How India’s Exit from RCEP can Help the Domestic Manufacturing Industry?

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The Regional Comprehensive Economic Partnership, a new free trade agreement, was signed on 15^th November, 2020 by 15 Asia-Pacific nations. The member states of RCEP together account for one-third of the global gross domestic product and almost 30% of the world’s population.

What is RCEP?  

RCEP, perceived to be the biggest free trade agreement in the world till date was proposed between the 10 ASEAN countries and their six FTA partner countries namely, Australia, China, Japan, South Korea and India during the 21^st South ASEAN Summit held in Cambodia in November 2012. The primary objective of the RCEP is to create an integrated and free market for the products and services of each of the member countries in the entire region that falls under the agreement.

RCEP now comprises of China, Singapore, Indonesia, Malaysia, Thailand, the Philippines, Brunei, Vietnam, Myanmar, Laos, Cambodia, South Korea, Japan, Australia and New Zealand. India, which was part of the negotiations earlier, pulled out of the RCEP last year, citing concerns over the agreement. However, India was given a chance to join the RCEP in the future.

India’s Reservations

India has been very keen to protect its interests in industries like dairy and agriculture and give a boost to the service sector.   However, as per the Indian officials, the key concerns and issues of India have not been addressed by the current structure of the RCEP.  The RCEP remained week on the part of the services, where India has a competitive advantage.

India has a huge trade deficit with China, and the RCEP did not have any safeguard provisions for imports from China. India already has Free Trade Agreements or Comprehensive Economic Cooperation Agreements with all the 10 ASEAN countries along with Japan and South Korea. So, signing the RCEP would have added only Australia, New Zealand and China to the list. In other words, it is signing an FTA with China, with which India already has a huge trade deficit of around USD 50-60 billion.

While there are many reasons for India not to join the RCEP, the single biggest reason seems to be China.  It has always been very hard for India to access the China markets in the areas where India enjoys a competitive advantage, with China not properly implementing the WTO rules. India believes that China has an advantageous position in the RCEP, leaving India in an uncertain situation.

Implications

Many countries in the RCEP like China, Japan, Singapore, South Korea, etc. are industrially well-developed, unlike India where full-scale industrialization is yet to be achieved. If India had signed the RCEP, it would have led to the flooding of the domestic market with cheaper products from China.  RCEP by offering a free market to foreign originated goods would have adversely impacted the Indian dairy industry that is mostly unorganized with cheap dairy products from the countries like Australia and New Zealand, where the dairy industry is more organized with stable land ownership and established infrastructure. So, India’s decision to come out of the RCEP agreement has saved the domestic manufacturing industries from the foreign industries that are relatively more advanced and innovative.

What Should India Do, Before Signing Such Mega Deals?   

It is true that India’s move to come out of the RCEP would take away the chance to tap the large market that the agreement offers. However, despite making FTAs with many countries, India’s imports have been rising over the past two decades with no major increase in exports, signifying the sorry state of the Indian manufacturing industry. For India to reach a position where it can cater to the global markets and leverage the mega trade deals like RCEP, it should first focus on capacity building and improving the domestic manufacturing industry.

In fact, FTAs have less to do with China becoming the global manufacturing hub when compared to its robust industrial infrastructure. Therefore, India too must pay heed to make the domestic manufacturing industry more competitive and innovative by improving the marketing conditions, R&D facilities, logistics and upskilling the human resources in the country, so that it can compete with global peers.

It is great that the Government of India is also taking steps in that direction through several initiatives such as Make in India, Atmanirbhar Bharat, etc. Recently, the government has announced production-linked incentives under the PLI scheme to the manufacturing industry in India, covering various sectors such as mobile phone manufacturing, electronics manufacturing, pharmaceuticals, food processing, automobile, textile, etc. The scheme has garnered huge attention from the industry, with several enterprises applying for the scheme.

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