By rejecting the RCEP membership, we have given China a free hand to integrate its economy with Asian nations. Maybe India should look West now

The “Act East” policy, with a focus on an extended neighbourhood in the Asia-Pacific Region, has been the cornerstone of India’s diplomacy in the current decade. While it was originally conceived as an economic initiative, in recent years, it has gained political, strategic and cultural dimensions, including the establishment of institutional mechanisms for dialogue and cooperation. India has upgraded its relations to a strategic partnership with Indonesia, Vietnam, Malaysia, Japan, the Republic of Korea, Australia, Singapore and the Association of South East Asian Nations (ASEAN) and has, thus, forged close ties with all countries in the Asia-Pacific. Further, apart from the ASEAN, the East Asia Summit (EAS) and the ASEAN Regional Forum (ARF), it has been actively engaged in regional fora, such as the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC), Asia Cooperation Dialogue (ACD), Mekong-Ganga Cooperation (MGC) and the Indian-Ocean Rim Association (IORA). The “Act East” policy has laid emphasis on India-ASEAN cooperation for our domestic agenda on infrastructure, manufacturing, trade, skills, urban renewal, smart cities, Make in India and other initiatives. The objective is to promote economic cooperation, cultural ties and develop strategic relationships with countries in the Asia-Pacific through continuous engagement at bilateral, regional and multilateral levels.

As a follow-up, India has entered into Regional Trade Agreements (RTAs) and comprehensive economic engagements with many Asian countries. Notable among them are RTAs with the ASEAN, Malaysia, Japan, Singapore, Thailand, APTA (Bangladesh, China, Korea, Laos and Sri Lanka) and South Korea.

However, India decided against joining the mega trade bloc or the Regional Comprehensive Economic Partnership (RCEP). It is a free trade agreement (FTA) between the Asia-Pacific nations of Australia, Brunei, Cambodia, China, Indonesia, Japan, Laos, Malaysia, Myanmar, New Zealand, the Philippines, Singapore, South Korea, Thailand and Vietnam. These 15 countries account for about 30 per cent of the world’s population (2.2 billion people) and 30 per cent of the global GDP ($26.2 trillion) as of this year, making it the biggest trade bloc in history.

The fear is that India’s agricultural and manufactured goods will not be in a position to stand up to competition from cheaper imports from abroad. Of course, lobbying by multiple associations protecting the interests of processed agricultural product and manufactured goods makers plays a significant role in the policymakers’ decision. In contrast, India’s service sector, which no doubt would have benefitted by gaining access to the large market, could not play its cards well. In the end, the belief that India’s merchandise trade deficit (already negative with ASEAN and other Asian countries due to the existing RTAs) will further worsen, tilted the balance in deciding that the country’s interests would be best served by not joining the RCEP.

In the long run, this decision will hurt India in a big way. Let me flag up the issues on this count. First, when you have RTAs with some members of the RCEP, it will be a Herculean task to stop merchandise from third countries being routed through these nations with whom we have an existing pact.  For instance, imports from China may be routed though ASEAN members like Vietnam and Malaysia with whom we have RTAs. Of course, one can argue that the “rules of origin” clause will stem this flow. However in reality, the “rules of origin” clause is not effective enough to curtain third country imports.

Second, India is missing the golden opportunity to be a part of the global value chain. If multinational corporations (MNCs) are thinking of shifting their value chains from China to other countries, they would go for any member of the RCEP like Vietnam and so on. This will be a win-win situation as they will have access to a large market and also benefit from the economies of scale of production.The same holds true for new investment from the European Union or US firms. The usual argument that India has a demographic dividend and MNCs will come here to make a production base falls flat. Given the income inequality, a significant part of the population does not have jobs and thereby income to purchase consumer goods. Gains from the demographic dividend are realised only when people are employed or else it becomes a burden on society.

Third, the service sector, where India has a comparative advantage, would be at a disadvantage because of this decision. Fourth, this decision should have been made based on long-term gain and not based on a higher trade deficit in the short run. By joining the group, Indian industries may suffer in the short-run. But in the end, they will be more competitive, which will open up opportunities in the world markets. It will be a win-win situation for the consumers, too, as they will have access to a variety of goods at a cheaper price. Alas, there is no one to lobby for the consumers’ interests.

Fifth, is it realistically possible to “Act East” without entering the mega trading bloc of the East? By rejecting the RCEP membership, India has given China a free hand to integrate its economy with Asian countries. Maybe India henceforth should look West.

(The writer is Professor, NCAER. The views expressed are personal)