India and the IPEF: Prospects, Challenges, and Way Forward

By Shweta

Published on November 8, 2024

The Indo Pacific Economic Framework (IPEF) was introduced in 2022 jointly by the United States of America (USA) with 14 other countries including Australia, Brunei, Fiji, India, Indonesia, Japan, Republic of Korea, Malaysia, New Zealand, Philippines, Singapore, Thailand, Vietnam and India to provide tangible benefits that fuel economic activity and investment, promote sustainable and inclusive economic growth, and benefit workers and consumers among partner countries with the objective of advancing growth, peace and prosperity across the region. It mainly focuses on four pillars- Trade, Supply Chain Resilience, Clean economy and Fair economy.

India’s selective participation in the IPEF through active involvement in Pillars II and IV—Supply Chain Resilience and Fair Economy—while holding observer status in Trade (Pillar I), reflects a strategic balancing act between regional cooperation and national autonomy in global trade. This approach allows India to engage with IPEF partners without committing to restrictive standards in areas such as labour laws and environmental regulations, which could impact its high-growth sectors like manufacturing. By not fully joining the Trade Pillar, India preserves flexibility for future negotiations, ensuring that domestic firms remain safeguarded from potentially adverse trade practices. This approach is particularly significant as India’s economic relevance in countries like Australia grows, underscoring the importance of strong bilateral ties within the IPEF framework. India’s status as a manufacturing hub is not indicative of a protectionist stance but rather a calculated move to keep options open, signalling its readiness to negotiate when conditions align with national interests.

As a signatory to the IPEF Supply Chain Resilience Agreement, India has shown its commitment to enhancing the stability and competitiveness of supply chains across the Indo-Pacific, focusing on critical sectors like semiconductors, agro-chemicals, and essential raw materials, including nickel, cobalt, and rare earth elements. These efforts are crucial for reducing dependencies exposed by the COVID-19 pandemic, especially for critical commodities. India’s leadership role as Vice Chair in this Pillar highlights its potential as a key partner for supply chain diversification and stability in the region. In the Clean Economy Pillar, the aim is to accelerate energy transition and environmental sustainability. This pillar enabled India to speed up investment in green technology such as solar and hydrogen, while receiving concessional funding in renewable projects. Initiatives like e-waste urban mining align well with India’s domestic goals of fostering a circular economy and reducing reliance on fossil fuels. With a vast solar potential of approximately 5,000 trillion kWh annually, India’s renewable energy leadership is further solidified under the National Solar Mission, aiming to achieve 50% non-fossil fuel-based power capacity. Under the IPEF Clean Economy Agreement, India is bolstered by concessional funding channels, promised significant financial support, including $1.5 billion from the U.S. International Development Finance Corporation, aimed at advancing India’s solar and other renewable energy projects. In line with the Fair Economy Agreement, India is committed to strengthening its anti-corruption framework and promoting tax transparency to improve investor confidence. Cross-border collaboration on asset recovery and anti-corruption law enforcement will be enhanced through peer learning and technical assistance from IPEF partners. India’s robust anti-corruption policies, already established domestically, align with global governance standards and efforts to combat illicit financial flows, setting the stage for streamlined tax administration and a more transparent economic environment through the support of IPEF’s technical assistance framework. Through these engagements, India demonstrates its intent to address contemporary economic challenges and leverage the IPEF partnership to bolster its standing within the Indo-Pacific while strategically reserving autonomy in trade matters.

Another regional framework, Regional Comprehensive Economic Partnership (RCEP) largely led by China is emerging as an overarching component of the regional economic architecture of the Indo-Pacific region. However after long drawn negotiations, India opted to stay out of the RCEP due to economic and geopolitical tension particularly with China. The major concern was that tariffs elimination under RCEP would open Indian markets to a flood of cheap imports, especially from China which could harm domestic Industries. India’s trade deficit with China and other RCEP members raised fears that being a part of RCEP would further skew India’s trade balance and make India a dumping ground for foreign goods, further weakening its manufacturing sector. India sought protections proposing mechanisms such as limiting excessive imports from China and other ASEAN countries. However, these requests were not accommodated by other RCEP members, leaving India no option other than opting out from the negotiation. This decision highlights India’s preference to avoid over reliance on any economic arrangement especially where china has significant influence.

India has not joined IPEF at one go either. Challenges still exist, particularly with India’s selective approach to IPEF’s trade pillar, where it has opted for an observer role to safeguard its domestic policies. As economies embrace digital framework, India’s cautious stance on trade alignment could complicate future engagements if it seeks a deeper role in IPEF. While India’s leadership across other pillars is appreciated, there are still hurdles such as advancing infrastructure, ensuring efficient execution of supply chain engagements and up skilling the labour force to meet the demands of the interconnected supply chain network. The shift towards renewable energy is also constrained by financial hurdles and ongoing major coal dependence although there are several initiative taken like mobilizing private investments in green projects for a positive change. Also implementing anti-corruption measures at the grassroots level, enhancing tax administration to ensure transparency across border could create challenges. These challenges can hinder IPEF’s potential alignments with India with respect to the latter’s national interest.

Overall, India’s strategic integration with IPEF highlight its proactive role in addressing global challenges, while protecting its own economic security. Unlike RCEP, IPEF does not bind India to strict trade liberalization commitments, allowing flexibility to adapt global standard in a way that safeguards its domestic industries. The IPEF framework is not taking place in vacuum, it is shaped partly by the broader geopolitical competition between the U.S. and China. It is offering India a platform to expand its regional influence while balancing ties with major powers. This framework also allows India to advance its economic and security interests in the Indo-Pacific.

*Shweta is a Research Intern at the Kalinga Institute of Indo-Pacific Studies (KIIPS). She is also undergoing her Postgraduate Studies in Economics at the University School of Management & Entrepreneurship (USME), Delhi Technological University.

Image Credit: US Embassy & Consulates in India