A propitious bargain
Having USA as the biggest trading partner augurs well for Indian economy
It is sarcastic. Notwithstanding the trade war between India and USA which heightened with India embracing high tariff for retaliation, the United States became the biggest trading partner of India in 2018-19, leaving behind China at the second position. Till then, China was holding the top position since 2013-14. Trade confrontation spurred with USA abrogating GSP benefits and imposing high tariffs on imports of steel and aluminium items. India retaliated the move by raising tariffs on 28 items of imports from the USA.
In the trade relation between USA and China, the notable paradox is that while USA's import from India was the gear to make it the top trading partner of India, export by China was the lead factor to push it at the helm for trade partnership. Furthermore, to the surprise of many, India could notch-up high export growth in the USA, amidst the feisty Trump protectionism. The USA is the biggest export destination for India in the world and vice-versa, China is the biggest destination for India's imports. Eventually, the favourable effect of the USA becoming the biggest trading partner is that it helped India to reduce the trade deficit.
In 2018-19, India's exports to the USA posted a higher per cent rate of growth than its average growth of exports to the world. Exports to the USA increased by 9.5 against India's overall growth of exports by 8.7 per cent. Against this paradigm shift, India's retaliation by a high tariff, as a counter challenge to USA's withdrawal of GSP benefits and high tariffs on steel and aluminium, is likely to dent the heyday of India-US trade relation. It connotes imprudent and untimely when the export has become the need of the day to reboot the sagging economy and employment generation.
The insightful analysis reveals that USA's protectionism will have a marginal impact on India's exports. According to one estimation, Indian exporters have been deriving nominal benefits from GSP. It was US$ 190 million a year out of total worth–US $ 5.6 billion. Hence, the withdrawal of GSP by the USA will have a slender impact on India's exports.
So is the case with the USA's high tariff on steel and aluminium. The USA accounts for only 4 per cent of India's export of steel and 6-7 per cent of aluminium exports. Both these are not the principal items of India's exports. Eventually, the USA's high tariff on these items will have a thin impact on India's overall
Given this balance sheet of the impact of trade confrontation between USA and India, it will not be unrealistic to arrive at the conclusion that India will be more of a loser than the USA in retaliation. It is not only the merchandise exports for which India depends on the USA substantially. Service exports and foreign investment are areas where India depends on the USA substantially. Both are important parameters for its external economic health.
IT and BPO services are the major components of India's service exports. Here also, the USA is the major destination of India's exports. Over half of its IT and BPO exports go to the USA. Besides, the USA is the potential hub for job opportunities for IT services.
Major items of India's exports to the USA are Petroproducts, drugs and pharmaceuticals, textiles, readymade garments and precious stones including diamonds. They account for more than half of India's exports to the USA. The trade figures of India's exports to the USA decipher that high growth in India's exports to the USA in 2018-19 was driven by textiles, precious stones including diamond and small machinery.
Besides trade, the significance of these exports is that they are labour intensive products. These industries are the potential hub for job creation. Given these, trade expansion with the USA has multifaced implications on the Indian economy, besides trade.
In fact, Indian Prime Minister Narendra Modi also upped the ante of protectionism at home. In December 2017, import duties were raised on various electronic items, including mobile phones, microwave ovens, cameras and others. The move was viewed as a step to bolster employment through incentivising domestic industries. It did not end here. The move was further accelerated by imposing high tariff barriers on auto components, CBU motor vehicles, bus and truck and electronic goods in the budget for 2019-20.
India reverted to import substitution programme to inject a new lease of life in the Make in India initiative. In 2016, the Ministry of Urban Development made it mandatory to procure railway equipment for metro projects from domestic sources. According to the policy, a minimum of 75 per cent of metro coaches and critical signalling equipment is to be procured from domestic sources by the central and state level metro project authorities.
India is far behind the USA's trade muscle. It accounts for one-sixth of India's exports and half of its IT-BPO exports. As compared to this, India accounts for merely 2 per cent of USA exports. Given this, the situation advocates for a patch up of disputes, instead of fueling the confrontation by retaliation method. India needs the USA more than the other way around. According to estimation, a 10 per cent shift in US imports due to a US-China trade war would give an annual boost of 20 per cent of India's exports.
(The views expressed are strictly personal)