In the current economic situation, opening up the markets to imports would hurt the country’s domestic industry. India has raised import duties on several items to protect its industry against Chinese imports. India’s trade deficit with ASEAN from less than USD 8 billion in 2009-10 rose to about USD 22 billion in 2018-19

New Delhi: India has decided against joining the world’s largest free trade area — the Regional Comprehensive Economic Partnership (RCEP) — at least for now. Many economists believe the decision to not join the RCEP will protect the economy from cheap imports, particularly from China, thereby saving millions of jobs in the time of economic downturn.

More importantly, at this current economic juncture, allowing huge tariff cuts and opening up the markets to imports would be detrimental to the health of the country’s domestic industry. At present, the Indian economy is in the midst of a severe slump. India’s GDP grew at a six-year low of 5 per cent in the June quarter because of a sharp deceleration in the manufacturing sector. Most global and domestic agencies have trimmed their growth projections, saying economic growth is likely to remain below 6 per cent for 2019-20.

It is worth noting that India’s trade deficit with the RCEP nation is USD 105 billion, of which China alone accounts for approximately USD 54 billion at the end of 2018-19. Quite a few commentators and media columnists were worried that the RCEP deal would widen the country’s burgeoning trade deficit gap with China. Around 50 per cent of the imports from China comprise high-tech products such as telecom equipment. The top items of export to China from India were petroleum products, cotton yarn, plastic raw materials and so on.

Plus, Beijing does not provide a level playing field for goods that they could export, especially in areas such as information technology, pharmaceuticals among others. Furthermore, India has increased import duties on several items to protect its industry against Chinese imports.

“India’s decision to not join RCEP at this point in time has rightly taken cognizance of the concerns of the domestic industry which, otherwise would have been subjected to a potential threat in terms of a surge of imports from other RCEP countries (particularly China). At a time when India is working towards developing its manufacturing competitiveness through initiatives such as ‘Make in India’, the decision to stay out of RCEP seems to be in the national interest,” observes Dr Niti Bhasin, associate professor of international business at Delhi School of Economics, University of Delhi.

There is one school of thought which argues that the new trading bloc would have benefitted the poorest by lifting their ability to purchase items produced at competitive prices. However, for India, it is a classic case of once bitten, twice shy. Worth mentioning here is that India’s past experience with free trade agreement (FTA) is not encouraging. To put this in context, data demonstrated that India’s trade deficit with ASEAN from less than USD 8 billion in 2009-10 climbed to about USD 22 billion in 2018-19.

Besides, the RCEP deal would have forced India to cut duties on 90 per cent of its tariff lines. It could have flooded the markets with cheap Made-in-China goods, placing the entire domestic industry in jeopardy. A report suggested that the revenue department estimated the tax loss may be around Rs 60,000 crore for the RCEP agreement.

“The government has done the right thing by moving away from the RCEP. India has preferential or free trade agreements with most of the members of RCEP. India is negotiating separate trade agreements with Australia and New Zealand. Therefore, signing of RCEP means opening up trade relationships mainly with China," says Parthapratim Pal, professor at Indian Institute of Management (IIM) Calcutta.

"China is a supremely competitive country and liberalising trade vis-à-vis China is likely to undermine the promotion of the manufacturing sector in the country. It would also raise serious questions about the rationale of tariff rate hikes on a range of manufactured goods over the last two years. I think better sense prevailed and during the time of the present slowdown, the government has dodged a bullet by moving away from RCEP," Pal added.

It is no exaggeration to say that had India joined the RCEP in its present form, it would have certainly poured cold water on the government’s flagship scheme ‘Make in India’. The government, however, should raise the competitiveness of Indian industry as it cannot continue to shield it with high tariff regime.