India's decision to withdraw from the Regional Comprehensive Economic Partnership (RCEP) will allow New Delhi more flexibility in its conduct of trade policies, but will hamper its economic integration with the rest of Asia and erode its influence in setting the trade agenda. This would be negative for India and also for the rest of the region. The reasons why India pulled out of RCEP are understandable. Large parts of its economy, including many of its manufacturing industries, as well as segments of its farming sector, such as dairy, are vulnerable to competition from cheap imports. India was unable to get significantly greater market access to other RCEP countries in services, an area in which it is relatively strong. It is also concerned about non-tariff barriers in goods markets - especially in China - which RCEP does not adequately address. Concerns about India's widening trade deficits with RCEP countries and vociferous opposition to the agreement from Indian political parties, industry groups, trade unions and civil society also influenced the government's decision not to sign up to the deal.
The upside for India is that it will retain greater freedom of action on trade policies - for example, to raise tariffs, as it has been doing in recent years. It will be less pressured to undertake difficult reforms that would make its manufacturing sector more competitive, such as land and labour reforms. And it will avoid a political backlash at home, given that the constituencies that oppose India joining RCEP far exceed those in favour.