India's Withdrawal From RCEP: Is It Better Off?

India's focus has shifted to the creation of a strong domestic agricultural and industrial base, and therefore, joining the RCEP no longer appears to be a priority
India's Withdrawal From RCEP: Is It Better Off?
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Partner-Indirect Tax, Customs & Trade Group, Singh & Associates
6 min read
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The Regional Comprehensive Economic Partners (RCEP) intends to unite some of the most dynamic economies, both developed and developing covering over 2.2 billion people and accounting for 30 per cent of the world’s economy. It seeks to achieve an inclusive and mutually beneficial economic partnership agreement among the ASEAN member states and its FTA (free trade agreement) partners. The agreement further allows for common one set of rules of origin in order to qualify for tariffs reduction with other RCEP members. The agreement also includes rules on intellectual property, telecommunications, financial and professional services and e-commerce.

With focus on policies such as ‘America First’ and ‘Make-in-India’ or Aatmanirbhar Bharat, various economies are protecting their indigenous market by controlling imports and consequently focusing on inward oriented strategy. Thus, the world economy one can say is slowly edging towards protectionism. In the recent history too, we have seen some developed economies taking very inward-oriented decisions to re-establish their economic benefit, for example withdrawal of the US from Trans-Pacific Partnership and the UK from the European Union. So, when after seven years of negotiations India opted out of RCEP stating that joining the deal in its current form would have adversely affected its national interest, may be India is following the same trend.

Lately, India’s focus had been on the disruption caused to manufacturing and indigenous producers by surging and cheap imports mainly from China. Although India had suggested some remedial measures to safeguard its interests such as keeping a check on imports beyond a threshold in a country and allowance to impose barriers if imports go beyond such threshold. However, India’s outstanding issues and concerns were not agreed by other member countries of RCEP.

Undoubtedly India being a part of RCEP would have definitely given a boost to industries such as textile and dairy since it is a huge market with a sizeable share of GDP. Further the move could potentially leave India with less scope to tap the mammoth market that RCEP presents. It is very important to note that RCEP did not do much for the benefit of sectors such as agriculture, dairy, manufacturing where the Indian government is inclined for more investments due to probable import of such commodities from superior producing nations such as Australia and China. India’s electronics and metal producers who were already facing obstacle by other FTAs with south-east Asian countries could have also lost in view of tough competition from the member countries such as China.

India has been raising constant concerns regarding its trade deficit with China. In 2018-19, India’s trade deficit with China stood at $53.56 billion. While India’s exports to China have been increasing over the past couple of years, India has not been able to minimize its huge trade deficit. Further, India has also trade deficit with other 10 RCEP members. In addition, the investment flow from RCEP countries to India has been rather low other than Singapore and Japan. Further India is not export driven economy as of now, which will make India largest consumer from RCEP which may help India in terms of consumer welfare by giving comparatively cheaper goods but may substantially destroy the domestic market. Thus, joining RCEP would not have helped much in improving the economic growth rate which declined from 8.2 per cent in 2016 to 6.1 per cent in 2019, owing interalia to slowdown in exports, domestic demand, manufacturing, etc.

It is pertinent to note that India uses high tariffs as a measure to protect its domestic industry and agriculture from foreign competition. However, India’s exports of various items have also suffered a great deal as the value chains are adversely affected by inverted duties. Also, while India has improved its rank in the World Bank’s Ease of Doing Business Ranking from 77th in 2018 to 63rd in 2019 (out of 190 countries), it is still below some RCEP countries such as China, Australia, New Zealand and Malaysia. However, in terms of recent studies India lags in streamlining the export and import processes and use of technology and automation for risk management and ensuring compliance, leading to high compliance costs, complicated clearances processes. Although India has been working towards streamlining its processes, it still needs to quickly address market access, logistics and trade facilitation issues so that domestic industry can become ready to take on the competition.

The decision to withdraw from RCEP comes at a time when India has recalibrated its priorities in a bid to strengthen its manufacturing capabilities. India’s goal of becoming a $5 trillion economy by 2024-25, would most probably have suffered a setback under RCEP.

With India not joining RCEP, the mega-FTA will lose some of its shine since GDP of most of the remaining members will be adversely affected, in contrast to the situation where India would have been part of RCEP. Therefore, other members have urged India to reconsider its decision regarding RCEP membership.

While India had some merits in resisting RCEP, exiting the agreement does constrain India from being able to shape future trade discussions that could come with this agreement along with power to negotiate, influence the institutional politics of regional trade that would revolve around the RCEP.

However, in view of the apparent impact of COVID-19 in mind, it is clear that the scenario has changed completely. The pandemic combined with growing tensions with China have revived apprehensions of Chinese imports flooding India, resulting in somewhat sacrifice of multilatarism and free trade. India like most other nations has sacrificed reasonable approach to trade at the expense of crises and geopolitical constraints that were in some ways present before but not central to the decision.

Although, RCEP’s institutional legacy could have far-reaching effects in cultivating trust, creating standards, with programmes such as ‘Make in India’, ‘$5 trillion economy’, ‘Aatmanirbhar Bharat Abhiyan’, along with result of the pandemic leading to contraction of trade, India’s focus has shifted to the creation of a strong domestic agricultural and industrial base, and therefore, joining the RCEP no longer appears to be a priority.

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