Indian Prime Ministerand Chinese Presidentmight have had a successful Sino-Indian summit at Mamallapuram in Tamil Nadu during 11-12 October.
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However, when it comes to protecting trade interests, the government has adopted a tough stand, especially in reaching an agreement on the Regional Comprehensive Economic Partnership (RCEP).
RCEP is the government’s most ambitious trade agreement planned to date. The agreement is based on its existing free-trade agreements (FTAs) with the 10-nation Association of Southeast Asian Nations (ASEAN) and five other nations.
The pact will include China, Japan, South Korea, Australia and New Zealand, with which ASEAN has trade agreements.
Japanese wire agency Kyodo quoted an unnamed Singapore official as saying that India “almost banged the table” during the negotiations. Thailand termed the ministerial meeting as “tough and serious”, and that the agreement was inconclusive due to India’s tough stand that stalled the negotiations.
What was the stand taken by India that stalled the talks? India insisted that it wants a safety valve or a process to safeguard its interests against at least 50 per cent of Chinese imports under RCEP if they flood the Indian market.
New Delhi also expressed its concern over issues such as e-commerce, investments, taxations, small and medium enterprises (SMEs), and regulations fixed by local bodies. It sought that the framework on these be reworked before it can sign the deal.
India contends that its taxation policy changes shouldn’t be questioned, while its obligations towards its SMEs should be allowed to be met. It has demanded more favourable investment rules, wanted its local bodies’ norms to be respected and asked Japan to address its concerns on e-commerce.
India faces a real dilemma with regard to the RCEP deal. On the one hand, it doesn’t want to miss out on an opportunity to be part of a large trading bloc. Trade among the bloc is worth around $2.8 trillion annually.
On the other hand, the fear in signing the deal is that it could trigger a deluge of imported Chinese goods — like electrical and electronic goods — in its domestic market.
India’s trade deficit with China, the largest exporter among the bloc to India, is $54 billion, more than half of the total $105 billion trade deficit with the bloc of nations that form the group.
India’s problems do not end with the threat of Chinese imports. The agriculture sector, particularly dairy and plantation industry, is worried that imports of dairy products, rubber, cardamom, pepper, and other spices could affect them adversely.
These products will likely come from New Zealand, Malaysia, Vietnam and Australia.
For example, India currently imposes a 64 per cent duty on import of dairy products. If it signs the RCEP agreement, the duty will have to slowly be reduced to zero, most probably over a 20-year period.
This could affect the Indian dairy farmers, who number over 100 million compared to 10,000 farmers in New Zealand. Thanks to its vibrant domestic market, India exports only a fraction of its milk products from 180 million tonnes (mt) it produces annually.
In comparison, New Zealand ships out over 90 per cent of the 22 mt it produces. Also, Indian farmers get 70 per cent of the milk price as their returns, while it is 30 per cent in New Zealand.
The manufacturing industry — especially metals like iron, steel, and aluminium — also fears it could be affected by the RCEP deal.
Trade observers say India’s exports to the countries that are part of the RCEP pact are only 20 per cent of its total shipments abroad, while imports from these nations make up 35 per cent of the consignments that arrive at the ports.
Those opposed to the deal also point at various FTAs that India has signed with countries such as Sri Lanka and Japan, and Malaysia and Singapore that are part of ASEAN.
According to a 2017 Niti Aayog report, exports from India are lower than imports from partnering countries with whom it has signed the FTAs. Indian exporters, too, are not taking full advantage of the agreements, thus resulting in New Delhi losing out.
China is the one that is pushing India to sign the RCEP agreement. The issue figured at the Mamallapuram summit and the Chinese premier reportedly assured India that its concerns would be addressed.
Commerce Ministry officials are of the view that one way of checking the deluge of Chinese goods is to have an auto-trigger mechanism to alert them for some of the imported products. Once an imported product crossed a pre-determined threshold, the mechanism is triggered, and India would begin imposing duties on these products.
The RCEP deal will allow importing of 74 per cent Chinese products duty-free but developing nations are pressing for allowing 90 per cent of their products to be duty-free.
India also says the trigger mechanism would cover over 65 per cent of the Chinese products, but China, predictably, is not in favour of such a triggering mechanism for so many of its products.
And trade experts say that the connectivity between Indian ports isn’t good enough to set off the alerts effectively.
There is, however, one agreement among the bloc: the pact will result in 28 per cent of the traded goods being made duty-free in the first phase. In the second phase, 35 per cent of all products will be free of any import levy.
India believes its professionals in the Information Technology field, medical personnel, and chartered accountants would stand to gain from the deal and hence, it would be good to sign it.
Despite pressure from China, India is insisting on a balanced and equitable deal. With India standing firm in protecting its interests, the bloc of nations looking to sign the deal has two options before them.
One, they can sign a limited deal with India that will protect everyone’s interests. Or two, they can try and address all of India’s concerns in a fair way and then sign the pact.
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Steve Ovett, the famous British middle-distance athlete, won the 800-metres gold medal at the Moscow Olympics of 1980. Just a few days later, he was about to win a 5,000-metres race at London’s Crystal Palace. Known for his burst of acceleration on the home stretch, he had supreme confidence in his ability to out-sprint rivals. With the final 100 metres remaining,
[wptelegram-join-channel link=”https://t.me/s/upsctree” text=”Join @upsctree on Telegram”]Ovett waved to the crowd and raised a hand in triumph. But he had celebrated a bit too early. At the finishing line, Ireland’s John Treacy edged past Ovett. For those few moments, Ovett had lost his sense of reality and ignored the possibility of a negative event.
This analogy works well for the India story and our policy failures , including during the ongoing covid pandemic. While we have never been as well prepared or had significant successes in terms of growth stability as Ovett did in his illustrious running career, we tend to celebrate too early. Indeed, we have done so many times before.
It is as if we’re convinced that India is destined for greater heights, come what may, and so we never run through the finish line. Do we and our policymakers suffer from a collective optimism bias, which, as the Nobel Prize winner Daniel Kahneman once wrote, “may well be the most significant of the cognitive biases”? The optimism bias arises from mistaken beliefs which form expectations that are better than the reality. It makes us underestimate chances of a negative outcome and ignore warnings repeatedly.
The Indian economy had a dream run for five years from 2003-04 to 2007-08, with an average annual growth rate of around 9%. Many believed that India was on its way to clocking consistent double-digit growth and comparisons with China were rife. It was conveniently overlooked that this output expansion had come mainly came from a few sectors: automobiles, telecom and business services.
Indians were made to believe that we could sprint without high-quality education, healthcare, infrastructure or banking sectors, which form the backbone of any stable economy. The plan was to build them as we went along, but then in the euphoria of short-term success, it got lost.
India’s exports of goods grew from $20 billion in 1990-91 to over $310 billion in 2019-20. Looking at these absolute figures it would seem as if India has arrived on the world stage. However, India’s share of global trade has moved up only marginally. Even now, the country accounts for less than 2% of the world’s goods exports.
More importantly, hidden behind this performance was the role played by one sector that should have never made it to India’s list of exports—refined petroleum. The share of refined petroleum exports in India’s goods exports increased from 1.4% in 1996-97 to over 18% in 2011-12.
An import-intensive sector with low labour intensity, exports of refined petroleum zoomed because of the then policy regime of a retail price ceiling on petroleum products in the domestic market. While we have done well in the export of services, our share is still less than 4% of world exports.
India seemed to emerge from the 2008 global financial crisis relatively unscathed. But, a temporary demand push had played a role in the revival—the incomes of many households, both rural and urban, had shot up. Fiscal stimulus to the rural economy and implementation of the Sixth Pay Commission scales had led to the salaries of around 20% of organized-sector employees jumping up. We celebrated, but once again, neither did we resolve the crisis brewing elsewhere in India’s banking sector, nor did we improve our capacity for healthcare or quality education.
Employment saw little economy-wide growth in our boom years. Manufacturing jobs, if anything, shrank. But we continued to celebrate. Youth flocked to low-productivity service-sector jobs, such as those in hotels and restaurants, security and other services. The dependence on such jobs on one hand and high-skilled services on the other was bound to make Indian society more unequal.
And then, there is agriculture, an elephant in the room. If and when farm-sector reforms get implemented, celebrations would once again be premature. The vast majority of India’s farmers have small plots of land, and though these farms are at least as productive as larger ones, net absolute incomes from small plots can only be meagre.
A further rise in farm productivity and consequent increase in supply, if not matched by a demand rise, especially with access to export markets, would result in downward pressure on market prices for farm produce and a further decline in the net incomes of small farmers.
We should learn from what John Treacy did right. He didn’t give up, and pushed for the finish line like it was his only chance at winning. Treacy had years of long-distance practice. The same goes for our economy. A long grind is required to build up its base before we can win and celebrate. And Ovett did not blame anyone for his loss. We play the blame game. Everyone else, right from China and the US to ‘greedy corporates’, seems to be responsible for our failures.
We have lowered absolute poverty levels and had technology-based successes like Aadhaar and digital access to public services. But there are no short cuts to good quality and adequate healthcare and education services. We must remain optimistic but stay firmly away from the optimism bias.
In the end, it is not about how we start, but how we finish. The disastrous second wave of covid and our inability to manage it is a ghastly reminder of this fact.