India And RCEP - A Detailed Analysis

India And RCEP - A Detailed Analysis

Updated on 14 October, 2019

GS3 International Relations Economy
india-and-rcep-a-detailed-analysis

The last round of negotiations for finalisation of the Regional Comprehensive Economic Partnership (RCEP) pact between ASEAN and six other countries, including India, is going on. The negotiations have entered the sixth year.

  • The 16-member Regional Comprehensive Economic Partnership (RCEP) bloc aims to cover among the issues related to goods, services, investments, economic and technical cooperation, competition and intellectual property rights.
    • India has declined to agree to the e-commerce chapter of the Regional Comprehensive Economic Partnership (RCEP) agreement.
    • Also, India’s manufacturing industries and farmers are fearful of its negative consequences. 
  • India has two tasks to take care of - improving the country's export statistics and expanding the manufacturing capacity base.

Issue of cross-border transfer of electronic information: Why India rejected the e-commerce chapter? The e-commerce chapter contains clauses that, if India had agreed to them, would have prevented it from implementing data localisation rules on companies doing business in India.

  • 14 members of the 16-country RCEP including ASEAN opposed data localisation.
  • This basically means that India cannot ask foreign financial companies to maintain a copy of their data within India.
  • In practical terms, a Thai private bank in India could not be prevented from transferring Indian customers’ data outside the country.

What is India’s stand on data localization issue?

  • India has proposed locating computing facilities inside the country if it is meant to protect its essential security interests and national interests.
  • Also, Reserve Bank of India’s (RBI) in its April 2018 notification mandated “all system providers shall ensure that the entire data relating to payment systems operated by them are stored in a system only in India”. It later clarified that a copy of domestic data can be stored abroad in the case of cross-border transactions.
Change in draft National E-commerce Policy
  • In light of the increasing importance of data protection and privacy, the National E-commerce Policy intended to regulate cross-border data flow, while enabling sharing of anonymized community data (data collected by Internet of Things devices installed in public spaces like traffic signals or automated entry gates).
  • It addresses six broad issues of the e-commerce ecosystem -- data, infrastructure development, e-commerce marketplaces, regulatory issues, stimulating domestic digital economy and export promotion through e-commerce.
  • The draft policy barred sharing of sensitive data with third-party entities, even with customer consent.
What is the recent change?
  • Data protection won’t be handled by E-commerce Policy now.
  • Data protection would now be handled by the nodal ministry of electronics and information technology (MeitY), which is working on a data protection bill
  • In July 2018, the Indian government published a draft Personal Data Protection Bill. If passed into law, the Bill would impose onerous burdens on firms, especially foreign firms, that process personal information.
Draft Personal Data Protection Bill A 10-member expert group headed by former Supreme Court judge B.N. Srikrishna, submitted the draft Personal Data Protection Bill, 2018, to MeitY.  It recommended setting up a data protection authority and placing restrictions on cross-border data flows. 
  • storing one serving a copy of all personal data within India. 
  • empowering the central government to classify any sensitive personal data as critical personal data and mandates its storage and processing exclusively in India.

Why RCEP does not want data localization?

  • It said these requirements raise costs for suppliers of data-intensive services by forcing the construction of unnecessary, redundant data centres. They create significant barriers to digital trade.
What is RCEP?
  • The Regional Comprehensive Economic Partnership (RCEP) aims to bring the 10 countries of ASEAN with Australia, New Zealand, South Korea, India, China and Japan to create the world’s largest trading block. 
  • If it comes into being, RCEP will constitute more than 40 per cent of the global population and almost half of the world’s economy. 
  • It consists of three of the six largest economies of the world, especially, the two fastest-growing large economies — India and China.
  • Out of the top 16 countries with the largest GDP, six belong to the proposed RCEP.
  • The RCEP aims to provide freer access to members to each other’s’ markets. 
  • During the Mammalapuram visit of Xi, the Chinese side is expected to urge India to open up more of its market to Chinese goods, especially now since the ongoing trade dispute of Beijing with the United States has already impacted its own exports.
  • If signed, the RCEP would become the world’s largest economic bloc, covering nearly half of the global economy.

India’s main issues with RCEP: 

  • The main issues that need resolution include
    • number of goods on which import duties should be completely eliminated 
    • norms to relax services trade
    • investor-state dispute settlement 
    • Rules of Origin (ROO)
  • Number of goods on which import duties should be completely eliminated 
    • RCEP members want India to eliminate or significantly reduce customs duties on a maximum number of goods it traded globally. India’s huge domestic market provides an immense opportunity for exports.
    • To protect the domestic industry against a surge in imports, India has suggested an auto-trigger method that would automatically increase import levies once shipments cross a given threshold limit.
  1. Norms to relax services trade
    • Under services, India wants greater market access for its professionals in the proposed agreement. But the RCEP grouping had earlier rejected India’s proposal for a visa fee waiver fearing migration and subsequent loss of jobs. 
    • India has been insisting on Mode 1 and Mode 4 of services. Computer-related service is a sector of India’s interest and in that Mode 4 is India’s main concern. 
What is Mode 1/Mode 2/Mode 3/ Mode 4?
    • Mode 1 is a cross-border supply between countries. Mode 1 refers to cross border supply of services such as call centres.
    • Mode 2 refers to consumption abroad. 
    • Mode 3 means a commercial presence, which includes joint ventures between foreign service providers and domestic businesses. 
  • Mode 4 or movement of natural persons is one of the four ways through which services can be supplied internationally. 
  1. The proposed inclusion of the controversial investor-state dispute settlement (ISDS):
  • Proposed RCEP trade deal includes a mechanism called the Investor-State Disputes Settlement (ISDS).
  • This mechanism gives the exclusive right to bypass domestic legal systems and sue governments at international arbitration tribunals whenever they feel government regulation can limit their profits. 
  • India does not want an ISDS mechanism in RCEP as it does not want its domestic laws to be challenged in offshore arbitral tribunals. 
  • India’s new model BIT is much more restrictive in its clauses than the ones promoted under RCEP.

 

Background of investor protection in India
  • Investor protection is critical for ensuring FDI inflows
  • A stable political and legal environment, assurances against taking away of the investment value through legislative or administrative acts, transparent public policy measures, and speedy access to justice are strong guarantees for foreign investors.
  • A bilateral investment treaty (BIT) between the two countries plays a key role in offering these guarantees on an international plane. 
  • In 2003, India released her first Model BIT – an investor-centric prototype used readily to ink BITs with other countries.
  • However, in 2011 India was directed by an international arbitral tribunal to pay an exemplary sum of $3.5 million to White Industries, an Australian investor, for failure to provide “effective means of asserting claims and enforcing rights” – as per a clause under the India-Australia BIT through a most-favoured-nation (MFN) provision.
  • In 2015, India replaced the investor-centric 2003 Model BIT with a State-centric model. To avert further damage, India terminated BITs with 58 countries in 2017.
  • The Model BIT stipulates that the aggrieved investor should use all local remedies as well as negotiations and consultations initiating arbitrations against the host State. 
  • The investor[row][double_paragraph]Left Side Content [/double_paragraph][double_paragraph] Right Side Content [/double_paragraph] [/row] can use outside remedies only five years after resorting to all domestic arrangements.
  1. Rules of Origin (ROO): 
  • Rules of origin are the criteria used to define where a product was made and are important for implementing other trade policy measures, including trade preferences, quotas, anti-dumping measures and countervailing duties. 
  • India wants strict rules of origin to prevent Chinese goods from flooding the country through member countries that may have lower or no duty levels. 
  • India has said the highest value addition with the help of indigenous inputs must be done in the country from which a product is exported. Globally, the average threshold for domestic content to get originating status for a product is 40-60%.
  • China and many ASEAN members want relaxed rules. These countries don’t have the kind of resources and manufacturing like India except Japan, which is into large-scale value addition and exports. So, they want lenient rules.

What India has accepted so far?

    • India has so far agreed to several provisions that bring it in line with the investment rules applicable in most comparable countries, including 
  • banning host countries from mandating that the investing companies transfer technology and training to their domestic partners
  • removing the cap on the quantum of royalties domestic companies can pay their foreign partners.
  • Indian laws currently have a provision wherein companies investing in the country can be made to transfer technology or know-how to their domestic counterparts.
  • The government and Reserve Bank of India also currently impose a cap on the royalties a domestic company can pay to its foreign parent or partner, for certain kinds of investments.
  • These restrictions have been seen as major hindrances to investing in India. The investment chapter of the RCEP deal has been agreed upon.
  • This means there will be no cap on the royalties that a company like, say, Maruti can pay a foreign partner.
    • Negatives of this move: Indian Industry fears that removing the cap on royalty payments would lead to increased outflow in foreign exchange and deplete the ability of domestic firms to pay dividends to shareholders, 
    • Positives: Removal of these restrictions will result in increased investments in India.
India’s reasons for not joining RCEP India’s reasons for joining RCEP
India’s trade deficits
  • India’s FTAs with the ASEAN, Japan, Korea, and Singapore have already widened India’s trade deficit.
  • India cannot afford the further cut in duties on imports from other RCEP member countries as demanded by RCEP.
The trade deficit should not be the only lens through which FTAs should be judged. 
  • More significantly, opening up markets and reducing tariffs will benefit consumers. 
Concerns for agriculture and dairy sectors
  • It will worsen the condition of India’s agriculture and dairy sectors, which are not in positions to compete with Australia and New Zealand.
National interest first:
  • National interests cannot be allowed to be hijacked by a few industries, and the government must look at the greater good. 
Poor market reforms, Poor labour productivity and fragmented labour laws
  • Multiple rates of GST often cause problems of compliance across the value-chain of a commodity. 
  • Despite low relative labour cost, labour productivity in India in manufacturing is still one of the lowest in the world.
  • Under such circumstances, the Indian industry is hardly in a position to compete.
Long term benefits for everyone:
  • The automobile, telecom, IT boom and solar power generation would not have been feasible without liberalisation. 
Going beyond WTO norms
  • It takes away an economy’s ability to customize trade policies according to the needs of specific time periods. 
Act-East Policy:
  • India’s participation in the RCEP can be viewed as a natural extension of its Act East and Act Far East policies.
Safeguard needed for domestic industries:  
  • Niti Aayog said in a study that “if duty is further cut under RCEP, domestic aluminium and steel industry will be severely hit.”
‘Make in India’ push
  • If India wants its ‘Make in India’ to become a global success, it must participate positively to become a part of the Asian value and supply chain which either begins or ends in India.
  • RCEP might open avenues for cotton exporters and pharmaceutical traders.
Boost for MSMEs:
  • RCEP will facilitate India’s Micro, Small and Medium Enterprises (MSMEs) to effectively integrate into the regional value and supply chains.
China factor
  • India is reportedly expected to reduce or eliminate duties on more than 75% of goods imported from China under the proposed agreement. 
  • Already, from ‘manjha’ (the string used to fly kites) to Diwali lights, Chinese goods have been flooding Indian markets across categories, frustrating local manufacturers.
  • Also, China does not provide a level playing field for items that India can export, especially in fields like pharmaceuticals, information technology, films, indigenous medicines, wellness and yoga.
Strategic benefits to India: 
  • India’s allies in Southeast Asia, as well as Australia, want India to join it to balance China. 
  • China is vulnerable due to its ongoing trade war with the US and demographic crunch, India could easily edge it out.
Falling exports:
  • According to a note by CARE Ratings, India’s export growth in the first eight months of 2019 has already fallen to just 1.4% ($219 billion) due to weak global trade scenario. 
  • A further lowering of the tariff could continue to hurt our exports in the coming years.
Participation in global value chains:
  • There will be cheaper intermediate goods as inputs for industries.
  • The RCEP can be leveraged to help Indian industry become more competitive, participate in global value chains, and seek additional market access.
Options outside RCEP:
  • India has been evaluating options outside the RCEP as well. 
  • Separately, India is negotiating FTAs with Australia and New Zealand as well.
RCEP has a much bigger scope
  • RCEP gained a new dimension after the US pulled out of the TPP and subsequently initiated a trade war, largely against China.
  • Multiple separate bilateral deals are no match to RCEP.

Way forward: Leveraging India’s service sector:

  • India’s main strength lies in the services sector and it must, therefore, ensure that RCEP includes unbridled access for Indian service providers as well as a liberalised visa regime for people working in these fields. 

Protection for some sectors:

  • Protection will need to be ensured for some sensitive industries crucial for national security. 
  • Some temporary protection may be required for certain sectors of agriculture, crucial for food security. 

Promoting exports:

  • Recently the govt. announced a package to boost exports that included a new WTO compatible scheme named Remission of Duties or Taxes on Export Product (RodTEP) to reimburse all central and state taxes paid by exporters; fully electronic refund of the input tax credit; cheaper dollar and rupee credit for exporters including priority sector lending norms. 
  • To address lower utilization of free trade agreements, a senior commerce ministry official will now head an “FTA Utilisation Mission" to spread awareness about preferential benefits available under FTAs.
  • Exporters now will also have to adopt all necessary technical standards to make Indian exports more competitive. This will also help the government put in place stringent norms to check low-quality imports.

Overcoming infrastructure and input market challenges

  • For instance, at present, road transport in India costs $7 per km, while the cost is only $2.50 per km in China. Correcting the situation will require domestic input market reforms and heavy investment in infrastructure to enable Indian companies to participate effectively in global value chains.
  • On the input side, critical reforms need to take place in the labour market.

Optimal competition, industrial and trade policies reforms:  

  • Reforms will allow the Indian economy to compete with its RCEP counterparts in attracting and facilitating the setting up of businesses. 

Tackling the slowdown

  • Given that India is experiencing a structural and cyclical slowdown, the RCEP can also serve as an additional external factor for reformers to push for difficult yet important domestic reforms.

Promoting multilateralism while safeguarding our interests

  • We could designate some tariff lines as special products and even have tariff rate quotas for some others. 
  • RCEP countries may provide for the creation of an independent arbitrator or ombudsman, depending on the situation, as a first step to resolve such differences.
  • Once the RCEP is in place, diplomatic efforts will be required to achieve convergence between the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (TPP-11) and the RCEP. 

A win-win situation

  • Over time, the RCEP may expand to include Russia, USA and other central Asian countries. RCEP is one sure-shot way of forcing China to provide a level playing field. All this would require smart diplomacy in favour of our trade, investment and strategic interests.

Also read: India Rejects RCEP E-Commerce Chapter  INDIA-Regional Comprehensive Economic Partnership (RCEP)

 
 


Categories : india'sforeignpolicy, indianeconomy, internationalinstitutions,
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