Dr. Mukesh Aghi
President and CEO
Contact Sukanya Sen
It is Time to Seal the U.S.-India Trade Deal
India’s decision to opt out of the Regional Comprehensive Economic Partnership (RCEP) has raised concerns on its ability to integrate with global value chains. More broadly, it is seen as a blow to an open and free economic system in the region.
An opportunity to reverse this notion would be by taking the much talked about US-India trade deal across the finish line. It gives both countries an opportunity to calibrate a deeper geo-economic alliance and adds further momentum to the bilateral economic cooperation between the two nations. Trade negotiators from both sides understand the value and significance of this deal for the bilateral relationship. Never before has there been such political will at the highest levels of both governments to allow this deal to reach fruition.
The current U.S.-India partial trade deal though limited in scope should be visualized as the beginning of an important chapter towards a larger Free Trade Agreement. It prefaces a future of the bilateral ties when both sides decide to engage more intrinsically. The Trump Administration has shown its willingness to work with the Modi government by agreeing to resolve trade issues in a tier-based approach. It is a unique opportunity for both countries as the United States follows a comprehensive trade negotiation template. Smaller trade packages such as the one being negotiated with India are more of an exception than the norm. The format of the US trade agreement generally includes chapters on labor, IPR, environment, and competition policies that affect trade, manufacturing, and investment in goods and services. In addition, the US also leans towards market access reforms for trade in goods that requires a competitive domestic market.
Allowing negotiations for a trade deal covering a handful of market access issues shows the Trump Administration’s recognition of the value of the US-India partnership.
Remarkably, India’s trade with the U.S. has been on the upswing without even having any trade arrangements. U.S.-India bilateral trade has grown in the last seven years by leaps and bounds, and it is expected to continue this growth trajectory in the near to long term. According to a USISPF study, U.S.-India trade is projected to grow to $238 billion in 2025 from the current $143 billion if the 7.5 percent average annual growth rate is maintained; bilateral trade can also reach $283 billion at the growth rate of 10 percent, and $327 billion at a 12.5 percent growth rate.
However, to attain these targets, both sides will need to address some thorny issues on the trade front. It will require a complementary rather than a confrontational approach to fulfilling the national goals of India and the United States— “Make in India” and “America First” respectively.
A potential U.S.- India trade deal likely includes market access commitments from India in Information and Communication Technology (ICT), access for American agricultural products, and rationalization of trade margins on medical device imports. Market access for ICT products will address the long-standing demand of the U.S. industry while also help make the domestic high-tech manufacturing sector more competitive. Political action on the U.S- India Trade package, will also send a favorable signal to foreign investors who have stalled investment decisions pending any major trade liberalization measures.
In exchange, the U.S. is likely to restore India’s partial or full duty concessions allowed under the Generalized Preferences System (GSP) program. India’s small and medium enterprises will be the direct beneficiary of the GSP restoration that employs millions of workers in export production of textiles, pharmaceuticals, engineering, and steel items.
But to reap the maximum benefit from a partial trade agreement, some immediate work lies on the domestic front. First, India needs a game plan for economic reforms and the timing couldn’t be more appropriate, especially when the BJP enjoys a clear majority. Some reforms are already in place— with the reduction of corporate taxes, roll-back of angel tax, bankruptcy code, and liberalization of several sectors of the Indian economy. Despite making strides on the World Bank’s Doing Business ranking, India still needs progress in enforcing contracts, modernization of courts, and the land administration system. It is also critical that India relaxes some of the highly restrictive labor laws. Additionally, businesses still face uncertain tax policies, and this can deter foreign investors from considering future expansions.
Secondly, India’s infrastructure bottlenecks are a real barrier when it comes to achieving true economic success. S&P Global Ratings has drawn clear linkages between economic benefits and positive credit impact from infrastructure spending, with the “multiplier effect” of spending 1 percent of real GDP likely to boost India’s GDP by at least double that amount. Increasing government spending on infrastructure to improve supply chain logistics will reap the most benefits to India’s manufacturing sector.
Both sides should move swiftly to finalize a partial trade agreement. With trade negotiators traveling to India next week, a tangible outcome would be to steer the conversation towards resuming the annual bilateral talk— the Trade Policy Forum— that has been stalled for almost two years. Bilateral deals when implemented in a phased manner can provide enough leverage to the commercial interests of both sides and a competitive edge to industry in the global market.
The article was published on India Inc. on November 29, 2019.
Other Policy Updates
India Climbs 14 places in World Bank’s Doing Business Report : Last month, India climbed 14 places in the World Bank Doing Business Report 2020 – now ranked 67th out of 150 countries. India was also listed as one of the top 10 economies that improved the most in their ease of doing business score— making trading across borders easier by cutting the costs and time associated with border and documentation requirements; resolving bankruptcy on the back of the government implementing the Insolvency and Bankruptcy Code; and making it easier to obtain construction permits. With several other reforms in place this year— reduction in corporate tax rates, roll back of angel tax on start-ups, among others, India now has a real opportunity to break into the list of top 50 countries in the Doing Business ranking. Access the full World Bank report here.Special Investment Desk for India’s North Eastern States: Commerce Minister Piyush Goyal has announced a special investment desk for India’s North Eastern states to drive the Government’s overall effort to promote investments in the country and raise the standard of living for citizens. Read full press release here.
India’s State Elections: Less than six months after the general elections of 2019, two major states Maharashtra and Haryana held elections where the BJP faced a tough electoral contest. Key outcomes include: in both states, BJP’s seat tally has reduced since 2014. In Maharastra, the BJP secured 105 seats with Shiv Sena securing 56 seats, giving the alliance an absolute majority in the Maharashtra assembly.In Haryana, the BJP has cobbled up a coalition government with the help of the newly formed Jannayak Janta Party led by Dushyant Chautala. Manohar Lal Khattar took oath as the Haryana chief minister for a second term and will lead the BJP-JJP (Jannayak Janata Party) coalition government in the state. JJP leader Dushyant Chautala took oath as his deputy, a day after the governor invited him to lead the alliance that also has the support of seven Independents. Another politically important state- Jharkhand- is scheduled to go to polls in early 2020.
Trade: Our latest analysis of US-India bilateral trade (include link) shows that bilateral trade has grown by 8.4% in 2019, with both exports and imports witnessing an upward trajectory. US-India trade has also matured significantly, moving from traditional items (jewelry, textiles) to mineral fuels, high-tech goods, machinery & industrial goods. However, the so-called mini-deal is yet to be announced. The U.S. is signaling the deal will be of “modest size” with some tariff liberalization and non-tariff trade barriers addressed. Trade in services, including digital issues and insurance, is still contemplated to be tackled in a yet-to-be-defined bilateral forum that would unfold after the conclusion of the mini-deal. On a related note, India has decided not to join the RCEP trading bloc that includes 10 ASEAN nations as well as China, Japan, South Korea, Australia and New Zealand, with Prime Minister Modi stating that “India has significant outstanding issues, which remain unresolved”.
Cyber: The bilateral Cyber Dialogue and ICT Working Group meetings were held in New Delhi at the beginning of the month. The governments discussed UN cyber-related security issues, 5G and law enforcement access to data in the government-only discussion. The ICT Working Group agenda included a discussion of GOI’s intentions regarding data flows. Industry and USG raised the new non-personal data experts group and was told by MeitY officials the meeting would be an open consultation.
Cloud Procurement: MeitY has updated its guidelines for government (state and central) procurement of cloud services. The update follows the initial 2015 guidelines, under which Cloud Service Providers (CSPs) were initially empaneled in 2016 and 2017. The documents provide guidelines to government IT purchasers and are instructive to CSPs now seeking empanelment or extension of an existing empanelment. From a policy perspective, the data storage requirement, initially included in the 2015 RFP, has been continued in the current documents. Government Cloud documents can be found at: https://meity.gov.in/content/gi-cloud-meghraj
Enterprise customer telecom license: TRAI has concluded its Other Service Provider License (OSP) consultation, passing its recommendations to the Department of Telecommunications for adoption. You can find the recommendations here and the summary begins on page 66. (Link here). The OSP license designation was originally designed to protect telecommunications service providers from call center operators mis-using their facilities. It was subsequently extended to the ITeS industry and all back office processors. It now effectively captures almost every type of enterprise service including cloud, advanced conference platforms and even CRM platforms.