Two trade deals have been grabbing headlines in the past few days. One, of course, was the US-China trade negotiations. The second, equally important one was the Regional Comprehensive Economic Partnership (RCEP)—a proposed free trade agreement (FTA) between 16 Asian nations.

Although RCEP will be the world’s largest economic bloc, India has opted out of it. Considering India’s past FTA experiences and RCEP’s terms and conditions, pulling out was a Hobson’s choice for us.

Graphic by Santosh Kumar Sharma/Mint
Graphic by Santosh Kumar Sharma/Mint

Here’s why.

Historical data shows that regional partnerships haven’t proven to be very beneficial for India. In fact, over the span of six years (2014-19), among its trading partners, India has improved its trade balance only with Safta countries, as a whole. In case of Asean countries, as the alongside chart shows, India’s merchandise trade deficit has widened in this period.

Further, an analysis by ICICI Securities Ltd shows that in FY19, India registered trade deficit with 11 out of the 16 RCEP countries. India’s trade deficit with RCEP countries stood at $105 billion, out of which China alone accounted for $52 billion.

Clearly, ignoring these numbers could prove to be costly for India, which is already grappling with a fiscal deficit.

Additionally, economists point out, a key concern for India is the dumping of cheaper goods such as diary and farm products, and electronic items, especially from China. The RCEP deal format required India to abolish tariffs on more than 70% of goods from China, Australia and New Zealand, and nearly 90% goods from Japan, South Korea and Asean. This would have made imports to India, cheaper.

Now that India has made up its mind to pull out of RCEP, what does this mean for India’s exports?

Analysts at Emkay Global Financial Services Ltd say that India’s exports are much more responsive to income changes than price changes. So, a tariff reduction/elimination does not boost exports significantly. “It is tough to say whether the Indian services will benefit as China and Thailand are emerging as a new services hub for attracting FDI," they said in a report.

Anagha Deodhar, an economist at ICICI Securities, says that given India’s size, its exit from the RCEP would greatly reduce its coverage and significance. “Although India may lose market access to Asian economies at preferential rates, its vulnerable domestic industries would be protected from intense competition and more importantly, Chinese dumping," she said.

In short, in this ongoing battle of fixing the severe domestic demand slump, India chose not to further hurt competitiveness of its local industries. This should come as a relief, especially for small- and medium-sized enterprises.

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