In November, the government took an unprecedented decision to withdraw from the Regional Comprehensive Economic Partnership (RCEP), which was to be the world’s largest economic integration agreement between 16 East Asian economies.
The decision to pull back came after almost all major players in both agriculture and manufacturing argued that the steep reductions in tariffs, one of the main planks of the RCEP, would be detrimental to their interests. This view of domestic entities, which was eventually accepted by the government, exposed their lack of competitiveness and their inability to stand up to import competition.
Several commentators have been critical of the government’s decision and have argued that the withdrawal from the RCEP would deprive Indian enterprises of easier access to East Asian markets. The question that needs to be asked is whether increased penetration into such markets that are among the most competitive in the world is a realistic possibility, given the export performance of these enterprises in recent years.
The first reality that must be pointed out is that India is not among the major exporting nations. In 2018, the country accounted for a share of less than 1.7 percent in total global exports. At the turn of the millennium, India’s share was less than 0.7 percent, which had increased to about 1.5 percent in 2010. Most of this increase in the share took place in the high growth phase between 2003 and 2010, barring 2008, the year of the global economic downturn. The growth in export share continued for just a year more: in 2011, India’s contribution to global exports was 1.65 percent. This was also the year when India’s exports hit $300 billion.
Export dynamism seen in the second half of the 2000s was completely reversed after 2011. In relative terms, India’s exports remained virtually stagnant until 2018, with the global share fluctuating at 1.6-1.7 percent. The more worrying signs could be seen from the absolute numbers of exports. Exports growth in terms of dollar value stuttered to barely 2 percent during 2012-14, which was followed by a steep decline in the next two years. In 2016, exports had declined to below $265 billion, or more than 18 percent below the peak of $323 billion in 2014.
Although exports had recovered to $325 billion in 2018 -- during 2018-19, exports were over $300 billion -- the current financial year is once again witnessing a reversal of export growth: In the first 8 months (i.e. until November 2019), exports were lower than the corresponding period in the previous financial year. Thus, after growing for the past two years and reaching a level of $330 billion, exports are losing momentum yet again.
The above-mentioned trends in exports have also contributed significantly to the lowering of the share of foreign trade in the country’s Gross Domestic Product (GDP). The trade to GDP ratio is one of the better indicators of a country’s integration with the global economy, which for India was less than 31 percent in 2018.
Compare this with the corresponding figure for 2012, which stood at 43 percent. Export to GDP ratio was down to 11.8 percent in 2018, off its high of 17 percent achieved in 2013. At the same time, import to GDP ratio had declined from nearly 27 percent in 2012 to below 19 percent in 2018.
These trends in trade to GDP clearly indicate that Indian economy is, in fact, going through a period of decoupling from the global economy, and that the increase in the absolute figure of exports in the past two years has not been able to improve the relative importance of the trade sector for India’s economy.
The overall trend in the export to GDP was reflected in India’s trade with the 10-member Association of South East Asian Nations (ASEAN), Korea and Japan, with whom free trade agreements (FTA) were concluded during 2009-10. The implementation of the three FTAs has shown that Indian enterprises were unable to increase their footprints in the markets of the three partners, despite the fact that the partners had reduced or eliminated tariffs on a large share of India’s exports.
Importantly, these FTA partners are 12 of the 15 countries that were participating in the RCEP negotiations, along with India. This implies that even if India had joined the RCEP, its ability to take advantage of the relatively open markets in the bloc would have been extremely limited.
In the past few days, there have been hopeful signs for the global economy heading into 2020 as the US-China trade tensions seem to be ebbing. However, even if trade flows bounce back as they are expected to, it does not seem plausible that India can benefit much, given infirmities of the domestic players. In 2020, therefore, the government must listen to the concerns of domestic enterprises and why they insisted a pullout from the RCEP, so that effective policies can be put in place to remedy their weaknesses.
Published On : 27-12-2019
Source : Money Control
