Joining the RCEP could boost productivity, bolster our ‘Make in India’ agenda and deliver gains
In 2013, a World Trade Organization high-level panel, of which yours truly was a member, estimated that the share of intermediate goods in global merchandise trade was anywhere between 60% and 70%. In recent years, as pointed out by the World Bank in its World Development Report (WDR) 2020, owing to a spate of protectionist policies around the world, it has come down to 50%, but remains substantial.
India has been poor in accessing Global Value Chains (GVCs)—about 16%—but the opportunity to change that is knocking on our doors by way of the Regional Comprehensive Economic Partnership (RCEP) deal.
Furthermore, the RCEP is important for our strategic interests, and to resuscitate a rules-based international trading order.
That said, the import of high quality and/or less costly intermediate inputs is shown to have multiple benefits: cheaper access for end consumers; positive effect on the productivity of firms; raised export growth; expanded employment and increased domestic income. With apt policies, the benefits can eventually reach the poor and less fortunate by creating jobs and job creators.
The import of intermediate goods and their use in exports is also made possible through GVCs. The WDR notes that GVCs have helped poor countries grow faster, created new jobs and lifted many out of poverty.
A single percentage point increase in GVC participation is estimated to boost per capita income levels by more than 1%, much more than the 0.2 % income gain from standard trade, says the WDR. These value chains can foster inclusive and sustainable growth, create better jobs, and reduce both poverty and inequality if developing countries implement deeper reforms and industrial countries pursue open, predictable policies.
This does not mean that domestic value addition is not important. According to a recent study by the Indira Gandhi Institute of Development Research reported in this newspaper on 18th October, Exports, Global Production Sharing, And Jobs In India, between 1999-00 and 2012-13, the domestic value-added content of India’s aggregate exports increased significantly from $46 billion to $234 billion. Also, export-related jobs grew faster than total employment.
India has not been able to fully exploit the potential of GVCs in the past, owing to our extremely cautious approach towards foreign goods and services, and our apparent inability to implement difficult domestic reforms. We have now been presented with an opportunity in the form of the RCEP, which includes the most dynamic economies of the Asia-Pacific region, to correct course and truly partake in the GVC revolution. Joining the RCEP would thus make eminent sense.
Globally, the import content in exports has risen from around 20% in the 1970s to around 40% in 2013. In India’s case, following an increase from around 19% in 2005 to around 25% in 2011, the foreign-value added content of India’s export has declined sharply to around 16 % in 2016.
While some civil society organizations (CSOs) have opposed India’s entry to the RCEP citing concerns of a huge upsurge in imports, the government must make a decision informed by vision, evidence and experience, and not by rhetoric. Since opposition to any major move, especially a difficult one, is considered fashionable these days, criticism of the idea naturally grabs the attention of the media, which doesn’t always seem keen to cover unpopular counter opinions.
Many CSOs, including CUTS International, have analysed evidence across countries for years, and thus have been arguing that it is possible for India to gain from the RCEP. This needs to be coupled with the right set of policies, particularly domestic reforms that would help run a business by reducing input costs such as on finance, power and logistics, removing bureaucratic hindrances, and encouraging active cooperative federalism.
Instead of considering measures like export and import restrictions, Indian policymakers should focus their energy on creating conditions for domestic stakeholders to use the opportunity to add value in GVCs formed under the RCEP. Measures to reduce input costs—by facilitating easy access to factors of production, leading to enhanced productivity—will enable firms to efficiently add value and command decent margins in international markets.
India is currently experiencing a slowdown in consumption, traceable in part to unsatisfactory levels of disposable income among workers across various sectors. A well thought out and harmonized approach to the RCEP, linked to an improvement in wages and conditions of workers, may not only be required from the perspective of sustainable development and inclusive growth, but also for boosting domestic demand.
Going forward, India should embrace GVCs, the RCEP in particular, as it has more to lose than others by staying out. It would raise productivity, which is necessary to create export-oriented jobs with better wages, and help the Make in India programme. India needs the RCEP more than the other way around. This government has time and again shown the resolve to take difficult decisions that would deliver gains in the long run. It should not lose this opportunity.
Most importantly, we need to reduce transaction costs for our businesses to help them become competitive globally. An embrace of the RCEP could and should hasten our domestic reforms agenda.
Pradeep S. Mehta is Secretary General of CUTS International
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