MacroScan (Printable Version) - Indo-US Economic Relations: More Give and Less Take?

Despite the presence of a group of high-profile chief executives and the launch of an Indo-US CEOs Forum, strategic rather than economic issues hogged the limelight during Indian Prime Minister Manmohan Singh’s visit to the US. Purely economic matters, even when discussed, were more frills to the show that occurred in the sidelines, rather than contributions to an advance in the relationship between the two countries. The agreement on nuclear energy cooperation subject to controversial conditionalities, the announcement of a joint global democracy initiative that signals a new pro-US tilt and the PM’s sceptical statements on the India-Pakistan-Iran gas pipeline were and would remain the focus of interest. Even the PM identified the nuclear ''breakthrough'' as being the high-point of his visit.

The economic elements of the joint statement that the visit yielded sound humdrum and uninspiring. They promise to:

Revitalize the U.S.-India Economic Dialogue and launch a CEO Forum to harness private sector energy and ideas to deepen the bilateral economic relationship.
Support and accelerate economic growth in both countries through greater trade, investment, and technology collaboration.
Promote modernization of India’s infrastructure as a prerequisite for the continued growth of the Indian economy. As India enhances its investment climate, opportunities for investment will increase.
Launch a U.S.-India Knowledge Initiative on Agriculture focused on promoting teaching, research, service and commercial linkages.

This uninspired tone is indeed surprising since trade and investment linkages between the two countries are not just significant but rapidly increasing. Total bilateral trade in 2004 crossed US $21 billion, having risen by more than 50 per cent since 2001 and doubled sine 1998. It is true that this increased two way flow seems to benefit India more than it does the US. At the end of calendar 2004, US exports to India stood at US$ 6.09 billion and imports from India at US$ 15.56 billion. This balance of trade in India’s favour has not only existed for over two decades, but had increased from around $3 billion in 1994.

But trade liberalisation involving the removal of quantitative restrictions and reductions in tariffs seem to be changing matters recently. After stagnating at around $3.5 billion, for five years or more, US exports to India crossed US$ 4 billion mark in 2002 and rose to touch $6.09 billion in 2004. US merchandise exports to India grew by more than 22 per cent in 2004, whereas the US merchandise exports to global markets grew by just over 12 per cent. Moreover, India is an important destination for US foreign investment, which makes the revenues earned by US corporations in Indian markets far more important than the export figures suggest. Around a fifth of foreign investment approvals into India since the launch of accelerated ''reform'' in 1991 was proposed by US firms.

From India’s point of view, the US is obviously an important trade partner. The US now accounts for 28 per cent of India’s trade and is the main market for the fast growing software and IT-enabled services exports from India. According to NASSCOM, 68 per cent of the $12.8 billion of software and IT-enabled services exports from India was directed at the US.

Thus, it is not because the economic relationship between the two countries is insignificant or not expanding that it received less attention in the course of the visit. There are clearly other reasons for the downplaying of matters economic, which still do dominate the headlines in day-to-day reportage. Principal among these is a post-liberalisation transformation that has introduced an element of asymmetry into the economic relationship between the two countries.

With India having graduated out of the aid arena because of its relatively comfortable balance of payments position and large capital inflows through private channels, the country no more requires direct support from the US government’s aid budget. Government-to-government agreements are significant only inasmuch as they promise to facilitate or regulate private sector relationships. Hence, if India was adopting a larger developing country perspective, it would have demanded that the US should cutback on the support it provides to its farming community in the form of direct support measures. The OECD estimates that the total support provided by the US government to its farming community stood at $109 billion in 2004. Such support keeps US production of agricultural goods at levels much higher than they would have otherwise been and both reduces access to global markets of producers in other countries as well as depresses the world prices of commodities exported by developing countries.

If despite this the matter did not figure in talks at the highest level, the reason is that in the current scenario, agriculture is not India’s principal concern. Rather it is services, especially software and IT-enabled services, which concerns India most today.

In this area, offshoring or the outsourcing of services by US firms to captive units or independent suppliers in India has for some time now been a source of controversy in the US. Arguments that such offshoring involves not just the transfer abroad of new job opportunities that would have arisen in the developed countries, but the loss of existing jobs in the US to offshore locations, abound. They derive their strength from reports that specific corporations have been reducing or plan to reduce their workforce in the US, even while expanding them in developing countries such as India. In the event, calls for protectionist responses that limit and roll-back the offshoring of services have increased.

Fortunately for India, the Bush administration and corporate America have thus far resisted the pressure to turn protectionist in this area, despite the effort in several states to pass legislation that restricts such outsourcing. In the circumstance, India finds it more convenient to ignore the issue of restraints on trade, rather than focus attention on it by demanding an assurance that services exports would not be protected, that greater freedoms would be provided for the movement of Indian IT personnel to the US on H-1B visas and that less domestic support would be provided to US farmers.

This does not, however, mean that the US has a similar attitude. It would after all be interested in a set of assurances and/or actions on the part of the Indian government that help improve the trade and investment environment in a way that reduces its trade deficit with India. For example, in a speech at a recent luncheon meeting hosted by the Federation of Indian Chambers of Commerce and Industry and the American Chamber of Commerce, U.S. Ambassador David C. Mulford said: "India's prosperity lies in trading more with the world, not less. I applaud what India has done so far to lower tariffs and taxes. I hope the next generation of reforms will offer more progress, both on tariffs and on the non-tariff barriers that are so frustrating and time consuming for economic agents to navigate, negotiate and resolve.''

The reason why this interest did not explicitly figure in the statement that emerged from the PM’s visit was because much had already been done in the run up to the visit to meet US demands in this area. This was clear from the PM's opening statement at US National Press Club at Washington D.C. on July 20, 2005. He said: ''Our track record on cooperation with the United States, even within the last year that our Government has been in office, clearly conveys a determination to raise its quality, content and scope. We have completed the next steps in strategic partnership. We have established Energy and Economic Dialogues at the very high cabinet levels, put in place an Intellectual Property Rights regime and investment policies that encourage business. We have addressed the long standing disputes about American direct investments in the famous Dabhol project. We have recently concluded with the United States an Open Skies Agreement. We have expanded our defence cooperation with a new framework and worked very closely with the US on tsunami relief operations last year. These achievements give us the confidence to now tackle the more ambitious agenda that we have before us.''

The controversial nature of some of these strategic ''next steps'' hardly needs emphasising. According to the NGO Prayas Energy Group (Economic and Political Weekly, June 18, 2005), the finances needed to buy out foreign investors and institutions in the Dabhol project amounts to around $761 million or Rs.3300 crore. In its view, by arriving at an agreement, ''the government of India is making settlement of one of the largest international claims on India. But while doing this, it has not bothered to follow the basic norms of checking the claimed figures. It has not checked whether the claims of equity invested by these multinationals are correct. Neither has it audited the expenditure of US $3 billion claimed by DPC.'' It is still unclear whether and how the government has carried out an independent evaluation of the claims by GE and Bechtel regarding their past dues and the cost of restarting the project.

There are other concessions that the US seems to have won for corporate America as well. At the end of April, Air India announced that it would order 50 aircrafts from the Boeing Company in a deal worth $6.9 billion. The deal included eight B777-200 LR (more than 250 seats) medium capacity ultra long-range aircrafts, 15 B777-300 ER medium capacity long-range 350-seater aircrafts and 27 B787 medium capacity long-range 250-seater aircrafts. The announcement of the deal generated a miffed and angry response from a spokesman of Airbus Industries, who said: "We are disappointed at the decision of Air India especially when we offered a better solution for more competitiveness." In fact, according to the New York Times of April 27: ''While both Boeing and Airbus outdid each other with financial and technical offers to clinch the Air India deal, intense lobbying between governments may have finally swung the deal to Boeing. President Bush spoke recently to India's Prime Minister Manmohan Singh, about the purchase, and the American transportation secretary, Norman Y. Mineta, last week lobbied Aviation Minister Praful Patel.''

Boeing’s India foray does not stop here. It has now joined the race to supply fighter jets to the Indian Air Force weeks after the United States and India signed a strategic defence pact. Reportedly in response to a request from the Indian government, Boeing made a presentation of its latest multipurpose jet—the F/A-18 Super Hornet—to defence officials last fortnight. The Super Hornet is the U.S. Navy's newest strike fighter which is a multi-role combat plane. The language was all right. ''We are pleased to have the opportunity to provide India with a premier aircraft that will help guarantee the security of India and its people,'' said Chris Chadwick, Boeing vice president for F/A-18 programs. Indian Prime Minister Manmohan Singh’s visit to Washington had made the environment more favorable for U.S.-based defence contractors wanting to do business with India, he added.

In sum, the US has got and continues to get what it wants from India on the economic front. On the other hand, India is not making too many economic demands, but would like the status quo to continue and the situation to improve in areas like the services trade. So economics, while important, is not the publicly declared flavour of the season in Indo-US relations. But it is clear that India is providing a range of economic concessions to the US in the hope of strategic gains. One is a change in the treatment it receives relative to Pakistan from the US. The second is support for a permanent seat in the UN Security Council. And the third is access to nuclear fuel for civilian energy purposes. It seems that some gains have been made on the first and none on the second. Only time will tell whether India has actually won anything with respect to the third and, if it has, whether it has given or promised to give far too much in return.



Themes > Current Issues	25.08.2005


Indo-US Economic Relations: More Give and Less Take?

C.P. Chandrasekhar

Despite the presence of a group of high-profile chief executives and the launch of an Indo-US CEOs Forum, strategic rather than economic issues hogged the limelight during Indian Prime Minister Manmohan Singh’s visit to the US. Purely economic matters, even when discussed, were more frills to the show that occurred in the sidelines, rather than contributions to an advance in the relationship between the two countries. The agreement on nuclear energy cooperation subject to controversial conditionalities, the announcement of a joint global democracy initiative that signals a new pro-US tilt and the PM’s sceptical statements on the India-Pakistan-Iran gas pipeline were and would remain the focus of interest. Even the PM identified the nuclear ''breakthrough'' as being the high-point of his visit. The economic elements of the joint statement that the visit yielded sound humdrum and uninspiring. They promise to: Revitalize the U.S.-India Economic Dialogue and launch a CEO Forum to harness private sector energy and ideas to deepen the bilateral economic relationship. Support and accelerate economic growth in both countries through greater trade, investment, and technology collaboration. Promote modernization of India’s infrastructure as a prerequisite for the continued growth of the Indian economy. As India enhances its investment climate, opportunities for investment will increase. Launch a U.S.-India Knowledge Initiative on Agriculture focused on promoting teaching, research, service and commercial linkages. This uninspired tone is indeed surprising since trade and investment linkages between the two countries are not just significant but rapidly increasing. Total bilateral trade in 2004 crossed US $21 billion, having risen by more than 50 per cent since 2001 and doubled sine 1998. It is true that this increased two way flow seems to benefit India more than it does the US. At the end of calendar 2004, US exports to India stood at US$ 6.09 billion and imports from India at US$ 15.56 billion. This balance of trade in India’s favour has not only existed for over two decades, but had increased from around $3 billion in 1994. But trade liberalisation involving the removal of quantitative restrictions and reductions in tariffs seem to be changing matters recently. After stagnating at around $3.5 billion, for five years or more, US exports to India crossed US$ 4 billion mark in 2002 and rose to touch $6.09 billion in 2004. US merchandise exports to India grew by more than 22 per cent in 2004, whereas the US merchandise exports to global markets grew by just over 12 per cent. Moreover, India is an important destination for US foreign investment, which makes the revenues earned by US corporations in Indian markets far more important than the export figures suggest. Around a fifth of foreign investment approvals into India since the launch of accelerated ''reform'' in 1991 was proposed by US firms. From India’s point of view, the US is obviously an important trade partner. The US now accounts for 28 per cent of India’s trade and is the main market for the fast growing software and IT-enabled services exports from India. According to NASSCOM, 68 per cent of the $12.8 billion of software and IT-enabled services exports from India was directed at the US. Thus, it is not because the economic relationship between the two countries is insignificant or not expanding that it received less attention in the course of the visit. There are clearly other reasons for the downplaying of matters economic, which still do dominate the headlines in day-to-day reportage. Principal among these is a post-liberalisation transformation that has introduced an element of asymmetry into the economic relationship between the two countries. With India having graduated out of the aid arena because of its relatively comfortable balance of payments position and large capital inflows through private channels, the country no more requires direct support from the US government’s aid budget. Government-to-government agreements are significant only inasmuch as they promise to facilitate or regulate private sector relationships. Hence, if India was adopting a larger developing country perspective, it would have demanded that the US should cutback on the support it provides to its farming community in the form of direct support measures. The OECD estimates that the total support provided by the US government to its farming community stood at $109 billion in 2004. Such support keeps US production of agricultural goods at levels much higher than they would have otherwise been and both reduces access to global markets of producers in other countries as well as depresses the world prices of commodities exported by developing countries. If despite this the matter did not figure in talks at the highest level, the reason is that in the current scenario, agriculture is not India’s principal concern. Rather it is services, especially software and IT-enabled services, which concerns India most today. In this area, offshoring or the outsourcing of services by US firms to captive units or independent suppliers in India has for some time now been a source of controversy in the US. Arguments that such offshoring involves not just the transfer abroad of new job opportunities that would have arisen in the developed countries, but the loss of existing jobs in the US to offshore locations, abound. They derive their strength from reports that specific corporations have been reducing or plan to reduce their workforce in the US, even while expanding them in developing countries such as India. In the event, calls for protectionist responses that limit and roll-back the offshoring of services have increased. Fortunately for India, the Bush administration and corporate America have thus far resisted the pressure to turn protectionist in this area, despite the effort in several states to pass legislation that restricts such outsourcing. In the circumstance, India finds it more convenient to ignore the issue of restraints on trade, rather than focus attention on it by demanding an assurance that services exports would not be protected, that greater freedoms would be provided for the movement of Indian IT personnel to the US on H-1B visas and that less domestic support would be provided to US farmers. This does not, however, mean that the US has a similar attitude. It would after all be interested in a set of assurances and/or actions on the part of the Indian government that help improve the trade and investment environment in a way that reduces its trade deficit with India. For example, in a speech at a recent luncheon meeting hosted by the Federation of Indian Chambers of Commerce and Industry and the American Chamber of Commerce, U.S. Ambassador David C. Mulford said: "India's prosperity lies in trading more with the world, not less. I applaud what India has done so far to lower tariffs and taxes. I hope the next generation of reforms will offer more progress, both on tariffs and on the non-tariff barriers that are so frustrating and time consuming for economic agents to navigate, negotiate and resolve.'' The reason why this interest did not explicitly figure in the statement that emerged from the PM’s visit was because much had already been done in the run up to the visit to meet US demands in this area. This was clear from the PM's opening statement at US National Press Club at Washington D.C. on July 20, 2005. He said: ''Our track record on cooperation with the United States, even within the last year that our Government has been in office, clearly conveys a determination to raise its quality, content and scope. We have completed the next steps in strategic partnership. We have established Energy and Economic Dialogues at the very high cabinet levels, put in place an Intellectual Property Rights regime and investment policies that encourage business. We have addressed the long standing disputes about American direct investments in the famous Dabhol project. We have recently concluded with the United States an Open Skies Agreement. We have expanded our defence cooperation with a new framework and worked very closely with the US on tsunami relief operations last year. These achievements give us the confidence to now tackle the more ambitious agenda that we have before us.'' The controversial nature of some of these strategic ''next steps'' hardly needs emphasising. According to the NGO Prayas Energy Group (Economic and Political Weekly, June 18, 2005), the finances needed to buy out foreign investors and institutions in the Dabhol project amounts to around $761 million or Rs.3300 crore. In its view, by arriving at an agreement, ''the government of India is making settlement of one of the largest international claims on India. But while doing this, it has not bothered to follow the basic norms of checking the claimed figures. It has not checked whether the claims of equity invested by these multinationals are correct. Neither has it audited the expenditure of US $3 billion claimed by DPC.'' It is still unclear whether and how the government has carried out an independent evaluation of the claims by GE and Bechtel regarding their past dues and the cost of restarting the project. There are other concessions that the US seems to have won for corporate America as well. At the end of April, Air India announced that it would order 50 aircrafts from the Boeing Company in a deal worth $6.9 billion. The deal included eight B777-200 LR (more than 250 seats) medium capacity ultra long-range aircrafts, 15 B777-300 ER medium capacity long-range 350-seater aircrafts and 27 B787 medium capacity long-range 250-seater aircrafts. The announcement of the deal generated a miffed and angry response from a spokesman of Airbus Industries, who said: "We are disappointed at the decision of Air India especially when we offered a better solution for more competitiveness." In fact, according to the New York Times of April 27: ''While both Boeing and Airbus outdid each other with financial and technical offers to clinch the Air India deal, intense lobbying between governments may have finally swung the deal to Boeing. President Bush spoke recently to India's Prime Minister Manmohan Singh, about the purchase, and the American transportation secretary, Norman Y. Mineta, last week lobbied Aviation Minister Praful Patel.'' Boeing’s India foray does not stop here. It has now joined the race to supply fighter jets to the Indian Air Force weeks after the United States and India signed a strategic defence pact. Reportedly in response to a request from the Indian government, Boeing made a presentation of its latest multipurpose jet—the F/A-18 Super Hornet—to defence officials last fortnight. The Super Hornet is the U.S. Navy's newest strike fighter which is a multi-role combat plane. The language was all right. ''We are pleased to have the opportunity to provide India with a premier aircraft that will help guarantee the security of India and its people,'' said Chris Chadwick, Boeing vice president for F/A-18 programs. Indian Prime Minister Manmohan Singh’s visit to Washington had made the environment more favorable for U.S.-based defence contractors wanting to do business with India, he added. In sum, the US has got and continues to get what it wants from India on the economic front. On the other hand, India is not making too many economic demands, but would like the status quo to continue and the situation to improve in areas like the services trade. So economics, while important, is not the publicly declared flavour of the season in Indo-US relations. But it is clear that India is providing a range of economic concessions to the US in the hope of strategic gains. One is a change in the treatment it receives relative to Pakistan from the US. The second is support for a permanent seat in the UN Security Council. And the third is access to nuclear fuel for civilian energy purposes. It seems that some gains have been made on the first and none on the second. Only time will tell whether India has actually won anything with respect to the third and, if it has, whether it has given or promised to give far too much in return.



© MACROSCAN 2005