RCEP: The Indian Perspective

“When I measure the RCEP agreement with respect to the interests of all Indians, I do not get a positive answer. Therefore, neither the Talisman of Gandhiji nor my own conscience permits me to join RCEP.” - Prime Minister Narendra Modi

PM Modi at the Asean summit in Bangkok.

That’s a pretty heavy statement for any world leader to use to refuse joining a trade agreement whose negotiations were going on for almost a decade. But why was such a statement warranted? Let’s take a quick look at what the RCEP is actually, and then try to figure out what it means for India Inc. going forward.

The Regional Comprehensive Economic Partnership is a free trade agreement between the 10 ASEAN Members and it’s FTA partners, tabled first in 2012. FTAs are agreements to lower or completely remove tariffs on imports and exports between one or more countries. The aim is noble, to provide a greater market to each others’ strong goods and services, while the list is mostly agreed upon. What one country produces well and the other requires is provided and vice versa. Win win for all.

But then, why the fuss around RCEP and why backing out? After all, with the 16 nations, it would have been, according to 2017 estimates, the largest free trade economic bloc in the world, comprising of almost one third of the global trade, more than one-third of the global GDP, and half the world’s population, with only India and China being the major powers getting these big numbers. Sounds terrific.

However, coming to India and its history of FTAs, the picture we have been seeing since the past one-and-a-half decades is not very rosy to be honest. A 2017 report by Niti Aayog showed that our FTA partners had unfavourable gains since the agreements kicked in. India’s trade deficit has only been rising since India signed a flurry of FTAs in 2006. It also says that India’s exports to FTA partners have not outperformed the overall export growth or exports to the rest of the world. In fact, the utilisation rate of provisions under RTAs by Indian exporters is very low, between 5% to 25%.

The major concern that the Indian government said in September 2019 was the fear of China dumping its goods in the Indian markets. The fears, however protectionist they may sound, seem to be indeed valid, since it has been noted that the ASEAN-China FTA of 2010 led the trade of the 6 ASEAN countries under this agreement with China to fall from an export surplus of US$ 53 Billion to an export deficit of US$ 56 Billion.

India was looking for clauses that would ensure that partner countries won't misuse the trade pact, and an auto-trigger mechanism to protect its markets in case of a surge in imports. On the contrary, there was no credible assurance on market access and non-tariff barriers. Another major concern was the use of 2013-14 as the base year for tariff reductions, when the negotiations started, after which India has been increasing its import duties until 2019.

China, on the other hand, wants such a deal to frutify rather quickly, given its trade tensions with the US and no signs of a favorable FTA anytime soon. With the BRI project also being criticised heavily, such a deal would have reestablished China’s geostrategic and political presence in the East and would have provided a safer trading environment closer home, given the emergence of pacts like Trans Pacific Partnership, and the relatively newly launched Trans-Atlantic Trade and Investment Partnership involving the United States and the European Union.

The Indian Industry stands divided on the issue, yet it is almost unanimous in saying that any such deal must not harm small traders and businesses, hurt jobs, or prove detrimental for Make in India, with industrial bodies like SIAM and CII voicing opinions.

So what’s the way forward on RCEP? Does India get to be a part of the bandwagon, or would India miss the show altogether? While PM Modi said that he did not accept the current form of the agreement, since Nov 4 2019 was agreed upon as the deadline for finalising the negotiations and agreements, China and the rest of the involved countries are still hopeful of India joining in. China says India can join whenever they are ready, while we have a one year window still left to join before the FTA kicks in.

That’s what we could make of it. What do you think?