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PM Modi's decision not to join RCEP is an admission that even the prospect of joining a massive regional trade agreement isn't incentive enough for New Delhi to launch deep economic reforms.

India, which has for some years now been raising walls against the rest of the world, appears to have definitively turned its back on freer trade. Fifteen of the 16 countries involved in negotiations agreed on November 4 to sign up to the giant trade agreement known as the Regional Comprehensive Economic Partnership (RCEP). Only India, after months of uncertainty, chose to hold back for the foreseeable future.

The decision wasn’t free of acrimony. The Chinese claimed that India had raised new demands at the last minute; the Indians insisted that they were simply holding out for the same concessions they always had. These include special protections from cheap Chinese imports and a tighter integration of services trade into the agreement.

India’s concerns are not entirely unreasonable. Of the 16 economies in the RCEP process, China stands out. Many of its domestic policies are trade-distorting. That means its participation in free-trade agreements needs to be constrained institutionally. It should always have been treated differently from the others.

Even so, India’s decision is a disappointing window into how much has changed in New Delhi since it became one of the initial movers of the RCEP process seven years ago under then-Prime Minister Manmohan Singh. Even Singh’s Indian National Congress party now opposes RCEP. With his departure from the political stage, there are few official voices left in favor of openness.

India now lacks both ambition and imagination; it fears the world rather than embracing it. In retrospect, it’s the two decades of optimism after the 1991 reforms that seem exceptional. Talking points released to media by the ruling Bharatiya Janata Party stressed the “pro-Indian industry” steps that the government of Prime Minister Narendra Modi had taken since 2014 -- a long list, in fact, of tariffs and barriers.

Almost comically, the press release described India’s long history of trade skepticism as “the days when Indian negotiators caved into pressures from the global powers on trade issues.” Trade negotiators around the world will be hard-pressed to recognize this description.

Indian officials who till a few weeks ago were warning that staying out of RCEP would only “isolate” India are today arguing that the agreement is against India’s national interest. What they actually mean is that Indian sectoral interests have successfully captured its government. Prime Minister Modi, speaking at the summit, insisted that his decision on RCEP would have to meet the test that Mahatma Gandhi specified for policy: It must improve the lives of the poorest. The reality is that, for a country like India, freer trade, cheaper goods and more reliable prices do indeed improve the lives of the poorest. Those hurt are the industrial blocs that seek protection from competition.

In effect, Modi’s decision is an admission that even the prospect of joining a massive regional trade agreement isn’t incentive enough for New Delhi to launch deep, competitiveness-enhancing economic reforms. If Indian industry were to enjoy more flexible land and labor markets, less red tape, and more access to capital, it could certainly manage to insert itself into the global value chains that will henceforth be dominated by RCEP.

But the political will to make those reforms is absent. The government has simply calculated that it’s easier to sell a departure from RCEP as “courageous” than to manage the politics surrounding domestic reform. The “national interest” doesn’t come into it at all.

The prime minister, speaking at the summit, insisted India was still committed to trade, but that “global economic and trade scenarios have changed” since 2012. It’s hard to tell if he means anything other than that more nations are skeptical of trade than they were a few years ago. Of course, India -- which will need to develop an export industry if it is ever to grow beyond lower-middle-income status -- should not be among those countries.

But Modi could also have been reflecting on where President Donald Trump’s abandonment of the Trans-Pacific Partnership has left Asia. An India uncomfortable with China’s trading power no longer has a U.S.-backed option to consider. The TPP still exists under a new name, without the U.S.; RCEP, without India. The “Indo-Pacific” as an economic geography is losing ever more meaning.

For India, meanwhile, the questions that existed about its development path yesterday are still valid today. How do its politicians intend to provide jobs to its hundreds of millions of deprived young people unless they produce goods for the world, and not just each other?

RCEP had dangers, yes. Trade always does. But India is hardly in a position not to take risks. Governments can try to shut out the world. Unless they can also shut down Indians’ aspirations, however, isolationism will eventually backfire on them.

This commentary originally appeared in Bloomberg.

Mihir Swarup Sharma (ORF)
12 November 2019

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