India’s Trade Policy and RCEP

The World Bank has advised India to reconsider its decision not to join the Regional Comprehensive Economic Partnership (RCEP), a major trade agreement in Asia. The World Bank believes that by joining RCEP, India could tap into regional value chains and meet its target of USD 1 trillion in exports.

Background

• India had previously pulled out of RCEP in 2019, citing unresolved issues, especially concerns over trade deficits (India imports more than it exports) and the effect of cheaper imports on domestic industries.
• This decision followed a 2018 report that highlighted India’s growing trade deficit with countries having free trade agreements (FTAs) with India.
• Why did India opt out? India was a member of the RCEP drafting committee from its inception in 2011, but in November 2019, it decided to opt out.
  • Concerns regarding China:India did not join RCEP raising a concern that this deal would open it up to Chinese goods.
  • Safeguarding domestic interest: Its decision was to safeguard the interests of industries like agriculture and dairy and to give an advantage to the country’s services sector. 

India’s Self-Reliance and Manufacturing Push:

• In response to these challenges, India has focused on becoming more self-reliant through policies like the Production Linked Incentive (PLI) scheme, launched in 2020. The PLI aims to boost domestic manufacturing by offering incentives to companies that produce goods locally, in sectors such as smartphones, automobiles, medical devices, and solar products.
• India’s manufacturing output under this scheme has increased significantly. For example, smartphone production grew to $51 billion in FY24, a 21-fold increase over a decade. Exports from this sector grew 81-fold to $16 billion.
• However, these industries still rely heavily on imports from China. For instance, 60% of India’s solar equipment imports come from China, and 30% of India’s industrial imports are from China. The government is working to reduce this dependence by developing domestic production of components and inputs.

Concerns About China’s Influence in RCEP:

• One of the main reasons India pulled out of RCEP was the fear that joining this trade bloc would expose India’s markets to cheap, subsidized imports from China. This could harm India’s developing industries, especially since China has a dominant position in many industries, such as electronics, solar panels, and electric vehicle batteries.
• The RCEP trade agreement could increase India’s reliance on China, worsening the trade deficit (India imports much more from China than it exports). For example, India’s trade deficit with China grew from $63 billion in FY19 to $85 billion in FY24.
• India’s concern is that RCEP’s value chains are dominated by China, which could disrupt the progress made by domestic industries under the PLI scheme.

Global Trade and Geopolitical Challenges:

• Global trade policies have become more protectionist due to rising geopolitical tensions. For example, the US and EU have implemented measures to protect their domestic industries, like the Inflation Reduction Act and Carbon Border Adjustment Mechanism.
• China’s subsidies to its industries (including solar, batteries, and EVs) have distorted global trade, making it difficult for countries like India to compete with China’s cheap exports.
• Countries in RCEP, such as ASEAN nations, Japan, and South Korea, have seen their trade deficits with China grow since the agreement. For example, ASEAN’s trade deficit with China increased from $82 billion in 2020 to $135.6 billion in 2023.