InvestorQ : Why did PM Modi refuse to sign the RCEP deal, when it would have given a boost to trade?
sara Kunju made post

Why did PM Modi refuse to sign the RCEP deal, when it would have given a boost to trade?

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10 months ago

As Mr. Modi put it, the trade deal would not be in the larger interests of India as the finer points were not suitable to Indian interests. Here are five reasons why Modi refused to sign the deal.

a) After consultations with the Finance Ministry, the PM was of the view that the deal may not be appropriate when the economy was facing a slowdown. GDP in June was at 5% and there are talks of GDP dipping below 5% in the September quarter. The government was of the view that in the midst of a slowdown, a major free trade pact like RCEP would expose Indian businesses and agriculture to unequal competition from countries which have subsidy support from the government; like China.

b) India runs a huge trade deficit with most of the major world economies with China alone accounting for a trade deficit of over $60 billion with India. India has large trade deficits with 11 out of the 15 RCEP countries. India’s annual trade deficit was close to $200 billion last year and is down this year only due to weak oil prices. Any oil spike could worsen the situation for India under the RCEP deal. That would have put unnecessary pressure on the INR too.

c) The government also felt that the interests of the farmers at the primary level and the industries at a secondary level would also be compromised. The latest core sector growth for September came in at (-5.2%) and that could worsen if domestic industry was forced to compete with cheap products from abroad. The PMI manufacturing and the PMI services have also shown pressure. But the bigger worry was on the agricultural front. In agriculture, domestic players dealing in dairy products, pepper, cardamom, rubber, and coconut would face dumping from South Asia while Vietnam and Indonesia could pressure local rubber prices.

d) Free trade agreements have had their own limitations and even the US has been walking out of recent free trade agreements or has been trying to renegotiate them to suit its terms. Even the Niti Aayog had come to the same conclusion based on the analysis of multiple free trade agreements that India signed in the past decade. Among those were FTA with Sri Lanka, Malaysia, Singapore, and South Korea. In most cases the imports from the FTA nations increased while exports failed to match up resulting in widening trade deficit.

e) The most important reason why India rejected this RCEP agreement was to curb the powers that China would have wielded. RCEP would have been to China what the Euro proved to be for Germany. It looked like a Chinese plan to save its manufacturing industries from crumbling under their own weight. In fact, several industry leaders in India red-flagged the Chinese agenda of flooding the Indian market using the RCEP countries as an intermediary.

These were the major reasons that India decided to opt out of the RCEP agreement.

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10 months ago

Not getting into RCEP without sufficient safeguards to domestic industry is a wise action. India is an attractive market and granting access to it without sufficient tarrifs will hurt local industry.