Does India's sudden RCEP pullout reflect a tactical shift in favour of US?

If the US quickly signs a trade deal with India and if India retaliates against Chinese denial of access to Indian goods, the logic of India's retreat from the RCEP will acquire a new dimension

It was a big surprise that the Narendra Modi government on Monday decided not to join the Regional Comprehensive Economic Partnership (RCEP) trade deal. The prime minister was present in Bangkok to take part in the deliberations during the third RCEP Summit and India seemed set to join the new trading bloc. But almost at the eleventh hour, India pulled out of it saying that the terms of the new group would adversely affect its national interest. What went wrong at the last minute? 

The RCEP was conceived as the world’s largest trading bloc of 16 countries (10 members of the Association of South East Asian Nations or ASEAN and six of its free trade agreement partners) that covered over 3 billion people (45 per cent of the world population) with a combined gross domestic product (GDP) of $21.3 trillion and 40 per cent share in world trade. After India pulls out of it, the group’s strength will be somewhat reduced, but will nevertheless remain the world’s largest trading bloc.

The surprise over India’s decision is understandable. In the run-up to the RCEP Summit talks in Bangkok early this week, the government and many other stakeholders, including industry bodies and even sections within the ruling Bharatiya Janata Party (BJP), had veered round to the view that it would be better to be inside the world’s largest trading bloc than to remain outside. Being inside would give the government an opportunity to modify the rules as and when they were framed to suit its interests, it was argued from the Indian side. What’s more, several countries within the RCEP had indicated to India that they would prefer India to be inside to manage and even contain a dominant member like China. 

Even the government-appointed High-Level Advisory Group (HLAG) on growing India’s trade had recommended in its report that there were strong advantages of India joining the RCEP.  The report was submitted barely 10 days ago. At a function where the HLAG report was released, Commerce Minister Piyush Goyal said the document was like the Geeta or the Bible or the Quran. So, what changed so fundamentally in a few days that India changed its stance on the RCEP so completely?

That it was a surprise last-minute decision was obvious from the fact that Mr Modi had attended the Summit. Rarely do heads of government attend a Summit and pull out of a deal at the eleventh hour. Comparisons will be made between what Mr Modi did on Monday and how the US President Donald Trump withdrew from the 12-nation Trans-Pacific Partnership agreement in January 2017. But there are key differences between the two withdrawals. Mr Trump had pulled out of an agreement his predecessor had signed in 2016. Mr Modi was taking forward a deal that his predecessor government had initiated and had come close to signing it before announcing a withdrawal. 

But from an international diplomacy perspective, Mr Modi’s decision to pull out of the deal will be seen as a setback for him. A strong leader enters the negotiating table only after reasonably ascertaining that success will be achieved in securing the country’s national interest. The question would be: Why did Mr Modi join the Summit if he was not sure of convincing other members of the need to address India’s concerns?  Even within India, Mr Modi would have to present more convincing reasons for his decision than what has been trotted out so far by government representatives as reasons for the withdrawal. 

The reasons cited so far for Mr Modi’s decision on the withdrawal include the RCEP member-countries’ refusal to accept India’s proposals for a cap on imports from China, provision for more trade in services, an assurance for better market access for more Indian goods and services to the Chinese market and making 2019 the base year for tariff reduction. India’s concerns were also over the proposed tariff reduction in agriculture and the dairy sector, which could have harmed Indian farmers. 

But none of these issues was new. The Indian government was hoping to make some progress on them and get a resolution through further negotiations over time. What, therefore, happened in Bangkok that the government decided to back out of the deal? Had the RCEP member-countries become less accommodative of the Indian concerns? Was it because of the growing China influence? And did India’s bargaining ability take a hit after the global mood and the reaction of some international leaders turned less friendly in the wake of recent developments in Kashmir? 

There is little merit or logic in the argument that the Indian government withdrew from the deal because of immense pressure being exerted on it by the Swadeshi Jagran Manch, an organisation that opposes free trade and justifies protectionist policies, and several industry leaders and farmers, who were worried over growing imports as a result of the RCEP deal. The fact is that Swadeshi Jagran Manch has always been opposed to RCEP. 

So, why was the Manch ignored earlier and suddenly it became important last Monday? Similarly, a few days before Mr Modi left for the Bangkok summit, the Confederation of Indian Industry (CII) issued a statement that favoured India signing the RCEP deal. But on Monday, the CII changed its stance and justified the Indian government’s decision to withdraw from the RCEP. 

It is also possible that the Indian government found in Bangkok that its demands were not being heard and decided to make a tactical shift to instead pledge itself for a trade deal with the United States. Joining the RCEP could have been viewed by the US as India becoming a closer trading partner with China and a new market for Chinese goods — a move that could also reduce the impact of the US trade tariff actions on China. India pulling out of the RCEP has thus opened up the possibilities of a new trading arrangement between India and the US. If  the US quickly signs a trade deal with India and if India retaliates against Chinese denial of access to Indian goods, the logic of India’s retreat from the RCEP would acquire a new dimension.