Asia Economy

India will likely go for bilateral trade pacts for now — not mega deals like RCEP

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Key Points
  • The world's largest trade pact — the Regional Comprehensive Economic Partnership or RCEP — was signed earlier this month by 15 Asia-Pacific countries.
  • RCEP is expected to eliminate most tariffs on traded goods and deepen supply-chain linkages in the region.
  • Analysts have said India worried about a potential surge of cheap imports as trade barriers were dismantled under the agreement, which could adversely affect several industries where local firms are not globally competitive.
A motorcyclist wears a protective mask while sitting at the side of the road at the Sabarmati Riverfront in Ahmedabad, India, on Thursday, Oct. 22, 2020. Prime Minister Narendra Modi said his government will ensure that all 1.3 billion people nationwide will have access to a Covid-19 vaccine as soon it is ready.
Sumit Dayal | Bloomberg | Getty Images

SINGAPORE — India is unlikely to join the world's largest free trade bloc anytime soon as New Delhi remains more inclined toward bilateral agreements, an economist told CNBC.

Fifteen Asia-Pacific countries signed the Regional Comprehensive Economic Partnership (RCEP) earlier this month — those countries combined represent about 30% of the global economy.

They include: China, Japan, South Korea, Australia, New Zealand and the 10 member states of the Association of Southeast Asian Nations.

India was part of the negotiations that began in 2013, but last year, New Delhi declined to join RCEP saying issues surrounding its "core interests" remained unresolved. Other member countries have said the door remains open for India to rejoin.

The agreement is expected to eliminate most tariffs on traded goods, strengthen supply-chain linkages in the region, and includes standardized rules for investments into member countries. It also has provisions on areas such as e-commerce, competition laws and intellectual property rights.

"The common rules of origin under RCEP do boost its attractiveness as a supply chain destination and that poses a challenge to India's ambitions of attracting supply chains relocating out of China," Priyanka Kishore, head of India and Southeast Asia economics at Oxford Economics, told CNBC.

Rules of origin refer to the criteria that helps determine the country or source of where the product originated from.

Under the common rules of origin agreement, when a product is created to meet RCEP's originating criteria, the regulation is the same for all 15 member countries, according to the Asian Trade Center. That means the specific product can be shipped to any of the RCEP countries and receive the same preferential tariff treatment, therefore lowering the cost of exports and improving the ease of doing business.

Until India focuses on improving the manufacturing sector's competitiveness, it remains ill-placed to participate in regional value chains.
Priyanka Kishore
Oxford Economics

Analysts have said the mega trade deal could attract multinational corporations, including the ones trying to diversify their supply chains out of China, to locate to another country within the RCEP bloc. It would also make ASEAN a more attractive alternative production base than India.

Kishore added that New Delhi's domestic schemes, such as production-linked incentives for certain goods manufactured locally, may provide temporary respite. "Until India focuses on improving the manufacturing sector's competitiveness, it remains ill-placed to participate in regional value chains," she said.

'Adverse terms of trade'

Analysis done in June by the Peterson Institute for International Economics (PIIE) said that India would lose both economic and strategic influence in the region if it doesn't participate in RCEP.

Calculations from the PIIE showed India's income would increase by $60 billion annually — around 1.1 percentage points in real GDP gains by 2030 — if it rejoins the agreement. If India doesn't join RCEP, its income would fall by $6 billion, the PIIE report said.

Still, New Delhi's thinking around RCEP was likely shaped by India's existing bilateral trade agreements with many of the member countries, according to Radhika Rao, an economist at Singapore's DBS Group.

"Limited benefits from prior trade agreements remains a source of worry especially as India runs trade deficits with the members of the RCEP bloc, of which China accounts for two-thirds of the deficit, which points to an already adverse terms of trade," Rao told CNBC.

"Clearly this sets the math on the wrong footing, as a move to swiftly lower tariffs (upon entering any multilateral agreements) could aggravate this situation and worsen India's external balances," she added.

Protecting domestic producers

Under Prime Minister Narendra Modi, India sought to bolster domestic manufacturing and protect small businesses through the "Make In India" program and more recently, a campaign promoting self-reliance.

Analysts have said that India worried about a potential surge of cheap imports as trade barriers were dismantled under the agreement, which could adversely affect several industries — including autos and agriculture — where local firms are not globally competitive. That would likely occur in a challenging economic environment where growth has drastically slowed down, in part due to the coronavirus pandemic, and millions of people are struggling to find work.

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"The official stance is likely to be focused on improving domestic manufacturing capacity and productivity, alongside incentivising local and global players to set up operations, which will level the playing field further before becoming a part of multilateral pacts," Rao said by email.

Kishore from Oxford Economics added that eventually, India might rethink its decision and join RCEP or other multilateral trade pacts.

"But I don't see that happening anytime in the foreseeable future," Kishore said. "The inclination is clearly towards bilateral trade agreements, where they have more flexibility in negotiating terms that they feel wouldn't disadvantage domestic manufacturers."