Nearly all countries involved in negotiating the Regional Closer Economic Partnership (RCEP) agreement have taken an understanding, even sympathetic, view of India’s refusal to come to the party. India conveyed its inability to join citing “Significant outstanding issues, which remain unresolved,” at the RCEP summit in Nonthamburi, Thailand in early November.
Speaking to media at the end of the summit, Singapore Prime Minister Lee Hsien Loong said, “We understand India’s position. Prime Minister Narendra Modi has expressed it in forthright terms. And there’s no anxiety or rancour... We fully understand and appreciate India’s point of view. They have made that decision. We respect that decision.”
Likewise, former Australian Prime Minister Tony Abbott commented that he understood India’s reluctance to join the pact.
Mr Modi was quoted in the Indian media as saying his “conscience did not permit” having him sign India on to RCEP without addressing these issues. India’s decision has been widely welcomed by most domestic trade bodies and a significant number of industry associations, though some like the Confederation of Indian Industry (CII) have been cautious. Even the opposition parties seemed to hail the decision wholeheartedly.
So what happens next? India’s concerns are substantial and not easily dealt with – partly because of the unwillingness of some players to accept India’s suggestions to mitigate these concerns and partly because of India’s own internal issues that it must deal with before getting on board an arrangement as complex as RCEP.
India’s reluctance comes because of several concerns. One of these is the other members’ reluctance to toe its line for tiered reduction of tariffs over a period of as much as a decade. Among all RCEP nations, India has the highest average tariff structure and cutting these down to near zero as is required by the RCEP deal, like most trade deals anyway, would have affected India more than most other nations.
The second significant concern would have been looming trade deficits with as many as 11 of 15 RCEP signatory nations, with the deficit with China alone being some $55-60 billion – nearly half of India’s overall global trade deficit. And this has happened without any free trade deal between China and India.
But even in the case of nations with which India has regional trade agreements, India has somehow ended up with progressively bigger trade deficits. India has more than a dozen such regional trade agreements which have boosted trade volumes greatly but also skewed them unfavourably against India with more deficits than surpluses with partner nations.
Another worry is that RCEP would potentially open the floodgates for cheap goods from China to inundate the Indian marketplace because of RCEP’s version of Rules of Origin that might allow such goods routed through other signatory nations. In Indian negotiators’ view the Rules of Origin do not favour India in this sense. This would potentially worsen the trade deficit with the others players in the deal.
According to one school of thought, though, the flooding of cheap goods could potentially affect India’s much-promoted ‘Make In India’ initiative, making it less attractive for investors to look at India as a manufacturing base for the domestic and export markets. However, the opposing view is that this would actually make domestic industry competitive, in turn driving up exports.
India wanted to build in thresholds for such potential flooding of goods that could progressively affect its domestic industry, particularly the small and medium sector. Thresholds, even if India left a door open to set them by mutual agreement with other players, were not acceptable to the other member nations.
Additionally, India found RCEP stacked against its own interests in intellectual property rights most significantly in its impressively growing pharmaceutical formulations export sector. Experts point out that RCEP’s IPR regime goes beyond WTO’s. India voiced concerns over this around patents and clinical trial data.
As well as enumerating most of India’s big concerns here, it must be said that an increasing body of Indian economists and trade experts are of the opinion that India needs to rejig its domestic economic policies that have suffered neglect under a succession of previous governments for decades before it can get the full benefits of a deal like RCEP.
The Narendra Modi Government is seized of this and is earnest in making sweeping changes to make domestic industry competitive and in line with international best practice. But it is not something that can happen overnight.
As much as the significant size of its economy, India is seen by several RCEP nations, especially Japan, as an important member with both the geopolitical and economic heft to counter the largest player in the deal – China.
There is no doubt that India is an important player in the RCEP deal. India aims to double the size of its economy to $5 trillion over the next decade and is tipped by global economists to grow into the world’s biggest economy by 2050 – facts that no nation can afford to ignore.
Leaving the door open
It is no surprise that all major RCEP leaders are counselling patience and leaving the door wide open for India to come back to the negotiating table to discuss its concerns threadbare. “It’s a pity that India is not yet on board. We hope one day it will come on board,” Singapore Prime Minister Lee Hsien Loong said.
The RCEP nations will meet again in February 2020 to sign the deal. It is highly unlikely that India would have made up its mind by then. The concerns seem to be far too significant to be addressed in the short time to February, even it wasn’t for the looming holiday season.
But India is too big to do nothing about. In the words of Mr Tony Abbott as quoted in prominent Indian newspaper The Hindu, “I am cautious about RCEP. As PM, I certainly did my best to promote freer trade, but I was very keen on doing bilateral deals with our significant trading partners.
“One of the things I was able to do as PM was to end the neglect of India. Let’s ensure that in the years to come there is at least as much Australian focus on the relationship with India as there was in that 30-year period on the relationship with China.”
Will New Zealand take a leaf out of Abbott’s India book and look at strengthening the bilateral trade relationship?