Prime Minister Narendra Modi with New Zealand’s Jacinda Ardern and China’s Li Keqiang. (Photo: Reuters) Prime Minister Narendra Modi with New Zealand’s Jacinda Ardern and China’s Li Keqiang. (Photo: Reuters)

On Monday, India decided to hold off on signing the Regional Comprehensive Economic Partnership (RCEP) until “significant outstanding issues” were resolved, even as all other 15 countries involved in the negotiations stated that they were ready to sign the mega trade deal in 2020.

Unsatisfactory negotiations pertaining to India’s trade with China — India has an over $50 billion trade deficit — is one of the major reasons for New Delhi not joining in at this stage.

Explained: What is the RCEP?

The Regional Comprehensive Economic Partnership (RCEP) is a trade deal that was being negotiated between 16 countries. They include the 10 Association of Southeast Asian Nations (ASEAN) members (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam) and the six countries with which the bloc has free trade agreements (FTAs) — India, Australia, China, Korea, Japan, and New Zealand.

The purpose of the deal is to create an “integrated market” spanning all 16 countries. This means that it would be easier for the products and services of each of these countries to be available across the entire region.

The RCEP is billed to be the “largest” regional trading agreement yet — the countries involved account for almost half of the world’s population, contribute over a quarter of world exports, and make up around 30% of the global Gross Domestic Product (the value of all goods and services produced in a year).

Negotiations to chart out the details of this deal have been on since 2013, and all participating countries had earlier aimed to finalise it by November 2019.

So what is the problem?

All the RCEP participating countries, except for India, have “concluded” text-based negotiations for all 20 chapters of the proposed deal, as well as their market access issues — and they are expected to be ready to ink the pact in 2020.

But India has held back because of “significant outstanding issues, which remain unresolved”.

The deal in its present form does not fully reflect “the basic spirit and the agreed guiding principles of RCEP”, according to Prime Minister Narendra Modi.

“When I measure the RCEP Agreement with respect to the interests of all Indians, I do not get a positive answer. Therefore, neither the Talisman of Gandhiji nor my own conscience permit me to join RCEP,” he said in his statement at the 3rd RCEP Summit in Bangkok on Monday.

What are the outstanding issues?

Key issues that have prevented India from coming on board include “inadequate” protection against surges in imports. This is a major concern for India, as its industry has voiced fears that cheaper products from China would “flood” the market. India had been seeking an auto-trigger mechanism that would allow it to raise tariffs on products in instances where imports cross a certain threshold.

India has also not received any credible assurances on its demand for more market access, and its concerns over non-tariff barriers. RCEP participants like China are known to have used non-tariff barriers in the past to prevent India from growing its exports to the country.

India had also reportedly expressed apprehensions on lowering and eliminating tariffs on several products from the country.

Its concerns on a “possible circumvention” of rules of origin — the criteria used to determine the national source of a product — were also not addressed. Current provisions in the deal reportedly do not prevent countries from routing, through other countries, products on which India would maintain higher tariffs. This is anticipated to allow countries like China to pump in more products.

The Prime Minister had earlier told The Bangkok Post in the run-up to the Summit that India has “long pushed for other countries to allow greater movement of labour and services” in return for opening up its own market. Concerns over “unsustainable trade deficits” also needed to be addressed, he had said.

“It needs to be recognised that opening the vast Indian market must be matched by openings in some areas where our businesses can also benefit,” he was quoted as having said. He added that the country had put forward “reasonable proposals in a clear manner”, and was engaged in negotiations with sincerity.

Despite India already having separate, bilateral FTAs with most RCEP nations, it has recorded trade deficits with these countries (see chart above).

During negotiations, it was also not able to get a favourable outcome on its demands on the base year that would be used to reduce the tariffs on the products that would be traded as part of the pact.

India had sought to safeguard the interests of its domestic industry through measures like seeking a 2014 base year for tariff reductions instead of 2013, when negotiations on RCEP began, as it has raised import duties on several products between 2014 and 2019. Using a base year before 2014 would mean a drastic drop in the import duties on these products.

What are the concerns of India Inc., the civil society and the political opposition?

Throughout the RCEP negotiations, several sections of the Indian industry have raised concerns over India signing the deal. They have argued that some domestic sectors may take a hit due to cheaper alternatives from other participant countries. For instance, the dairy industry was expected to face stiff competition from Australia and New Zealand. Similarly, steel and textiles sectors have also demanded protection.

Given India’s poor past track record with its existing FTAs, civil society bodies and trade experts have also raised questions over the possible gains from an RCEP deal.

In addition to opposition from the Left parties and the RSS’s Swadeshi Jagran Manch, members of the previous United Progressive Alliance government, which had initiated the RCEP trade talks, also asked the government to avoid signing it.

Congress leader Jairam Ramesh was reported to have said that the move would be “suicidal” for India, after the hits to the economy due to measures like demonetisation and the implementation of GST.

Congress president Sonia Gandhi on Saturday said that joining RCEP would deal a “body blow” to the country’s economy. She alleged that the economy was “under siege”, and the government was “under complete denial”. Sonia predicted that the move would result in “untold hardship for farmers, shopkeepers and small and medium enterprises”.

What does this decision mean for India?

As all other RCEP nations have agreed to sign the treaty on the terms negotiated, they will likely try to persuade India to agree to the same. It remains to be seen whether those efforts ultimately lead. “All RCEP Participating Countries will work together to resolve these outstanding issues in a mutually satisfactory way. India’s final decision will depend on satisfactory resolution of these issues,” the joint statement by RCEP members said.

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