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Why India Has Opted Out of the RCEP

Written by: Melissa Cyrill, India Briefing, Dezan Shira & Associates
Posted: 16th December 2019 08:51
  • India opted out of the RCEP trade pact at the Bangkok ASEAN Summit this week.

  • India explained the decision by referring to long-standing concerns over the trade deal’s provisions on market access and rules of origin, tariff relaxations, and non-tariff barriers.

  • Prime Minister Narendra Modi’s government still has a year to change its mind but major local interest groups have pushed for a more protectionist stance.

India will not be joining the Regional Comprehensive Economic Partnership (RCEP), Prime Minister Narendra Modi announced on November 4, at the conclusion of the three-day Association of Southeast Asian Nations (ASEAN) summit in Bangkok. Modi had been facing fierce criticism at home from opposition political parties, local industry associations, and agricultural lobbies.

The RCEP is a proposed trade pact between the 10 ASEAN member countries, Australia, New Zealand, Japan, South Korea, China, and India. India was set to join the 16-member trade grouping this week but finally backed out after failing to receive any assurances on its concerns over market access, tariff relaxations, and non-tariff barriers.

India’s position on the RCEP

A reluctant participant in much dragged out RCEP negotiations that began back in 2012, India gradually warmed up to the idea of greater economic integration as necessary to moving up the global value chain.

However, it could not reconcile those interests with immediate concerns over a potential surge of cheap Chinese manufacturing imports or dairy products from New Zealand and Australia in the Indian market dislodging local producers and small-scale businesses – were it to join the Asia-Pacific trade group.

Those supporting trade liberalization lament that India has missed a vital opportunity. Opening up its protected industries to external competition would have strengthened local capabilities, incentivized innovation, and increased investments in the country but detractors to the RCEP point to the already lopsided impact of India’s existing free trade agreements (FTAs) with South Korea and Japan.

In fact, renegotiating the terms of India’s FTAs with South Korea, Japan, and ASEAN feature among the long-term demands made by influential Hindu right-wing conservative economic organizations like the Swadeshi Jagran Manch (SJM) and Bharatiya Kisan Sangh (BKS) – affiliates of the Rashtriya Swayamsevak Sangh (RSS) – which is the ideological parent of the ruling BJP party.

All three organizations vehemently oppose India’s joining the RCEP – fearing the impact it would have on the country’s farmers, dairy, manufacturing, textiles, pharmaceutical, chemicals, and steel industries. They also point to India’s large trade deficit with RCEP member states, which stands at about US$105 billion, including a US$54 billion deficit with China.

This is also why India previously refused to offer tariff liberalization ‘above 86 percent of traded goods’ to non-FTA partners during RCEP negotiations. RCEP members wanted India to increase tariff relaxations on 92 percent of traded goods but refused to incorporate any safeguards within the trade deal.

Modi government low on political mileage

India still has a year to reconsider joining the RCEP. The remaining member states now return to their local constituencies to kick-start the legal process of finalizing the deal and are looking at a 2020 deadline for signing the agreement into effect. Any change in India’s position on the RCEP, however, remains unlikely.

The country’s economic growth has hit a six-year low and fallout from an ongoing trade war between the US and China has hurt its export growth. Other factors contributing to the present economic pain include the demonetization shock of 2016 and a chaotic implementation of the goods and services tax (GST) system.

Meanwhile, the Modi government is counting on its local manufacturing and job creation programs, such as Make in India and Skill India, to improve the country’s economic fundamentals. Opening India’s market to a flood of imports via the RCEP could have undermined the success of these economic programs although their mixed record show little cause for optimism anyway.

Ultimately, the choice to stay away from the RCEP deal reflects the strength of India’s local industry and agricultural lobby groups whose interests are shared by parties across the political spectrum. Poor showings in recent state elections in Maharashtra and Haryana (major industrial and agricultural hubs in the country) for Modi’s BJP party mean that the national government may also lack the political mileage to force through unpopular decisions.

This article was first published by India Briefing, which is produced by Dezan Shira & Associates.

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