India Not to Accede to RCEP: Final Decision or Just a Step in Negotiations?

India’s decision not to accede to the Regional Comprehensive Economic Partnership (RCEP), which comprises ASEAN member countries, China, Japan, South Korea, Australia and New Zealand, came as a surprise, as it was made during the final stage of the negotiating process. It is, nevertheless, consistent with New Delhi’s trade policies in recent years. The prospect of joining the partnership has sparked a violent discussion in India, especially as the participating countries are getting closer to reaching an agreement. 

Several reasons that prompted the Indian government to reconsider its participation in the Regional Comprehensive Economic Partnership should be pointed out. The issue that worried the Indian politicians and industry representatives most was the Indian market’s growing vulnerability to the inflow of Chinese-made goods. India has an impressive trade deficit with China to the tune of $53 billion. The prospect of increasing the volume of Chinese-made imports, including through third countries, and the government’s inability to impose restrictive measures to protect the market were the causes for serious fears in India. The free trade agreements (FTAs) with Japan, ASEAN and South Korea, concluded in 2007 and 2010, respectively, have led to a major increase in the trade deficit, and gave the critics of the RCEP in India a strong argument against joining the association. The inclusion of a mechanism for counteracting surges in imports into the RCEP agreement, which New Delhi sought, was rejected by the other countries. 

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Significant concerns stem from the inevitable increase in competition that Indian manufacturers would have faced if the country joined the RCEP. The talks went hand in hand with serious pressure on the government from the business community and the opposition. 

In addition, the possibility of the country joining the economic partnership was criticized by the Rashtriya Swayamsevak Sangh (National Volunteer Organization) which is the oldest and most influential Hindu nationalist organization. The ruling Bharatiya Janata Party is its political wing. The extreme right in India has traditionally opposed global trade believing that everything should be manufactured in India and the country must say no to imported products, with the rare exception of essential items. The National Volunteer Organization’s criticism of the government’s actions meant a split within the ruling party regarding the country's trade policy and most likely influenced the final decision not to join the regional trade association. 

The debate over participating in the RCEP was further aggravated by economic woes, with the Indian economy noticeably slowing over the past two quarters. A crisis in agriculture, a decline in industrial output, a drop in purchasing power, and an increase in unemployment have adversely affected the socioeconomic situation in India. 

As a result, after lengthy talks at the minister of industry and trade level, Prime Minister Narendra Modi said at the East Asia Summit in Bangkok that the RCEP Agreement “does not address satisfactorily India’s outstanding issues and concerns,” so it is not possible for the country to join the RCEP Agreement under current circumstances. The Government of India presented its decision to not join the economic partnership as a step in protecting its national interests, farmers and small- and medium-sized businesses, as well as the pharmaceutical, textile, steel and chemical industries. India’s Minister of Home Affairs and President of the ruling Bharatiya Janata Party Amit Shah called the decision “a historic milestone” noting that, when making it, Prime Minister Modi was guided by the India First principle. 

Despite obvious similarity with President Trump’s famous slogan, the policies of the two countries, especially in trade policy, are far from similar. Indeed, in many respects, the clash of these slogans underlies the unresolved trade differences between India and the United States, which the countries have so far been trying to resolve to no avail. However, unlike Donald Trump who, immediately after taking office, chose to terminate trade agreements that don’t work for the United States, the Narendra Modi government’s approaches to global trade have become manifest only now, early in his second term in office. The image of a global India, which draws in foreign investors and strives to take an important place in global trade processes, is gradually being replaced by tougher policies to protect the local market from global competition. It is no coincidence that disagreements between India and its major trade partners, China and the United States, escalated after the Bharatiya Janata Party-led government was re-elected in May 2019. 

What are the implications of India not joining the RCEP? On one hand, the last-minute decision, taken after lengthy talks, doesn’t do much to improve India’s global image. ASEAN and Japan were most disappointed with India’s decision. They had seen India as an important balance to China if it had joined the RCEP Agreement. At the same time, India’s withdrawal means the completion of painful talks, which had dragged on since 2012. None of the regional partners wants to spoil relations with New Delhi, since the Indian market remains attractive and readily available to them, and talking with India on a bilateral basis is a little easier. In addition, India’s dissatisfaction with the existing FTA agreements was positively received by its partners: the ASEAN countries have expressed a willingness to revise the terms in order to achieve greater trade balance with India.

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Even though other RCEP countries decided to sign an economic partnership agreement without India, they left the door open for New Delhi. Australia, Japan, ASEAN, and China expressed hope that India would still join the RCEP eventually. India’s withdrawal is particularly harmful for China. India has not ruled out the possibility of joining the RCEP, if the RCEP countries take its concerns into account. 

India’s trade policies in recent years have been marked by high levels of unpredictability. However, the desire to uphold its own economic interests is obvious. A country whose economic growth largely depends on globalization still often resorts to protectionist measures to protect its own market. Amid unstable global trade, New Delhi prefers drawn-out and unproductive talks on prospective free trade zones to ill-considered agreements that may be disadvantageous for the Indian economy. Nevertheless, in order to maintain economic growth, India will have to not only focus on domestic growth, but also seek compromises with its foreign partners in order to increase its participation in global value-added chains.

Views expressed are of individual Members and Contributors, rather than the Club's, unless explicitly stated otherwise.