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Risk Intelligence

  • Prachi Priya
  • Jan, 2021
  • 896
  • India’s Out of RCEP: What’s Next for the Country and Free Trade?

India’s foreign trade policy must be aligned to its self-reliance goals. But it also needs to work towards making domestic industries competitive

The Regional Comprehensive Economic Partnership (RCEP), a mega free trade agreement (FTA) was signed recently by 15 nations, namely the 10 ASEAN states, Japan, South Korea, China, Australia, and New Zealand. India had decided to walk out of trade pact in November 2019, when Prime Minister Narendra Modi stated: “Whenever I try and gauge India’s interest in light of her joining RCEP, I do not get an answer in the affirmative; neither Gandhiji’s policy of self-reliance nor my wisdom allows me to join RCEP.”

India’s decision to exit the mega trade deal was taken after negotiating the deal for seven years in the backdrop of several unresolved issues concerning market access for China, non-tariff barriers faced by Indian exporters, services trade, and rules of origin criteria, among other issues. While India was often tagged as the “troublemaker” in the deal negotiations, Indian policymakers stood their ground firmly when it came to the interests of domestic producers, especially regarding Chinese exports of subsidized goods to India. Apart from economic factors, India’s decision to not join RCEP had a strategic dimension given China’s domination of, and leading role in, the pact. Since Modi’s announcement, the Line of Actual Control standoff with China in Ladakh has sealed India’s decision to stay firm and leaves no space for any further trade negotiations involving its northern neighbor.

Make no mistake, India had no option but to exit the pact. RCEP in its present form would have not served any purpose for the country. A NITI Aayog paper titled “India’s FTAs and Its Costs,” which we have co-authored with Dr. V.K. Saraswat, a NITI Aayog member, highlighted India’s experience with its previous FTAs and its reasons for not joining RCEP. The post-pandemic world trade landscape and its associated challenges; China’s unfair trade practices and its constant endeavor to side-line issues critical for Indian industry in RCEP; and, most importantly, rising border disputes with China reiterate that India did the right thing by staying out of RCEP.

Having exited the mega trade deal, the pertinent question is what next for India on trade strategy? In the following we provide some answers.


The United States and Europe have been India’s traditional trade partners. Given huge trade complementarities between India and these countries, they are our natural allies for trade. Despite having FTAs with major Asian economies like ASEAN, Japan, and South Korea, India’s exports share in these has declined from 51 percent to 46 percent in the last decade. The U.S. and Europe’s share in India’s exports have, on the other hand, increased from 38 percent to 43 percent even though we do not yet have FTAs with these economies. It is time for India to now kickstart the India-EU trade negotiations that haven’t seen the light of the day due to pending issues when it comes to automobiles, pharmaceuticals, data security, alcoholic beverages, and services trade. With the U.S. too, the incoming Biden administration is expected to bring in more policy stability and the U.S. may not close its doors to a limited trade deal with India (before a full-fledged trade deal) as it plans to build a unified front of democracies against China. Focus on deep bilateral trade deals instead of multilateral ones should be India’s goal for the time being.


India ranks 68th out of 141 countries in the World Economic Forum’s Global Competitiveness Report and slipped 10 places in 2019 compared to 2018, with low overall scores for infrastructure, information and communication technologies adoption, skills, labor market, and business dynamism. That India’s manufacturing sector has been an under-performer is no secret. The share of manufacturing in overall GDP has stagnated at around 16-17 percent in the past decades. The manufacturing sector is critical to economic development in a vast and populous country like India as the multiplier effect leads to two to three additional jobs created in other sectors for every job created in the sector. Thus, first and foremost India requires a well-crafted industrial policy to address key concerns of the manufacturing sector, including addressing critical issues deterring industrial competitiveness. Multiple factors have led to India’s poor manufacturing performance and low competitive score, including cost and quality of power, high logistics cost (14-15 percent of GDP compared to the 9 percent global benchmark), low labor productivity, and low R&D expenditure (0.7 percent compared to 2-4 percent globally). A targeted industrial policy addressing the...

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