Can India be part of Asia’s growth story without the RCEP – or China’s trust?
The decision of 15 Asian countries earlier this month to seal the Regional Comprehensive Economic Partnership (RCEP), heralding a major step forward for economic integration, has sparked a debate among diplomats and academics in India about whether the country is being left out of Asia’s growth story because of its decision not to join the group.
“India has been repeatedly missing the Asian bus, despite our desire to get on board,” Sanjaya Baru, an adviser to former prime minister Manmohan Singh, told The Hindu newspaper. He compared the current situation to the 1990s, when New Delhi decided not to join the Asia-Pacific Economic Cooperation (Apec) – another major trade group, comprising 21 member countries.
The decision not to join Apec slowed the pace of economic reforms in India and also made several of the group’s members wary of India, which they viewed as overly protective of domestic industries. Although the moratorium set by Apec on taking new members was lifted in 2010, and India has indicated a willingness to join, there has been no unanimity in the trade bloc to include India
The RCEP, which covers a third of the global population and a combined GDP of US$26.2 trillion, could have been significantly bigger if India – with 1.3 billion people and a GDP of about US$2.7 trillion – were a member. But it pulled out of the grouping last November after seven years of negotiations on the conditions for its membership, arguing its key concerns were not addressed.
For example, India wanted stricter “rules of origin” to prevent cheap Chinese goods from flooding its domestic market and more safeguards for its agricultural industry. It was also unhappy with China’s reluctance to grant concessions as well as with other Asian countries’ attempts to put up non-tariff barriers.
Mohan Kumar, a former Indian diplomat and current chairman of the Research and Information System for Developing Countries, a New Delhi-based think tank, said the concessions sought by India from China were in effect “safeguards” – provisions to allow the imposition of tariffs if there was a surge of goods from Beijing.
Despite Japan’s attempt to broker a deal, it failed because of China’s reluctance to accept India’s terms. “We thought the issues [would] get resolved eventually, but it did not happen,” Kumar said.
But one major factor in the breakdown of negotiations was India’s growing distrust of China, fuelled by a months-long stand-off between the two countries at the Himalayan border that looks set to stretch into a brutal winter.
Since both sides became locked in their worst dispute since 1962 over the unmarked 3,488km border, India has doubled down on efforts to strengthen domestic production and supply chains, and has also placed restrictions on Chinese imports and investments – measures that would go against the RCEP if India were a party to it.
According to India’s former commerce and industry minister, Anand Sharma, staying out of the RCEP was “a backward leap”. Sharma had initiated RCEP negotiations for India in 2012, and his disappointment indicates that in future, other countries will find it difficult to see India as a reliable trade partner.
Biswajit Dhar, professor of economic studies and planning at Jawaharlal Nehru University in New Delhi, said the decision to withdraw became inevitable after the country’s crucial manufacturing, agricultural and dairy industries all came out against membership, although he added that India could have built a firewall between its economic and political engagements with China.
“It may be difficult now as the popular sentiments have gone completely against China after the border skirmishes, but it is an option that must be explored to go forward,” he said.
India’s leaders have sought to defend the decision not to join the RCEP, with external affairs minister S. Jaishankar saying at the Indian School of Business’ Deccan Dialogue last week that New Delhi had allowed subsidised products and unfair production advantages from abroad to prevail, without naming China.
He said the effect of past trade agreements had “deindustrialised” some sectors in the country, but that as India pursued becoming a self-reliant economy it did not mean it was turning its back on the world.
“What we will be deciding now is whether India will become a first-class industrial power,” Jaishankar said.
But Congress party leader and former finance minister P. Chidambaram, who is now a member of parliament, said in a tweet that “Jaishankar’s views reflect the language spoken in the 1970s”. He was referring to an era when India’s reluctance to open its economy resulted in an average annual growth rate of just 3.5 per cent, while GDP growth of other Asian countries and regions – Singapore, Hong Kong, Taiwan and South Korea – blossomed at an average rate of 7 per cent from the 1960s to 1990.
India began its economic liberalisation in 1991 and in subsequent years averaged 8 per cent annual growth, benefiting from the free-trade agreements it signed with other countries.
“India remains relatively closed when compared to other major economies,” Prabhash Ranjan, a senior assistant professor of law at the South Asian University in New Delhi, argued in an opinion piece in The Hindu.
According to Ranjan, India’s applied most favoured nation import tariffs are 13.8 per cent, the highest for any major economy. It also figures in the “very restrictive” category on the UN Conference on Trade and Development’s restrictiveness index. In addition, from 1995 to 2019 India initiated anti-dumping measures 972 times – the highest in the world – to protect its domestic industry.
“By refusing to sign the RCEP, India is now truly in the margins of the regional and global economy,” Ranjan told This Week in Asia. “India’s offer to become a hub for the global supply chain as opposed to China will be severely affected, as any manufacturer who wishes to be part of the supply chains that export to the 15 countries in the RCEP would like to base itself in a country that would enjoy preferential tariffs.”
But Kumar, the former diplomat, is optimistic that India’s large domestic market will help it survive and substantially reduce the impact of not joining the RCEP. He pointed out that India has big export markets in the European Union, the United States and the Gulf, and that Delhi’s objective is to have free-trade agreements with each of them.
“In the post-pandemic situation, ‘resilience and trust’ rather than value chains would become more important,” he said.
Significantly, RCEP members have kept the door open for India to join if it so desires in the future. But with New Delhi not being part of any major trading arrangement that involves other major economies in Asia, where does this leave it now?
“That will leave India out in the cold,” former Indian foreign secretary Shyam Saran said in an interview with The Hindu. He also cautioned: “There is this assumption that people have to come to India on our terms. But that, to my mind, is a fairly optimistic assessment.”