RCEP – Domestic Compulsions Outweigh Global Commitments

While announcing that it was not joining the Regional Comprehensive Economic Partnership (RCEP) “for now”, India has rightly indicated that it was postponing the decision. It must join, sooner than later, if it wants to play a leading role in its region, now billed as “Indo-Pacific.”

It had rejected overtures to work with the Association of Southeast Asian Nations (Asean) due to cold war compulsions and took long to catch up. It cannot now afford such delays.

This month it declined to be part of the 15-nation trade bloc — of the 10 Asean members, China, Japan, South Korea, Australia, and New Zealand, stating the deal disadvantages its services and agrarian sectors.

Prime Minister Narendra Modi has always juggled the domestic with regional and global to stay popular at home and seek popularity abroad. In deciding to keep out of the RCEP, he has achieved the first, but may lose out on the latter.

In explaining the eleventh-hour decision in terms of Mahatma Gandhi’s ‘talisman’, he has not just “helped the poorest” hit by a faltering economy, but also the rich and powerful farm, trade and industries lobbies and the equally powerful conservatives within his political fold.

These very forces that have selectively made reforms difficult have also rallied against RCEP. There is no denying the collective sigh of relief. Even for Modi, as of now, there are no political dividends to be garnered by unsettling the economic community already harassed by the economy’s slowdown. But he must deal with them medium term, if not short, and not wait long-term.

It’s a play-safe. It’s not that the Modi Government has shied away from taking risky, even controversial, decisions. Some have not worked. This is being written, by the way, on the third anniversary of the November 2016 demonetization. Its contribution to the present state of the economy is significant. Unsurprisingly, Moody’s has scaled down the Indian economy’s assessment from ‘stable’ to ‘negative’.

The public discourse in the run-up to the Bangkok meet when RCEP was concluded changed by the day, even by the hour. Confusion prevailed whether Modi would be doing right. In the forefront were his ardent supporters who rooted for RCEP when he left for Bangkok and called names to previous governments. They quickly changed sides when India stayed out.

Indeed, Commerce Minister Piyush Goyal was the worst-hit, having stuck his neck out repeatedly as his job demands that. He could have said RCEP is off, for the time being, and saved more blushes in future.

Congress President Sonia Gandhi, Goyal’s principal target, who opposed joining RCEP, may enjoy vindication of sorts. Protectionism comes easy to all while dealing with India’s complex politico-economic situation.

To be fair, her party’s Manmohan Singh Government had in 2010 pushed through a key Free Trade Agreement (FTA) with the Asean despite severe opposition from three Kerala ministers who feared severe economic crises back home.

That FTA’s success, although partial, helped the Modi Government to aggressively re-configure Narasimha Rao Government’s “Look East Policy” into “Act East Policy”. What happens to the AEP with RCEP rejected needs watching.

A difficult decision though, it exposes India’s inability to affect domestic reforms that would make production competitive. It also indicates shrinking of economic space for maneuvering and of succumbing to domestic compulsions, both political and economic.

One can argue that the economic environment isn’t conducive to RCEP. It may result in higher imports in the short term. India suffers a cost disadvantage in energy, logistics and capital.

The Indian economy is really in the grip of a slowdown, and the country’s entry into RCEP at such a time would have caused significant pain. It may have meant more industrial distress. And it could have caused more jobs to be lost at a time when enough are definitely not being created. Manufacturing is in a mess, services sector is not growing fast enough, and agriculture continues to be at the mercy of external elements and internal inherent problems.

But then postponing the inevitable is not the solution. Now that it has decided, India can use this breathing gap to shape up things.

Coming to the brass tacks, China is the real fear factor behind the decision. India is worried at the prospect of being flooded by cheap Chinese imports, some routed through the other RCEP signatories, others through neighbours Nepal and Myanmar.

India is also concerned about the lack of adequate safeguards, some of them justifiable. For instance, the Asean-China Free Trade Area agreement, signed in 2002, has benefitted China much more than it has the Asean countries. India already has a huge $50-billion trade deficit with China, which is two-thirds of its deficit with the RCEP grouping as a whole.

The question is, should India just stall and escape or brace up to take on China? It is out of the world’s largest free-trade block. David has yielded space to Goliath.

By not signing the deal, India has missed the opportunity to be part of global supply chains, and may miss some trade opportunities in the region — a not-so-easy trade-off for a country that has grown its economy the fastest when exports have done well.

Like it or not, rejecting RCEP gives India’s “five trillion economy” and “Make in India” quests a setback, not just psychologically, but also economically and politically. Investors from the new grouping’s members may be wary and traders would need to deal with India bilaterally.

It is a mis-step in international terms in one’s own region that is being vacated by Trump’s America. The Indo-US relations have been marked by closeness that is not always cozy.  India has willy-nilly joined an isolationist U.S. in the last year’s Trump’s presidency. Will it change tack should a future American administration revert to a global approach?

The writer can be reached at mahendraved07@gmail.com