Last week, Narendra Modi cut short India’s participation in what has been touted as the world’s largest trade agreement, the Regional Comprehensive Economic Partnership or RCEP. At a summit in Bangkok where 16 nations were to approve the deal, Modi withdrew with customary theatricality, proclaiming, “Neither the talisman of Gandhiji nor my own conscience permits me to join RCEP.” Like the sucker punch of demonetisation, the prime minister’s decision came out of the blue and, like the radical change in the Rafale fighter deal with France, it left his cabinet colleagues flailing to explain their recent pronouncements.
“India looks at RCEP as a logical extension of its Act East Policy and it holds enormous potential for economic growth and stability for the entire region,” the government’s point man for the negotiations, Commerce Minister Piyush Goyal, said back in July. Last month, following a ministerial meeting to finalise India’s approach to the deal, Goyal stated, “If India remains out of RCEP, we will be left isolated from this large trading bloc.”
Luckily for the commerce minister, the legacy media, eager as always to spin the episode as a triumph for Modi, largely ignored the potential consequences of what Goyal had described as India’s isolation. Questions, however, need to be asked, among them: Why have we been unable to bolster our agriculture and industry enough to be confident of withstanding imports? Why is it that, despite government programmes like Make In India and Skill India, we are unable to produce most goods at competitive prices? Why did India find insufficient value in RCEP when nations with a wide variety of economies at very different stages of development, from Myanmar and Cambodia, through Malaysia and China, to Japan and Australia, believe it is in their interest to sign? Why did India’s negotiating teams, despite years of discussions, fail to secure our interests on a range of issues from data localisation to protecting the dairy industry?
Serious repercussions
Under the present regime, we have cut ourselves off from the biggest infrastructural programme in the world, the Belt and Road Initiative. Doubling that disengagement by ditching RCEP is bound to have serious repercussions. Investors wanting to build factories whose products are geared towards exports will think twice about locating them in India, and Indian entrepreneurs will increase investment in nations that are party to the RCEP, which offer easier access to large markets.
Although the impact may not be felt immediately, and will not be precisely quantifiable, we can ill afford to miss out on the RCEP opportunity at the present moment. The agency Moody’s just revised its outlook for the nation’s Baa2 sovereign rating from stable to negative. Government officials and the State Bank of India are forecasting that GDP growth in the financial year’s second quarter might fall below 5%, The brokerage house Nomura slashed its GDP growth forecast for the current financial year as a whole to 4.9% from 5.7%. And core sector output contracted by 5.2% in September, its worst performance in 14 years.
The difficult situation of the economy, which is the best argument for pressing ahead with ambitious global engagement, is also the strongest reason for retreating, the reasoning being that weakened industries might collapse under a fresh wave of imports. But India is far from the only nation that considers particular sectors deserving of protection. Those are precisely the issues to be hammered out during talks, and there have been plenty in the past seven years. No less than 27 rounds of trade negotiations have been held since the first meeting in May 2013, two of them hosted by India, the first in Delhi and the second in Hyderabad.
The reason for India’s failure to obtain its goals might have little to do with the Prime Minister and his cabinet, or with political parties in general. It could be related to the way our bureaucracy functions, something the former Reserve Bank of India Governor Raghuram Rajan touched on in a post-lecture exchange at Brown University last October 11, the same day the Chinese Premier Xi Jinping arrived in Chennai to meet Narendra Modi with RCEP on the agenda.
Rajan’s view
Answering a question about lateral entry into the bureaucracy, Rajan said, “Having been an outside input into government, one of the things that struck me was, on the one hand how much experience there was, and on the other hand how little knowledge there was… and you need that to be combined… When you start debating at the international level, you’re debating trade policy, you’re debating monetary policy, you’re debating with people who have spent 20 years in that field after getting their Ph.Ds. And what we send are generalists there, who’ve spent a year in the department because they’ve just been transferred. So, we absolutely need experts, and I think successive governments have seen that. The problem is does the system accept an outside expert? And the system usually says, ‘Yes, acceptable, provided you limit the term to three years, and at the end you kick them out’…. or,’They come in but they come in at Joint Secretary level and have no scope for further promotion.’ Because the system wants to preserve its positions. It doesn’t want these people to get those promotions. So, we need a lot of work here to make sure that we have this back and forth, we need to be able to hire private sector experts, into the banking system for example. We should be able to pay more market-related salaries and not have a CBI investigation every time you pay that.”
India does have a dedicated Trade Service, but it is under-staffed, under-powered and lacking in specialists in subjects like international trade law. Unless we find a way to inject specialised expertise into our civil service, we are doomed to many more failures of the RCEP variety.