Author: Debashis Chakraborty, Indian Institute of Foreign Trade.
After pursuing an active regional trade agreement (RTA) policy since 2005, India changed course in November 2019. Having participated in Regional Comprehensive Economic Partnership (RCEP) negotiations since 2013, with the goal of elevating its regional economic integration, India decided not to sign the agreement.
This came after India had joined a number of trade agreements spanning East and Southeast Asia, particularly since 2010–11, for trade and investment promotion. RCEP seemed to align with India’s long-term engagement strategy, and its desire to integrate the regional economy with regional value chains. But the decision to withdraw from RCEP negotiations cited potential conflicts with economic interests and national priorities.
India’s decision was largely influenced by its trade balances. From 2011 to 2015, India’s average trade deficit with RCEP members stood at US$38.75 billion. This increased to US$44.03 billion during 2016–19. Over the same period, India’s trade deficit with ASEAN increased from US$4.55 billion to US$5.12 billion. The most crucial driver of the RCEP decision was the widening trade deficit with China, which had increased from US$22.95 billion to US$25.13 billion.
Among other factors, India’s modest participation in several manufacturing value chains with RCEP partners, particularly the developed ones, remained a major area of concern. Given the political and economic importance of primary sectors, concerns over a rise in imports from developed countries — such as Australian and New Zealand dairy imports — forced the hand of policymakers.
Growing dependence on Chinese imports, even without an RTA, was also viewed with caution. India’s perception that RCEP participation is a threat to their economic interests originates both from existing RTA partners, such as ASEAN, and non-partners like China. Growing imports conflict with the ‘Make in India’ policy launched in 2014, a key objective of which is to revive the domestic manufacturing sector.
The repeated anti-dumping investigations launched by India against China also raised concerns about unfair trade practices from China. And since the Galwan Valley crisis, mistrust between the two countries has grown, with significant ramifications for economic cooperation. Since 2020 India has banned many Chinese apps and explored possible options to reduce import dependence. Despite these moves, India’s bilateral trade deficit with China increased to US$46.55 billion during the first nine months of 2021 compared to US$29.86 billion in the same period of 2020.
But while India rejected RCEP as a bloc, it can continue embracing individual RCEP members — such as ASEAN, Japan and South Korea — and other partners through existing bilateral relationships. It can also move towards incremental expansion of RTA relationships.
The announcement of India’s decision to pull out of RCEP also noted the possibility of entering into RTAs with the European Union and United States. Since 2019, India has tried to revitalise negotiations with the European Union and a free trade agreement with the United Kingdom is under discussion. While the need to initiate RTA negotiations with the United States has been discussed, it is yet to be launched.
The Indo-centric RTAs in the post RCEP pull-out period is indicative. India concluded the India–Mauritius Comprehensive Economic Cooperation and Partnership Agreement in April 2021. Negotiations for the India–United Arab Emirates bilateral trade agreement have also concluded with a comprehensive trade treaty signed in February 2022, with expected benefits for mid-tech manufacturing sectors like garments and jewellery. An interim trade agreement with Australia is expected to be concluded by the end of 2022, which will set the stage for a comprehensive trade agreement. Negotiations with Australia have been prioritised given its importance for India’s energy security. Meanwhile India’s growing engagement with the Quad (Australia, Japan and the United States) can be viewed as an attempt to improve its supply chain resilience.
Still, India has adopted a cautious approach in its RTA journey with the West, with its ‘Look West’ strategy largely guided by strategic considerations. Compared to the European Union, United Kingdom or United States, India enjoys a crucial labour cost advantage. While India is anticipating a rise in service exports on one hand and growing inward investment on the other, the imposition of stringent product and process standards may take away some of these cost advantages. The European Union has already initiated a process to strengthen its environmental and labour related policies, with profound business implications for Indian players.
These non-trade concerns can be part of India’s agreements with the European Union and United Kingdom. Recently, the United States has been more amenable to the idea of a trade agreement with India, but the two countries must first settle their bilateral tariff and other trade-related issues amicably.
In the post-COVID world, employment and income security are the most crucial policy concerns for India. This explains the threat perceptions from adverse trade balance experience in the East and why the Indian trade agreement strategy since withdrawing from RCEP has intently tried to identify partners with minimal possible disruptions to India’s domestic markets.
Preserving the domestic manufacturing sector is a crucial component of India’s ‘Vocal for Local’ policy objective, under the ‘Atmanirbhar Bharat Abhiyan’ scheme — meaning Self-Reliant India — launched in 2020. Realisation of the manufacturing sector’s resilience is also crucial for India’s recent development vision, Amritkaal, which is expected to facilitate inclusive growth over the next 25 years. Cold strategic considerations will dominate India’s trade agreement enthusiasm for some time.
Debashis Chakraborty is Associate Professor of Economics at the Indian Institute of Foreign Trade (IIFT).
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