Why India is reluctant to sign RCEP?

India seemed to have pulled out of RCEP. Regional comprehensive Partnership Agreement (RCEP) is a proposed free trade agreement (FTA) between 10 ASEAN countries and their six FTA partners, namely Australia, China, India, Japan, Korea and New Zealand. It accounts for 25% of global GDP, 30% of global trade, 26% of FDI flows and 45% of the total population. From India’s point of view RCEP is critical. RCEP countries account for almost 27% of India’s total trade. Exports to RCEP account for about 15% of India’s total exports and imports from RCEP comprise 35% of India’s total imports. India runs a trade deficit with ASEAN as well as the partner countries of RCEP. India’s trade deficit with the bloc has risen from $9 billion in FY05 to $83 billion in FY17, of which China alone accounts for over 60% of the deficit. The primary reason is India's limited success with FTAs.

India’s experience with FTAs

Regional trade agreements (RTAs) have become increasingly prevalent since the early 1990s. RTAs cover more than half of international trade and operate alongside global multilateral agreements under the World Trade Organization (WTO). The first eleven years (1995-2005) of the WTO were paralleled by a tripling of RTAs from 58 to 188. Currently, 455 RTAs are in force globally. India is one among top countries in Asia with the maximum number of FTAs either in operation or under negotiation or proposed. According to the Asian Development Bank Institute, as of now, India has 42 trade agreements (including preferential agreements) either in effect or signed or under negotiation or proposed. Out of this, 13 are in effect, one is signed but not yet implemented, 16 under negotiation and 12 are proposed/under consultation or study. Most of India’s existing FTAs are with Asian countries which are quite different from each other in terms of the level of their economic development. The major FTAs that India has signed and implemented so far include South Asia Free Trade Agreement (SAFTA), India-ASEAN Comprehensive Economic Cooperation Agreement (CECA), India-Korea Comprehensive Economic Partnership Agreement (CEPA) and India-Japan CEPA.

Indian exports to SAFTA countries have increased faster than its imports from them leading to a significant rise in trade surplus with these economies from about US$ 4 billion to US$ 21 billion. The maximum growth in exports to SAFTA region has been recorded with Bangladesh and Nepal. contrary to India-SAFTA trade India’s imports from ASEAN has increased at a significantly higher rate than Indian exports to ASEAN. Another important point worth to be noted is that the imports from ASEAN grew much faster than India’s imports from the world. The faster growth in imports has resulted in a significant increase in India’s trade deficit with ASEAN from less than US$ 8 billion in 2009-10 to about US$ 22 billion in 2018-19. With CEPA, India’s trade deficit with Korea from US$ 5 billion in 2009-10 to US$ 12 billion 2018-19. As in the case of ASEAN and Korea, India’s trade deficit with Japan has not only increased during2011-12 to 2018-19 but grown faster than India’s trade deficit with the world.

India seems to have underutilised its existing FTAs. The percentage of India’s international trade routed through the preferential route/FTAs is very low. According to the Asian Development Bank, the utilisation rate of India’s FTAs varies between 5% and 25%, which is one of the lowest in Asia. Moreover, exports to FTA partner countries and non-partner countries have grown at the same pace. Complex rules of origin criteria, lack of information on FTAs, higher compliance costs and administrative delays dissuade exporters from using preferential routes. The compliance cost of availing benefits under these FTAs is so high that exporters prefer using the normal route. India has actively pursued FTAs with several major trading partners in the past without benefitting much.

NITI AAYOG recommendation

Before getting into any multilateral trade deal india should

·        firstly, review and assess its existing FTAs in terms of benefits to various stakeholders like industry and consumers, trade complementarities and changing trade patterns in the past decade.

·        Second, negotiating bilateral FTAs with countries where trade complementarities and margin of prefeence is high may benefit India in the long run.

·        Third, higher compliance costs nullify the benefits of margin of preference, thus reducing compliance cost and administrative delays is extremely critical to increase utilisation rate of FTAs.

·        Fourth, proper safety and quality standards should be set to avoid dumping of lower quality hazardous goods into the Indian market.

·        Fifth, circumvention of rules of origin should be strictly dealt with by the authorities. In case of India- SriLanka FTA, Srilanka had started exporting copper to India by under invoicing of imported scrap to in order to show higher value addition for qualifying for preferential rates under the FTA. Thus, Rules of Origin (ROO) norms can easily be circumvented by simple accounting manipulation to flood Indian markets.The over-arching conclusion of this report is that FTAs have to be signed keeping two things in mind, mutually reciprocal terms and focusing on products and services with maximum export potential.