increased, implying that the capacity to sustain trade deficit has also increased," the authors say.
For instance, among the five FTAs that were considered, India’s engagement with ASEAN was the biggest in terms of the size of total trade ($81 billion) and the size of trade deficit ($12.9 billion). Researchers show that in this particular case, the increase in India’s trade deficit was the least compared to other FTA partners during 2009-2018 period. "Trade deficit to total trade ratio vis-a-vis ASEAN has decreased from -17.4 per cent in 2009 to -15.9 percent in 2018. This implies that its capacity to afford trade deficit has increased. This is because with respect to increase in total trade between India and ASEAN in the post-FTA period compared to the pre-FTA period, the increase in trade deficit is lower, hence the trade deficit to total trade ratio has declined," the paper notes. The authors argue that one should not be paranoid about trade deficit as long as the increase in trade offers the capacity to afford it.
The paper also highlights the growing importance of imports in the changing structure of India’s trade with these FTA partners. While India’s exports to all FTA partners primarily comprise non-raw material goods, its imports are mainly goods like heavy machinery and iron and steel products, which are not finished products but something that add to the production capacity of India. "The percentage share of intermediate goods imported from all of these five FTA partners in the total imports from respective five FTA partners have recorded significant increases," the authors say.
"First, India’s exports are primarily accounted for by non-raw materials with respect to each FTA partner. It falls in 78-96 per cent range. In the case of ASEAN, non-raw materials account for 78 per cent of total exports to ASEAN. Second, India’s imports are primarily accounted for by non-consumer goods with respect to each FTA partner. It falls in 78-89 per cent range. In the case of ASEAN, non-consumer goods account for 84 per cent of total imports. This can be an ideal export and import structure of India vis-a-vis FTA partners," they point out.
The third important aspect of FTAs, highlighted by the authors, is the cost advantage to Indian imports. "For major FTA partners, India has witnessed a fall in the unit value of imports in the post FTA period, that is, the unit value of imports in the current year (2018 here) is much lower than the unit value of imports in the pre-FTA period (one year before the FTA was implemented). In other words, in absence of an FTA, the current quantity being imported (that too from FTA partner only) would have been sourced from the world at a higher price," they say.
The authors claim that for five major FTAs, marginal revenue loss because of tariff reduction would have helped India avoid or save trade deficit equal to $51.34 billion in the year 2018.
According to the research paper, there is a need for better statistics in trade in services. "Lack of data on direction of services particularly by partner country or by company hampers negotiations on trade in services. There is no global database capturing the ’ultimate’ source or destination of country effectively," the authors say.
One of the recommendations in the paper is to develop a better understanding of how services are traded, measured and regulated in order to establish India as a major services exporter to take fuller benefits of India’s FTAs. The paper calls for a shift in India’s engagements from geo-politics to geo-economics. It wants FTAs to be studied on the basis of reciprocal benefits and employment generation potential rather than from a solely export perspective.
Commerce Minister Piyush Goyal will have to decide whether sectoral industry interests should be given priority over macro-pictures the authors are trying to showcase. If India’s decision to keep Goyal away from the recent RCEP meeting while ensuring bureaucratic representation at the highest level is an indication, the country could opt for a mix of both.