India already has an FTA with ASEAN, the largest grouping within the RCEP, which essentially means signing up to deal with China, Australia and New Zealand. The assumption is that more Chinese goods will make their way through ASEAN countries and so, safeguards will be absolutely vital given India’s $53 billion trade deficit with China.
But that’s not the only number to worry about. Let’s look at the Indian experience with ASEAN. India’s utilisation ratio of its current FTA with ASEAN is just about 6%, going by the recent review carried out by an interministerial group.
In contrast, ASEAN countries have a 36.3% utilisation. Also, unlike with Japan and Korea, the investment component is also not quite large.
So, there are serious capacity issues that have gone unaddressed on the ASEAN front. To hope that these will somehow work themselves out dramatically on RCEP through structural adjustment policies is being optimistic. Moreover, unlike with ASEAN, India’s ability to use political clout with China is also limited.
For all the opposition from the Congress party on RCEP at this point, the fact is that it was the UPA which had agreed in a joint statement in January 2008 to commence discussions on a “mutually beneficial and high-quality regional trading arrangement” with China. It also negotiated the ASEAN FTA around the same time, which as the numbers show, have not quite worked according to expectations.
The truth is that the way the pendulum has swung thus far on RCEP is an indicator of how uncertainty has come to dominate India’s approach on trade. What’s telling is that India’s best performing FTA, by far, has been with Sri Lanka, where Indian exports have registered some growth.
Besides the big China factor, it’s important to realise that the ASEAN economy is essentially part of the big global supply chain. So, the other question to ask is what kind of FTA deal should India strike with essentially competitor countries? Then, of course, there’s the political question around exposing Indian agriculture and dairy to big state-owned enterprises of China and the likes of Fonterra in New Zealand. It’s important to note that many of the RCEP countries are very protectionist in granting market access. This is not to say India should stay away but neither can it walk into it blind. It must negotiate, knowing well there are red flags. India has placed proposals on the table on strengthening rules of origin, putting in place a trigger mechanism that will set off if goods entering India cross a certain threshold but there are also doubts if these would be enough.
This is undoubtedly a tough call to make, but let there be no doubt that this is a call on the terms of doing business with China first, then ASEAN, not the other way round.