Manufacturing sector critical for sustainable growth:
- The contribution of the manufacturing sector to India’s GDP has remained stagnant at around 17% since the 1990s, and the sector needs a big push in order to drive potential GDP growth.
- The focus on the manufacturing sector is critical for sustainable economic growth.
- Manufacturing not only creates strong positive backward and forward linkages in the economy, but, as per some estimates, every job created in manufacturing has a multiplier effect of 2-3 times additional jobs in other sectors.
Boost to this sector needs careful planning:
- Industrial revolutions don’t happen overnight.
- They require careful planning, policy interventions, regular upgrades, and innovations and investments at every stage of development.
- The Prime Minister has set up two key Cabinet panels on growth & investment and employment & skill development.
Trade protectionism on the rise across the world:
- In the current situation of rising trade war tensions and slowing global growth, most countries are protecting their domestic industry from trade diversion.
- Trade protectionism has been on the rise both in terms of the number of global trade-restrictive initiations and import coverage of these measures.
Strategy to deal with this situation:
- In the current scenario, a two-pronged strategy is the need of the hour:
- Raising domestic competitiveness – via a carefully-planned and targeted Industrial Policy
- Cushioning the industry from surge in imports due to trade diversion – via a carefully-negotiated FTAs
Cautious approach needed towards FTAs
India’s trade deficit with FTA partners growing fast:
- India’s combined trade deficit with FTA partners like the ASEAN, Japan and South Korea has almost doubled in the last 8 years (, as highlighted in the Aayog note on ‘Free Trade Agreements and Their Costs’).
Also, the quality of trade has deteriorated under the ASEAN-India FTA:
- The Niti note also highlighted that the quality of trade has deteriorated under the ASEAN-India FTA.
- As per UN’s Harmonised System of product classification, products can be grouped into 99 chapters and further into 21 sections (like textiles, chemicals, vegetable products, base metals, gems and jewellery, etc).
- Trade balance has worsened (deficit increased or surplus reduced) for 13 out of 21 sectors.
- This includes value-added sectors like chemicals and allied, plastics and rubber, minerals, leather, textiles, gems and jewellery, metals, vehicles, medical instruments, and miscellaneous manufactured items.
- Sectors where trade deficit has worsened account for about 75% of India’s exports to the ASEAN.
Trade deficit with proposed RCEP bloc is very high:
- The proposed Regional Comprehensive Economic Partnership (RCEP) is a 16-country mega Asian FTA, including 10 ASEAN nations plus China, Japan, South Korea, India, Australia and New Zealand.
- As noted above, India already has high trade deficits with most of the countries.
- India’s trade deficit with the RCEP bloc itself, of over $100 billion, is almost 64% of its total trade deficit.
- Of this, China alone accounts for over 60% of the deficit.
Being careful with RCEP negotiations:
- In this context, the RCEP has been viewed with caution by Indian policymakers.
- With the negotiations coming up, the Union Commerce minister has held industry consultations to ensure all industry issues are considered before the deal is sealed.
Need to carefully consider positives and negatives:
- Reciprocity is the key to FTAs.
- The biggest driver for trading partner countries to sign an FTA with India is the access to a big and booming consumer market.
- So it’s quite logical for India also to assess what it gets in return.
Concerns for India over signing RCEP
Lax rules of origin:
- Rules of origin are critical as they determine the source of a product for it to qualify for preferential treatment.
- For example, if India has FTA with ASEAN countries, we should be able to ensure that products from those nations have a good percentage of value add in those countries. China shouldn’t be allowed to first export to ASEAN, and from there use the India-ASEAN FTA to export to India.
- Other example is, under the India-Sri Lanka FTA, Sri Lanka had started exporting copper to India by under-invoicing of imported scrap in order to show higher value-addition for its goods to qualify for preferential rates under the FTA.
- Rules of origin norms can easily be circumvented by simple accounting manipulation.
- India has been demanding a stricter rule of origin criteria for its domestic industry (40-60% of value-add) as it fears that China can easily misuse lax rules of origin to reroute Chinese goods into Indian markets via India’s FTA partner countries.
- However, India’s proposal for strict rules of origin requirements was not welcomed by other FTA partner countries.
India’s industry fears opening up of the domestic market to Chinese exports:
- Indian domestic industry has been clearly expressing concerns with respect to opening up of the domestic market to Chinese exports.
- This is understandable given the massive Chinese overcapacity in key manufacturing industries, and major support programmes (in the form of financial, non-financial and trade measures) for the domestic industry that give an edge to Chinese producers over other trade partners.
- China’s manufacturing surplus and dumping of goods across the world is well known.
- China is the recipient of the highest number of anti-dumping duty (ADD) measures in the world, with 926 ADD measures against it (1995-2017), which amounts to almost a quarter of all ADD measures globally.
China also imposes huge NTBs:
- Indian Policymakers should also be aware of the use of non-tariff barriers (NTBs) by China.
- A nontariff barrier (NTB) is a way to restrict trade using trade barriers in a form other than a tariff. These include Quantity Restrictions, Quotas and Licensing Procedures, Technical and Administrative Regulations etc.
- China’s usage of NTBs like complex product certification process, labelling standards, customs clearance, pre-shipment inspection and import licensing have hindered India’s access to their markets.
- As per reports, China has agreed to open almost 92% of their tariff lines, expecting India to reciprocate in the same manner. But China imposes NTBs in a very non-transparent manner that can easily deny access to its markets for India products, despite very low or no tariffs imposed officially.
- Dealing with NTBs is costly and India’s concerns over China’s NTBs merit serious attention.
- Thus, in terms of reciprocity in an FTA, India’s exports access to Chinese markets will be limited given China’s overcapacity, use of NTBs, and significant financial and non-financial support available to its domestic industry.
- India must factor in this associated barrier before we move ahead with trade pacts, the RCEP in particular.
How can India protect itself if it joins RCEP
Having safeguard clauses:
- Against this backdrop, India must have a plan to deal with the massive support that China offers its industries, leading to overcapacity and price undercutting post-RCEP.
- Some experts suggest that appropriate safeguard clauses must be put in place within the RCEP in case injury to domestic industry is found.
- 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.
Any tariff elimination should be phased:
- Given the current state of Indian industry, phased elimination of tariffs is necessary.
- This is especially important for some key manufacturing industries that have long gestation periods until they start running on full capacity.
- Example of phased tariffs: An example of this kind of negotiation was the India-Japan FTA where India negotiated for 63% tariff lines under sensitive track (tariffs here are reduced in accordance with the timeframes).
- Example of immediate tariff elimination: In contrast, in the ASEAN-India FTA, 76% of tariff lines were opened up for complete duty elimination.
- Therefore, at least a 15-25 years’ tariff elimination schedule should be negotiated for key sectors like chemicals, metals, automobiles, machinery, food products and textiles, which individually contribute more than 5% to India’s manufacturing GDP and employment.
Domestic manufaturing improvements:
- While we bargain hard for an inclusive and balanced RCEP, domestically we must fiercely focus on eliminating the niggles our manufacturing sector and exports are facing.
- New industrial policy: India’s transformational plans for the manufacturing sector will require support in the form of a new industrial policy that creates the necessary incentives for key sectors to be an active part of this process.
- In terms of RCEP negotiations, phased elimination of few key manufacturing industries is absolutely essential with respect to China.
- Rules of origin criteria is a must that ensures a fair amount of value-addition to determine the source of a product.
- Improving India’s manufacturing effeciency and competitiveness are necessary complements for ensuring maximum leverage out of our trade deals, and especially the RCEP.