The way forward in US-India economic ties

Updated on: Dec 05, 2021
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There are many irritants for both trading partners. The re-launch of the India-US trade forum is a step in the right direction

Being the world’s leading democracies and market economies, India and the US see each other as vital strategic and natural allies and, more so given the rise of China and given the changing geo-political and strategic space in the Indo-Pacific.

Moreover, many countries including US and India feel the necessity to diversify their supply chain portfolio to avoid over-dependence on China. If the US-China tariff war posed uncertainties in world trade and investment, the pandemic clearly exposed the perils of the centrality of China in global value chains. A strong India-US bilateral trade and investment pact along with forums such as ‘Quad’ can help in developing alternative supply chains.

The re-launch of the India-US Trade Policy Forum (TPF) after a gap of four years is a welcome step to discuss and sort out bilateral trade and investment issues.

As per the USTR (2020), India is the 9th largest trading partner in goods for the US. The US was India’s leading trade partner and export market in 2019-20. India has a trade surplus with the US. Despite the uncertain policy environment such as discontinuing the trade policy forum, delisting from Generalised System of Preferences (GSP) programme, the India-US bilateral merchandise trade has witnessed robust growth, faster than its trade with rest of the world.

India’s exports and imports with the US grew at CAGRs of 7.7 per cent and 14.3 per cent respectively compared to 5.1 per cent and 5.2 per cent growth of India’s global exports and imports between 2015 and 2019.

Indo-US trade in commercial services increased at a CAGR of 6.4 per cent and reaching $54.1 billion from $42.2 billion from 2015 to 2019 (USTR, 2020). Although the services trade balance continues to remain in India’s favour, the US’s services exports — mostly travel, transport and intellectual property — to India have grown faster than its services imports from India in the recent years.

The US is the fifth largest source of FDI for the country (DPIIT, 2020) with $30.42 billion inflows during April 2000-June 2020. In 2019-20, the FDI equity inflow from the US to India was $4.2 billion which is 34.5 per cent higher than previous year and is also the highest annual inflows during the last two decades.

However, the current level of economic engagement falls behind the potential. India’s total trade with US ($146 billion) is less than one quarter of the US-China trade ($615 billion) in 2020.

Some of the key issues for India include the withdrawal of trade preferences given to India under the GSP programme, removal of India from the US’s list of ‘developing countries’, high import tariffs on steel and aluminium and visa restrictions that particularly hamper the exports of services, especially the IT-BPO services. Unpredictable regulatory requirements and restrictive digital trade measures are also an issue.

US grievances

USTR, 2021, highlights that exporters from the US face a number of tariff and non-tariff barriers that impede the US exports and market access to India. The average Most-Favoured-Nation (MFN) applied tariff rate in India is 17.6 per cent — 14.1 per cent non-agriculture products and 38.8 per cent agricultural products — which is highest among major economies. The US has also concerns with regards to the gap between WTO bound rates and MFN applied rates in India that allows significant flexibility to alter tariff rates at any time, which creates uncertainty for the US exporters. US has also issues with government procurement, weak intellectual property (IP) protection and enforcement, restrictions on FDI in the retail industry etc.

IPR continues to be one of the most long standing and contentious issue between India and the US. As a result, India remained on the Priority Watch List in the 2021 Special 301 Report of the USTR. Some of the key issues pertaining to India Patents Act for the US include potential threat of patent revocations, lack of presumption of patent validity, trademark counterfeiting and the narrow patentability criteria. Continuous engagement between the two countries though India-US TPF’s Intellectual Property Working Group is the way forward.

Both India and the US are keen on exporting agricultural products to each other. The US agri-products face both tariff and non-tariff barriers (NTBs). Some of the products that face high duty in India and are of interest to the US include vegetable oils, apples, corn, motorcycles, automobiles, flowers, walnuts and alcoholic beverages.

The major TBT issues for US exporters to India include Rejection of USDA Certified Organic Consignments, restrictions on imports of livestock genetics, onerous requirements on dairy imports etc. Both countries agreed to finalise work on market access facilitation for mangoes and pomegranates, and cherries and alfalfa hay for animal feed from the US during the recently concluded TPF meeting.

The re-launching of India-US TPF provides a robust institutional mechanism to reboot the India-US economic relations. The overriding factor driving the strategic relationship is “China”. The two nations are working together under the umbrella of Quad to counter the Chinese threat globally and also ensure that the Quad works closely with each other to develop strong economic and defence ties.

Sahoo is Professor, Institute of Economic Growth, and Rai is Fellow, ICRIER

Published on December 05, 2021

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