National Interest vs The Invisible Hand: Implications of India's RCEP Withdrawal

News of India deciding not to join the mammoth Regional Comprehensive Economic Partnership (RCEP) trade deal set off a huge sigh of relief to some camps within the country. However, experts on the subject saw this as a failure on the part of ineffective negotiations and maintained that over one-third of the 3.6 billion population who reside within Asia will not be a part of a global commerce pact.

The 16-country trade deal which took over 7 years of intense negotiations would have been one of the world's largest agreements covering over 40 percent of the global economy. When Prime Minister Narendra Modi announced his decision of withdrawing from the deal at the RCEP Summit held in Bangkok in early November 2019, he promptly substantiated his resolve stating the negotiations failed to address India's 'outstanding issues and concerns'.

Read | South China Sea, Myanmar and RCEP on ASEAN agenda

India pulling out of the RCEP came amidst a pair of politico-economic developments that could have gone a long way towards influencing any decision. 

On one hand, India's growth was witnessing a slowdown which was further hampered by the rollout of GST, fear of trade deficit with partners, manufacturing and service sectors becoming vulnerable due to foreign impact, sour experiences of gaining no net advantages in the past and the Chinese agenda of flooding Indian market using RCEP countries to dump goods. 

On the other hand, the Modi dispensation had just won a decisive mandate for another five years, ensuring stability, and empowering it to continue with structural or other reforms.

Jawed Ashraf, India's High Commissioner to Singapore, in a conversation with a leading international news outlet stated "All negotiations, FTA (Free Trade Agreements) or otherwise are based on a set of domestic interests. India understands and believes in the importance of strategic merits of RCEP. Since 2012, we have negotiated in good faith, a great deal of commitment and a lot of hard work has gone into it. We have also made great concessions from our side, particularly in the area of services, but there were concerns over trade deficits.'

The High Commissioner elucidated, India's trade deficit with RCEP countries has increased from $7 Billion in 2002 to about $118 Billion in 2018. Notably, over half of that was with China. Safeguards and scope of coverage to ensure there was no dumping of goods in the country either directly or via other countries will remain a major concern. 

Read | India has not closed doors on RCEP: Jaishankar

As India continues to open its economy slowly, signing FTAs with Singapore, Thailand, South Korea, New Zealand and Australia, the key agenda to consider is balancing negotiated interests between countries and opening up to a commitment of an unfettered, large range of goods will affect MSMEs in the country.

Notably, the deal is structured in a way that exposes the economy in its full bearing and at a time when India is going through major internal changes and upheaval, it would be unwise to hurt local businesses. Maintaining a mild dose of protectionist "Hand of God" to nurture the current state of the economy with flagship projects of modernising industries is the way to go.

Read | Japan indicates efforts to address India's concerns over RCEP

Merits of joining RCEP

• Potential new markets for Indian goods and services
• Greater openness in services with trade partners to counter the US and EU challenge
• Global resistance to immigrants could be curbed by looking and 'Acting East'
• Commitments from RCEP members to lower barriers to Indian exports of goods and services
• Swifter work visa process for India's skilled labour  

India's concerns over joining the negotiations are sixfold:

Weak manufacturing sector:

Indian goods will not find a substantial market to export, in exchange for the large volume of goods and services that will enter the Indian markets. Poor agricultural output also makes it difficult to compete with international players (in particular ASEAN countries)

Service sector and management of human capital

Exchange of human capital, in particular, skilled labour and IT services were not tabled for discussion, despite India raising concerns over the issue on several occasions, a fair deal was not arranged.

Fear of opening India's market to be flooded by cheaper Chinese goods

India will stand exposed to cheap and poor quality goods from China flooding domestic markets which will harm local industries and MSME (Micro, Small and Medium Enterprises). Numerous industries such as textile, steel, agro products, copper, etc., will be affected by opening up the market with the new RCEP deal.

Issue of the country of origin

Chinese goods have on several occasions found a way into Indian markets through other countries, using other RCEP member States as a platform to dump their cheaper goods in the country.

Ballooning trade deficit

India already has a trade deficit with 11 Asian countries, the largest currently being with China. The new deal will open the wound further allowing the deficit to increase substantially.

India's demands of more market access in China sidelined

Access to sell pharmaceutical drugs, agro and dairy products, textile, etc., in China has been repeatedly denied.

Do the risks outweigh benefits?

Read | Union Minister Piyush Goyal praises PM Modi for pulling India out of RCEP

Beyond the specific issues with RCEP, India's past experience with regional FTAs have given experts little reason to expect the benefits of free trades will outweigh the challenges.

According to a NITI Aayog report, In spite of India currently engaging in regional trade agreements with 15 countries, the signing of each deal has led to a greater bilateral exchange, but at an internal cost, where imports have increased substantially more than exports.

In the past, India has made only superficial gains with such agreements, and due to its inverted duty structure, taxing imported goods at a lower rate than raw materials has resulted in Indian goods being uncompetitive. The new agreement will do the same if the tax codes don't see a significant overhaul - without which no net gains will be made.