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15 countries whose population totals 2 billion people and whose GDP makes up 29% of the worlds total recently signed on to the largest regional trade agreement ever seen. India, however, conspicuously decided to stay out of the Regional Comprehensive Economic Partnership (RCEP), in spite of the insistence of many of the member countries that it reconsiders its decision.

16 countries, including India, had been negotiating this deal since 2013. It was only in November of 2019 that the Indian government decided to stay out, which came as a surprise to many. The remaining members have made it clear that the door is open for India to join should it change its mind. Japan has tried especially hard to lobby India in to signing on. The RCEP has even gone as far as discarding the 18-month waiting period for new countries to join, for India only.

Why did India opt out?

India has a trade deficit with 11 of the 15 countries who are part of the agreement. The trade imbalances with countries like China and Indonesia are quite massive, and in fact, it has only been getting worse. Added to this is the fact that India and China are not on the best of terms at this moment in time, with the border skirmishes going on at Galwan Valley. Signing a trade agreement with China would benefit its current ‘nemesis’ more than itself.

China’s influence over the region will only grow stronger with such an agreement. The likes of Australia are already being bullied into adhering to China’s demands, which makes it all the more surprising that an agreement was reached at all. There is a growing movement around the world to combat the Chinese by developing resilience on the supply chain. An agreement like RCEP does not help that effort. India wants to protect industries like agriculture and dairy and is aware of China’s propensity to dump goods into foreign markets. 

A simple ban on such practices can also be circumvented by supplying the goods to India via a third party which could be any of the other member countries. India is also wary of the fact that signing such an agreement would mean that it may be obligated to share information about sensitive sectors like defence, which is not something it can afford to do given its present circumstances.

India did raise these issues over various meetings, and it was only after much discussion that it came to the decision to stay out of the agreement. It was not taken lightly. There will be issues as opting out would mean that India risks being isolated from the other 15 members who may prefer to trade amongst themselves, given the smoother conditions with which they have to work with. India is also losing out on a huge market that is 2 billion in size.

The decision, however, is in line with the government’s current stand on economic affairs, which is one of self-reliance, or at least some variation of the same. There is a protectionist quality to the approach that the government has taken with respect to the tariffs that it currently imposes, as they are amongst the highest in the world (13.8% on average). 

A report last year by the US Trade Department described India’s trade policy as “opaque and unpredictable”.  India routinely courts foreign investments but will do as much as possible to ensure that foreign companies are not able to sell their goods in its domestic market. This raises questions on the ability of the domestic market to compete with foreign players.

Yet, deciding to stay out may well have been the right choice. The size of the trade imbalances is a genuine cause for worry. 

India’s exports to these nations have remained stagnant over the last few years, and even free trade agreements with some of the RCEP members have not helped improve the situation with a modest CAGR of just 7.1%. 

What India needs to focus on now is engaging in bilateral free trade agreements with other entities like the US and the EU, in a way that benefits Indian exports. 

It is also important for India to integrate itself into the global supply chain so that its domestic goods can actually compete with the goods of China and Japan. Ensuing that there is demand for Indian goods abroad is a key element of signing any trade deal, as these deals need to be mutually beneficial.

India has seen in the past how bilateral agreements have harmed the growth of its domestic industries. Trade policy is about finding the right balance between imports and exports which is tricky, and as such it is understandable why India decided to stay out of the RCEP for the time being.

For feedback, comments and views please write to pavan@bclindia.in 

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