14th East Asia and Regional Comprehensive Economic Partnership (RCEP) summit
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TOPIC: General Studies 2:
- Bilateral, regional and global groupings and agreements involving India and/or affecting India’s interests
The Regional Comprehensive Economic Partnership (RCEP) is a proposed free trade agreement (FTA) between the ten member states of the Association of Southeast Asian Nations (ASEAN) (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, Vietnam) and its six FTA partners (China, Japan, India, South Korea, Australia and New Zealand).
These 16 countries account for over a third of world GDP and trade, and are collectively growing at a rate that is double the rest of the world. The Indian economy is large, but the rest of the RCEP is eight times its size. It is by far the most attractive market in the world today, and will be for the next 20 years.
The RCEP is ambitious in both scale (the 16 countries combined make up an economic area exceeding the European Union) and scope (going well beyond trade in goods). But, after protracted negotiations that began in 2012, India announced last week that it is not pursuing membership in the RCEP. The 15 remaining RCEP members are going ahead and have committed to signing an agreement early next year.
India & RCEP in 2019
Seven years after India joined negotiations for the 16-nation ASEAN (Association for South East Asian Nations)-led RCEP India dropped out of the agreement, citing its negative effects on “farmers, MSMEs and the dairy sector”.
“When I measure the RCEP Agreement with respect to the interests of all Indians, I do not get a positive answer. Therefore, neither the Talisman of Gandhiji nor my own conscience permit me to join RCEP.” – Prime Minister Narendra Modi
Why did India opt out?
- The deal requires the gradual elimination of tariffs which may flood Indian markets with Chinese goods and agricultural produce from oceania, harming local producers
- Lack of access to Indian services- allowing Indian labour mobility to other countries for services – in the RCEP countries (Services is India’s strong area and has huge potential to tap into RCEP market)
Another area of hard bargaining for India is our unfulfilled want for exemptions from the Ratchet obligations. As per the Ratchet mechanism, if a country signs a trade agreement with another country where it relaxes tariffs and quotas on merchandise exports and imports, it cannot go back on them and bring in measures that are more restrictive. India wants a clear exemption from the Ratchet obligations, so that in the future, to protect the interests of exporters and importers, it can bring restrictive measures, if required.
Why is the Industry apprehensive?
India has been the leading producer and consumer of dairy products with a sustained growth over the years. Estimated production of milk in 2018-19 was 187 million tonnes. Milk is equally important to both farmers and consumers.
Cheaper dairy products from New Zealand would
- Worsen the trade deficit
- Dent the domestic industry – If India signs the RCEP, without exemptions for dairy and its products, it would allow the dairy industry of Australia and New Zealand to unfairly target its huge market.
- Indian products would start facing stiff competition from Australian and New Zealand products
- Will lead to unemployment and worse living conditions – There are 70 million households dependent on dairy in India, the corresponding number is just 10,000 in New Zealand and 6,300 in Australia.
- The unit cost of milk production is relatively low in countries like New Zealand because of extensive grazing lands (which reduce feed costs), mechanised operations and the advantages of economies of large-scale production, and the high productivity of milch animals
- According to estimations made by Amul, if free imports of skimmed milk powder from New Zealand are permitted, the average price for milk received by an Indian dairy farmer would fall to ₹19/l (presently it is ₹30/l).
- In turn, that will lead to decline in the cattle rearing and proper care for them which will lead in the decline of population. India will cease to become self-sufficient –
- India’s dairy sector provides livelihood to about 70 million households. A key feature of India’s dairy sector is the predominance of small producers.
- In 2017, if the average herd size in a dairy farm was 191 in the U.S., 355 in Oceania, 148 in the U.K. and 160 in Denmark, it was just 2 in India
- Yet, due to Operation Flood after the 1960s, India’s contribution to world milk production rose from 5% in 1970 to 20% in 2018.
- As a result, India does not import or export milk in any significant quantity.
- In 2033, India’s milk production would rise to 330 MMT while its milk demand would be 292 MMT. Thus, India is likely to be a milk-surplus country by 2033
India’s average bound tariff for dairy products is about 63.8% while its average applied tariff is 34.8%. Joining RCEP would have bound India to reduce that level to zero within the next 15 years. RCEP could perhaps end up doing to dairy what the free trade agreement with the Association of Southeast Asian Nations (ASEAN) did in palm oil, fear many in the industry in India.
India commands around 1.7 per cent share of the world’s total goods exports ranking 20th as per the WTO 2018 data. For achieving a 5 per cent share in world exports (the government targets $1 trillion exports out of total global exports of $20 trillion), India must build its manufacturing capabilities, and the recent steps by the government are in that direction. How India manoeuvres the geo-political space will determine how successful it is in becoming an export behemoth (in its quest towards a $5 trillion economy).
Connecting the Dots
- What is the RCEP trade pact? How does it affect India’s interests? Comment.
- Joining RCEP would have had high socio-economic costs on Indian dairy farmers. Elaborate.
- Economic isolation is not an option for India and It must move towards bilateral trade pacts. Analyse.
- A trade agreement like RCEP is both an opportunity and a threat. It all depends on what one makes of them. Discuss.