No FTA with nations you have armed conflict with: Fin secy on RCEP decision

India did not join the Regional Comprehensive Economic Partnership (RCEP) due to strategic considerations, said Finance Secretary TV Somanathan, pointing at the border stand-off with China, a key member of the trading bloc. Besides, some free trade pacts India has signed have had large trade diversions and little benefit as partner countries resorted to non-tariff barriers, he said

“I am not aware of too many countries which have signed FTAs with countries with whom they have live armed conflicts," the finance secretary said. India decided against joining RCEP in 2019, which includes China and the Association of Southeast Asian Nations (Asean). He was speaking at a panel discussion organised by economic think-tank National Council of Applied Economic Research (NCAER) in his personal capacity.

He said there has not been much benefit from some of India’s free trade pacts. “Also, even if free trade may promise economic efficiency in importing certain items from another country, strategic considerations including armed conflicts with certain nations would eclipse such economic gains. There are instances where economics is overwhelmed by strategic considerations,” said Somanathan, who is also the expenditure secretary.

Addressing concerns related to protectionism, he said that a dose of carefully calibrated tariff protection for select sectors showing potential may be desirable and will not make the country protectionist. “I do not think it is the policy of the government to become protectionist. But if incremental protection from a relatively moderate rate of tariff is necessary in certain sectors of the economy as a transitional measure for an infant industry that must grow up, then perhaps there is a case in some areas,” he said at the ‘India Policy Forum 2021’ organised by the NCAER.

He added that the idea is to ensure that critical supply chains are available locally and that India is not dependent on others for drugs, etc.

Somanathan also emphasised on the need to improve the fiscal position through reforms in farm, food and fertiliser subsidies in order to provide for funds in the health, education and infrastructure space.

“At the present juncture we have two main kinds of buckets of reform. First, if we have to set our fiscal house in order and also provide for the many things that governments legitimately should provide. We will need to reform some of our subsidies -- farm subsidies, food subsidies, fertiliser subsidies. Some of them are intertwined with each other,” said Somanathan. However, he pointed out that while subsidy reforms are very difficult to implement politically, they are easy administratively. “It is easy to raise the price of fertilisers, but difficult to announce. On the other hand, reforms to improve efficiency in public expenditure like education, health and infra space are easy to announce, but difficult to implement administratively.“ No political party is opposed to these reforms, but they are very hard to cary out as they can’t be implemented by the Centre alone and need the support of states, he said.

Somanathan added that while there is tension over Centre being expected to lead the reform process, he expects states to be able to be autonomous and make their own choices. “People say that we must prioritise spending on health and education but money given to states must be untied. These objectives don’t sit together,” he said.

He also expressed hope that revenue collections from goods and services tax (GST) would see improvement going forward with key loopholes plugged and glitches fixed.

On concerns related to the GST Council, Somanathan said that the discussions at the Council are healthy and loud and that the system is not broken. ”You will hear noise, but the structure is healthy and will keep working,” he said.