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New Delhi stayed away from the world's largest trade bloc as its critical concerns were not addressed. While this makes sense for the moment staying away from the RCEP can be a short-term palliative but IT cannot be a long-term solution to India's ambitions of emerging as a global manufacturing hub.
India is wary that RCEP will, in reality, translate into a free trade agreement (FTA) with China by stealth, something that will hit its economy hard, given the skewed trade balance between the two countries.
The Regional Comprehensive Economic Partnership (RCEP), the world's largest trade bloc is now a reality. It comprises 15 members - the 10 ASEAN nations, China, Japan, Australia, New Zealand and South Korea. As has been widely reported, India, the 16th country that participated in the negotiations over seven years, withdrew from it last November, despite calls from allies such as Japan and Australia to join.
India is wary that RCEP will, in reality, translate into a free trade agreement (FTA) with China by stealth, something that will hit its economy hard, given the skewed trade balance between the two countries.
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It is the right approach, but only up to a point. The Modi government is rightly concerned that Chinese companies would use this pact to circumvent the rules of origin and route its exports to India via other RCEP members.
India runs a $105-billion trade deficit with the RCEP nations, of which China alone accounts for more than half. Easing the entry of goods manufactured in China, dairy products from Australia and New Zealand and spices from Malaysia and Indonesia could debilitate large sections of Indian industry, the dairy sector and parts of the farming value chain in India.
It must be borne in mind that following the US-China trade war, the Chinese manufacturing sector is saddled with massive over capacities. Easier entry norms would have allowed it to dump goods in India - to the detriment of Indian industry.
Then, its argument in favour of an automatic mechanism to impose safeguard duties in the event of an import surge in specific items is also aimed at protecting Indian industry that is steadily inching towards the take-off platform following the Covid-induced slowdown.
India has indicated that it will be willing to join the RCEP in the future if its concerns are addressed. This sends out a message that the Modi government realises that economic isolation breeds stagnation and that the way forward lies in greater engagement and integration with the world. That, as the Prime Minister has repeatedly said, is the basis of his vision of an Atma Nirbhar Bharat (Self-Reliant India).
Staying away from the RCEP can be a short-term palliative but cannot be a long-term solution to India's ambitions of emerging as a global manufacturing hub, which must mandatorily include greater linkages with globally dispersed supply chains. Joining the RCEP will be an important step in this direction.
the Modi government realises that economic isolation breeds stagnation and that the way forward lies in greater engagement and integration with the world. That, as the Prime Minister has repeatedly said, is the basis of his vision of an Atma Nirbhar Bharat (Self-Reliant India)
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Commenting on India's decision to withdraw from the RCEP negotiations last year, leading economist Dr Surjit Bhalla had said: “India should join trade agreements such as RCEP but only after negotiating from a position of strength We should be very cognizant of our own interests.”
For example, the RCEP agreement did not provide Indian pharmaceutical products with easy access to the Chinese market. It did not also give India's services sector - and especially Indian professionals - easer entry into other member states.
Every trade agreement produces opportunities as well as threats. Under the current circumstances, it would have been very difficult for India to have taken full advantage of the opportunities that this deal would throw up. Therefore, the decision to withdraw from RCEP may be the best one in the present context.
The Indian government has already initiated a number of measures to improve the competitiveness of Indian industry. It must now double up on those measures.
The steep cut in corporate tax rates, making India competitive on this count compared to ASEAN and other Asian peers, is a step in the right direction. Other reforms measures, such as the Insolvency and Bankruptcy Code, the new labour codes, the newly reformed farm laws, the extension of the production-linked incentive scheme to 10 sectors following the success of the initiative in attracting global smartphone makers to set up factories in India and the opening of up every single sector to the private investments are all aimed at shoring up India's global competitiveness.
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But it is imperative that India quickly resolves its internal issues and join the RCEP, albeit on its own terms. That is the only way India can have a say in writing the rules of trading with what are some of its most important economic partners.
Also, staying out of the RCEP would subject India to trade barriers vis-à-vis countries in the ASEAN and others like Japan, Australia and South Korea, which are otherwise its allies in strategic sphere.
“India should join trade agreements such as RCEP but only after negotiating from a position of strength We should be very cognizant of our own interests.”
The trilateral India-Japan-Australia Supply Chain Resilience Initiative (SCRI) to reduce dependence on China would also come to nought or, at the very least, lose much of its potency if India stays out of the RCEP for too long.
Meanwhile, it will be a good idea for India to more aggressively pursue bilateral trade deals with countries such as the US, the UK, Australia and Japan and blocs like the EU. Success in these will give the country the necessary edge to resume negotiations with RCEP, but this time with a stronger hand, as Dr Bhalla and many others have recommended.