FDI TO GET A BOOST FOLLOWING DEAL
In 2018-19, USA became the biggest trading partner of India, scuttling Chinese predominance for over half a decade. Paradoxically, however, the reasons for the trade buoyancy with two countries are diagonally opposite to each other. While USA reached the helm of trade due to large scale imports from India, China reached the peak due to large scale exports to India. In terms of qualitative trade relation, USA played more important role to Indian economy by boosting exports, against China causing widening trade deficit.
Given this trade dynamism of India with USA and China, question arises should India focus on USA for sustainable growth in export , instead of boarding RCEP , where China will be pivotal to influence the trade dynamism in the block.
To this end, Commerce Minister Piyush Goyal’s endeavor to embrace new trade deal with USA amidst several niggling issues is noteworthy. In US-India Strategic Partnership Forum, he decoded that both countries have agreed to broad contours of proposed trade packages, after closing the pending gaps.
Export has globally been recognized 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 in post 2011. One reason is international trade still receives low attention, both in public and private sectors. India’s share in global merchandise exports was 1.7 percent in 2017-18 and that of in service sector, it was 3.4 percent. With this backdrop, government set a target of doubling exports by 2025.
This means India’s export should reach US $ 660 billion by 2025. Obviously, RCEP – the biggest trade block – should have more scope to meet the target, given the fact that it has larger stake in India’s export. RCEP countries account for one-fifth of India’s total export.
But, in terms of export growth, USA played more important role in stretching the exports. Export to USA increased much faster than to RCEP countries, despite some members in RCEP have already 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 percent over a period of eight years, as compared to increase by 50.8 percent to USA.
Against this backdrop, all said and done, USA provides more opportunities to India to expand export than RCEP. Then, why not go for FTA with USA.
For years, India shot down FTA with USA. USA was eager than India was. Former US Ambassador to India Kennth 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 FTA would be key to resolve the trade irritants. Endorsing it, President of USISPF said “Once you have FTA, all the issues of tariff will go away”.
USA has become crucial trade ally to India in recent years. A number of disputes broke out between USA and India, owing to Trump’s protectionism measures, such as suspending GSP scheme, castigating India’s high tariff on Harley Davidson motorcycles and raising objection to MEIS scheme in WTO. It alleged India’s trigger in export growth to USA above the average growth level. In 2018-19, export to USA increased by 9.5 percent against India’s average export growth of 8.7 percent. USA also sought access to India’s diary product and medical device markets.
This signals some in government lobby groups to poach FTA with USA to restore the disputes.US-India Strategic Partnership Forum suggested that FTA could hold the key to resolve the disputes. World Bank and Peterson Institute of International Economies ( PIIE) predicted significant gains for both countries, if a FTA is concluded.
However, the basic problem lies with the two leaders Mr Narendra Modi and Donald Trump when they advocated Make In India and America First. These did not reflect the sentiment of free trade. Both campaign anchored on protectionism.
Delving in the benefits of FTA with USA and RCEP, it is predicted that FTA with USA will reap more benefits for India. USA will be the first nation to have FTA, with whom India has a long term trade surplus. In contrary in RCEP, FTAs with ASEAN, Japan and South Korea triggered protracted trade deficit. This augurs well for a new challenge to have FTA with USA.
Exports to USA attach greater significance than RCEP in terms of weeding out various economic problems, which are shadowing the economy. Major items of India’s exports to USA are apparels, diamonds, marine products and footwear. A free trade agreement will open more opportunities for 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 USA at the cost of China loosing the market. China is the biggest supplier of apparel and footwear, embracing 40 percent and 70 percent share, in US market respectively. Cotton is the main component for US apparel market. Paradoxically, China is cotton deficient. It largely depends upon USA and India for cotton import. With the tariff hike retaliation against USA, cotton import has become more expensive from 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 USA, owing to imposition of high tariff on import from China. These intermediates relate defence and aerospace sector, vehicles, auto parts and engineering goods.
FTA will leverage US FDI in the country. With tariffs done away under FTA, FDI from USA will surge. Surge in FDI will open new opportunities for US technology transfer to India. India is heading towards a new manufacturing dynamism after digitization and automation. These industries require high technology and skilled manpower.
In a nutshell, FTA with USA will bolster its export, catalyze more employment opportunities by rejuvenating small scale industries and widening the scope for FDI in the country.