India Turns Down RCEP Free Trade. Will It Turn To The Eurasian Economic Union?

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Op/Ed by Chris Devonshire-Ellis

Indian Anti-China Views Could Stimulate New Delhi To Consider A Eurasian Trade Alternative

India has just pulled out of the much-anticipated and long delayed Regional Comprehensive Economic Partnership (RCEP) which will now take place without it. A pan-Asian Free Trade Agreement, RCEP includes the ASEAN member states of Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam. However India already has an FTA with the ASEAN bloc.

Of note is that the Eurasian Economic Union has already signed FTA deals with ASEAN members Singapore and Vietnam, while negotiations are currently underway with Cambodia, Indonesia, Philippines and Thailand.

Meanwhile, the RCEP deal also includes China, Japan, South Korea, Australia and New Zealand. Of those countries, India also has FTA with Japan and South Korea, but not with Australia, China or New Zealand, although the Australians and New Zealanders do have FTA with several other Asian nations. The RCEP has been a sacrifice made due to India’s on-going mistrust, prejudice and insular approach to the Chinese, where domestically India faces democratic opposition from politically powerful Indian companies concerned that China will swamp their markets with cheap products.

Indian MNC’s tend to be anti-China as they fear both competition to their businesses in India and wish to avoid having to invest in upgrading to deal with increasingly superior Chinese products, in terms of both cost and functionality.

It is pertinent to note that China – a country whose foreign direct investment is welcomed throughout the world and is the subject of much lobbying by Belt & Road countries, has subsequently invested very little in India. Indian businesses make China feel unwelcome. It may not be a wise policy – according to China’s Ministry of Finance, China’s outbound investment this year to date has increased by 2.1% and currently stands at about US$70 billion for the first eight months of 2019. That’s about US$8.75 billion a month. India is making no effort to capture any of that.

It also means that India and its businesses are missing a huge opportunity – India today has a similar worker-age demographic as China did twenty years ago – a massive pool of cheap, young labor. Now is exactly the time that India plc should be cashing in on that dividend – the country is at a prime time in its development to offer inexpensive manufacturing costs.

Soon, China will overtake India not just in economic strength but in manufacturing strength and technologies too. Indian businesses, by cutting China out of the loop are preventing their own development and acquisition of skills, experience and know-how. There is practically zero technology transfer between the two. Indian manufactured products will start to decline in quality, productivity will decrease and lethargy and insularity will – already are – start to press their dead weights on business – unless alternatives can be found.

In terms of India’s trade with China, this decline is already happening. Despite both China and India having relatively high GDP growth rates of 6% and 9% respectively, bilateral trade between them has been decreasing in 2019. Indian exports to China declined by nearly 2% in the first six months of 2019, and are currently running at about US$15 billion per annum. That is a terrible statistic for Indian exporters looking at a China market currently consuming US$175 billion a month and between the two most populous countries in the world. Pulling out of RCEP because Indian businesses are failing to adapt to China’s rise – 30 years in the making now – can be expected to decrease this further. RCEP is a missed opportunity to motivate Indian businesses to compete and develop. Alternatives need to be found – and this is where doors open for Russian businesses and investors.

Although the door to RCEP admission remains open, it seems unlikely that the business politics in India that will permit agreement to any deal that involves China market access into the country. However – there is an alternative deal in the offing that could go some way to alleviate Indian indifference towards China as a trade partner, and that is to look to Moscow for Free Trade support in other markets.

India & The Eurasian Economic Union 
India is currently in negotiations with the Eurasian Economic Union (EAEU), a free trade bloc that includes Armenia, Belarus, Kazakhstan and Kyrgyzstan along with Russia.  The EAEU has a GDP of US$1.9 trillion, and a population of about 180 million. Geographically, it sits in land between Europe and China, yet is relatively far enough away so as not to pose too much of a domestic competitive threat. Russia is the lead partner, and the wealthiest, and needs access to new markets. However its economy is far smaller than China’s, and Indian businessmen will be much more amenable to establishing Joint Ventures with Russian partners than they will Chinese. There is also regional precedence: Vietnam signed off an FTA with the EAEU nearly three years ago, and the results have been positive – a fact that will not have gone unnoticed by Delhi. Russian businesses have invested US$10 billion into Vietnam the past two years and Russian manufacturers such as Gaz Trucks are setting up JV’s in the country with local partners.

A deal between India and the EAEU makes sense, not least because of the issues with Indian manufacturers not wanting to lose control over their domestic market – the EAEU isn’t powerful enough to be disruptive, while at the same time can offer investment and market access to Russia and Central Asia – regions India is keen to reengage with. It also sends a message to Washington, who have slapped tariffs on a wide range of Indian products that it says are to United States disadvantage. US Senator Lindsey Graham recently stated, concerning global tariffs on US products that “India is the worst.” This type of language is very familiar to the Kremlin.

India-Russia trade has plenty of growth opportunities – and is also relatively low given the size of the respective economies, at just under US$9 billion. However, there have been Ministerial calls on both sides, with verbal commitments and MoU signed to increase this to US$30 billion by 2024. Chief Ministers of several Russian and Indian Provinces stated that they expected collaboration and investment in energy, agriculture, food-processing as well as gold and diamond mining. India is a major buyer of the latter and Russia possesses some of the worlds largest gold and diamond reserves. Indian diamond processing businesses have been establishing operations in Vladivostok’s Eurasian Diamond Exchange while Indian Prime Minister Modi has introduced a US$1 billion Investment Fund for Indian businesses to invest in the Russian Far East. India’s rejection of the RCEP agreement and the apparent developments elsewhere between Delhi and Moscow appear to indicate that India views Moscow as a preferential trade partner to both Beijing and Washington. India needs to get an EAEU deal done to show at least some sort of commitment to Free Trade, somewhere. The EAEU can be considered a safe harbor with low-hanging fruit, and I expect a deal to be concluded between 2020 and 2021. Russian businesses and investors should be looking at the Indian business demographics to examine where the opportunities lie.

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About Us

This article was written by Chris Devonshire-Ellis, the Chairman of Dezan Shira & Associates. Chris established the firm’s China practice in 1992 and followed with setting up their India practice in 2003. He is currently based in Moscow. The firm assists Foreign and Russian investors understand establish operations throughout Asia and has offices across ASEAN, China and India, providing strategic, analytical in addition to legal and tax advisory services. For assistance please email us at asia@dezshira.com or visit www.dezshira.com

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