India must rethink its decision to opt out of RCEP

Published on November 11, 2019

By Dr. Nehginpao Kipgen and Shivangi Dikshit

Bangkok Post – November 11, 2019

On Nov 4, India decided against joining 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, as well as New Zealand.

The agreement aims to reduce tariff rates to an acceptable level and boost the exchange of goods and services within the member states. Had India decided to join the deal, RCEP would have become the world’s largest free trade area – covering 45% of the world’s population, accounting for 39% of global GDP, 30% of global trade, and 26% 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 spirit 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”.

The question is, what led India to finally abandon the deal it has negotiated since 2012? That said, 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.

India’s Concerns

RCEP negotiations were launched at the Asean Summit in Cambodia in November 2012. In September 2015, India offered to eliminate tariffs on 42.5% of items from China, and more for Asean states.

India then improved its offer by agreeing to eliminate tariffs for about 90% of items from Asean, and over 74% 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 surges, insufficient differential with China, lack of assurances on market access and non-tariff barriers, and 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 the death knell for India’s manufacturing and production industries. Many are concerned that such an agreement could potentially make India a dumping ground for cheap Chinese goods.

There is also a concern about the “ratchet obligation”, which means that member states cannot raise tariffs once the agreement comes into force. As India fears an unexpected flow of imports, this obligation would prevent New Delhi from taking any action in the future to protect its national interests and could potentially cripple the domestic economy.

Moreover, 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 import duties on goods have increased over the past six years.

A Protectionist Move

The Indian government’s actions 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 the import of cheaper goods from outside would further hurt their businesses, which are already suffering from an economic slowdown.

Also, some in India see that RCEP is intended to balance out the losses from the ongoing US-China trade war. Therefore, the choices 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 about US$105 billion (about 3.18 trillion baht), of which China alone accounts for about US$57 billion.

If India were to join RCEP, it would have been obliged to cut down its import duties by 90% 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 marginalised sections of Indian society.

New Delhi’s move is also one way of appealing to the mass electorates. By listening to their voices, the government wins the confidence of its traders, farmers and industrialists, all the while assuring them that the government would address the interests of all of its people.

Win-Win Strategy for All

Joining RCEP could be beneficial for India since it will provide her greater access to the regional market, more opportunities for Indian businesses to expand in the region, and also increase foreign investments.

It will also allow consumers to choose from a larger “basket” of standardised goods and cost-effective goods in the market. This may lead to improvements in India’s trading environment, as more choices mean more competition – which will ultimately force Indian exporters to increase their standards and quality to meet international best practices and trade norms.

RCEP can also promote regional stability as this agreement makes the economies of the member states even more dependent on each other. This will restrain them from taking steps that could hamper each other’s economic growth.

The current government in Delhi often stresses the importance of its Act East Policy. RCEP would have added to India’s Act East Policy, thus allowing it further to integrate itself with the region.

As a part of RCEP, India would have been able to increase its hold in the region and even emerge as a counterbalance to the growing Chinese presence in Southeast Asia.

It would allow India to frame future developments in the region.

Moving Forward

Even though India has decided to opt out for now, the doors are still open for further negotiations. Mr Modi said that India supports greater regional integration as well as freer trade, but the current RCEP terms do not reflect a balanced give-and-take relationship. Subsequently, the 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. China’s state-run Global Times newspaper reported on Nov 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,” it said.

India would have gained more global sway by joining RCEP, but it first needs to assure that its goods are competitive in regional and global markets. It also needs to assure that her export-oriented industries are stable.

The government should now focus on internal issues and make structural changes in its economy to protect domestic interests. This will allow the economy to mitigate the ramifications which may result when an agreement with a scope like RCEP is signed and implemented.

Dr. Nehginpao Kipgen is Associate Professor, Assistant Dean and Executive Director at the Center for Southeast Asian Studies (CSEAS), Jindal School of International Affairs, O P Jindal Global University. Shivangi Dikshit is a Research Assistant at CSEAS and a Master’s student in the department.

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