India’s decision to stay out of RCEP: what does the future hold?

November 06, 2019 7:16 PM

India needs a road map and time frame within which to make structural changes and join RCEP, thereby deriving benefit from the agreement.

The Indian delegation issued a separate statement, stating that it had decided not to join the RCEP since it did not receive any “credible assurance on market access and non-tariff barriers”.

By Anil Wadhwa

After seven years of negotiations, the 16 participating states in the Regional Comprehensive Economic Partnership (RCEP) agreement issued a statement on 4 November 2019 at Bangkok, conveying that 15 of the participating states had concluded text-based negotiations on 20 chapters of the agreement and will proceed to sign this agreement in 2020. The statement mentioned that India has significant outstanding issues, which remain unresolved and that all RCEP participating countries will work together to resolve these outstanding issues in a mutually satisfactory way. India’s final decision, the statement read” will depend on the satisfactory resolution of these issues”.

The Indian delegation issued a separate statement, stating that it had decided not to join the RCEP since it did not receive any “credible assurance on market access and non-tariff barriers”. A statement by the Indian Commerce Minister Piyush Goyal on 5 November revealed that there were at least 70 outstanding issues in the negotiations, of which 50 pertained to India. Prime among these is a proposed import cap for China and a mechanism to raise tariffs on Chinese imports if it crossed a certain threshold through an auto-trigger mechanism. This shows the divergence of positions between India and the rest of the participating states.

The Indian concerns stemmed from the large trade deficit with ASEAN and China and fears  that unless issues like rules of origin, provisions to counter sudden surge in imports, particularly from China, and securing better access in the services sector were met, India will become a dumping ground for cheap imports from the rest of the ASEAN partners.  A major concern also was the use of 2014 as the base year for tariffs in the negotiations – India had proposed that the base year being 2019 since it has raised tariffs on as many as 3500 products since then.  Leading up to the negotiations, at least eight different industry sectors had expressed apprehension about the utility of the agreement for India, there was opposition from other political parties, and a division amongst the think tank community in India. The difficult state of the Indian economy and stagnation in Indian exports added to the pessimistic solution.  It does seem that Indian negotiators put forth their points forcefully, but the crucial issues for India kept getting pushed right till the end without resolution.

India also brought in additional issues into the negotiations over the last two rounds, after further evaluation of the impact that the RCEP in its current form could have on the Indian economy. It does seem from various reports that the Indian concerns could not be accepted. Given these circumstances, staying out was a logical option for India. While the statement by the Prime Minister at the RCEP meeting merely stated that India will not join the RCEP, Commerce Minister Piyush Goyal, speaking on 5 November noted that “ should the other countries come up with better offers in the interests of India’s industry and people, we will discuss it and do what is good for our farmers, industry, and the services sector.

Prima facie, this seems like an option, but in reality, to expect Indian concerns to be resolved within the legal scrubbing phase of the RCEP text seems difficult unless there is a concerted effort made by the rest of the RCEP partners.

In the long run, India needs to be part of RCEP. This will facilitate FDI in manufacturing in India as RCEP will allow access to the Chinese and other 14 countries who will be part of RCEP. The fear of being swamped by Chinese goods can only be mitigated by making Indian economy and manufacturing efficient, reforming agriculture, promulgating new labour laws, bringing down the cost of capital, reducing deficit financing, rationalization of indirect taxes and levies, reducing bottlenecks, and improving logistics.

India needs a road map and time frame within which to make structural changes and join RCEP, thereby deriving benefit from the agreement. Like the other participating states in the RCEP negotiations, India will need to improve transaction costs and improve its position on indices such as ease of doing business.

Participation in RCEP will promote the formation of supply chains and will provide access to mutual recognition agreements. Remaining outside RCEP will have an adverse impact on exports to the RCEP members, who will enjoy lower tariffs within the grouping. It would also mean that RCEP Members will be seen as better investment destinations, being part of a larger grouping with market access within the group. While making these preparations, India will need to focus its attention on FTAs outside the grouping – e.g. Europe, USA or Africa.

The CECA negotiations with Australia could be revived given the vast potential of trade and investments with that country. The existing FTAs with ASEAN, South Korea and Japan will need to be reviewed and made to work better to obtain a level playing field and to keep up the momentum in our Act East Policy. Bilateral trade, investment and connectivity projects will have to be concentrated upon. India’s growing role in the Indo Pacific demands that this engagement is maintained and that eventually when India is ready, participation in RCEP reactivated.

(The author is a former Secretary (East) in the Ministry of External Affairs, and former Ambassador to Poland, Oman, Thailand and Italy. Currently, he is a Distinguished Fellow with the Vivekananda International Foundation in New Delhi. Views expressed are personal.)

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