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India is opting out of a China-backed trade deal. That could hurt its economy

India is ducking out of one of the world’s largest free trade agreements, saying it wants to protect its farmers and local businesses. That decision risks hurting the country’s already struggling economy.

Indian Prime Minister Narendra Modi decided not to sign the Regional Comprehensive Economic Partnership (RCEP) at a summit in Bangkok, Thailand on Monday, a proposed trade pact involving 16 countries in the Asia-Pacific region.

“India had significant issues of core interest that remained unresolved,” Vijay Thakur Singh, a senior official at India’s foreign ministry, told reporters late Monday. Modi was concerned about the “fairness and balance of the agreement” and the “impact it would have on the lives and livelihoods of all Indians, especially vulnerable sections of society,” Singh added.

India was worried that its market could be flooded with Chinese goods as well as agricultural and dairy products from countries like Australia and New Zealand. Local trade groups as well as India’s main opposition party had urged the government not to sign the RCEP.

Modi has walked a tightrope when it comes to India’s economy, trying to strike a balance between promoting local businesses and attracting more foreign investment.

“I think it’s the fallout on the domestic [side] that has motivated this decision,” said Rajat Kathuria, director of the Indian Council for Research on International Economic Relations.

Kathuria said that while some of India’s concerns are “legitimate,” overseas competition would have strengthened Indian industry at a time when the country’s economic growth has slumped to its lowest level in six years.

“RCEP would have provided a much-needed external push for our industry to gear up, and to become more competitive,” he said.

The other 15 countries, including China, Japan, Australia, Thailand and Vietnam, said in a joint statement that they would go ahead and sign the agreement next year and “work together to resolve [India’s] outstanding issues” in the meantime.

Some experts fear India is missing out on a chance to join a major trading area that will form a key part of global manufacturing supply chains.

“India will ultimately suffer significant geopolitical and economic costs if it decides to stay out of RCEP, compromising its strategic influence in Asia and ability to participate in regional supply chains,” analysts at the Eurasia Group wrote in a research note.

While the door for India to join the agreement remains open, it may find it more difficult to get the deal it wants, which includes retaining some tariffs on imports into India and getting better access to service industries in other RCEP countries. And the damage may have already been done.

“You’re just reinforcing the often-held perception that India is a difficult country to do business with,” Kathuria said. “Joining at a later stage would mean that we would have to give more concessions,” he added.

“India will now try to mitigate the damage done to its relations with [the other countries] as well as the negative message it sends to international businesses and investors,” the Eurasia Group analysts wrote. “But the shenanigans in Thailand, after years of negotiations, will not fill other countries with enthusiasm for discussing trade deals with India.”

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