Walking out of RCEP deal wasn't a 'bold decision', it was induced by fear of competition and will end up only harming India in long run

In a rerun of the Dunkel Draft moment when there was a mass movement in India against joining the multilateral trade agreement in 1994, there has been a near-total political unanimity in India against joining the Regional Comprehensive Economic Partnership (RCEP) — a free trade agreement that lowers tariffs and trade barriers among 10 ASEAN nations and their six trade partners (China, India, South Korea, Japan, New Zealand and Australia). In the end, India's decision to walk out of the deal at the last minute has been interpreted back home as a moment of triumph with political parties of all hues in a mad rush to claim credit.

The Congress claims that it is owing to its "forceful" resistance led by Rahul Gandhi that the Narendra Modi government has been forced to back out of the deal that would have dealt a crippling blow to farmers and traders in India. In fact, the Congress and the Left, bitter rivals in Kerala, recently united in the state to urge the Centre not to become a signatory to the RCEP.

Not just the Left and Congress, opposition to RCEP came equally from the right with RSS-affiliate Swadesh Jagran Manch (SJM) applauding government's move as "bold". The Sangh's economic wing, SJM, held that RCEP would have "killed" government's initiatives such as Make In India, Digital India, Skill India, and requested the NDA to review the "faulty" FTAs with Japan, South Korea, and other countries.

Not to be left behind, the BJP rushed to claim credit for the decision with Union home minister Amit Shah tweeting that the move was indicative of Prime Minister Narendra Modi's "strong leadership".

It is strange to call a decision a metric of "strength", that has been taken out of fear. Regardless of the Opposition's or government's narrative, the fact remains that India's move to walk out of the deal was borne out of worry against competition. The political leadership (rightly) felt that the economy is not strong and competitive enough to benefit from an agreement that may lead to a flood of cheap imports, and therefore it sought to build walls. A move, thus born, is not indicative of strength, but weakness.

Prime Minister Narendra Modi with China's Premier Li Keqiang during the 3rd Regional Comprehensive Economic Partnership (RCEP) Summit in Bangkok. Getty Images

Political positions, however, are not born in a vacuum. When there is a bipartisan consensus against India joining the deal, with Modi telling his counterparts at the RCEP Summit in Bangkok that "when I measure the RCEP agreement with respect to the interests of all Indians, I do not get a positive answer. Therefore, neither the Talisman of Gandhiji nor my own conscience permits me to join RCEP." It has to be understood that India has been guided by its self-interest in taking the decision, even though it puts the nation at a long-term economic and geopolitical disadvantage. An Asian 'giant' that seeks to project power and safeguard its interests in Indo-Pacific cannot afford to remain in splendid economic isolation.

The tragedy lies in the fact that even two decades after liberalization, the Indian economy suffers from such a mortal fear of free trade that we are forced to sell economic disengagement as a "victory" to domestic audience, instead of letting the world's sixth-largest economy take advantage of the global supply chains by being a signatory to world's biggest free-trade bloc.

This skepticism of free trade is not unfounded given the circumstances that India finds itself in but we have to ask ourselves that what has led to the situation where we find ourselves always at a disadvantage when it comes to trade agreements, and why have we become reflexively defensive?

There's not a shadow of doubt that India's walking out of the RCEP deal makes economic and political sense. Equally, it has to be acknowledged that while India's move was justified, it isn't necessarily correct. India has managed to insure itself against the world's biggest free trade pact, but this decision will eventually impose deep economic and geopolitical costs. It will continue to cripple India's ability to move towards becoming a five-trillion economy unless the government shows political will in implementing deep-seated economic reforms.

As has been mentioned, the decision to abandon the RCEP, even though negotiation went on for seven years, was a no-brainer. RCEP would have exposed India's vulnerabilities and highlighted India's uncompetitiveness. It would have underscored the fact that Indian economy needs deep structural reforms. Since accepting these truths aren't easy, fashioning the protectionist stance as a "bold step", or a signal that India did not "cave in" makes political sense.

However, this is a pyrrhic victory.

Protecting Indian farmers, businesses, consumers and workers from competition, doubling down on isolationism, raising barriers and labeling all trade agreements against "national interest" speaks of a defeatist attitude. Lack of competition will eventually make Indian businesses and farmers even more unfit, wary of competition and lack of exports will make it harder for India to register the kind of growth that it seeks to register.

This is not to say that India should have walked into the deal at the present stage of its development. As this article in The Times of India points out, quoting a government source, "India was in many ways, the odd one out there - all the ASEAN countries are part of the global supply chains, with more sophisticated systems than India. None of these countries have a problem with China's bottom-lines the way India does, because at the end of the day, India is basically, just a large market."

This is the nub of the issue. Unless we develop our markets, increase scope for exports and face up to competition, our position will remain axiomatically defensive in trade agreements. Though India is stressing on bilateral instead of multilateral deals, it is imperative to address these structural issues or else all negotiations will essentially be the same - always defending, always at a disadvantage.

As Soumya Kanti Ghosh, Group Chief Economic Advisor, State Bank of India, reminds us in Financial Express, "India ran a merchandise trade deficit with 11 out of the 15 other members of RCEP in 2018-19, totaling $107.28 billion. India's overall merchandise trade deficit was $184.00 billion in 2018-19. In 2018-19, 34 per cent of India's imports were from this region, while only 21 per cent of India's exports went to this region. China is the biggest trade partner amongst these countries and the major concerns that India had throughout the negotiations were with regard to China."

The focus of India's attention during RCEP deal has been protecting our domestic sectors from "unfair" competition, but for a market that is perennially protected from competition, every challenge will seem unfair. The real issue, then is lack of reforms.

As Livemint points out, "India suffers a cost disadvantage in energy, logistics and capital. Added to this is lack of scale, inflexible labour laws, incoherent policies for special zones and clustering, and endless bickering among upstream and downstream players across various sectors." This, along with an overvalued rupee, has led to poor performance in exports.

This should be the real worry. The dressing up of a defeatist move as a "win" is the easy part. The government must move towards doing away with inspector raj, remove obsolete laws, implement reforms in agricultural and financial sectors, simplify land and labour laws to unleash the animal spirts. Then and only then can India approach trade agreements that befit the swagger of an economy that is poised to become the fifth-largest in the world.