Why India pulled out of the RCEP free trade deal

Indian Prime Minister Narendra Modi's government took a decisive step this week and announced the country's withdrawal from the Regional Comprehensive Economic Partnership (RCEP).    

After New Delhi's pullout, the proposed free trade deal now aims to bring together the 10-member Association of Southeast Asian Nations (ASEAN), China, Japan, South Korea, Australia and New Zealand.

These countries said the deal would be signed early next year after they, without India, reached agreement on the text and market access issues, seven years after talks began.

Modi's government said the proposed agreement was unacceptable to India in its current form as it did not accommodate New Delhi's concerns and "core interests."

"When I measure the RCEP Agreement with respect to the interests of all Indians, I do not get a positive answer," Modi said in a speech in Bangkok, according to a government note.

India's 11th-hour pullout came after days of late-running negotiations at the ASEAN summit, which closed Monday. Differences and concerns over some provisions in the proposed agreement — involving equitable market access, the rules of origin, dispute settlement mechanisms and sensitivities of domestic industries — prompted India to pull out of the deal.

Acknowledging New Delhi's concerns, the remaining members expressed hope that India would join the pact at a later date.

Trade imbalance fears

The RCEP has been viewed as key to regional economic integration in Asia. With India as a member, it would have brought together about half of the world's people and 30% of global GDP. The trade deal figured prominently in New Delhi's "Act East" foreign policy.

But a big concern for India was that it would be flooded by goods from China and elsewhere. India already has a massive trade deficit with China, amounting to $53 billion (€48 billion). It's the biggest deficit India has with any country.

PM Modi raised the issue with Chinese President Xi Jinping when both leaders recently held talks in the southern Indian resort town of Mahabalipuram, south of Chennai.

Some sectors of the Indian economy, like the pharma and IT industries, have found it tough to enter and expand in the Chinese market. Despite India repeatedly calling on China to ease barriers, Beijing hasn't taken any substantive measures. 

And in 2018, China started exporting goods via Hong Kong, in an attempt to make a cosmetic change to the balance-of-trade situation with India. This would be a violation of the rules-of-origin provisions, if a fair free trade mechanism comes into force.

Adding to India's reservations is the country's rather unpleasant experience with the free trade deal it struck with ASEAN several years ago. 

In 2010, when the ASEAN-India agreement was signed, the services sector — which is India's forte — was not included in the agreement, and it took the negotiating parties another five years to hammer out a deal on services and investment. India's trade deficit with ASEAN has widened over the years.

Protecting vulnerable sections

India was also concerned about the RCEP's potential impact on sectors like agriculture, which would affect the country's vast rural population. Indian agriculture is largely subsistence-based and beset by alarmingly low levels of modern technology, packaging, processing and storage facilities.

Opening it up to competition from much more advanced agriculture producers in places like Australia, New Zealand and Japan would have led to an economic and social crisis in the South Asian nation. That would have been the case even with agriculture-related sub-sectors like dairy and food processing.

So protecting weaker and vulnerable sections of Indian society was a key factor behind India's pullout. But that's not the complete story.

Even bigger industrial sectors, like steel, iron and rubber manufacturing, were not in favor of the trade pact. These industries in India are dominated by big family-controlled firms, which are protectionist in nature.

These companies are not competitive enough to survive the potential onslaught of imports from across the region after the conclusion of the RCEP. Given the wide-ranging implications, the role of these businesses in shaping the opinion of Indian policymakers cannot be ruled out.

Long-term impact

While concerns about the socioeconomic impact on weaker sections cannot be overlooked, India's withdrawal from the RCEP also highlights the glaring gap between the competitiveness of Indian and Chinese industries, and the slow pace of comprehensive reforms to make the Indian economy more outward looking and globally competitive.

The Indian government's decision protects vulnerable sections of the economy, as well as medium and big industries, from foreign competition for the time being. It might also help India clinch a better deal as informal negotiation channels are still open. 

Although the move appears reasonable at the moment, staying away from the RCEP would have far-reaching implications for India in the long run, not least by excluding the country from the regional supply chain mechanism and further entrenching its inward-looking economic tendencies.

Rahul Mishra is senior lecturer at the Asia-Europe Institute of University of Malaya in Kuala Lumpur, Malaysia. He specializes on politico-security affairs of the Asia-Pacific region.