Has India missed out by sitting on the sidelines of the RCEP?

Asia's third-largest economy already has a large trade deficit with China and the government is keen to reduce it

A woman walks through a market without a mask on the outskirts of New Delhi, India, Friday, Nov. 20, 2020. Authorities in capital New Delhi are fighting to head off nearly 7,500 new cases a day while ensuring that the flagging economy doesn’t capsize again. The government hiked the fine for not wearing a mask four times to 2,000 rupees ($27) as it considered fresh restrictions. (AP Photo/Altaf Qadri)
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The agreement for a deal to create the world's biggest trade bloc, the Regional Comprehensive Economic Partnership, has left experts in India divided. Many are asking if Asia's third-largest economy missed an opportunity to boost its economy or would the cost from joining the bloc have outweighed the benefits?

The RCEP is made up of 15 Asia-Pacific countries, including China, Japan, South Korea and Australia. The free trade pact was almost a decade in the making before it was finally signed a week ago. Members of the pact represent 30 per cent of the global economy, the combined equivalent of about $26 trillion of gross domestic product, and 30 per cent of the world's population, or about 2.2 billion customers.

But India walked away from negotiations last year. The government said it had concerns over imports flooding the market, to the detriment of local businesses.

“India needs to be very cautious before entering any such partnership as it hardly benefitted from its previous trade agreements in Southeast Asia,” Rakesh Mohan Joshi, chairperson and professor at the Indian Institute of Foreign Trade, says.

“An influx of cheap Chinese products, directly or even through third country routes in the RCEP, had been an important concern – that it may threaten hundreds of thousands small and medium[-sized] businesses, throwing millions out of employment in India.”

India's trade deficit with several countries that are part of the RCEP has been growing in recent years – in particular with China. Figures from the Indian government show its trade deficit with China stood at $48.66 billion in the financial year to the end of March, as the country imports a higher value of Chinese goods compared with how much it exports. This trade deficit and dependence on Chinese imports is something the Indian government is eager to reduce.

Another concern that India had about the free trade deal was that dairy and other agricultural products imported from New Zealand and Australia could negatively affect the livelihoods of its farmers. Official figures show about half of India's population depends on agriculture for their livelihoods and the sector makes up about 15 per cent of GDP.

Fears about the deal coincided with the launch in May by India's prime minister Narendra Modi of a policy known as Atmanirbhar Bharat, which translates from Hindi as “self-reliant India”.

Even before this, Mr Modi had been focusing on lowering the country's dependence on imports. One of his flagship initiatives is the “Make in India” scheme, launched the year he came to power in 2014, which aims to transform the republic into a global manufacturing hub.

In a speech at an RCEP summit last year, Mr Modi said when withdrawing from the negotiations  that “our farmers, traders, professionals and industries have stakes in such decisions".

"When I measure the RCEP agreement with respect to the interests of all Indians, I do not get a positive answer,” he said.

The government has stressed that its drive towards self-reliance does not mean that India should isolate itself from the global economy.

But Gary Hufbauer, a non-resident senior fellow at the Washington-based Peterson Institute for International Economics, says that India is becoming increasingly protectionist in its approach, and he argues that this is hampering its growth prospects.

“The external trade-to-GDP ratio is far lower for India than other countries of its economic size,” he says. “The RCEP offered a path out of this morass. Competition between Indian firms and firms based elsewhere in Asia – notably, South Korea, Japan, China, Singapore and Australia – could sharply improve the performance of Indian firms.”

Foreign direct investment from RCEP countries could also bring much-needed, highly-paid jobs and new technology to India, Mr Hufbauer explains.

“India will be the loser, not other RCEP countries and certainly not China.”

With border flashpoints between India and China flaring up this year, relations between the two nations have strained.

“In the short term, due to border tensions with China and the increasing trade deficit, not joining RCEP can be justified,” says Debraj Ghosal, Faculty-International Business & Strategy at Bhavan's SPJIMR. “But in the long run, India has to embrace more international competition and join global multilateral trade blocs.”

India has to look beyond domestic consumption, he says. Although the country has a population of 1.3 billion with an expanding middle class, global demand for its own goods and services could help propel India's economic growth to new heights.

“The goal should be to become self-reliant in a few critical sectors which are important for national security and pharmaceutical products,” Mr Ghosal says.

“For other sectors, [India should] follow a mix of domestic manufacturing and imports; embrace global components and technology to add value in India for exports [and] become part of the global value chain.”

But some trade experts argue that the RCEP is not in India's interests – at least for now.

“From outside it looks like a missed opportunity for India,” says Ambrish Kumar, the founder of digital logistics platform Zipaworld and group chief executive of AAA 2 Innovate. “However, India has rightly backed off, having had a close look at the flip side of the coin.”

He says India could benefit more from its own direct trade negotiations with countries like Japan.

At this stage, Mr Kumar says that “India is yet to become competitive in the manufacturing sector”, putting it at a disadvantage if it had joined the RCEP. This is something that needs to be improved.

“The coronavirus pandemic and the tensions with China have in some way paved the way for making manufacturing the need of the hour,” he says, adding that India's participation in the RCEP would have been “a roadblock” to this process.

Mr Joshi at the Indian Institute of Trade argues that the strategy of self-reliance is not about “isolation”, but “aimed at creating an ecosystem for indigenous manufacturing" that will eventually make its products competitive in international markets.

In the long run, India has to embrace more international competition and join global multilateral trade blocs

Besides, it is still possible that India could join the RCEP later.

“The idea of not joining this trade bloc is not a foolish one as India is still an observer with an option to join in the future,” says Gaurav Garg, the head of research at CapitalVia Global Research.

By sitting on the sidelines, India can boost its position in the long term, he argues.

“To make its trade more competitive and export-oriented, India is already reforming its domestic economic policies with Make in India and Atmanirbhar Bharat,” he says.

But with the RCEP proceeding without India, the country will need to work hard to make sure it is not left behind.

“The main advantages for India [of not joining the RCEP] would be time to develop competitiveness in focus industries and give protection to local industries,” says Mr Ghosal.

“India can benefit if it can bargain better terms and then join RCEP at a later date.”