By Subrata Majumder
Majority of industry associations, entrepreneurs and trade analysts rang alarm bell for India in joining RCEP – a new and the largest trade block consisting of ASEAN -10 and 6 countries. Before, India had several FTAs. But, none of them yielded any trade benefit. Instead, they widened trade deficit. This provided cascading impact on balance of payment.
The first full-fledged FTA, India signed, was with Singapore under the umbrella of CEPA (Comprehensive Economic Cooperation Agreement) in 2005. Prior to this, India had surplus trade balance with Singapore. Afterword, trade balance reversed against India. With South Korea, India’s trade deficit doubled in 2018-19 after it entered CEPA in 2009-10 and with Japan trade deficit surged by over one-fifth in 2018-19 after it entered CEPA in 2011-12. This led to a dilemma for joining RCEP.
Nevertheless, the recent corporate tax cut opens a new look to RCEP. It should mar the apprehension for joining RCEP and raise the hope for deluge of foreign direct investment from RCEP. At present, FDI from RCEP nations account for 47 percent of total FDI flow in India in 2018-19. Of these, ASEAN nations are the biggest investors, accounting for 80 percent of RCEP investment in the country.
With massive dig in corporate tax, India’s investment competitiveness leaped at par with ASEAN countries, China and S. Korea. Against India’s bottom level tax structures at 15 per cent and 22 percent, corporate taxes in ASEAN nations vacillate in between 17 per cent to 25 percent. In China and S. Korea, it is 25 percent and in Japan it is 30.8 percent.
Given the corporate tax trimming, India emerges a big challenge to intra -RCEP foreign investment, provided it joins ASEAN. Excepting Singapore, India has already established a more potential destination for foreign investment. In 2018-19, FDI inflow in India was US$64 billion, compared to US $ 13 billion in Thailand, US$ 15.5 billion in Vietnam, US $ 8 billion in Malaysia and US $10 billion in Philippines in 2018.
Albeit, ASEAN-4 (Indonesia, Thailand, Malaysia and Vietnam) have been accredited as more investment friendly nations than India. The paradox lies with the lag in infrastructure and ease of doing business. In the World Global survey of Ease of Doing Business in 2018, Singapore, Malaysia Thailand and Indonesia pitched higher rank than India.
Notwithstanding, India has an edge over ASEAN and China in terms of low cost production, excepting Vietnam and Myanmar. Measured by wage level, India’s wags in Mumbai (for general workers) were half of Guanzhou (China) and two-third of Bangkok (Thailand) and Kuala Lumpur (Malaysia) during December 2018-January 2019, according to a international survey.
Coupled with low cost production base, cut in corporate tax will trigger India’s competitiveness for a potential investment destination in RCEP. Zero trade tariff under RCEP FTA will be an added attraction to induce RCEP members to invest in India.
By supplying component, parts and intermediates and get product manufactured at two or three tier level in India, either by establishing manufacturing facilities or contract manufacturing and availing the benefits of zero tariff regime, India can pitch for a base for re-export to investors’ country or other RCEP members. Correspondingly, it will increase India’s exports in the block.
This exercise is possible only when India is within RCEP. Distancing from RCEP will nullify this opportunity to India.
Nevertheless, there are other aspects which warrant immediate attentions for the uptick in India’s potential as investment destinations. They are reforms in land and labour. The new Land Bill 2014 should have been the trigger to manufacturing and Make in India, which went in vain after getting defeated by vehement protests from oppositions and farmers. Having minority in Rajya Sabha, Modi government opted to distance from the reforms in the bill.
Eventually, the land acquisition continues to be the major impediment for foreign investors. Consent of farmers and Social Impact Assessment – the two crucial requirement under existing land acquisition law – continue to be the major bottleneck for foreign investment. Now, it requires more than 4-5 years to buy a land
Therefore, the aim for joining RCEP should be viewed not only from the perspective of trade merit, but also from the point of view of investment, which has become the need of the day in current situation of economic downswing.
Even China – the most threatened and major obstacle for India’s joining RCEP – is likely to be a prosperous future foreign investor, given the trade war between USA and Chinalingers. Chinese products are becoming costlier after the tariff hike and investors in China will shift their productions bases to India and other countries. China is seen not a foe, but an opportunity after the trade war broke. Trust deficit began to dilute and bonhomie between the two leaders rose. Both have vowed to make a relook to their relation and endeavor for a joint partnership for growth, instead of brickbat.
China extolled India’s potential as an important destination for investment. “India has an wealth of experiences in utilizing international capital. There is no doubt it has become more attractive to foreign investors”, according to Mr Zjao Gancheng, Director of Centre for Asia Pacific Studies at Shanghai Institute of International Studies. As of the end of 2017, Chinese Ministry of Commerce recorded Chinese investment in India more than US $ 8 billion. Start-ups, infrastructure and electronic manufacturing have become the key areas for Chinese investment.
China has already made a big investment in mobile telephone manufacturing in India. China brands now account for over 51 percent of the smart phones sales in India. Large penetration of Chinese top brands of smartphones, like Xiaomi, Oppo, One-plus, Gionee, Vivo, Huawei are posing challenges to Koreans and Japanese brands in the country. (IPA Service)