RCEP And India: Investment Linked Trade Will Outplay Trade Demerits – Analysis

A Majority of industry associations, entrepreneurs and trade analysts rang alarm bell for India in joining RCEP – a new and the largest trade block consisting of ASEAN -10 and 6 countries. India had several FTAs. But, none of them yielded any trade benefit. Instead, they widened the trade deficit.

The first full-fledged FTA, India signed, was with Singapore under the umbrella of CEPA (Comprehensive Economic Cooperation Agreement) in 2005. Prior to this, India had a surplus trade balance with Singapore.

Afterward, the trade balance reversed against India. With South Korea, India’s trade deficit doubled in 2018-19 after it entered CEPA in 2009-10 and with Japan trade deficit surged by over one-fifth in 2018-19 after it entered CEPA in 2011-12. This led to a dilemma for joining RCEP.

Nevertheless, there is another side of RCEP. RCEP is the main source of FDI (Foreign Direct Investment ) in India. In 2018-19 RCEP accounted for 47 percent of total FDI flow in India. Investment has become the need of the day after the country plunged in downswing.

It will mar the panic of trade xenophobia, if India joins RCEP. For example, even though India’s FTA with ASEAN widened trade deficit, it unleashed windfall in FDI flow in India. In between 2011 (since when India had FTA with ASEAN) and 2018, FDI from ASEAN leaped 80 percent. It accounted for 37 percent of total FDI in 2018 , as compared 12 percent in 2011. This underpins the other side of FTA , albeit trade demerits.

Thanks to Singapore, which led India an attractive destination for FDI. It was the engine for FDI growth from ASEAN. FDI from Singapore accounted for 98 per cent of FDI from ASEAN in 2018. Incidentally, surge in FDI from Singapore coincided with India signing FTA with ASEAN. FDI from Singapore sparked by over 450 percent in 2018 over 2011.

With recent massive cut in corporate tax and India blessed with low cost production hub, its competitiveness leaped at par with ASEAN countries and China. With India’s corporate taxes plunged to 15 percent and 22 percent, it challenges corporate taxes of ASEAN nations and China, which vacillate between 17 per cent to 25 percent.

India has an edge over ASEAN and China in terms of low cost production, excepting Vietnam and Myanmar. Measured by wage level, India’s wags in Mumbai (for general workers) were half of Guanzhou (China) and two-third of Bangkok (Thailand) and Kualumpur (Malaysia) during December 2018-January 2019, according to an international survey.

Given these favourable parameters, India will emerge a big challenger to intra -RCEP investment, after joining ASEAN. The total annual intra- RCEP FDI flow is US $25 billion. India has already established its edge over ASEAN as a potential investment destination. In 2018-19, FDI inflow in India was US$64 billion, compared to US $ 13 billion, US$ 15.5 billion , US $ 8 billion and US 10 billion in Thailand, Vietnam, Malaysia and Philippines respectively in 2018.

With the joining of RCEP, India will have an added advantage to cut a pie of intra-RCEP investment. Zero trade tariff under RCEP will be an added attraction to induce RCEP members to invest in India.

By supplying component, parts and intermediates and get product manufactured at two or three tier level in India, either by establishing manufacturing facilities or contract manufacturing and availing the benefits of zero tariff regime, India can pitch for a base for re-export to investors’ country or other RCEP members. Correspondingly, it will increase India’s exports in the block.

This paradigm is possible only when India is within RCEP. Distancing from RCEP will nullify the opportunity.

Albeit, ASEAN-4 (Indonesia, Thailand, Malaysia and Vietnam) have been accredited as more investment friendly nations than India. The paradox lies with the lag in infrastructure and ease of doing business. In the World Global survey of Ease of Doing Business in 2018, Singapore, Malaysia Thailand and Indonesia pitched higher rank than India.

Even China – the most threatened and major obstacle for India’s joining RCEP – is likely to be a prosperous future foreign investor. China has already made a big investment in mobile telephone manufacturing in India. China brands now account for over 51 percent of the smart phones sales in India. Large penetration of Chinese top brands of smartphones, like Xiaomi, Oppo, One-plus, Gionee, Vivo, Huwai are posing challenges to Koreans and Japanese brands in the country.

Chinese products are becoming costlier after the wage hike. In addition , trade war with tariff hike has become double whammy. Foreign investors in China, including Chinese investors , will shift their productions bases to India and other countries. China is seen not a foe, but an opportunity after the trade war broke. Trust deficit began to dilute and bonhomie between the two leaders rose.

In some quarters of analysts, fears loom over China backtracking from investment if India joins RCEP. The argument is negated by the import basket from China. About one fifth of import from China relates to electronic goods, such as mobile phones and their parts and components. Most of these are permitted duty free under ITA agreement. Even though India imposed custom duty on these items , they are challenged in WTO.

Nevertheless, there are some irritants which need to overcome to increase investment. They are reforms in land and labour. The new Land Bill 2014 should have been the trigger to manufacturing and Make In India, which went in vein after getting defeated by vehement protests from oppositions and farmers.

Eventually, land acquisition continue to be the major impediment for foreign investors. Consent of farmers and Social Impact Assessment – the two crucial requirement under existing land acquisition law – continue to be the major bottleneck for foreign investment. Now, it requires more than 4-5 years to buy a land.

Therefore, the aim for joining RCEP should be viewed not only from the perspective of trade merit alone , but also from the point of view of investment, which will boost trade within the block. RCEP is significant to India, both from the angle of geostrategic and geo-economy. Abstaining from RCEP will isolate India to play a major role in world economy and geo-political dimension.

Views expressed are personal