India’s Trade Policy: Embracing national interests and selective engagement

Why India walked out

Why did India pull out of RCEP after participating in twenty-eight rounds of discussion for nearly seven years? No country would invest so much negotiating energy and resources, unless it visualized distinct gains from the outcome. That it withdrew nonetheless is obviously due to a shift in thinking regarding the perceived costs of joining the deal overshadowing perceived benefits.

Several reasons led India to withdraw. These include fears of domestic industry getting swamped and marginalized by cheap imports; the commercial and geopolitically worrisome prospect of joining a FTA with China; and, entering trade agreements with reciprocal market access commitments being an intrinsically unacceptable idea for a policy establishment focused on championing indigenous production through flagship import-substitution strategies like ‘Make in India’. The onset of economic slowdown in India and the high political risk of antagonizing key domestic constituencies virulently opposed to RCEP were additional factors. 

Most of the mentioned factors point to a deep dislike for free trade, amounting to distrust of FTAs enabling foreign producers’ unrestricted access to domestic markets. Those holding these views, such as most domestic businesses and politically influential interest groups championing indigenous production, perceive FTAs to be inimical to national interests, such as economic sustenance of local producers and achieving self-sufficiency.

These perceptions significantly influence the shaping of India’s current trade policy, in contrast to earlier more outward-oriented visions favouring greater engagement in FTAs. The powerful influence of the views is evident from India disengaging from a process it was committed to for years due to the economic and geostrategic benefits of being part of the world’s largest free trade agreement.

India’s emerging trade policy 

Given the conspicuous lack of support for free trade in India, its trade policy is expected to become narrow and restricted in scope. Trade engagement is likely to be selective, focusing on partners with whom more trade would further specific national interests, like expanding export-oriented domestic production, without facilitating imports.    

A pervasive import phobia, and paranoia over competition from foreign producers, is likely to encourage India to choose partners on the basis of bilateral trade balance. The tendency would be similar to the US, where President Trump blames trade deficits for ruining the American economy. Notwithstanding spats on bilateral trade issues, the similarity between defensive posturing of the US and Indian trade policy is unmistakable.

A constricted trade policy, guided by import-substitution and heavy regulation of imports, makes India’s return to RCEP very difficult. India’s existing FTAs with RCEP members – Korea, Japan and ASEAN – are currently being reviewed by the government to make them ‘balanced’, i.e. restricting imports. The review is also influenced by the apprehension that China, which doesn’t have a FTA with India, can use rules of origin provisions in some of India’s FTAs with Asia-Pacific countries, to export more to India. Such views are unlikely to draw India close to Asia-Pacific FTAs.

On the other hand, India would be interested in pursuing more ‘beneficial’ FTAs, like the one with the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation countries (BIMSTEC includes Bangladesh, India, Myanmar, Sri Lanka, Thailand, Nepal and Bhutan). As the largest economy in this grouping of countries around the Bay of Bengal rim, India’s economic and geopolitical heft would help it in fashioning a FTA tailored to its advantage.

Import threats from most BIMSTEC members (except Thailand) are limited. Indian exports to these countries would increase further from tariff cuts in the FTA, as would Indian FDI through liberal inward investment rules, enlarging prospects of Indian businesses creating value chains around the Bay of Bengal. Having a FTA with countries around the Bay of Bengal also helps India geopolitically, principally in terms of countering Chinese influence in the region.

It would also be consistent with efforts by India and its major extra-regional strategic partners – US, Japan, Korea and Australia – to restructure regional supply chains, ostensibly to reduce dependence on China. It is difficult to say whether such efforts might see revival of the long-stalled FTA negotiations with Australia. The possibility can’t be ruled out given the common strategic imperative of countering Chinese influence in the region. 

The Coronavirus impact

Like several other countries, following the Coronavirus outbreak India resorted to export curbs for ensuring adequate domestic availability of diagnostic testing kits, various active pharmaceutical ingredients (APIs) and their formulations, paracetamol and hydroxychloroquine (HCQ). It subsequently withdrew the export restrictions following large global demand for many of these items. India’s pharmaceutical industry - the world’s largest producer of generic drugs and accounting for more than half of the global demand for various vaccines - is poised to reap rich dividends, as countries ramp up preparedness for tackling future outbreaks, and the race for a Coronavirus vaccine accelerates.

The prospects for its pharma industry will influence India’s trade policy outlook. The critical challenge is the industry’s dependence on China for sourcing bulk drugs and APIs. This dependence will continue until India develops sufficient domestic capacities for producing bulk drugs, or is able to source more of its requirements from other countries. This could lead India to explore selective pharma-specific trade arrangements with other partners, including China, for exploiting upcoming opportunities.

Conclusion

India’s withdrawal from RCEP is a turning point in its trade engagement. It reflects the profound influence of inward-looking mindsets on its current trade policy, making India’s trade outlook more circumspect and selectively engaging.

Premising trade engagement on bilateral trade balances, specific national interests (including geopolitical), and circumstantial opportunities, like those arising from COVID19, make national trade policies become disconnected from market forces that drive economic development towards more efficient outcomes. Several countries, though, are currently preferring to disconnect from market signals by reorganizing their trade policies around national interests. In that context, India is no exception.

By Amitendu Palit, Senior Economic and Trade Policy Research Fellow at the Institute of South Asian Studies in the National University of Singapore.

Amitendu can be reached at isasap@nus.edu.sg. The views expressed here are the author’s alone.