India on November 4 decided not to join the Regional Comprehensive Economic Partnership (RCEP), a free trade deal involving the 10 countries of the Association of Southeast Asian Nations (ASEAN), Australia, China, South Korea, Japan, and New Zealand.
The agreement aims to reduce tariff rates to a considerable level and boost the exchange of goods and services within the member states. Had India decided to join the deal, RCEP would have the world’s largest free trade area covering 45 percent of the world’s population, and also account for 39 percent of global GDP, 30 percent of global trade, and 26 percent of global foreign direct investment flows.
Indian Prime Minister Narendra Modi, in his speech at the RCEP summit in Bangkok, said, “The present form of the RCEP Agreement does not fully reflect the basic spirt and the agreed guiding principles of the RCEP. It also does not address satisfactorily India’s outstanding issues and concerns. In such a situation, it is not possible for India to join RCEP Agreement.”
What has led India to finally abandon the deal it has negotiated since 2012? More importantly, India should rethink its decision on RCEP. Having India on board can be a win-win strategy for all RCEP countries, including India.
RCEP negotiations was launched at the Asean Summit in Cambodia in November 2012. In September 2015, India offered to eliminate tariffs on 42.5 percent of items from China, and more for Asean states.
India improved its offer by agreeing to eliminate tariffs for about 90 percent of items from Asean, and over 74 percent of items from China. However, the government’s offer saw a backlash in 2018 when key ministries and departments, including steel, textiles and heavy industry objected to the proposal.
India felt that there was inadequate protection against import surge, insufficient differential with China, lack of assurances on market access and non-tariff barriers, the unviability of getting most favoured nation status among member countries as the benefit would then lose its edge to nations beyond the bloc.
The Congress, India’s main opposition party in the parliament, opposed the move, and even the pro-government organisation Rashtriya Swayamsevak Sangh-linked Swadeshi Jagran Manch had argued that a free trade agreement with China would be a death knell for India’s manufacturing and production industries. Many are concerned that such agreement could potentially make India a dumping ground for cheap Chinese goods.
There is also a concern on the ratchet obligation which implies that member states cannot raise the tariffs once the agreement comes into force. As India fears an unexpected flow of imports, this obligation would prevent her from taking any action in the future to protect its national interests and could potentially cripple the domestic economy.
Moreover, the member states prefer taking 2014 as the base year for reducing tariffs, whereas India is pushing for 2019 to be taken as the base year as the import duties on goods have increased over the past six years.
The government of India’s action can be described as a protectionist move taken to save its domestic economy. This strong decision was taken by the government after concerns were raised by farmers and traders in India, who feared that an import of cheaper goods from outside would further hurt their businesses which are already going through an economic slowdown.
Also, some in India believe that RCEP is intended to balance out the losses from the ongoing US-China trade war. Therefore, the choice made by the government of India is seen as a powerful step to prioritise the interest of its citizens. India’s trade deficit with the RCEP countries is USD 105 billion, of which China alone accounts for about USD 57 billion.
If India were to join RCEP, it would have been obligated to cut down the import duties by 90 percent for 15 years which can be unfavourable for the agriculture and dairy sectors. Since these sectors are based on small-scale enterprises in rural India, the agreement would have impacted the growth of the weaker sections of the Indian society.
The government’s move is also one way of appealing to the mass electorates. By listening to their voices, the government is intending to win the confidence of the traders, farmers and industrialists, and assure them that the government would address the interests of its people in all circumstances.
Joining RCEP could be beneficial for India since it will provide her greater access to the regional market, opportunities for its businesses to expand in the region, and also increase her foreign investments.
It will also give larger market access to the customers thereby providing them with a bigger basket of cost-effective and standardised goods to choose from. The trading environment in India can improve as the agreement will likely increase competition for the Indian exporters which will motivate them to enhance their standard of production and to embrace the international trade norms.
RCEP can also promote regional stability as this agreement makes the economies of the member states even more dependent on each other and prevent them from taking steps that would hamper each other’s economy.
The current government gives significance to its Act East Policy. The membership to RCEP would have added to India’s Act East Policy and allow it to further integrate itself in the region. As part of RCEP, India will increase its hold in the Asean region and could have emerged as a counterbalance to the Chinese presence in Southeast Asia. This will even allow India to frame future developments in the region.
Even though India has decided not to join the bloc for now, she has kept her doors open for further negotiations. Modi said in his speech that India supports greater regional integration as well as freer trade, but the current RCEP terms do not balance the spirit of give and take. Subsequently, the trade agreement which was meant to be signed this year has now been postponed to 2020.
Interestingly, China has urged for further negotiations to understand India’s concerns. The Chinese state-run Global Times newspaper reported on November 6 that, “The countries involved in the Regional Comprehensive Economic Partnership shouldn’t lose the chance to include India…For the participants in the negotiations, it is worth thinking about how to persuade India to reconsider the trade deal. To achieve its superpower dream, India should join RCEP.”
India could have gained more global power by joining RCEP, but it first needs to assure that its goods are competitive in the regional and global markets. It also needs to assure that her export-oriented industries are stable. The government should now focus on the internal issues and make structural changes in its economy to protect domestic interests. This will allow the economy to mitigate the ramifications it might face with agreements like the RCEP, if and when implemented.
Dr Nehginpao Kipgen is Associate Professor and Executive Director at the Center for Southeast Asian Studies (CSEAS), OP Jindal Global University (India). Shivangi Dikshit is a Research Assistant at CSEAS and a Master’s student in the department.