Why the RCEP is detrimental for 'Make in India'

The Regional Comprehensive Economic Partnership (RCEP), the mega-regional trade agreement of 16 East Asian countries, cannot be taken lightly, as it may adversely affect India's manufacturing sector

Gyanesh Chaudhary
Updated: Oct 17, 2019 06:02:51 PM UTC
Image: Shutterstock

India has taken quite a few initiatives in the last decade in pursuit of development and growth. Although the country has witnessed inspiring progress, it is important to acknowledge that India is witnessing tectonic shifts in the global trading arcade. In such a scenario, the negotiations for adopting the Regional Comprehensive Economic Partnership (RCEP), the mega-regional trade agreement of 16 East Asian countries, cannot be taken lightly. Especially, when the agreement can adversely affect India’s manufacturing.

Probing for insight
Coming from the Indian solar industry, I understand the urge to protect domestic manufacturing from the effects of RCEP. The logic seems clear as the agreement would enhance the market for Chinese exports. How? Well, the US-China trade war has led China to provide huge subsidies to avoid manufacturing exodus. And RCEP market would become China’s best option to claim more market share, thus overwhelming India’s manufacturing sector, which is already the scenario in case of solar manufacturing sector (India spent $2.1 bn to solar imports in FY 18-19). Considering that India’s trade deficit with China was more than $60 billion in 2018, the agreement would only lead to increase the deficit further.

Understanding the outcome, leaders of solar, iron and steel, dairy, textiles, marine products, electronics, chemicals, pharmaceuticals and plastic industries have been vocal against the trade deal. It is apparent that while our negotiators focus towards an inclusive and balanced RCEP, the primary objective of the country at this point should be eliminating the internal and external issues restraining the growth of our manufacturing sector and exports.

Manufacturing can strengthen the economy and estimate shows that every job created in manufacturing has a multiplier effect of 2-3x additional jobs in other sectors. The contribution of India’s manufacturing sector into the country’s GDP has remained at around 17 percent since the 1990s. And now when most countries are focused to cushion their manufacturing sectors to initiate industrial, technological, economic and social growth, India must show caution in going for agreements that can push aside its potential of becoming a manufacturing hub. Because manufacturing alone stands to solve employment, poverty and economic slog simultaneously.

Collaboration: Yay or Nay?
Is the RCEP completely opposite of India’s current requirements? Not really. It is advocated that RCEP can aid India’s MSMEs to effectively integrate into the regional value and supply chains. Also, economists have explained that although it may incur short term costs, RCEP can produce long-term benefits like aiding “Make in India” succeed in the global platform.

We should also note that India’s trade deficits with nations have always jumped up after signing free-trade-agreements (FTAs) with them. Case in point: India’s FTAs with the ASEAN, Japan, Korea, and Singapore, most of which are RCEP nations. However, I do not believe that turning away from collaboration is the only answer here. The step forward would be to have strong measures to nourish and protect the domestic industry if the RCEP agreement is to be signed.

India must have a plan to be at par with China’s massive support mechanism afforded to its industries, leading to overcapacity and price undercutting post-RCEP. In my opinion, carefully calculated and calibrated safeguard clauses must be put in place within the RCEP to avoid/compensate any injury to the domestic industry. A clause on provisional safeguard measures should also be introduced. Within the FTA, a provision should be made for safeguard measures to be invoked if a volume or price trigger for the concerned products is reached.

Additionally, more focus on manufacturing is required. Focusing on manufacturing can lead the Indian manufacturing sector to account for 25 percent of the country’s GDP from the current 17 percent share.

Focus on manufacturing can help India ascent
India’s flagship initiative, 'Make in India' was designed and is still capable to bring in foreign investment at unprecedented levels. Although the recent economic reforms have not really given the leg up manufacturing industry needed to become competitive for international trade, the industry can still scale great heights with support.

India’s plans for the manufacturing sector need support in the form of a new industrial policy that creates incentives for key sectors. Strategies to enhance domestic competitiveness and to cushion the industry from a surge in imports due to trade diversion are sorely needed. If the domestic industry has to thrive, protection, product market reforms and enabling conditions have to be created. That is the only way India can have fruitful agreement through RCEP.

We need to understand that RCEP is actually an economic negotiation. And collaboration can work wonders for the growing country if India successfully arranges the right equation to garner benefits while protecting its domestic manufacturing sector. There is a challenge of course, but I believe that there are opportunities as well if we move forward, keeping our priorities intact.

The writer is MD and CEO of Vikram Solar.

The thoughts and opinions shared here are of the author.

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