India opting out of RCEP and “Creative Destruction” vs “Protectionism”:

The Regional Comprehensive Economic Partnership or RCEP was signed in November 2020 by all 10 ASEAN members, China, Japan, South Korea, Australia and New Zealand. The 15-member countries account for about 30% of the world’s population and 30% of global GDP, making it the biggest trade bloc in history. The purpose of RCEP is to make it easier for products and services of each of these countries to be available across the region. The agreement is expected to eliminate most tariffs on traded goods, strengthen supply-chain linkages in the region and includes standardized rules for investments into member countries. It also has provisions on areas such as e-commerce, competition laws and intellectual property rights.

But India decided to exit discussions over “significant outstanding issues”. Under PM Modi, India sought to bolster domestic manufacturing and protect small businesses through the “Make in India” program. This decision surfaces the debate over “Creative Destruction in Capitalism” versus “Protectionism”. We shall discuss both sides of the debate.

CREATIVE DESTRUCTION in Capitalism :

Below is the excerpt from the Government of India’s Economic Survey written by the Chief Economic Adviser Krishnamurthy Subramanian:

“India’s aspiration to become a $5 trillion economy depends critically on promoting “pro-business” policy that unleashes the power of competitive markets to generate wealth, on the one hand, and weaning away from “pro-crony” policy that may favor specific private interests. Economic events since 1991 provide powerful evidence supporting this crucial distinction. Viewed from the lens of the Stock market, which captures the pulse of any economy, creative destruction has increased significantly after reform. Every five years, one-third of Sensex firms are churned out, reflecting continuous influx of new firms, products and technologies into the economy.”

In capitalism, Creative Destruction is essential. Some companies lose out because they are inefficient, non-competitive, do not have good ideas, do not know the market, do not respect the market and get shaken out. In turn, they are replaced by more competent companies. Before 1991, the average age of a company on BSE Sensex was 60 years, later reduced to 12 years. Best thing about competition in good capitalism is that it’s fair and doesn’t bother about reputation.

1991 Economic Reforms liberalized the Indian economy by reducing tariffs unilaterally. After 1991 economic reforms, many iconic Indian companies faded away, but were replaced by the new Indian companies which had better ideas and technologies. After 1991, private companies such as HDFC, HDFC Bank, Axis Bank, Maruti Suzuki, Tech Mahindra, Kotak Mahindra Bank, HCL, TCS, Infosys, ICICI Bank, Bajaj Finserv, Airtel, Titan ; PSUs(Public Sector Units) : SBI, NTPC, ONGC, Powergrid flourished and now have big market caps . India’s exports, especially its software services boomed which proved to be a big success story.

Without any foreign competition, domestic companies may decide the price of different commodities at their own will giving rise to monopoly. Going away from the trade agreements which protect domestic industries from the foreign competition, obviously at the cost of us consumers and taxpayers can be a completely misplaced idea. There still exists a chronic fear of exports which runs deep in our Indian psyche.

PROTECTIONISM :

Traditional trade theory suggests that countries, in order to be competitive, should reduce tariff barriers. With high tariffs, domestic producers may become complacent and won’t bring down costs or won’t become innovative. This will give rise to monopoly within the domestic economy because of no pressure of imports.

But the trade in the real world is far from that in traditional trade theory. Today, the world market is flooded with cheap Chinese products. Therefore, what many countries are finding is that opening up trade, especially with China, is not giving them the kind of benefits that they thought it would. China, being a monopolist today, is also a major economy among RCEP members. RCEP pact stresses on the reduction of tariffs. A potential surge of cheap Chinese imports due to the reduction of tariffs could further de-industrialize some manufacturing sectors in India. Hence, the domestic industries instead of being competitive, shut down because of cheap Chinese products. India’s trade deficit with other RCEP countries is also rising. In this situation where things are not behaving like in the traditional trade theory, countries are becoming more protectionist. Secondly, many countries use various trade policies as their political weapons. The Galwan valley clash has further soured the relationships between India and China.

We are all aware of the fact that India needs better laws, better contract enforcement and better court management systems. By improving infrastructure, India can do much better, get more manufacturing and more investment than just trying to go through the trade route.

In fact, it’s sort of a precondition that if you want to become competitive, you first better be able to supply electricity 24*7. If you cannot supply consistent power, having trade deal isn’t going to make you become more competitive. India has not been able to do what it needs to do before it can become confident of being more competitive.

Written by: Aman Verma