We must resist the temptation of giving away valuable access for empty global praise. Today on RCEP, 15 countries are neither ignoring us nor laughing at us.

by Nilesh Shah

After years of hard fought negotiations, India pulled out of RCEP. We must have taken a right decision as many ‘friends’ of India have called it a historical blunder. Our experience with free trade agreement (FTAs) isn’t very satisfactory as reflected in stagnant exports and widening trade deficit.

During the West Indies tour of India in the 80s Clive Lloyd praised local umpires and compared them with the best in the world. For that praise or otherwise benefit of doubt ended up in favour of West Indies. We must resist the temptation of giving away valuable access for empty global praise.

In my humble opinion FTAs should be negotiated to cover following aspects for creating a mutually beneficial deal.

Countries which have surplus capacity want tariff free access for their goods to our vast domestic market. We must link access to our domestic market to reciprocal access for our services and labour. We are surplus in labour and competitive in services. Countries preaching us to open our domestic market for their goods must reciprocate by opening their services and labour market for us. In services like technology, tourism, research & development, consulting, BPO / KPO we are pretty competitive. With reciprocation we can breach language and cultural barrier. We have surplus labour. We can provide white collar officers as well as blue collar workers to any country in whatever quantity they desire. Middle East is a shining example of how Indian knowledge and perspiration can create a miracle. The reciprocation between tariff free goods market, unrestricted labour and services market will ensure mutually beneficial outcome from FTAs.

We should link access to tariff free domestic goods market to foreign exchange (FX) neutral / marginal trade balance outcome. An FX neutral FTA will ensure that we don’t run large trade deficits. Obviously FX neutrality should not come by routing of existing exports or buying of gold jewellery. It should come through genuine value add. For example, if country X wants to sell their goods in India, they should encourage their citizens to spend equal money on tourism in India or they should set up a unit in India to manufacture and export to balance their FX outflow. Such FX neutrality will ensure mutually beneficial outcome from FTA. FX neutrality is a small price to pay for exclusive access to a large and growing market. From denying F-16 fighter planes to offering it to make in India is the kind of change which large market access can achieve.

We must negotiate for mutually beneficial outcome for our vulnerable section. For example, if a country wants to sell their excess milk in India, they must help our milk producers to export value added items like butter and cheese for an equal amount. If a country wants to export electronics to India it must reciprocate by helping our manufacturers export components of equal amount.

While it looks impractical, Maruti Suzuki has done this in the automobile sector without being asked to do so. Auto sector today contributes more than 40 % of our manufacturing GDP. Our trade surplus in auto and auto components was about $ 13 billion last year. In fact it is the only manufactured product where we have trade surplus of this scale. While India has benefited by presence of Maruti, Suzuki has also benefited with Maruti producing more cars than Suzuki and having higher market capitalisation than Suzuki. If we market the Maruti example appropriately, many companies will be willing to trade and invest in India despite seemingly tough conditions of supporting vulnerable sections of society.

We must seek settlement of trade surplus in rupee. Imagine if instead of running $ 58 billion trade deficit with China last year we had run ₹4,06,000 crore trade deficit with China. The burden of running trade deficit financed in rupee would have been far lower than financed in hard dollars. One can legitimately ask why China should agree as rupee is not a reserve currency like the US dollar. However, we must remind that we are negotiating only for the trade surplus and not for the entire trade. In a large country like India they will always be able to find an opportunity to invest or trade with their rupee surplus. It isn’t going to be an easy negotiation but if we begin the journey some day we will reach the destination.

As Mahatma Gandhi said first they ignore you, then they laugh at you, then they fight you and then you win.

Today on RCEP, 15 countries are neither ignoring us nor laughing at us. They may not be fighting against us but are certainly standing on the opposite side. I am sure if we negotiate on above points we will be able to create a win-win situation not only for a India but also for all for the other countries.

At the same time we must remember that access to a large market isn't the only leverage to attract investors. We must encourage entrepreneurship by liberating factors of production like land, labour and capital along with rule of law.

The author is MD of Kotak Mahindra Asset Management