Millennium Post

Looking West

Free Trade Agreement with America will augur well for the Indian economy

In 2018-19, USA became the biggest trading partner of India, scuttling Chinese predominance for over half a decade. Paradoxically, reasons for the trade buoyancy between the two countries are diagonally opposite to each other. While USA reached the helm of trade due to large scale imports from India, China reached its peak due to large scale exports to India. In terms of qualitative trade relation, the USA played a more important role for the Indian economy by boosting exports, against China causing widening trade deficit.

Given this trade dynamism of India with USA and China, the question arises as to whether India's focus on the USA for sustainable growth in export is justified. This is naturally in opposition to boarding the RCEP where China will be pivotal in influencing trade dynamism in the block.

To this end, Commerce Minister Piyush Goyal's endeavour to embrace a new trade deal with the USA amidst several niggling issues is noteworthy. In the US-India Strategic Partnership Forum, he disclosed that both countries have agreed to broad contours of proposed trade packages after closing the pending gaps.

Export has globally been recognised as a strong parameter for world economic growth. To this end, India's lacklustre growth in exports has been lamented. India is the fastest-growing economy in the world, though its export growth was sagging post-2011. One reason for this is that international trade still receives low attention, both in public and private sectors. India's share in global merchandise exports was 1.7 per cent in 2017-18 and in the service sector, it was 3.4 per cent. With this backdrop, the government set a target of doubling exports by 2025.

This means that India's export should reach USD 660 billion by 2025. Obviously, RCEP – the biggest trade block – should have more scope to meet the target, given the fact that it has a larger stake in India's export. RCEP countries account for one-fifth of India's total export. USA provides more opportunities for India to expand export than RCEP

But in terms of export growth, the US has played a more important role in stretching the exports. Export to the US increased much faster than to RCEP countries, despite some members in RCEP already having FTAs with India. For example, ASEAN is the biggest component in RCEP. India entered FTA with ASEAN in 2011. India's exports to ASEAN increased marginally by 2 per cent over a period of eight years, as compared to an increase of 50.8 per cent to the US.

Against this backdrop, all said and done, the USA provides more opportunities for India to expand export than RCEP.

For years, India has shot down opportunities to sign FTAs with the USA. The US was clearly more eager than India was. Former US Ambassador to India, Kenneth Juster mulled for FTA between USA and India. A top American business advocacy group, US-India Strategic Partnership Forum (USISPF) pressed for FTA with India. It is believed that an FTA would be the key to resolving trade irritants. Endorsing it, the president of USISPF said- "Once you have FTA, all the issues of tariff will go away".

The USA has become a crucial trade ally to India in recent years. A number of disputes broke out between USA and India, owing to Trump's protectionist measures, such as suspending GSP scheme, castigating India's high tariff on Harley Davidson motorcycles and raising an objection to MEIS scheme in WTO. In 2018-19, exports to the US increased by 9.5 per cent against India's average export growth of 8.7 per cent. The USA also sought access to India's dairy product and medical device markets.

This acts as a signal for some in government lobby groups to poach FTAs with the USA to restore the disputes. US-India Strategic Partnership Forum suggested that an FTA could hold the key to resolving the disputes. World Bank and Peterson Institute of International Economies (PIIE) predicted significant gains for both countries if an FTA is concluded.

However, the basic problem lies with the two leaders – Narendra Modi and Donald Trump – when they advocated Make In India and America First. These did not reflect the sentiment of free trade. Both campaigns are anchored on protectionism.

Delving in the benefits of FTA with USA and RCEP, it is predicted that FTA with the USA will reap more benefits for India. USA will be the first nation to have FTA with India alongside a long term trade surplus. In contrary in RCEP, FTAs with ASEAN, Japan and South Korea triggered protracted trade deficit. This augurs well for new challenges to having FTA with the USA.

Exports to USA are of greater significance than RCEP in terms of weeding out various economic problems which are shadowing the economy. Major items of India's exports to the USA are apparels, diamonds, marine products and footwear. A free trade agreement will open more opportunities for the development of labour-intensive industries and pave the way for more employment opportunities, which is reeling under distress.

USA-China trade war will open new opportunities for better market accessibility in the USA at the cost of China losing its hold. China is the biggest supplier of apparel and footwear with 40 per cent and 70 per cent share in US market respectively. Cotton is the main component for the US apparel market. Paradoxically, China is cotton deficient. It largely depends upon the USA and India for cotton import. With the tariff hike retaliation against the USA, cotton import has become more expensive from the USA. This leverages India's scope for expanding apparel export to USA and cotton to China.

According to a CII report, India will gain more potential to export intermediates to the USA owing to the imposition of high tariff on an import from China. These intermediates relate to defence and aerospace sector, vehicles, auto parts and engineering goods.

The signing of FTA will leverage US FDI in the country. With tariffs done away under FTAs, FDI from the USA will surge. A surge in FDI will open new opportunities for US technology transfer to India. India is heading towards a new manufacturing dynamism after digitisation and automation. These industries require high technology and skilled manpower which will be enabled by the signing of an FTA.

In a nutshell, FTA with USA will bolster its export alongside catalysing more employment opportunities by rejuvenating small scale industries and widening the scope for FDI in the country.

Views expressed are strictly personal

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