India Was Right to Walk Away from RCEP, But What Comes Next?

Domestic enterprises must be pulled up by their bootstraps before they are able to compete in global markets. Modi must focus this critical dimension going forward. 

India’s withdrawal from the Regional Comprehensive Partnership Agreement (RCEP), the 16-country mega regional trade agreement in East Asia and also the world’s largest trading bloc, must be seen as evidence that strong voices from domestic stakeholders can make their impact felt on the government’s decision-making. 

Few realised that for the first time in post-independence India, a cross-section of domestic constituencies, including farmers, trade unions, representatives of major sectors of Indian industry and civil society organisations, spoke in one voice against the threats to their future posed by the RCEP. They gave a clear message that ceding the country’s economic space to foreign businesses by accepting the trade liberalisation commitments under RCEP would deal a body blow to the interests of domestic players.

In other words, RCEP would have hurt an already stressed economy, which is saddled with a perceptible slowdown in the manufacturing sector coupled with an increasingly distressed farming sector.

There were adequate reasons for India to avoid hopping on to the RCEP bandwagon when it was first proposed in 2012. India had concluded three free trade negotiations (FTAs) with ASEAN, Korea and Japan, and the benefits of concluding these deals were being questioned by farmers’ organisations and some state governments. However, those backing the deals saw benefits for India in terms of enhanced market access in one of the most dynamic regions and participation in regional value chains.

Watch:  ‘RCEP Is Neither Necessary nor Sufficient for Us to Achieve Our Export Targets’

The reality of these FTAs became apparent before long, with India failing to take advantage of any of the purported benefits. Expansion of exports were much below expectations, but imports from the FTA partners kept increasing since India had reduced/eliminated its relatively high tariffs. India’s participation in the value chains, too, became a distant dream.

The NDA government fully understood this reality and took measured steps to engage in the RCEP negotiations in at least two important areas: market access to RCEP participating countries (RPCs), and protection and promotion of foreign investment.

In the area of market access, India’s initial offer showed that the government had factored in the adverse implications of the three existing FTAs. A modest increase in market access was offered to ASEAN, Korea and Japan, its existing FTA partners. Further, the most significant RPC, namely China, was promised relatively less market access, the logic being that if China was able to establish such a large presence in the Indian market even when its products did not receive preferential tariffs, grant of tariff preferences to China under RCEP could result in rapid expansion of the Chinese footprint.

But India’s initial offer was rejected by the RPCs, and the mandate of the RCEP, “progressively eliminating tariff and non-tariff barriers on substantially all trade” and achieving “high level of tariff liberalisation”, seemed to have been accepted by India.

Also read: Why India Shouldn’t View its Refusal to Join RCEP as a Victory

As regards the protection and promotion of foreign investment, RCEP negotiations saw the major economies among the RPCs, except India, argue in favour of an investment agreement that gave a strong endorsement to investor rights, often at the expense of the host country. India’s view was to the contrary mainly because foreign investors had taken advantage of the dispute settlement clauses (the so-called investor state dispute settlement mechanism, or ISDS) in the bilateral investment treaties that India had signed up to, and had taken the government of India into international arbitration.

After India lost the first dispute in 2012, a review of the bilateral treaties was undertaken, an exercise that was completed in 2015. The NDA government revised the model text for the Indian bilateral investment treaty, which provided several safeguards against excesses by foreign investors. The government announced that future investment agreements negotiated by India would be based on the model text. However, RCEP investment negotiations did not have any space for India’s suggestions.

Given the aforementioned, several issues arise regarding India’s continued engagement in RCEP negotiations. 

The first is the justification of remaining engaged when the government’s initial assessment of RCEP was clearly downbeat. In fact, this assessment was identical to those voiced by the stakeholders about the imminent risks of joining RCEP.

A second issue arises with respect to the process that was followed while engaging in the negotiations. Here again, the government showed its willingness to put in the public domain its initial negotiating stance on the important issue of market access in the starting stages of the negotiations. This was in keeping with the democratic traditions of decision-making. But this changed dramatically afterwards, for in the critical later stages, the government negotiated the country’s economic future in complete secrecy.

Also read: Invoking Mahatma Gandhi to Stay out of RCEP Is a Lazy Act

A third issue relates to assessments of possible outcomes of the RCEP negotiations, which the government or its agencies never attempted, or even if they did, the assessments were not put in the public domain. Although the government was reluctant to walk this path, it had become clear from the implementation of the ASEAN, Korea and Japan FTAs, 12 of the 15 RPCs, that the growing trade deficits would become unsustainable after joining RCEP.

What also became clear was that while in the three existing FTAs, India was able to protect the vulnerabilities in agriculture and the sensitive industries in the manufacturing sector, RCEP opens these sectors to import competition. Already suffering from the consequences of low productivities and efficiencies, such an external shock could certainly have resulted in disruption causing loss of jobs that the country can ill-afford in the face of growing unemployment.

Also read: In India’s RCEP Exit, Domestic Compulsions Sideline Fear of Being Isolated

Several narratives have appeared in the aftermath of India’s withdrawal from RCEP that are critical of the government’s decision. These use the arguments that India has lost export opportunities in East Asia by stepping aside and also that policy makers have foregone the opportunities to push domestic reforms by accepting the policy package that RCEP has to offer. 

The first argument, being made much like the way it was when India was negotiating the three FTAs with ASEAN, Korea and Japan, can effectively be addressed by considering ability or more pertinently, the lack of it, of domestic enterprises to utilise the market access opportunities provided by these FTAs. This effectively proves that domestic enterprises must be pulled up by their bootstraps before they are able to compete in global markets. The government must focus on this critical dimension going forward. 

As regards the second argument, it needs to be pointed out that the experience of successful economies, especially in the East Asian region, is all about the ability of their governments to utilise the policy space to make their domestic enterprises more efficient. These successful economies have crafted their policies with an eye on the domestic imperatives and have avoided importing policy packages promoted by other countries.

Biswajit Dhar is a professor at the Centre for Economic Studies and Planning, Jawharlal Nehru University.