china-india-brief-139


Published Twice a Month
May 31, 2019 – June 14, 2019

Centre on Asia and Globalisation
Lee Kuan Yew School of Public Policy


Guest Column

India needs to ‘Keep Calm and Carry On to RCEP’

By Devyani Pande


CIB139_1200x800Photo by Scott Dexter on flickr.com

After a clean sweep by the Bharatiya Janata Party (BJP) in one of the most anticipated elections in India in recent times, Narendra Modi has taken over as the country’s Prime Minister for a second term. Known for his dynamic foreign policy stance in his first term, Modi now has to walk the talk when it comes to the ‘Act East’ policy. Concluding the long-running negotiations for the Regional Comprehensive Economic Partnership (RCEP) would be an ideal opportunity to do so. The agreement is being negotiated between the ten members of the Association of Southeast Asian Nations (ASEAN), as well as India, China, Japan, South Korea, Australia, and New Zealand. There have been major speed-breakers along the way, in part due to India’s reluctance to provide tariff concessions on goods and market access to other RCEP members, especially China. This is a significant partnership for India, given the opportunity to implement domestic reforms to bolster the economy and strengthen regional trade ties, particularly with China, in the context of the ongoing US-China trade war. Modi has an opportunity to conclude the RCEP negotiations, lest China moves forward with its own recent proposal of an ASEAN+3 agreement with ASEAN, Korea, and Japan.

The RCEP negotiations, which began in 2013, have taken longer than expected to conclude and were in a ‘deep freeze’ for some time before the Indian elections. One of India’s key concerns relates to the rising trade deficit with China that currently is more than one-third of its total trade deficit. The fear of Chinese goods flooding the Indian market is another source of domestic opposition. Indian manufacturers are jittery about increasing cheap imports from China, evidenced in the burning of Chinese goods in New Delhi in March this year. There will be opposition from such groups, and signing the agreement will not be easy. However, there are compelling economic and strategic reasons to do so.

The RCEP will cover almost half of the world’s population, 30 percent of the global economy, and will form the world’s largest free trade area when concluded. It holds immense importance for the trade integration of the Indo-Pacific region, given that the region’s two largest powers–India and China—will be part of the final deal. Many hopes are pinned on the RCEP to achieve its main objectives of facilitating trade and investment between members and improving the engagement of enterprises in the region within global and regional value chains. Given the economic and strategic importance of RCEP, India’s fears regarding its trade deficit with China and having to provide market access to Chinese goods seem rather misplaced.

There are three main reasons why Modi should push for the conclusion of RCEP.

First, running a trade deficit is less of a problem than appears. It has been long established that using trade deficits as an indicator to restrict trade with a country is misguided. Running trade deficits simply signal that the imports of a country are greater than its exports, there is more consumption than production, and the difference is being covered by importing from another country. India relies substantially on China to meet its need for manufactured goods. In 2018, the top three imports of India from China were electrical machinery and parts thereof; nuclear reactors, boilers and machinery; and organic chemicals.[1] For a fast-growing economy like India that is still working on developing infrastructure for its industrial sector, this seems to be reasonable. A bilateral trade deficit with China on account of such imports should not hold up signing the RCEP.

Second, RCEP can be used as a means to boost domestic reforms. India is apprehensive about the demand of RCEP members to provide duty cuts on 92 percent of tariff lines, fearing an influx of Chinese goods into the market. Its offer stands at liberalizing 86 percent tariff lines for RCEP members and 74 percent for China. Instead of resisting liberalization, India must capitalize on this opportunity to set its own house in order. In recent years, the bulk of India’s imports from China have consisted of manufactured goods such as electrical items, chemicals, and pharmaceuticals.[2] The competition from China and other RCEP members would give it the required push to work on reforming the manufacturing sector and making itself more competitive in the world market.

This is reminiscent of how competition in China’s domestic market worked in its favour when it became a member of the World Trade Organization in 2001. With the main objectives of improving economic growth and preparing domestic companies to face greater competition from trading partners, China undertook economic and legislative reforms to conform to WTO rules.[3] The main reform was opening up to foreign direct investment and directing it towards the already-established special economic zones and using the technical know-how to upgrade exports. [4] The legislative reforms comprised of reducing the export value-added tax on steel products, leather, and grains.

Third, RCEP can provide a fillip to the manufacturing sector, which is vital to India's future. The results of Modi’s flagship initiative—‘Make in India’—have been dismal. Introduced in 2014, it aimed to increase the manufacturing sector’s share in India’s GDP to 25 percent. However, as of 2018, the figure was 16.6 percent, compared to 40.7 percent in China. Over the period 2014-18, the share of manufacturing grew by a meagre 0.6 percent. NITI Aayog’s Strategy for India@75 emphasizes the need for establishing self-sufficient clusters to cater to the needs of industries and industrial corridors by improving hard infrastructure and supporting logistics.[5] Clusters of textile producers in the cities of Surat, Ludhiana, and Tirupur and of pharmaceutical producers in Hyderabad, Mumbai, and Ahmedabad are already in place. The production in these clusters that would lead to trading opportunities with RCEP partners must be utilized.

The RCEP partnership will have costs with respect to providing market access, as with any other trade agreement, but the positives are more compelling. The arrangement also assumes importance from a strategic perspective for India. Given that it will give India a chance to engage with China, New Delhi should take the lead in bringing about an early conclusion to the negotiations. Taking such a step will be a signal of its intention to live up to the idea of unfettered trade and integration in the region and secure its image as a country willing to work with its neighbours. In an interconnected world, where trade takes place through global value chains, India should not be averse to capitalizing on the potential for trade with RCEP members and improving its own competitiveness.


[1] Based on data from UN Comtrade, International Trade Statistics Database, https://comtrade.un.org/.

[2] Ibid.

[3] Longyue Zhao and Yan Wang, “China's pattern of trade and growth after WTO accession: Lessons for other developing countries”, Journal of Chinese Economic and Foreign Trade Studies 2, no. 3 (2009): 178-210.

[4] Nicolas R. Lardy, “Issues in China’s WTO Accession,” The Brookings Institution, May 9, 2001, https://www.brookings.edu/testimonies/issues-in-chinas-wto-accession/.

[5] NITI Aayog is a think tank of Government of India established on January 1, 2015 to provide policy inputs.


Devyani Pande is a PhD Student at the Lee Kuan Yew School of Public Policy, National University of Singapore. She holds a M.A. in Economics (Specialization in World Economy) from Jawaharlal Nehru University, New Delhi, India. Devyani has previously worked with think tanks in India on projects related to trade and investment in South Asia and ease of doing business in India. She can be reached at decb64_ZGV2eWFuaUB1Lm51cy5lZHU=_decb64 and decb64_ZGV2eWFuaS5wYW5kZTI4QGdtYWlsLmNvbQ==_decb64


The views expressed in the article are solely those of the author and do not necessarily reflect the position or policy of the Lee Kuan Yew School of Public Policy or the National University of Singapore.



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Books and Journals

Asia Policy

Converting Convergence into Cooperation: The United States and India in South Asia
Asia Policy, Volume 14, no. 1 (2019): 19-50

By Constantino Xavier, Fellow in Foreign Policy Studies, Brookings India

Seeking to counter China's expansionism in South Asia, India's traditional sphere of influence, New Delhi now partners with several "like-minded" countries to offer an alternative source of infrastructure development and connectivity initiatives. This has opened a window of opportunity for the U.S. to cooperate with India in the region. Based on historical case studies in Nepal, Sri Lanka, and Myanmar, with new evidence from primary sources, this article shows how different strategic priorities, capabilities, and perceptional challenges have at times hindered U.S. and Indian policies from aligning. At the same time, however, the article dispels the common assumption that the U.S. and India have always been locked in an inevitably hostile relationship across the region. A detailed analysis of both states' approaches to the region since the 1950s shows that, despite significant challenges and differences, there have been instances of policy coordination that are relevant for today's attempts to facilitate cooperation amid convergence. To work together more efficiently and counter China's rising leverage in South Asia, India and the U.S. will need to learn from past interactions and focus on their communication and coordination of policies in the region.


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