Why India shouldn’t join RCEP. It will stifle economy, undo PLI progress

The World Bank has urged India to reconsider its position on RCEP. Worries about China’s overcapacity and India’s struggles with previous FTAs had led to its withdrawal in 2019.

Illustration: Ramandeep Kaur, ThePrint

The World Bank has urged India to re-evaluate its stance on free trade agreements and consider joining the Regional Comprehensive Economic Partnership or RCEP. The institution highlighted India’s potential to leverage regional value chains and achieve its ambitious $1 trillion export target.

In 2019, India chose to exit RCEP, citing several “outstanding issues”. A 2018 NITI Aayog paper, co-authored by us, noted that India’s combined trade deficit with free trade agreement (FTA) partners doubled between 2011 and 2018, accompanied by a decline in trade quality.

Our analysis revealed that India’s FTAs did not significantly boost value-added exports but instead allowed imports to flow freely, adversely impacting domestic industries. At the time, we recommended that India avoid joining the China-led trade bloc—a stance India ultimately adopted. Concerns about China’s massive overcapacity, subsidised exports, circumvention of rules of origin, and India’s lacklustre performance with previous FTAs led to India’s decision to withdraw.

We maintain that India should continue to refrain from joining RCEP or, at the very least, avoid rushing into this mega trade bloc. Here’s why.

Self-reliance push is bearing fruit

In recent years, India has emphasised self-reliance by building domestic manufacturing capabilities through initiatives like the Production Linked Incentive (PLI) scheme, launched in 2020. With an outlay of over $26 billion, the PLI scheme aims to boost manufacturing and exports while increasing domestic value addition across 14 key sectors, including automobiles, smartphones, medical devices, food products, and textiles.

Several sectors, such as electric vehicles (EVs) and batteries, white goods, solar PVs, and APIs, are in the early stages of capacity building. The PLI scheme covers sectors with a high import share—40 per cent of India’s total imports come from PLI-targeted sectors, with a large portion sourced from China. Currently, China accounts for 30 per cent of India’s overall industrial imports. However, over 70 per cent of inputs and components for PLI sectors such as electronics, telecom, EV batteries, pharma, and solar PV cells are sourced from China. For instance, over 60 per cent of India’s solar equipment imports, by value, originate from China.

The government’s efforts under the PLI scheme are gradually showing results. As of June 2024, the scheme has attracted investments worth Rs 1.32 trillion ($16 billion), generated manufacturing output of Rs 10.9 trillion ($130 billion), and created over 850,000 jobs (direct and indirect). Additionally, exports worth Rs 4 trillion have been attributed to the scheme. However, the full impact on investment and production will be realised only after FY25. 

One successful example is the smartphone PLI scheme, which has transformed India’s mobile manufacturing industry. In FY24, India’s mobile phone production increased to $51 billion, increasing 21-fold over a decade ago, while exports increased by 81-fold to $16 billion. Imports now account for less than 3 per cent of the market share, down from 78 per cent in 2014-15.

Despite these achievements, the scheme has faced criticism for low domestic value addition. This shortfall is largely due to China’s dominance in global value chains (GVCs), which necessitates reliance on Chinese inputs, components, machinery, and expertise—at least for now. As domestic production scales up, this reliance may even increase. 

To address this, the government is exploring ways to support the manufacturing of inputs and components for PLI-targeted products to enhance domestic value addition. The goal is to build a robust domestic value chain and ecosystem, eventually reducing dependence on Chinese imports.

Opening Indian markets to China at this critical stage of transformation could flood them with subsidised imports, undermining the domestic industry’s capacity-building efforts.

RCEP members state as world goes inward

Rising geopolitical tensions and economic fragmentation since 2020 have led global industrial policies to become more inward-looking. Examples include the US’ Inflation Reduction Act (IRA) and CHIPS Act, the EU’s European Green Deal and Carbon Border Adjustment Mechanism (CBAM), and China’s ‘Made in China 2025’ initiative.

According to the International Monetary Fund (IMF), China, the world’s largest user of subsidies, implemented around 5,400 subsidy policies between 2009 and 2022, causing significant trade distortions. These subsidies, reflected in China’s export prices, have shifted from traditional industries (like metals and textiles) to strategic sectors such as solar panels, batteries, and EVs.

Since 1995, over 1,200 anti-dumping duty (ADD) measures have been imposed on Chinese exports, with more than 200 initiated after 2019. Meanwhile, rising protectionism—including the EU’s CBAM and tariff measures by the EU and US on China’s EV and solar industries—could lead to an influx of diverted imports into developing economies like India.

For those suggesting India to join RECP, they should answer if RCEP member countries have truly benefited from the trade pact. The truth is they haven’t. For many RCEP nations, trade deficits with China have widened since the agreement was signed. For instance, according to the Global Trade Research Initiative (GTRI), ASEAN’s trade deficit with China increased from $82 billion in 2020 to $135.6 billion in 2023. Japan’s deficit has doubled and South Korea is projected to face a deficit with China this year. These trends underscore how regional value chains within RCEP remain heavily tilted in China’s favour, even for export-driven economies. 

China’s dominance in Indian markets persists. India’s trade deficit with China rose to $85 billion in FY24 from $63 billion in FY19. Joining RCEP could exacerbate these imbalances, further undermining domestic industries and thwarting the government’s efforts through the PLI scheme.

While India must integrate with global value chains through well-designed FTAs, entering value chains overwhelmingly dominated by China will stifle domestic industry rather than integrate it meaningfully. India’s path to sustainable growth lies in forging strategic trade partnerships that bolster, rather than undermine, its manufacturing ecosystem.

VK Saraswat is member, NITI Aayog, Prachi Priya is a Mumbai-based economist, and Aniruddha Ghosh is a US-based economist. Their X handles are @DrVKSaraswat49, @priyaprachi01, and @ani_econ respectively. Views are personal.

(Edited by Prasanna Bachchhav)