Reaping the benefits
Given the backdrop of the US-China trade war, Trump’s visit to India offers diverse opportunities for Delhi to profit from its growing relations with Washington
Not too long ago, India refused to join RCEP because China became a big burden for India's trade deficit. Export is recognised as a strong driver for growth when the nation is reeling under slow growth, according to an economic survey. The US is expected to play an important role in this regard as it is the biggest export destination for both goods and service from India. It accounts for 16 per cent of goods exports and 50 per cent of IT and BPO services exports.
USA emerged as the biggest trade partner of India in 2018-19. It pushed China to the second position. The categorical difference between the two in terms of trade structure is that while trade with the USA has surged due to exports by India, trade with China increased due to large scale imports from China. This translates into the fact that trade buoyancy with the US is more gainful than China. This has raised hopes for offsetting the export losses by banking on trade with the US and not joining RCEP.
It is ironical that despite concerns raised over Trump's protectionism, USA has emerged as the biggest export destination for India. A number of disputes broke out between USA and India, owing to Trump's 'America First' policy. USA has recently suspended the GSP scheme, pointing towards India's high tariff on Harley Davidson motorcycles and raised objection to the MEIS scheme, after India's per capita income exceeded the WTO threshold limit ($1000 per year for three years in a row).
The debut to Trump-Modi hobnob began with both leaders meeting on the sideline of G-20 summit in Kobe in July 2019. The meeting became a gamechanger while pursuing each other for readjustment with trade wars.
Prior to this, the seeds for military cooperation were sown, when the US declared India a "Major defence partner" in 2016. The 2+2 dialogue between the two countries yielded a significant outcome and that was signing of the 'Communication Compatibility and Security Agreement' (COMCASA). This was the beginning of journey for consolidation of military power between the two countries. COMCASA paved the way for supply of equipment with transfer of technology. Under FMS (Foreign Military Sales), it is mandatory for the sale to be approved by the US President under the Arms Export Control Act of USA. The signing of COMCASA was a breakthrough in this defence partnership, given the fact India has strong military partnership with Russia.
The decision to start exchanges between the US Naval Forces Central Command (NAVCENT) and the Indian navy was another milestone for strengthening maritime cooperation in the Western Indian Ocean.
The strengthening of military ties, coupled with strong economic relation paved the way for a new synergy in US-India relation.
The trade war, pitched by President Trump, has had a nominal impact on US-India trade. Insightful analysis has revealed a different scenario. The analysis said that India derived nominal benefits from the GSP scheme. It was $190 million a year out of $5.6 billion. So were the cases of high tariffs on steel and aluminium. The US accounts for only 4 per cent of India's steel exports and 6-7 per cent of the aluminium exports.
Export has been recognised as the prime driver to uptick the momentum of GDP growth, which was slowing down in Modi 2 period. India targeted its export to reach $660 billion by 2025. Obviously, RCEP — the biggest trade block — should have more potential to meet the target, given the fact that it has larger stake in India's export.
Bereft of RCEP, USA has emerged as a major saviour for India's exports. Figures show that export growth to USA was faster than ASEAN plus 6. Exports to USA increased by 50.8 per cent in between 2011-12 to 2018 -19, compared to 2 per cent for ASEAN.
Exports to the USA attach greater significance to weeding out various domestic economic problems, which are shadowing the economy. For example, major items of India's exports to the US are apparels, diamonds, marine products and footwear. These industries are labour intensive. Eventually, this will pave the way for more employment opportunities, a facet of the economy which is reeling under distress.
According to a CII report, India will have more potential to export intermediates to the USA, owing to the imposition of high tariff on imports from China. These intermediates relate to defence and aerospace sector, vehicles, auto parts and engineering goods.
Given the upswing in US- India trade and economic relation, US-China trade war is seen as an opportunity rather than a source of disruption. So far, China was the US workshop to meet its domestic demand and export. The trade war, which shows no sign of slowing down, is likely to benefit India and a number of Asian nations in the areas of "dislocation of supply chains and trade diversification", according to Economist Intelligence.
Already, nations like Indonesia and Thailand have adopted special packages of incentives to woo dislocation of factories and shield high tariff barriers. Indonesia offered 200 per cent tax reductions for skill training activities and 60 per cent tax deduction for investment in new and expanded capacities for labour-intensive industries. Thailand has offered 50 per cent corporate tax reduction for 5 years for new industries (applications should be made in 2020) and tax deduction for investment in automation, training for advance technology and skill development.
India has naturally followed suit. It has reduced corporate tax from 30 per cent to 15/22 per cent in September 2019. Though these concessions were not officially regarded as relocation incentives, media reports said that Indian Ministers were considering them as relocation packages given in the midst of the ongoing trade war.
But, these measures are not enough by themselves. The major headwinds to investment in India are inadequate availability of skilled workforce and lacklustre infrastructure. To this end, India should adopt a bullet policy to incentivise the up-gradation of skill and infrastructure, such as setting up various industrial parks like Neemrana in Rajasthan.
In this respect, the first visit of US President Donald Trump to India foresees a dynamic upturn in US-India relation, even though concerns abound around his inclination towards protectionism.
Views expressed are strictly personal