Pacific pact may marginalise India

To many, Prime Minister Narendra Modi symbolises investment. His global whirlwind tour directly aimed at arousing the sentiments of all hues of investors is never in doubt. But how much of it will really fructify with the 32 countries that he has visited including the recent tour  of UK, Turkey, Malaysia and East Asia summit in less than 19 month of his tenure casts some doubt.

That is because the conclusion of the Trans-Pacific Partnership (TPP) negotiations in October 2015 has changed the dynamics by creating a diversion which India finds it difficult to influence. The TPP is set to usher in a new era for global trade.

Though it still has formalities to be completed such as domestic ratification and legislative approval of its 12 signatories, the tremors it has already signalled in the spines of many emerging economies such as India, is a point of worry that merits immediate attention.

The TPP is a substantive move led by US to usurp, garner and control more than one-third of the global trade in this Asia-Pacific region where the future of world growth lies. Rest of the world is witnessing slow or negative growth.

The USA is also clear and convinced that if it aims to achieve its future trade agenda, it has to resort to agreement like the TPP. Because through WTO, it’s already proving difficult as the WTO process is democratic where each country has a vote to pass any agenda-such as forcing developing countries to open its agricultural sector.

Hence, the emergence of the TPP as a mega trade bloc is very much in the offing by roping in many important economies in Asia Pacific. This initiative has the potential to offset significantly the prospects of India’s global trade share. What is impending is the fear that India may be reduced to the position of a marginal player especially in Asia-pacific where it currently enjoys enviable position. The question is how TPP will unfold for India?

A major change that is noticeable in the near future is the amount of trade and investment diversion that will take place. A conservative estimate envisages US$4–5 billion loss over 10 years while annual loss close to S$50 billion is considered plausible if more countries, including China, join the bloc.

Study by the Centre on Global Trade and Investment proclaims that India’s nominal GDP is likely to lose more than 1 per cent due to this diversion. Ensuing negative effects on India’s economy by way of revenue and job losses will be substantial.

India is vying for investment globally. Investment diversion can be more damaging than trade diversion. A recently-concluded TPP and the prospect of unfettered market access could induce foreign companies to invest in a TPP member rather than in India, where investment policies are more lucrative, transparent such as Singapore. Given the FDI’s potential to create jobs and help build infrastructure, India will find it hard to forego such an opportunity.

World market share
Flagship initiatives like ‘Make in India’ and ‘Smart Cities Mission’ could be in jeopardy then. Exports from India are likely to be affected as the TPP provides special concessions to some of its key partners to purchase from other TPP members.
High international standards such as IPR, labour laws and environmental standards imposed by TPP will be further difficult for India to comply with; hence India’s share of world market will further shrink.

Slowly, India will lose its market share in countries with which it has not signed an FTA, such as the United States, India’s largest export destination. Its trade with Australia and New Zealand could also be hurt if India does not hurry itself to conclude the ongoing FTA negotiations with these two countries.

Given that WTO Ministerial Conference is scheduled before the end of this year, it is uncertain whether India will be able to conclude an FTA by the end of the year as Australia wishes.

The TPP also involves regulatory harmonisation, meaning that multi-national corporations under the aegis of the TPP do not have to face regulatory hostilities in host countries or grapple with different laws. India’s legislations are not particularly aligned with global standards and companies have previously encountered retrospective tax legislations. Modi’s promise in UK to remove this retrospective tax will be a good move for investment.

Finally, in the wake of the conclusion of the TPP negotiations, Indian experts have begun to assert that India needs to resume, (re)negotiate and conclude bilateral FTAs that are in the pipeline, particularly those with the European Union, Canada, New Zealand and Australia.

They are also pushing for India to take more realistic positions on Regional Comprehensive Economic Partnership so that the only mega FTA of which it is part can be enacted in parallel with the TPP. India’s accession to APEC and the conclusion of a Bilateral Investment Treaty with the United States, although uncertain, are considered to be other measures that could mitigate and minimise adverse impacts of the TPP.

(The writer is Professor, Lal Bahadur Shastri Institute of Management, New Delhi)