India favours bilateral free trade agreements over China-led RCEP
India consciously rejected the China-centric Regional Comprehensive Economic Partnership (RCEP) in favour of beneficial trade agreements with key economies such as the US and the European Union (EU), where Indian products and services are competitive, three officials familiar with the matter said on Monday.
The Narendra Modi government frustrated Chinese designs of using RCEP to get unfettered access to the vast Indian market at the cost of India’s micro, small and medium enterprises (MSMEs), farmers and start-ups, officials from three ministries said on condition of anonymity.
While RCEP states resorted to the unusual step of adopting a separate ministers’ declaration on India’s future participation in the trade deal when the agreement was signed on Sunday, people familiar with developments said there is no fresh effort underway from Asean or New Delhi in this regard.
The people said Japan, which consistently pushed for India’s inclusion in RCEP to ensure a balanced outcome, led the drafting of the ministers’ declaration that acknowledged India’s strategic importance in creating “a region of even deeper and expanded value chains”. One of the people said: “Japan will continue to play a leading role in India’s future participation in RCEP.”
One of the three officials with direct knowledge of the matter said: “It is widely known that RCEP is not lucrative enough without India. But India cannot engage with any trade bloc led by China, which is globally notorious as an aggressor. Besides, it is a direct threat to India’s sovereignty and territorial integrity.”
The 10 members of the Association of Southeast Asian Nations (Asean), Australia, China, Japan, New Zealand and South Korea signed the world’s biggest free trade deal at a virtual ceremony hosted by Vietnam on Sunday.
More than a year before the signing, Prime Minister Narendra Modi signalled India’s decision not to join RCEP, telling a summit in Bangkok in 2019: “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.”
China’s official Xinhua news agency said on Monday that India had committed a “strategic blunder” and “missed the bus” to long-term growth by not signing the deal.
“The Chinese outburst shows how India has frustrated Beijing’s design to invade the Indian market,” a second official said. “India will avoid joining agreements, which are in reality free trade agreements (FTAs) by stealth with countries like China,” said the official directly involved in trade matters.
“Unlike previous governments, the Modi government will not succumb to global pressures and sign uneven, biased and useless agreements,” a third official said. The government has initiated a comprehensive review of all FTAs as most of them are “heavily tilted against” India.
“India’s trade deficit with RCEP states increased from $7 billion in 2004 to $78 billion in 2014. India’s deficit with China is more than $50 billion. India’s domestic industry is still reeling from dumping and cheap imports,” the third official said.
India eliminated tariffs on 74% lines under Asean, but richer countries such as Indonesia eliminated tariffs on only 50% lines for India, and Vietnam on 69%. This led to significant trade distortions, the third official said. “Therefore, to sign RCEP, India needs to first resolve issues in previous FTAs, and second, to ensure balanced, fair and beneficial framework in RCEP,” he added.
While delivering a lecture on Monday, external affairs minister S Jaishankar referred to similar concerns without naming RCEP. He said the effect of trade agreements signed since India’s economic reforms of 1991 had “been to de-industrialise some sectors”.
“The consequences of future ones would lock us into global commitments, many of them not to our advantage. Those who argue stressing openness and efficiency do not present the full picture. This is equally a world of non-tariff barriers of subsidies and state capitalism. Without exaggeration, what we will be deciding now will determine whether India will become a first-class industrial power or not,” Jaishankar said.
However, a joint statement by leaders of the 15 RCEP states said they “would highly value India’s role in RCEP and reiterate that the RCEP remains open to India”. India’s accession will be welcome in view of “its strategic importance as a regional partner in creating deeper and expanded regional value chains”, the statement added.
A diplomat from an Asean nation, who spoke on condition of anonymity, said: “It costs nothing to keep the door open for India and we believe, with time, it will be India’s decision [whether to join RCEP].”
Ram Singh, professor at the Delhi School of Economics (DSE), said India’s decision against signing the RCEP agreement was “practical and prudent” in terms of economic and geo-political circumstances. “The deal would have brought down import duties on 80-90% goods. These provisions will lead to flooding of Indian markets with cheap goods, particularly from China, harming our industries in the process. Issues like lack of framework for addressing trade deficit and opening of services also rendered the agreement less attractive for India,” he said.
“India is the third biggest economy in the RCEP region. So access to Indian market is important for the RCEP countries. India can also gain from participation, but only if we join the grouping after addressing constraints on competitiveness of our industry and agriculture sector,” he added.
Experts said while RCEP was not suited for India in its present form, New Delhi can explore other options in Europe, America and Africa. Adil Zaidi, partner and leader, Economic Development Advisory at consultancy firm EY India, said, “India will have to play to its strengths and negotiate trade agreements with existing consumption hubs in America and Europe as well as with emerging ones in Africa. It is equally important to monitor imports from alternate routes under Asean, SAFTA and other FTAs.”
“With GoI’s [Government of India] focus on ‘Atamanirbhar Bharat’, it is important for India to consolidate the demand and drive factors of production in favour of domestic manufacturing. Thus, India needs to prepare itself to not only cater to domestic demand but also to improve exports,” Zaidi said.
Divakar Vijayasarathy, founder and managing partner at consulting firm DVS Advisors LLP, said the RCEP deal was not favourable for India, particularly for its farming community. “RCEP was politically sensitive issue since access to India’s dairy market would have been available to these countries upon signing. The dairy market in India is highly unorganised and does not have the depth to compete with corporates of other countries.”
“Further, greater access to India’s service sector was negotiated without any success and the government was also worried about the FTAs leading to trade deficits. All these issues lead to India pulling out of RCEP,” he said.
He, however, said India cannot keep itself aloof from global markets. “In order to succeed in the mission of making India a manufacturing powerhouse under its Athmanirbhar Bharat programme, FTAs would be an important cog in the wheel, else global companies would choose countries which have favourable treaties giving access to many economies for their operations,” Vijayasarathy said.
“FTAs are definitely double-edged; they would increase the export demand but at the same time it would challenge the domestic industries. The domestic industry has to mature to take on the global competition,” he added.