A long waited US President Donald Trump’s maiden visit to India evokes spectacles, though no trade deal is in the offing. The trade deal is pertinent when both nations are not party to RCEP – the upcoming biggest trade block after TPP lost vigour without USA.
USA’s importance surged when it emerged biggest trading partner of India, outsmarting China and when both inched towards close military ties. Iron is the trade war failed to dent India’s exports to USA. Instead, surge in exports become instrumental to pitch USA the biggest trading partner of India in 2018-19
India refused to join RCEP. Because, China became a big burden for India’s trade deficit. Export is recognized a strong driver for the growth when the nation is reeling under slow growth, according to Economic Survey. USA is to play an important role as it is the biggest export destination for both in goods and service from India. It accounts for 16 percent in goods exports and 50 percent of IT and BPO services exports.
The categorical difference between the two nations in terms of trade structure is that while trade with USA surged due to exports by India, trade with China increased due to large scale imports from China. This translates that trade buoyancy with USA is more gainful than China.
It is irony that despite concerns raised over Trump’s protectionism, USA emerged the biggest export destination for India. A number of disputes broke out between USA and India, owing to Trump’s America First policy. USA suspended GSP scheme, alleged India’s high tariff on Harley Davidson motorcycles and raised objection to MEIS scheme, after India’s per capita income exceeded the WTO threshold limit ( US $ 1000 per year for three years in 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 game changer while pursuing each other for readjustment with trade wars.
Prior to this, the seeds for military cooperation were sown , when USA declared India a “ Major defence partner” in 2016. The 2+2 dialogue between two countries yielded a significant outcome and that was signing of 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 US President under Arms Export Control Act of USA. The signing of COMCASA was a breakthrough in defence partnership , given the fact India has strong military partnership with Russia.
The decision to start exchanges between US Naval Forces Central Command ( NAVCENT) and 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.
Trade war, pitched by President Trump , has nominal impact on US-India trade. The insightful analysis revealed a different scenario. The analysis said that India derived nominal benefits from GSP scheme. It was US $190 million a year out of US $ 5.6 billion. So were the cases of high tariffs on steel and aluminum. USA accounts only 4 percent of India’s steel exports and 6-7 percent aluminum exports.
Export has been recognized 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 US $ 660 billion by 2025 . Obviously, RCEP – the biggest trade block – should have been more potential to meet the target, given the fact that it has larger stake in India’s export.
Bereft of RCEP, USA emerged a major saviour to India’s exports. Anecdotal evidences show that export growth to USA was faster than ASEAN plus 6. Exports to USA increased by 50.8 percent in between 2011 -12 to 2018 -19, compared to 2 percent to ASEAN.
Exports to USA attach greater significance to weed out various domestic economic problems, which are shadowing the economy. For example, major items of India’s exports to USA are apparels, diamonds, marine products and footwear. These industries are labour intensive. Eventually, this will pave the way for more employment opportunities , which is reeling under distress.
According to a CII report, India will have more potential to export intermediates to USA , owing to imposition of high tariff on import 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 an opportunity rather than source of disruption. So far China was the US workshop to meet its domestic demand and export. 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 , the nations like Indonesia and Thailand adopted special packages of incentives to woo dislocation of factories and shield high tariff barriers. Indonesia offered 200 percent tax reductions for skill training activities and 60 percent tax deduction for investment in new and expanded capacities for labour intensive industries. Thailand offered 50 percent 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 followed suit. It reduced corporate tax from 30 percent to 15/22 percent in September 2019. Though these concessions were not officially regarded as relocation incentives , media reports said that Indian Ministers were considering them relocation packages of trade war.
But, they are not enough. The major headwinds to investment in India are inadequate availability of skilled workforce and lackluster infrastructure. To this end, India should adopt a bullet policy to incentivize upgradation of skill and infrastructure , such as setting up industrial park like Nimrana 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 pervaded his protectionism.