There was no mention of the Regional Comprehensive Economic Partnership when the foreign ministers of India and ASEAN met in New Delhi last month. India opted out of RCEP negotiations in 2019. New Delhi might want to reconsider its position.
New Delhi hosted a Special ASEAN-India Foreign Ministers’ Meeting (SAIFMM) on 16-17 June 2022 to commemorate 30 years of Dialogue Relations and 10 years of Strategic Partnership between India and ASEAN. It was co-chaired by the foreign ministers of India and Singapore, Dr Subrahmanyam Jaishankar and Dr Vivian Balakrishnan, respectively. While the meeting touched on some vital issues, such as developing digital connectivity ecosystem and infrastructure, more alignment may be achieved in the area of trade through focused deliberations. Disagreement in this area between the two sides, as may be evident, can negatively impact India-ASEAN economic relations.
Although the ministers at SAIFMM decided on an early review of the ASEAN-India Trade in Goods Agreement (AITIGA) as an impetus to the ASEAN-India Free Trade Area (FTA), there was no mention of the Regional Comprehensive Economic Partnership (RCEP). The mega trade deal has been signed by 15 countries in the Asia-Pacific and is the largest trade bloc in the world. But ASEAN and India are at an impasse. New Delhi has laid more stress on the AITIGA review after it pulled out of the RCEP negotiations in 2019. ASEAN wants India to re-evaluate its decision and join RCEP as an original member.
India’s Commerce Minister Piyush Goyal had called for the renegotiation of the India-ASEAN FTA in 2021 as “non-tariff barriers (NTBs), import restrictions, quotas and export taxes” have impeded Indian exports to ASEAN countries. He added that despite a drop in India-ASEAN trade, foreign direct investment (FDI) from India in the ASEAN region in 2020 alone amounted to US$2.2 billion. This is an increase from US$1.7 billion in 2018, indicating New Delhi’s confidence in ASEAN’s consistent economic growth.
India’s primary concern over RCEP is that it will flood the Indian market with cheaper goods, especially from China. This will hurt large numbers of micro, small, and medium Enterprises (MSMEs) which form the backbone of the Indian economy, notably in the dairy farming and textile sectors. Given the trajectory of relations with China in the past few years, India’s geo-economic objectives also include preventing dependence on China, which RCEP may likely foster. Key Chinese exports into India include electronic goods (in particular, smartphones), fertilisers, chemicals and active pharmaceutical ingredients. Major Indian exports to China include raw materials such as iron ore and cotton. This is important for the internal political debate on indigenous manufacturing in India and the government’s “Make in India” initiative. It can be argued that joining RCEP could risk reinforcing India’s role of being a source of raw materials instead of manufactured goods.
India has been averse to signing FTAs based on poor experience and increased trade deficits. India’s trade deficit with ASEAN exceeded US$23 billion in the April 2019-March 2020 period. Its Comprehensive Economic Partnership Agreements with Japan and South Korea have also resulted in a decline in exports and an increase in imports. NTBs and regulatory standards have prevented the growth of Indian exports to Northeast and Southeast Asian countries, which are significant members of the RCEP. The exclusion of services from these pacts, a stronger offering from India, has led to dissatisfaction in New Delhi.
But New Delhi’s reservations about RCEP go beyond considerations about trade. One analyst notes that “a rational approach to trade has been lost”, highlighting that geopolitical insecurities have taken centre stage in India-China relations, which were “in some ways present before but not central to the decision.”
As both India and ASEAN seek to maintain a balance of power in the region, their cooperation on issues like RCEP is assuming greater significance. India staying out of the trade bloc may not serve its own interests in the long term. It will certainly widen the gap in its economic cooperation with rest of the Asia-Pacific.
As RCEP becomes functional and member economies grow, it will develop into a formidable trade group with possible institutional expansion. India joined the negotiations in 2013, but opting out at the last stage will only exclude it from shaping Asia-Pacific trade relations in the decades to come. It is essential for India to be an original member of RCEP to be able to wield influence in its evolving institutional framework and broader economic order in the region. Doing so will allow India to participate in setting the terms for inclusion of services in RCEP, the lack of which in earlier FTAs has been a source of worry.
It is also important to separate Indian industries from consumers. The presence of cheaper alternatives in the market presents consumers with choices. In turn, this will compel local manufacturers to improve standards. Cheaper imports of many products, which can be utilised as intermediate goods, will facilitate higher output by MSMEs that will consequently boost exports. India’s membership in the RCEP will allow these MSMEs to export to other RCEP countries more easily than before.
One of India’s economic objectives is greater integration with Southeast Asian economies and their value chains. The global move after the Covid-19 pandemic towards flexible and multi-level sourcing will provide Indian manufacturers with export opportunities and result in India’s greater involvement in value chains concentrated in the Southeast Asian region. Fresh rounds of negotiations between India and ASEAN on the RCEP can help find common ground, such as on India’s proposal for differential tariff concessions. India’s earlier proposals — which had suggested cutting down 80 per cent tariff lines for ASEAN, 65 per cent for Japan and South Korea, and 42.5 per cent for the other RCEP member states — were rejected. But further deliberations may help reach more feasible numbers. Alternatively, a phased approach to reduce tariff lines over 20 years, as proposed by ASEAN, may be discussed further.
As both India and ASEAN seek to maintain a balance of power in the region, their cooperation on issues like RCEP is assuming greater significance. India staying out of the trade bloc may not serve its interests in the long term. It will certainly widen the gap in its economic cooperation with the rest of the Asia-Pacific. As India inches closer to the possibility of a Comprehensive Strategic Partnership with ASEAN, New Delhi may want to embrace a larger perspective that includes geopolitical as well as economic concerns. This will serve not only its interests but also its ASEAN partners. For ASEAN, India’s membership will ensure the presence of a large and growing market, possibilities for more aligned foreign investment, and greater strategic buoyancy in the region. An understanding in ASEAN capitals about India’s struggle with domestic structural reforms, which have often negatively affected the competitiveness of Indian products, can go a long way in strengthening mutual trust and goodwill. In turn, this will allow both sides to tap the vast potential for growth in their relationship.
Akash Sahu is Research Analyst at New Delhi-based Manohar Parrikar Institute for Defence Studies and Analyses (MP-IDSA).