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India’s RCEP Exit And Its Regional Future – Analysis

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By Asha Sundaram*

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India’s exit in November 2019 from negotiations on the world’s largest trade deal — the Regional Comprehensive Economic Partnership (RCEP) — was a significant disappointment for proponents of regional economic integration.

Those advocating India’s exit cited New Delhi’s increased trade deficits with countries it has free trade agreements (FTAs) with, as evidence of what RCEP-led economic integration would bring. Others had reservations about the lack of safeguards allowing India to respond to import surges, particularly from China, the threat of import competition in agriculture, and inadequate market access for services exports, including greater mobility of people to deliver them. Rising border tensions with China were argued to justify a guarded approach to foreign investment in sensitive sectors such as defence, communication and energy.

Prominent economists argued strongly that India’s exit was not in its best interests.

By sacrificing the opportunity to shape the trade architecture of one of the world’s most economically dynamic regions, India was forgoing market access in sectors — such as information technology services and pharmaceuticals — where it enjoys a comparative advantage. Experts also highlighted the risk of trade diversion away from Indian products and services as RCEP members gained preferential access to each other’s markets.

In a world where production is organised around supply chains, India’s exit would disadvantage not only its consumers, but also its firms. Consumers would lose access to more affordable imports, while firms would lose competitiveness due to their inability to source cheaper and more diverse inputs at preferential tariff rates.

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India would no longer be an attractive destination for foreign investment since foreign firms producing in India would not have the same access to the RCEP market as firms in signatory states.

And many argued that concerns about RCEP worsening India’s trade deficit were unsupported by data. As pointed out by Krishna and Panagariya in The Economic Times in November 2019, although India’s bilateral trade deficit from previous FTAs had increased in nominal terms, the share of the trade deficit attributable to India’s FTAs had actually decreased.

India’s exit was not just a loss for New Delhi, but also for other RCEP countries. India was one of Asia’s fastest-growing economies at the time the agreement was signed. In the five-year period between 2015 and 2019, India’s annual GDP growth rate averaged 6.72 per cent against China’s 6.7 per cent, Vietnam’s 6.8 per cent and the Philippines’s 6.6 per cent. India was the second-largest economy in the Asia Pacific, and its pre-pandemic GDP was US$2.87 trillion in 2019.

India’s government was also pursuing a reform agenda targeted at improving market access through investment in transport infrastructure. Some 28,000 kilometres of national highway was added between 2014 and 2018, and in 2016, the Udan Yojana scheme was launched with a focus on building regional airports.

Other goals included enabling a digital payments interface (the Unified Payments Interface) to spur e-commerce, increasing the ease of doing business, streamlining rigid labour laws and taxation policy and enhancing the purchasing power of the growing middle class. Tackling poverty would be achieved through the provision of fuel, banking services and direct cash transfers to low-income households. Combined, these initiatives were poised to make India a thriving market for exports.

Yet the COVID-19 pandemic, lockdowns and the devastating Delta wave in April 2021 took their toll on the Indian economy, almost setting GDP back to 2017–18 levels. Per capita consumption expenditure, in spite of the fiscal response, regressed three years, and unemployment more than doubled to 21 per cent in April–June 2020.

As India emerges from the pandemic and seeks to rebuild in 2022, the question is how it conceives its role in the post-pandemic Asia Pacific, and what its future is in relation to RCEP. Factors at play are socioeconomic and political pressures within India, as well as the tenor of the country’s geopolitical tensions with China.

India’s current domestic reform agenda revolves around the idea of Atmanirbhar Bharat — a self-reliant India. The stated aim of this agenda is to enhance Indian manufacturing in sectors such as solar cells and electronics. If these reforms are successful and a high-growth trajectory fuelled by manufacturing is attained, India might be more confident in its ability to compete in the global market. A confident India might return to the RCEP negotiation table — even if sceptics view the push for a self-reliant India as just another guise for protectionism.

India has already signed bilateral FTAs with ASEAN, Japan, Malaysia, Singapore and South Korea and is negotiating an FTA with Australia among others, reflecting the recognition that FTAs are crucial to integrating India into global supply chains. It cannot be lost on New Delhi that while this spaghetti bowl of FTAs might be easier to negotiate, individual agreements cannot boost trade in the same way as a multilateral deal with the scope of RCEP.

The dragon in the room is China. Though several China experts in India are wary of its regional geopolitical intentions, China is India’s second-largest trading partner and trade continues to hit new records, emphasising the dichotomy between India’s economic and political realities. India is not alone. Both Australia and Japan are members of the Quad security arrangement with India and the United States. They are navigating tensions with China on the geopolitical front as members of RCEP, in recognition of its economic benefits.

The alternative scenario is that India’s economic growth remains sluggish. This is likely if the government pursues an import-substitution strategy under Atmanirbhar Bharat — a strategy that failed to generate growth before 1991 and which is unlikely to succeed now. Production-linked incentives are likely to be poorly administered, advantaging privileged firms and thus crimping economic outcomes.

Greater policy uncertainty may discourage foreign investors, agriculture reforms may stall, and micro-enterprises in the informal sector — where employment was worst hit by the pandemic — may fail to recover. A weakened economy could increase pressure on an election conscious government to turn inward, forcing it to pursue a strident nationalist agenda and place all bets on bilateral FTAs.

If border tensions with China escalate, India could pivot westward. India is pursuing FTAs with the EU, the United Kingdom, Canada, Israel and the Southern African Customs Union. But these economies are small or geographically distant from India. The gravity model of international trade predicts that prospects with these nations are unlikely to match the benefits of RCEP. Besides, an FTA with the EU — or even the United States — will be tougher on labour and environmental and investor protection standards, so returning to RCEP negotiations might be a more fruitful avenue for India.

It is fortunate that RCEP includes a pathway for India to participate in cooperation activities pending accession and a fast-track accession option should it wish to join in the future. Advocates of globalisation can always hope that India will exercise these options.

*About the author: Asha Sundaram is Senior Lecturer at the Department of Economics, University of Auckland.

Source: This article is published by East Asia Forum and appears in the most recent edition of East Asia Forum Quarterly, ‘East Asia’s Economic Agreement’, Vol 14, No 1.

East Asia Forum

East Asia Forum is a platform for analysis and research on politics, economics, business, law, security, international relations and society relevant to public policy, centred on the Asia Pacific region. It consists of an online publication and a quarterly magazine, East Asia Forum Quarterly, which aim to provide clear and original analysis from the leading minds in the region and beyond.

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