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The climate cost of India's RCEP exclusion

Top experts warn it could slam the brakes on the green recovery

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Lou Del Bello

Nov 20 2020

6 mins read

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Image credit: Deni International

Last week, when 15 Asian countries came together to sign the world’s biggest free trade agreement, India was not at the table. And while this may shield some areas of the Indian industry that have not benefited from previous free trade agreements, it could slam the brakes on its burgeoning green industry.

Originally negotiated between the ten South East Asian countries of the ASEAN group plus Australia, China, Korea, Japan, New Zealand and India, the Regional Comprehensive Economic Partnership (RCEP) surpasses the European Union in size and will cover nearly a third of the world’s population and economy. 

It set out to establish a “mutually beneficial economic partnership framework to facilitate the expansion of regional trade and investment and contribute to global economic growth and development”. It plans to do so by phasing out most of the tariff and non-tariff barriers on goods and services over a period of 20 years, progressively liberalising trade and bolsting investments in the region. However, some key elements of this pitch left India unconvinced. The government withdrew its participation in November 2019 and by the time the agreement was signed, on November 15 this year, PM Modi hadn’t changed his mind.

Opting out

India’s decision boils down to two reasons, says Biswajit Dhar, a professor at Jawaharlal Nehru University and one of India’s top trade experts. “One is the ‘China factor’. The way China has been expanding its footprint into the Indian economy has been a source of concern,” he says, “and India wanted to impose higher tariffs on China as compared to the other members.” 

As the bloc’s biggest economy, China is expected to have the upper hand in how rules are made within the pact, expanding its influence within the region and globally. 

The efficiency of some Indian industries has also been dwindling, Dhar says. For instance, in textiles and clothing India has been losing ground to Bangladesh and Vietnam. “And, because of this steadily eroding competitiveness, India was unable to take full advantage of the three FDAs it had signed with ASEAN, Japan and Korea,” he says. While inputs from partner countries increased, India wasn’t able to export that much, so its trade deficit grew.

A blow to India’s green recovery

Withdrawing from a free trade agreement also makes sense in the context of the protectionist India that the current administration has been shaping over the past two years, Dhar says. But in a globalised economy, not all sectors benefit from tight borders. India is hugely dependent on China for its solar and battery industry. The government wants to rectify this by boosting local production, and just last week it announced a $19.61 billion stimulus package for manufacturing in ten key sectors, including solar and batteries. “I'm not too sure whether this kind of a strategy is really desirable or feasible at this juncture,” Dhar says. “Because by the time the domestic makers start producing efficiently, I wonder whether India would actually have missed the bus.”

Even if India was able to quickly scale up its solar panel industry, “We won’t be able to match the Chinese in terms of costs,” Dhar adds. This in turn means that the price of solar energy will grow, becoming less attractive for consumers and industries. “And then there is a ripple effect, which may slam the brakes on the spread of solar energy in the country at a time in which it’s starting to replace coal,” he says.

Climate targets at stake

Vibhuti Garg, energy finance analyst at the Institute for Energy Economics and Financial Analysis, echoes his concerns. Opting out of the RCEP means that India’s renewable energy target of 175 GW by 2022 and 450 GW by 2030 is likely to shift, as India imports more than 90% of its modules and cells from China and Malaysia, she says. “Further, in the past financial year India bought batteries worth $1.2 billion, making this sector heavily dependent on imports.”

Being a price taker economy, India’s fast growing renewable industry has benefited hugely from the lower prices set by China. “Promotion of domestic manufacturing will reduce India's import bill,” Garg says, “However, India's products will find it harder to gain access to other countries' markets as well, thus reducing its competitiveness.”

Concerns over the impact of leaving the RCEP on India’s green industry go well beyond the solar sector. “It would have been prudent for India to have some sort of trade agreement with China to propel seamless adoption of these technologies especially in the areas of solar and electric mobility,” says a senior expert in the electric mobility sector. “India’s efforts to build manufacturing capacity will take time, and will start with interventions at a particular point in the value chain.” For example, India has already started battery packaging, but the cells and its constituents such as raw materials, cathodes and anodes are still being imported from China

In the absence of RCEP, the senior expert says, India would have to look at other partners who may not have the same cost advantage as China and build new value chains from scratch. “This would inevitably delay the process of demand generation in the sustainability sector, and would have a huge impact on the climate goals in the short and medium term.”

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