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RCEP: India refused to bite the bullet

  • Category
    International Relations
  • Published
    12th Nov, 2019

Recently, India refused to join RCEP in ASEAN summit in Bangkok.

Issue

Context

Recently, India refused to join RCEP in ASEAN summit in Bangkok.

Background

  • The Regional Comprehensive Economic Partnership (RCEP) is a proposed free trade agreement(FTA) between the ten member states of ASEAN (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, Vietnam) and its five (formerly six) FTA partners (China, Japan, South Korea, Australia and New Zealand).
  • In November 2019, India, the sixth FTA partner, decided to opt out of the pact. In light of India's departure, China announced that India is welcome to join the RCEP whenever it's ready.
  • RCEP negotiations were formally launched in November 2012 at the ASEAN Summit in Cambodia. In 2017, the 16 prospective signatories accounted for a population of 3.4 billion people with a total Gross Domestic Product(GDP, PPP) of $49.5 trillion, approximately 39 percent of the world's GDP.

Analysis

Why did India opt out of RCEP?

 India chose to opt out of RCEP because of following reasons:

  1. Economic Slowdown
  • The Indian economy is passing through a rough patch as the rate of GDP growth has been slowing down for five consecutive quarters, that is, since January-March 2018.
  • Combined with the aftereffects of the demonetization move in November 2016, the GST rollout proved to be a double-disrupter of the economy, which is yet to fully come to terms with these two key decisions.
  • As the industry is reeling under pressure and the government is grappling to deal with the domestic economic situation, a massive free trade pact like RCEP would have exposed the Indian businesses and agriculture to unequal competition from countries which are lurking like giant sharks in the export arena.
  1. Trade Deficit
  • India, as a whole, is a 'bad' business entity. It has massive trade deficits with almost all economic powerhouses of the world. Of the 15 RCEP countries, India has serious trade deficits with at least 11.
  • India's trade deficit with these countries has almost doubled in the last five-six years - from $54 billion in 2013-14 to $105 billion in 2018-19. Given the export-import equation with the bloc, a free trade agreement with the grouping would have increased it further.
  • At present, India ships 20 per cent of all its exports to the RCEP countries and receives 35 per cent of all imports from them. China is the ringmaster of this export-import circuit. It is the largest exporter to almost all countries of the group, including India. Of India's $105 billion trade deficit with RCEP countries, China accounts for $53 billion.
  • The widening trade deficit would empty foreign exchange reserve of India at a faster rate. And, a depleting foreign reserve is never good for any economy and is least desirable for one trying to recover from an already disrupted situation.
  1. Industries and Farmers
  • RCEP was one of those pacts that was opposed by both the industry and farmers alike. Manufacturing sector in India is in crisis. The sector has seen contraction in recent months. Manufacturing output grew at its slowest pace since last two years.
  • Services sector is also not doing well, of late. China and ASEAN countries have robust service sector, and a free entry to these players may damage the lone saviour of Indian economy in these times of crisis.
  • In agriculture, domestic players dealing in dairy products, spices -- chiefly pepper and cardamom, rubber, and coconut would face dumping from the South Asian spice majors. Sri Lanka is already giving a tough time to Indian spice growers.
  • Vietnam and Indonesia have very cheap rubber to export. Australia and New Zealand are waiting for a free access to India for their dairy products. Indian businesses would be hit hard as RCEP does not offer enough protection to them.
  1. FTAs have not benefitted India
  • The NITI Aayog, in 2017, in its report pointed out that free trade agreements have not worked well for India. It analysed multiple free trade agreements that India signed in the past decade. Among those were FTA with Sri Lanka, Malaysia, Singapore, and South Korea.
  • The NITI Aayog analysis showed that import from FTA countries increased while export to these destinations did not match up. Even India's export to FTA countries did not outperform its overall export growth. The NITI Aayog found that FTA utilisation by India has been abysmally low between 5 and 25 per cent.
  1. China’s Gameplan
  • Finally, RCEP has come up as a Chinese gameplan to save its manufacturing industries from crumbling under their own weight and the ongoing trade war with USA. Several industrial players in India red-flagged the Chinese agenda of flooding the Indian market using the RCEP countries as a connecting network.

Not Joining RCEP will also hurt Indian Economy

  • While the fears of cheap import surges hurting our dairy and agriculture sectors have been abated for the time being, the decision does nothing to enhance the competitiveness of our domestic industries or to make them ready for global competition. 
  • The decision to not join RCEP also does nothing to bolster our ‘Act East’ and ‘Act Far East’ policies. Instead, our status quoist approach has provided a fillip to a growing rhetoric of protectionism. 
  • China has already covered most markets united under RCEP umbrella. The above mentioned NITI Aayog report pointed out that China has changed the trade equation with the ASEAN countries after inking ACFTA - standing for ASEAN-China free trade agreement - in 2010.
  • ASEAN-6 (Indonesia, Malaysia,Philippines, Singapore, Thailand and Vietnam) had a trade surplus of $53 billion in 2010 which turned into a trade deficit of $54 billion in 2016.
  • India, with its 1.3 billion population, offers the biggest free access market to the Chinese companies that are feeling the pinch of US-China trade war with Donald Trump administration taking on the manufacturing giant in the past one-and-a-half years.
  • China needs greater access to Indian market to sustain its manufacturing industries. A failure to find a market will have cascading effect on Chinese economy and President Xi Jinping's global ambitions. In Bangkog, PM Modi just refused to be a willing dumping ground of China's trade imperialism.
  • India wanted a key clause to be included in the RCEP pact for auto-trigger mechanism as a shield against sudden and significant import surge from countries (read China). The RCEP covers trade in goods and services, and also investments, economic-technical cooperation, competition and intellectual property rights.

Benefits for India of Joining RCEP

  • It can boost India’s inward and outward foreign direct investment, particularly export-oriented FDI.
  • It would also facilitate India’s MSMEs to effectively integrate into the regional value and supply chains.
  • It presents a decisive platform for India which could enhance strategic and economic status in the Asia-Pacific region and can complement its Act East Policy.
  • It can augment India’s existing free trade agreements with the Association of South-East Asian Nations (ASEAN).
    • It can address challenges emanating from implementation concerns vis-à-vis overlapping agreements of ASEAN.
  • The RCEP would help India streamline the rules and regulations of doing trade, which will reduce trade costs.
  • India enjoys a comparative advantage in the services sector such as information and communication technology, healthcare, and education services etc. Thus, RCEP will create opportunities for Indian companies to access new markets.

Way Forward

  • An opportunity to negotiate a better deal still exists, as India has a year to negotiate and be part of RCEP.

The assumption that the world will bend to our demands given the size of our market doesn’t hold good any more. We need to put our house in order to take on global competition and benefit from export opportunities that external markets offer, and such multilateral agreements create.

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