Giving in to domestic pressure on RCEP

Jayshree Sengupta
Senior fellow, Observer Research Foundation

It is interesting that India has walked out of the mega treaty — the Regional Comprehensive Economic Partnership (RCEP) — after much suspense. India also managed to stall the signing of the treaty this month by raising sticky points; the 15 members will sign it in 2020 in Vietnam. This is the biggest free trade treaty in the world, covering a little less than half the global population and one-third of the world’s GDP. It now comprises 15 countries from the Indo-Pacific region (ASEAN’s 10 plus China, South Korea, Japan, New Zealand and Australia).

In recent times, there was a lot of pressure from various quarters on India to sign it. But as Prime Minister Modi pointed out at the 16th ASEAN-India summit in Bangkok, where he mainly talked about India-ASEAN trade and did not even mention the RCEP, trade imbalances between India and ASEAN members are important and should be addressed. India has trade deficit with ASEAN of $22 billion (2018-19). Later, in an interview in Bangkok, he said that the treaty should address India’s main concern about trade and services. 

Earlier, the Modi government seemed willing to give its terms and conditions in a less adamant manner and waited for their resolution rather passively, but due to various domestic pressures that built up against the treaty, the NDA government was forced to take the stronger step of walking out of the treaty.

The farmers' lobby has already agitated, though it went largely unnoticed, about the influx of agricultural products, especially dairy from RCEP countries. New Zealand was the main threat as it was likely to dump milk powder on India at prices much lower than those prevailing here. 

The Swadeshi Jagran Manch, an associate of the RSS, has also been active in protesting against the signing of the treaty because of fear of influx of Chinese goods that will cause unemployment. The BJP-backed trade unions were also against the treaty.  

But the main reason why India resisted the various clauses of the treaty is the fact that unemployment has been at a decadal high and the Indian economy is reeling under serious problems. Various measures that the government has taken to reverse the downturn have not been successful and demand remains tepid. Only some more passenger cars have been sold in the festival season but this could be a temporary phase— besides demand for commercial vehicles has not taken off. 

On the economic front, the core sector comprising steel, coal, fertiliser, cement, crude oil and electricity which make up for 40 per cent of the Index of Industrial Production, shrank by 5.2 per cent in September. Manufacturing and export growth have been low and there are few signs of recovery on the horizon. 

At this juncture of weak economic performance, India has done well to not sign the treaty. It can still join it if its main complaint about rapid tariff reduction by 80 to 90 per cent on imports from China is resolved. Also, its concerns about services have to be dealt with, especially regarding the movement of service workers within the region.  India could not at this point have opened its huge market to the ASEAN and China unconditionally. 

India intended to see to it that the 'rules of origin' are strictly adhered to and the value addition on a product by the exporting country is high at about 25 per cent. Otherwise, all Chinese products would gain entry into India via Vietnam, Bangladesh and Nepal with only a little value addition, like adding a glass top to the cell phone manufactured in China. India has been protective of its electronic industry which has helped it to retain its market at home. 

Western countries and neo-liberal economists have been very critical of these protectionist measures and have vehemently voted for a freer trade regime under globalisation and pressured India to sign the treaty. But recent data show that many countries (US in particular) have become protectionist while championing their own domestic policy. Globalisation is under serious threat because no country wants to lose jobs to cheap labour countries like Bangladesh, Vietnam and China. 

Modi has rightly pointed out the need to rebalance trade and reduce the unsustainably huge deficit with China. The various automatic mechanisms that would control a sudden surge of imports from China by high tariffs are not easy to implement as there is lack of an appropriate infrastructure to monitor such a surge. 

The main argument in favour of signing the treaty has been about the possibility of more FDI from ASEAN countries which have in the past contributed heavily to India's total FDI. It has been pointed out that through FDI from partner countries. India could enter international value chains that would create jobs and lead to higher incomes. These advantages had to be weighed against the more immediate task of stopping a surge in Chinese imports which would decimate many of our small and medium-scale industries, specially in textiles, engineering goods and steel.

India will always be an important destination for FDI because of its huge market and, as Modi said at the Bangkok summit, India is in a reform mode, especially with regard to trimming of bureaucracy and red tape which have been proverbial obstacles. India has already climbed up further to the 77th place in 2019 in World Bank’s Ease of Doing Business and with more reforms, it will attract FDI in the future. 

The bigger partners of the RCEP, like Australia, South Korea, China and New Zealand, wanted to go ahead with the signing of the treaty without India and their goal has been achieved. But the ASEAN members, like Thailand, wanted India to join because to them, India would act as a buffer against China's domination.

Now that the signing of the RCEP has got postponed, if India’s concerns are addressed between now and next year, India could join it later.