Why India Pulled Out Of the Regional Comprehensive Economic Partnership 

By Abhay Almal

The Regional Comprehensive Economic Partnership (RCEP) is a multilateral trade program consisting of the ASEAN 10 Economies (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam), and six others, namely India, Japan, South Korea, New Zealand, Australia, and China. 

These countries collectively make up around 30% of the global Gross Domestic Product, and trade receipts among them cumulatively stands at approximately $2.8 trillion USD. This makes the RCEP the world’s largest trade pact. Negotiations over the terms of agreement have been underway since 2012, but on November 4, 2019, Prime Minister Narendra Modi announced that India will not be joining the RCEP. The decision came amidst increasing domestic opposition to the treaty from two RSS affiliated parties, members of the Opposition, as well as a significant portion of the BJP itself. However, in choosing bilateral agreements over pacts like the RCEP, India has foregone a chance to embed itself in a regional economic framework that encompasses three of the biggest Asian economies (India, China, Japan) as well as free trade partners of the ASEAN like South Korea, New Zealand, etc. So was India correct in turning down the RCEP? This article discusses both sides of a complex debate that has no simple answer. 

Why Modi Decided Against the RCEP

There are several reasons why the BJP ultimately gave up on this trade initiative. Firstly, many in industries such as dairy, automobile, steel, and agriculture are fearful of an influx of higher quality products from abroad that will boost imports and lower sales. India already has a massive trade deficit with countries in the RCEP bloc, amounting to $105 billion USD. Almost half of this amount applies exclusively to China, which is the largest exporter of goods to India1. The proliferation of Chinese goods is a particular concern for those in the textile and steel industries, while those in dairy, fear competition from New Zealand. 

 

Secondly, India’s history with free trade agreements has left many disillusioned with the nation’s ability to benefit from this pact. Since 2006, India’s exports to its bilateral and regional free trade agreement partners have largely mirrored exports to non-partners2. India already has bilateral deals with most members of the RCEP bloc, with some still undergoing negotiation. But the deficit India has with these countries could worsen if tariffs were further lowered and other barriers removed. Make in India is another initiative that the BJP has consistently tried to promote, and RCEP is believed to be a major threat to it due to increasing competition from imports. 

 

These economic concerns led to several parties affiliated to the RSS to campaign heavily against the RCEP. The Swadeshi Jagran Manch (SJM) and Bharatiya Kisan Sangh (BKS) were chief among them, with the former holding nationwide protests in the name of farmers, and other underprivileged classes that work in these industries. The SJM also claimed that 50 million people would lose their jobs if India agreed to the RCEP3. External pressure from the Congress Party, as well as members from the concerned industries,  resulted in BJP pulling out after much-extended negotiation. 

Should India Have Stayed?

India still has until 2020 to be a part of the RCEP, and Commerce and Industry Minister Piyush Goyal has claimed that the party would still consider joining if their terms are met. Yet chances look bleak as Modi has once again turned his back on the promises of economic liberalization that brought him to power in 2014. After the reforms of 1991, India has regressed to become one of the most protectionist economies in the developing world, with the average tariff being 13.8% 4. Supporters of the RCEP believe that opening up the Indian services market and promoting trade might result in some short term losses but will likely result in higher returns eventually. But this is a tricky argument to make since the complexity of the economic framework makes it hard to project the precise impact it might have on its member nations. The terms of the agreement too are classified for the public, making independent assessment difficult. 

 

Detractors have commonly argued that the Indian manufacturing industry is simply in no position to take advantage of RCEP due to low levels of competitiveness. Shyam Saran, in a piece for the Hindustan Times, highlights the difference in export efficiency between India and China. He claims that the cost of exporting a container from India is approximately $950, double that in China. It also takes much more time to export and deliver goods out of India than it does in China. The former takes at least 17 days, while products in the latter take only 55. Government involvement could stimulate the industry into becoming a global competitor, but much-needed reforms to achieve this end have not materialized. Not only that, but we seem to be going in the opposite direction in light of the raises in import duties across the board in the most recent Budget. 

Choosing to sit by the sidelines of the RCEP agreement is bound to have its consequences. While ASEAN countries continue to strengthen their ties with FTA partners, India misses out as it focuses on investments and uplifting its lagging manufacturing sector. It is clear that significant internal pressures had much to do with the decision, but whether the fears of firms in the relevant industries are justified is still unclear. Amit Shah wasted no time to log onto Twitter and praise PM Modi for his “strong leadership and unflinching resolve to ensure national interest in all circumstances”. The party has also expressed its solidarity with the working-class citizens employed by these industries. But in the name of strong leadership BJP has, in some sense, taken the easier route by choosing not to risk the wrath of a vital voting demographic. India has once again bowed down to the fear of foreign competition even as manufacturing growth eludes the country. As of this writing, the remaining 15 nations continue to negotiate the treaty in India’s absence. Indonesia and Japan have determinedly lobbied for India to stay, but with no foreseeable solution to its qualms with the RCEP, it looks like India might have missed an opportunity. 

Abhay Almal is in his third year pursuing a bachelor’s in political science at Ashoka University.

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