India’s economic interests are better served in its ability to customise its trade policies that are not possible under RCEP. Several challenges need to be surmounted.
New Delhi: The final suspense of India’s participation in RCEP was revealed on 4 November 2019 when Prime Minister Narendra Modi announced India’s withdrawal from the deal at the third RCEP Summit in Bangkok. US President Donald Trump’s absence at the ASEAN meet has been interpreted as US snub to the RCEP at a time when it has laid emphasis to the Indo-Pacific region. The Indian government has been under pressure from its industry ever since the RCEP negotiations were underway. Finally the Modi government cleared its stance, stopping short of signing the RCEP deal unless its economic concerns were taken on board. After almost 28 rounds of discussions, the question is if it was wise on India’s part to walk out of RCEP.
Even though RCEP is the world’s largest free trade agreement of 10 ASEAN members plus five countries (Australia, China, Japan, Republic of Korea and New Zealand), of which India could have been 16th member, national economic interests demanded a “cost vs benefit” analysis. It’s relevant to note that India already has FTAs with ASEAN, Japan, Singapore and Korea, all of which are part of RCEP. India has hardly utilised its trade pacts. According to the Asian Development Bank, the utilisation rate of India’s FTAs has varied between 5% and 25%, which is one of the lowest in Asia. Therefore, it is right to say that India hasn’t gained much from its RCEP members. Talking about China, the elephant in the room, India has been wary about opening its domestic market to its biggest competitor. There is no doubt that RCEP will provide more market access to third countries and attract foreign investments into India in the short run. But in the long run the cost might worsen the trade deficit it currently faces. India-China border dispute has been simmering on the back burner for over six decades. It has bred mistrust between the two countries and the trade benefits are discounted due to geopolitical strategic factors. Analysts have measured the trade value between the two countries, which have indicated that over the period of 2008-2016 there has been a high dependence of India on imports from China compared to its exports. Currently, China has a huge trade surplus with India, which is likely to go up further in case China gains more favourable market access terms via RCEP. Hence, India has always been sceptical to go into RCEP, as its current trade deficit with China is almost $53 billion (2018). Apart from this, China has been very selective in opening up its own markets. Through RCEP, it seems that China is trying to avoid reciprocating India’s demands where the latter is expected to open its own markets for all the member countries.
India also has trade deficits with Australia and South Korea, who are major exporters. Australia specialises in dairy products, which may threaten India’s dairy sector that is largely based on household subsistence animal husbandry in poor rural homes as compared to large commercial dairy farms in Australia. South Korea’s manufacturing investments in India and additional market access may undermine the “Make in India” program on industrialisation. Weighing in the overall scenario, RCEP feels more like a trade agreement with China. Lastly, in the final rounds of discussions, RCEP countries have not shown much support in liberalising their service markets, which is one of India’s strongest areas. So, India does not seem to gain much out of the RCEP in the long run.
Speculation is if India’s move will isolate it from the increasingly connected world economy at a commercial level. It is worthy to note that India does not have an export led strategy of growth like that of China. Its share of exports to GDP is also much smaller than that of China. It does not need a very large share of global markets for sustaining its economic growth. The domestic market has sustained its growth since the last seven decades. Domestic consumption has driven its growth and will continue to do so for many future decades. Hence, at present it’s better not to indulge in a regional trade agreement where the domestic market isn’t prepared to fight the growing competition. India’s economic interests are better served in its ability to customise its trade policies that are not possible under RCEP. Therefore, these issues need further discussion and demands that need to be first put on the table for future negotiations. Then only India can move forward.
In diplomatic circles, it has been speculated that India’s decision to back out of RCEP has been taken to please the United States. This feeling arose from the fact that RCEP is an agreement dominated by China that replaces the now defunct Trans Pacific Agreement, which was being led by the US. Nothing could be farther from the reality. India has an autonomous and independent foreign policy, which only advances its national interests and is not subservient to any country including the US. This can be seen in India not buckling under US pressure not to buy the Russian S400 system. India has also initiated trade disputes against the US in WTO and has not followed the US policy on Iranian relations.
Finally, India’s decision to stay out of RCEP isn’t the end of the story. There are several challenges that still need to be surmounted. At a more fundamental level, India’s reluctance to be part of the deal also has a lot to do with its own industry’s lack of competiveness in the global arena. The relatively high cost of land, capital, freight and power in India has undermined the industry’s growth, which requires urgent attention. Apart from this, there is also a need for review of existing trade agreements by India. Further, minimum standards, quality control and compliance mechanisms will also be key elements in promoting its market. Crafting rules of origin (ROO) will also require special care, to avoid circumvention by other partner countries. India still has a long way to go in strengthening its trade policies.
Prof Sri Ram Khanna specialises in International Business and is former Head and Dean of Commerce Faculty at Delhi School of Economics, University of Delhi. Naimat Chopra is a former MBA International Business student of Prof Khanna at Department of Commerce, Delhi School of Economics, University of Delhi.