Why did India stay out of the RCEP deal?

On November 15, the Regional Comprehensive Economic Partnership (RCEP) was signed by 15 countries led by China, Japan, South Korea, Australia, New Zealand, and the 10-country ASEAN group.
It is billed as one of the world’s largest Free Trade Agreement (FTA), accounting for nearly 30% of the global GDP covering 30% of the world’s population.
After long negotiations, India exited the grouping last November, saying it wanted to protect its economy from rising trade deficits with a number of RCEP members.

Of the 15 countries in RCEP, India had previously signed an FTA with the Association of South East Asian Nations (ASEAN), and also with Japan and South Korea, all three of which are now under review.
India’s trade deficit with these countries or groups rose very sharply during the period after signing FTAs.
For eg: Between 2011 and 2019, India’s trade deficit with ASEAN rose from about $5 billion to about $22 billion. In the last decade, our trade deficit with Japan rose from $4 billion to about $8 billion and with South Korea from about $8 billion to $12 billion.
The trade deficit with China has burgeoned from about $4 billion in 2005-06 to nearly $50 billion today, even without a trade agreement. In fiscal year 2019-20, India’s trade deficit with China was $48.64 billion, which was lower than the trade deficit of $53.56 billion in 2018-19.

Some experts contest the FTA argument on two accounts. They argue that while deficits have increased for India in all foreign trade, India’s FTAs or PTAs (Preferential Trade Agreements) do not account for a bigger chunk of the trade deficit than they did before.
Trade deficits with India’s bilateral partners accounted for 12.6% of the overall trade deficit in the year 2007. In 2017, they accounted for a considerably smaller 7.5%.
Another explanation for the growing trade deficits comes from the downturn in India’s GDP since 2016, and the decline in manufacturing. In addition, FTAs are not the only reason imports from RCEP countries, especially China, are rising.
If one looks at China, 75% of the inputs from China on machinery, bulk drugs, chemicals, and other equipment are goods that are not available in India in sufficient amounts or at competitive prices.

The COVID-19 pandemic has left the global economy in a state of disarray. For the first time in 60 years, nearly every country in the RCEP grouping is facing a recession.
The fears over individual losses, combined with the trend worldwide against globalisation, are driving countries to formulate smaller trading coalitions outside of the World Trade Organization.
In addition, travel between countries is being restricted by the spread of the virus, further promoting local or regional trade and travel bubbles.
On the other hand, India’s tensions with China over the PLA’s (People’s Liberation Army) aggressions at the Line of Actual Control this year, and the continued standoff between their armies have hardened its position on RCEP.

Several RCEP countries still hope India will reconsider its decision of staying out.
For Japan and Australia, the large size of the Indian economy and its negotiating heft would pose a valuable counterpoint to China within the grouping. It is for this reason that Japan led the drafting of the special statement on India, which would waive the 18-month mandatory waiting period if India applied formally to rejoin the group.
For ASEAN countries that led the RCEP negotiations, India’s presence would provide weight to the centrality of the ASEAN grouping in the region. The importance of drawing India into the agreement was underlined when leaders of all ten ASEAN countries travelled to India as the Republic Day chief guests in 2018.
For China, too, having India within the RCEP tent would not just open up India’s market access for Beijing, but would also provide one more forum on which to cooperate that does not include the United States (U.S.), its biggest rival.
Finally, there is the question of how the Quad (Quadrilateral Security Dialogue) would operate on economic issues, particularly in terms of securing supply chains, with the U.S. walking out of the Comprehensive and Progressive agreement for Trans-Pacific Partnership (CPTPP), and India exiting the RCEP.

The next big question is whether India will accept the invitation from RCEP countries to be an “observer” at their meetings.
External Affairs Minister S. Jaishankar without mentioning RCEP directly, recently said rather than suffer trade deficits that had been the outcome of various FTAs India had signed, India would prefer to go it alone, or as he put it, have “the courage to think through the problem for ourselves”.

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