Commentary / World

Modi lacks the political ticker for tough economic decisions

by Ramesh Thakur

India has an unmatched capacity to look an opportunity firmly in the eye, turn around, and walk off resolutely in the opposite direction. The latest manifestation of this genius gift is the decision to reject the Regional Comprehensive Economic Partnership (RCEP) despite 29 rounds of negotiations and scores of ministerial meetings and intersessional dialogues. According to my Crawford School colleagues Peter Drysdale and Adam Triggs: “In signing RCEP, Asia has chosen openness over protectionism, regionalism over nationalism, cooperation over confrontation, and solidarity over suspicion.” By implication, India has chosen nationalism, protectionism and suspicion.

Meeting in Bangkok on Nov. 4, 15 Asia-Pacific countries decided to sign RCEP next year. Boasts of a 142-cm chest notwithstanding, come crunch time, courage failed Prime Minister Narendra Modi. Once again India shows interest in a multilateral deal in the abstract, but rejects the package actually negotiated by all others. While they found common ground through mutual accommodation, India seems congenitally prone to giving less and taking more.

India’s defection robs RCEP of the initial ambition to be bigger than the North America Free Trade Agreement and the European Union, but is not fatal to the project. A major new plank in the Indo-Pacific economic architecture, RCEP will implement an integrated, single set of trade rules and value chains for the whole region minus India. Amid rising protectionist pressures fueled by anti-globalization sentiment, it should help to offset the declining salience of international institutions like the WTO.

The key question is: On balance, would India’s likely gains and benefits, both short-term and over the long haul, be more or less than the costs to the variety of stakeholders whose interests were engaged? Put like this, the answer is clear: Modi has effectively mortgaged India’s economic future and its rise as a comprehensive national power because, long-term gains notwithstanding, he took fright at the short-term economic pain and adjustment costs of integrating with the world’s most dynamic and fastest-growing region.

India’s trade was in $107 billion deficit with 11 of the 15 RCEP countries in 2018-19, half with China alone. India’s demands included the base year for tariff benchmarks to be deferred by five years to 2019, provisions to prevent sudden surges in manufacturing and food imports with China-specific safeguards, and better market access for its services sector. By opting out, India will find it much harder to achieve its ambitious target of doubling exports and the size of its economy by 2025. The net result of India’s rejected exceptionalism is that China will dominate the region, vital to India’s commercial and geopolitical interests, even more.

Meanwhile, analysts cast doubt on the prospect of completing FTA negotiations with Australia that have been underway for eight years. Modi has surprised observers by the way he lets bureaucrats set limits to India’s aspirations to be a major economy and power. Instead he should recruit successful Indians from the private sector as Cabinet ministers in the relevant economic portfolios, like Ruchir Sharma of Morgan Stanley and Gurcharan Das, former managing director of Proctor and Gamble, writer and a frequent columnist in the Indian media.

Conditioned into a statist mindset, Indians bear regular witness to Modi exhorting foreign investors to “Make in India.” Investment decisions are not made on the basis of political speeches. India is a tough market to crack because of serious infrastructure deficiencies, low worker productivity after decades of neglect of human capital formation, layers of Byzantine regulations at all levels of government, severe labor market rigidity on hiring and firing, an extortionate bureaucratic mentality that inflicts tax terrorism regardless of whether an enterprise is profitable or flailing, an opaque and corruptible legal system plagued with delays and an unattractive quality of life for expatriates.

RCEP will reduce India’s comparative advantage of market size. It promises region-wide open trade and investment, with market access commitments to reduce tariff and non-tariff barriers on goods, services and investment for one-third of the world’s population, 30 percent of global GDP in purchasing power parity, and per capita income significantly higher than India’s. Looking at the advantages offered by investment opportunities inside the RCEP compared to the myriad problems besetting India, why would capital flow there?

India effectively conceded its companies and products cannot compete even in its home market against firms based in RCEP countries, despite market size, economies of scale and cheap labor. Decades of protectionism, whereby wealth is accumulated more through political connections than created by risk-taking entrepreneurial initiative, have left Indian industry uncompetitive. The price is paid by the Indian consumer through restricted choice, higher cost and shoddy quality. The dairy industry complained vociferously that giving access to the super-efficient New Zealand dairy would lead to the collapse of milk prices by two-thirds. This is an argument for RCEP, not against it.

Staying outside the principal regional trading bloc will badly dent the credibility of India’s entire Indo-Pacific strategy. The illusion of a rising great power may have been punctured in its own government’s and the region’s perceptions. A visionary, bold and decisive prime minister would have signed RCEP and used the shock to impose exogenous discipline on Indian manufacturing, agricultural and dairy for long-overdue surgical reforms.

China says India is welcome to join RCEP whenever it’s ready. Japan will urge India to reconsider. Speaking in Tokyo on Nov. 5, Chief Cabinet Secretary Yoshihide Suga said: “Japan hopes to continue playing a leading role toward the signing of a RCEP agreement of 16 countries including India.”

Just seven months into a second five-year term with a stronger mandate and increased parliamentary majority, Modi could have absorbed the political costs of the adjustment pain, explained the necessity for it, and been able to point to the benefits by the time of the next election in 2024. The more Modi delays, the more difficult it will be politically for India to join later in the election cycle. In reality Modi has paid the price of failing to implement major structural reforms in his first term (2014-2019).

Modi lost his nerve again and has locked India into a bleak future. The gap with the rest of the Indo-Pacific countries will widen, making it tougher for India to integrate with the regional and global economy on favorable terms at a later date.

Ramesh Thakur, a former United Nations assistant secretary-general, is emeritus professor in the Crawford School of Public Policy, Australian National University.