Indian Prime Minister Narendra Modi decided not to sign the Regional Comprehensive Economic Partnership (RCEP) at the summit in Bangkok, Thailand on October 4. Can you explain why India decided to withdraw from the agreement after seven years of negotiation? What are India’s concerns?

There are several factors, but one of the most important was that under the rules of the RCEP, the Indian government perceived that there wouldn’t be enough positive market access to the other member countries, particularly for India's agricultural and services exports. At the same time, policymakers were deeply concerned that China would flood India’s market with cheap consumer goods and industrial inputs. So India was worried about both the access India would receive and the RCEP’s negative impact on domestic Indian industries and consumers.

How does the India-China rivalry factor into India’s decision not to join RCEP, which China has aggressively promoted?

This is certainly an important factor. Things have changed in the India-China relationship since RCEP negotiations first began. This particular prime minister, Prime Minister Narendra Modi, is quite concerned with the threat China poses, both in strategic and economic terms. Moreover, the foreign policy establishment in New Delhi is also worried that the RCEP would be a “Trojan horse” insofar as it serves as a vehicle for the Chinese to spread their economic and diplomatic influence.

What could have been India’s possible benefits from joining the RCEP? What were the demands placed on India by the RCEP?

India is not well integrated into global supply chains right now and faces real economic pressure at home as its economy slows down. It has a very young population and there has been a dramatic rise in the number of people looking for gainful employment. It is estimated that India has on the order of one million people entering the labor force every month. One way for India to provide employment for the millions of people who are looking for jobs is to build up its industrial-based manufacturing sector and find a way to link it to global supply chains. At the same time, India is worried that many of its domestic industries are not globally competitive. Given the weaknesses of India's competitiveness, there will be goods coming in from other countries, including China and Korea, which would negatively impact India's industrial base. What other countries hoped India would do was open its market. India has the highest tariff barriers of any country in the RCEP bloc, and the tariff barriers have actually been increasing rather than decreasing in the recent years. This is why lots of other Asian nations were hoping that India would be a part of the RCEP group.

How much time does India need to become better integrated into global supply chains? Has the government undertaken any reforms for this?

Ironically, one of the arguments for India pulling out of the RCEP was that it needed first to undertake reforms to make its industries more competitive. However, whether India is in the RCEP or not, the reform agenda remains basically the same: improving the ease of doing business, making it easier for manufacturers to acquire land, creating more flexibility in the labor market, and building infrastructure that would facilitate trade linkages both within India and abroad. That's really the unfinished agenda, and the Modi government has started very gingerly down that road. But it's a long way from completing that mission.

How was Prime Minister Modi’s decision greeted in India, in particular by the business community?

There were two simultaneous yet opposite reactions. On the one hand, there were those who were quite upset and thought India was missing out on a window of opportunity to join global supply chains and to trade with the world. On the other hand, there were those who thought India's strategy to pull out could protect infant India's industries. In other words, there were multiple reactions - some celebrated the decision, while others condemned the decision. But it's important to point out that India could still choose to join the RCEP in the future. It hasn’t completely shut its door on that possibility. Recently, Japan came out and said that it would not sign the agreement if India were not in the group. So this is not the last chapter of the RCEP debate.

Do you think India will join the RCEP in the future?

It really depends on what kind of reforms India takes up. Despite a lot of talk about making India more open to business and pursuing liberal reforms, the government has been somewhat reluctant to tackle some deep-seated, difficult issues like labor and land reform. So it is not very likely that India will join the RCEP in the near term, but I should mention India is going through a serious economic downturn right now. GDP growth is slowing down, new investments are depressed, and exports have slumped. Economic crises sometimes have the effect of spurring governments to take action. There’s an old cliché that “crisis can lead to opportunity.” So it's possible that the government will be compelled and pushed to act.

Can you talk about India's current economic reform?

This government’s recent economic moves have not been that well received by the business community, given several new tax provisions that investors worried would hamper investment (some of these have been rolled back after they were introduced). The one major reform the government has taken in recent months that industry has cheered is the introduction of a corporate tax rate cut that brings India's corporate tax rate in line with many of its competitors. But the impact of this will likely be muted because India is also suffering from a demand crisis. There has been a paucity of domestic and international demand, and India doesn't have the fiscal resources to further stimulate the economy. In terms of reform, India recently introduced the Goods and Services Tax (GST), which is brand new nationwide indirect tax. However, the design of the tax has been far messier than what was originally intended. Right now, there is a lot of discussion about how to streamline the tax to reduce the compliance burden on small businesses and to boost revenue. These are all things that we are likely to see the government address in the upcoming weeks and months.

How will non-participation of the RCEP affect India's domestic economic reform?

The market won’t be flooded by imports from other countries, but that might actually allow policymakers to step back from taking drastic economic reforms. I certainly hope that is not the message they take away. The other message they could take is that right now is the chance to get the country’s economic house in order so that India can join the RCEP and other trading agreements in the future. Thus far the government has remained incredibly popular despite the fact that the economy isn't doing so well. So they may not feel as pressured as other democratically elected governments would.

How does the Indian public think of free trade these days?

Generally speaking, public opinion surveys show that Indians embrace free trade and globalization. But there are lots of concerns about how the opening up of the market would affect uncompetitive domestic industries. In broad terms, the India public is quite supportive, but the labor unions and the trade unions are strongly opposed to the RCEP. They would like to have more protection to give more time to domestic industries to build themselves up. And these unions are an important constituency of the ruling party. Indeed, many of the most vocal ones are explicitly affiliated with the party.

Pulling out of RCEP means India will have to rely on multiple bilateral trade agreements with other countries to ensure that its exporters have market access. How will non-participation in the RCEP affect India’s trade with other Asian countries in the future?

There are two views on that. The optimistic view is that India has some valuable bilateral trade agreements, for example with South Korea and Japan. Thus, non-participation may not necessarily have that much of an impact in the short term. But the question, assuming the RCEP gets ratified and comes into force, is about the long term. The benefits India enjoys from its current trade deals could start to dwindle as trade gets increasingly diverted away from India. India is simply not in the position to give up any of its (relatively small) global market share. The current government has a vision of turning India into a $5 trillion economy by 2024. The export sector must be an important part of that plan, and this requires India to have much better trade linkages.

What are other countries’ reactions to India's withdrawal?

There was a lot of disappointment within East Asia since this was an agreement that had been negotiated for many, many years. India had its opportunity to withdraw at an earlier point but did not. Right now, India’s withdrawal puts a question mark on the entire negotiations. With India's withdrawal, now Japan is reconsidering. One politically difficult question is whether India decides to join the RCEP after taking up reforms and becoming more competitive. But in this instance, will the other countries still want to include India, given its behavior? If so, this could further deepen that credibility crisis that India faces.