Global Economy

RCEP: Why India should not succumb again to the export pessimism of licence raj days

By Nayan Chanda

“Are you from India?” my auto-rickshaw driver in Phnom Penh asked. “This tuk tuk is made in India, it’s very good,” he explained. It seemed to me that Bajaj manufactured almost every auto-rickshaw in the Cambodian capital. Indeed, it accounts for over 90% of three-wheelers sold in ten Asean member states. The success of Bajaj, which overcame challenges and intense foreign competition to emerge as one of the world’s leading exporters, stands as a rebuke to India’s defeatist approach to global trade. After seven years of negotiation to join a mega free trade bloc, India confessed it was too unprepared to open up to competition. Unless India stiffens its spine and accepts the challenge to modernize its economy, it will end up decoupling itself from the most vibrant part of the global economy and sink back into the obscurity of the licence raj.

Despite earning a reputation for protectionism, India raised hopes when it joined negotiations for the 16-member Regional Comprehensive Economic Partnership in November 2012. When the Modi government decided to revitalize the tired slogan of ‘Look East’ as an “Act East” policy, official documents expressed hope that RCEP offered a decisive platform to boost its regional economic position and operationalise that policy.

Now those supporting India’s RCEP retreat are trying to assure the rest of Asia that it is not turning its back, that it just needs more time to prepare for an export deluge from China and agricultural and dairy products from Australia and New Zealand. Such arguments ignore the fact that Indian negotiators have worked hard to ensure a long enough on-ramp to ease Indian industry and farming into a free trade zone. Although the details of the negotiations are still unknown, there are reports that there were sufficient safeguards against Chinese goods flooding the market and long delays built into the potential import of many products.

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By continually protecting its inefficient companies, India is eliminating the market competition that winnows out struggling businesses and rewards companies like Bajaj. Shielding weak and outdated manufacturing from foreign rivals will cause long-term harm to India’s industrial ambitions and the Make in India plan at a time when artificial intelligence and automation are rapidly transforming the market. Protectionism also deprives Indian consumers of the quality and price competitiveness they expect and deserve.

Since the bold reform of 1991, successive governments have pledged to prepare the country to confront international competition. Instead, acceding to the demands of the industry lobby and various interest groups proved easier than adopting a politically costly tough love approach. It is perhaps not fair to compare authoritarian China with democratic India. But one cannot but note the steely determination and resolve with which China reformed its iron rice bowl economy in the 15 years before joining the WTO. Chinese leaders did not hide the fact that they wanted to use the WTO demands as a wedge to crack open barriers put up by vested interests and reform its sclerotic socialist economy. To be sure, China has continued to subsidize enterprises, filched technology, worked around WTO rules, and manipulated its currency to build a huge surplus. But its openness and reforms have nonetheless helped create a modern economy that is the envy of the developing world.

There is no doubt that India could improve upon the deal it has got especially in its effort to open the market for its pharma and IT exports to China. India’s 400 million middle-class consumers represent an attractive bargaining chip that negotiators can still employ before throwing in the towel. It is not just politeness that motivates the 15 members that India left when they express hope that India would return to the fold. The size of China’s market remains the most attractive aspect of this mega deal, but others would feel reassured if Asia’s other pole too added its weight. India too will emerge stronger for that.

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