Time for Modi-Biden Tango
He (Joe Biden) won because the election was rigged..." A tweet from US President Donald Trump on November 15 was his first acknowledgement that he has lost the presidential elections. The same day, something symbolically significant happened in another corner of the world. Fifteen countries, mostly Asian, signed the worlds biggest free trade pact, the Regional Comprehensive Economic Partnership (RCEP) Agreement, which covers 30 per cent of the global economy.
Trump has been an advocate of trade protectionism. He started a major trade war with China and, to a lesser extent, with other countries, including India. One of his first decisions after taking charge in 2016 was pulling the US out of what could have been the world's largest free trade agreement, the Trans Pacific Partnership, which represented 40 per cent of global GDP.
The change of government in the US and the deal for economic integration among RCEP members, the 10-nation Association of Southeast Asian Nations, apart from Australia, New Zealand, China, South Korea and Japan, can have a direct impact on India's plans to export goods and services worth $1 trillion by 2025. In fact, more trade with the US is exactly what India needs to compensate for whatever market access it may lose by opting out of RCEP (India stayed out at the last moment despite being one of the 16 negotiating partners). RCEP members have kept the option open for India to join later, but the country seems to be more inclined towards closer ties with the US than China, the strongest player in RCEP.
The reason is simple: The US is central to India's trade plans. It is India's second-biggest trade partner - with a $28.8-billion trade surplus in India's favour - behind China and Hong Kong, which is considered as a single entity. Its exports to the US have been growing consistently and have more than doubled in the last 10 years. For India's pharmaceutical and IT services firms, a more trade-friendly government in the US makes their biggest foreign market even more attractive. This is in sharp contrast to China, with which India has an unsustainable trade deficit. For instance, during the first six months of the financial year (April-September), India had a $16.8-billion trade deficit with China in goods alone as against a $10.3-billion surplus with the US. The Indian government has been courting US investors and discouraging Chinese investments. The government is hoping that US multinational corporations' move to de-risk their supply chains by diversifying in order to avoid a repeat of pandemic-induced supply disruptions may make them shift a part of their production base from China. India wants to be one of the beneficiaries. India's preference for the US has a national security angle too. The US is increasingly seen as a strategic partner and a key source of advance defence equipment. China is a potential threat due to border tensions.
Overall, India has enough reasons to hope for a better relationship with the US, though a lot will depend on the priorities of the new regime. Will Joe Biden continue to see China as a threat to the US and find merit in a balancing trade relationship with India? Will changes in the US visa policy help India's tech services exports? Will Biden scrap the limited trade deal with India that was almost sealed under the Trump administration? For answers, one may have to wait for the Biden administration to take charge in January 2021, but early signals are not disappointing.
Trade & Trump
India's trade with the US may have been resilient, but Trump's inward looking approach and "America First" policies had relegated India to the status of a competitor rather than a partner. India got the first taste of Trump's protectionist policies when the US imposed import duties on Indian steel (25 per cent) and aluminum (10 per cent) in March 2018. Next year, his administration withdrew the concessional and zero tariff offered to hundreds of products under the Generalized System of Preferences (GSP), meant to support economically weaker countries. India has been GSP's biggest beneficiary with over 12 per cent of its exports, worth $5.58 billion, falling under the category. It was a major shock. In retaliation, India increased tariffs on select items from the US. This included walnuts and chickpeas. Still, India-US trade grew. Kashish Parpiani, a research fellow at New Delhi-based think-tank ORF, says Trump's central contention of the US having "an almost $800-billion trade deficit with other nations" does not apply to India as the deficit with India has been declining for the past couple of years. The data from the United States Trade Representative shows that the deficit with India decreased from a peak of $32 billion in 2014 to $28.8 billion in 2019. "This near-balancing of trade happened in spite of a surge in US foreign direct investment in India," Parpiani noted in a February 2020 policy brief.
India has also firmed up long-terms plans to make the US its second-biggest defence supplier, civil aircraft supplier and energy source in order to further reduce the deficit. It was in view of these growing trade opportunities that Trump and Modi administrations decided to work out a quick deal to reverse some of the measures taken against each other and build on that to facilitate even more trade. "India will gain significantly if we do the limited trade deal. The US will get its corresponding share of benefits," Piyush Goyal, Union Minister for Commerce and Industry, said in September after India's exports to the US grew rapidly in spite of the disruption due to the pandemic.
The Headwinds
There was more to Goyal's happiness about September numbers; India's exports grew 5.99 per cent month-on-month to $27.58 billion, a first in FY21. Indian exports had been contracting for a year even before Covid-19, except in one or two months, worrying everybody concerned. Though the performance was not repeated in October and November, experts say the September performance was not a fluke. "Had it not been for supply-side challenges, especially due to unavailability of containers and disruptions caused by farmers' agitations in hinterlands, especially Punjab, the growth in October and November could have been positive," says Ajay Sahai, Director General and CEO of Federation of Indian Export Organisations (FIEO). He says some exporters with later delivery deadlines also delayed supplies in hope that the prevailing high freight charges will soften in the coming months. However, Sahai is not willing to say that the worst is over for Indian exports. "Christmas and New Year sales will be the litmus test. With lockdowns back in the US and Europe, there is question mark on that. If Christmas and New Year sales are not good, inventories will continue to be there. That is a big challenge. If it goes well, we can conclude that we are on the track to recovery," he says.
Commerce Secretary Anup Wadhawan is more cautious. "We were seeing signs of a global slowdown (before Covid-19 itself). We had the backdrop of the US-China trade war and slowdown in Europe and the US. That is when Covid-19 came along. It was a major negative shock both in terms of health and economic costs across the globe. If we look at exports, during April-November 2020, there has been a decline of 17.4 per cent. If you compare with other countries, it is on the moderate side, but still significant," says Wadhawan. Incidentally, the decline in exports in FY21 (April-November 2020), excluding gems & jewellery and petroleum, is lower, only 8.3 per cent. India's imports declined almost 34 per cent, but if you take out petroleum and gems & jewellery, the fall is 26 per cent. Low demand for petroleum products or lower crude oil price shows economic slowdown. Fall in gems & jewellery trade also shows recession. Essential and raw material exports have done well. "Our pharma exports grew 15 per cent, rice exports 39 per cent, in April-November. Iron ore exports have gone up significantly, though that is not something we should be happy about, because we should be producing iron and steel ourselves and then exporting. Otherwise, essential items, food and pharma have done well. We need to sustain this growth," says Wadhawan.
The commerce secretary has a point. The United Nations Conference on Trade and Development (UNCTAD), in its October 2020 update on global trade, pointed out that India's export performance has not been very bad compared with other countries, but its export volatility has been high, signifying high level of uncertainties. "There is definitely a huge volatility. We are seeing ups and downs because commodity prices are moving up and down. The good thing is that in food, pharmaceuticals, electronics and networking products, chemcials and plastics, we are expected to do well both in short term and medium to long terms," says FIEO's Sahai. According to him, prospects of sectors such as apparel, textile, footwear, sports goods, handicraft are not clear. "We have to keep our fingers crossed," he adds.
In spite of the uncertainties, Goyal is positive. Addressing the Board of Trade meeting organised by his ministry on November 2, he said the government is looking at a genuine single window to improve the ease of doing business. He said the ministry has identified 24 sectors that can add Rs 20 lakh crore yearly product manufacturing in India. "Trade should bank on India's strengths of quality, cost competitiveness, economies of scale and comparative advantages like labour. Going forward, we have every possibility of achieving the export target of $1 trillion by 2025." The highlight of the meeting of the board - the most representative trade body that has states, central government departments, export promotion bodies and industry associations - was recommendations that most stakeholders made. One suggestion made by several bodies was that India must sign a free trade agreement with the US.
What Americans Want
In July, the US-India Business Council (USIBC) and advisory firm Economic Laws Practice came out with some prescriptions to position India well "to capture global supply chains and grow economic opportunity." One of the key suggestions was exactly what Goyal said at the Board of Trade meeting - introducing a common single-window clearance system for approvals from the Central government and states. Land reforms and simplification of labour laws, also recommended by the US industry, are also work in progress in India. "We believe that for India to achieve the gains that other large economies enjoy, particularly with regard to attracting new investments in the manufacturing sector, India's supply chain and logistics ecosystem needs to be standardised," Nisha Biswal, President, US-India Business Council, and Suhail Nathani, Managing Partner, Economic Laws Practice, say in the report. They say India has modern manufacturing with intellectual and human capital as good as anywhere else in the world but moves products to domestic and international markets inefficiently. The 'occasional white paper', submitted to Goyal, lists nearly 40 recommendations about policy reforms, regulations and incentives that can make India a more attractive investment destination. The USIBC draws its membership from the world's largest multinational companies representing almost every major sector.
One of the advantages of India-US bilateral partnership is that existing mechanisms are already in place. According to the Ministry of External Affairs, there are more than 50 bilateral inter-governmental dialogue mechanisms for exchange of views on issues of mutual interest. These include the India-US 2+2 Ministerial Dialogue led by the heads of foreign and defence ministries of both countries. Three rounds of dialogue have alreday happened since September 2018. The India-US Commercial Dialogue and the India-US Trade Policy Forum are two platforms where India's commerce minister interacts with the US Secretary of Commerce and the US Trade Representative, respectively, to enhance bilateral trade relations. The India-US Economic and Financial Partnership is led by the Indian finance minister and the US Secretary of the Treasury. These institutional mechanisms can help the US government and businesses that cater to their interest to reach out to Indian policymakers.
Biden's Mind
Daniel H. Rosen, partner of US-based economic data research firm Rhodium Group, does not see any dramatic shift in US policy after Biden takes charge. "It is uncertain whether (incoming) President Biden will continue decoupling from China, which the Trump team has been saying. If Biden continues this policy of pulling away from China, that has the power to move, let's say, $100 billion a year to other economies," he says. Rosen believes India can see this as an opportunity to be part of the global supply chain business of multinational corporations as they continue to become more resilient to political and natural shocks and disruptions by diversifying their sourcing bases by partially shifting manufacturing operations from China. The China factor is on top of the mind of India-based analysts too. "The anti-China rhetoric, however, is likely to prevail. A Joe Biden presidency may, on the whole, work, albeit marginally, in India's favour on the trade front," Care Ratings said in a recent report, 'US Elections and India'. Researchers associated with broking firm Motilal Oswal are more specific. They say three policy changes are likely to be on the priority list of the Biden administration and each of these will be positive for India. The first is adoption of a multilateral approach (rather than a unilateral protectionism approach) towards trade war with China; the second is rejoining the Iran Nuclear Deal; and the third is rolling back restrictions related to work visas.
"Although Biden's intentions indicate possible simmering down of the public debate on the trade spat with China, his multilateral approach will inadvertently mean a cordial relationship with India. This comes as a positive in the current scenario of ongoing border tensions between China and India, where the latter's current rhetoric is 'Boycott China'," say Nikhil Gupta and Yaswi Agarwal, analysts at Motilal Oswal. They also feel that Biden's policy document underscores his strong will to safeguard India's territorial integrity. "The India-US defence and counter-terrorism cooperation will remain intact and likely to strengthen in the face of the common threat of a rising Chinese economy. Therefore, despite Biden's plans to tackle the China trade war situation, we believe affable Indo-US relations will remain largely unaltered. This is important because the US alone accounted for 17 per cent Indian exports in FY20," they add.
While Biden's campaign assurances such as increase in number of visas for permanent, employment-based immigration are expected to directly benefit IT professionals, his plans to re-join the Iran Nuclear Deal will bring India an indirect benefit. Resumption of economic relations with Iran without sanctions and restrictions has immense strategic and economic importance for India. "From being the third-largest supplier of crude oil in 2018 (26mmt; 13 per cent of total oil imports), Iran supplied only 6mmt in 2019 - 3 per cent of India's oil imports. Therefore, such a reduction in consumption - from a quarter of the oil produced by Iran until 2018 - will not bode well for other strategic businesses between India and Iran. India's $500-million commitment to build Iran's Chabahar Port on the Gulf of Oman - connecting India to Afghanistan, through which it could gain access to Central Asia and Eurasia (bypassing Pakistan) - is a case in point," Gupta and Agarwal point out.
There are concerns too. Biden is also for "Make in America", something which may work against unbridled imports. His stringent approach toward "polluters" in the context of the climate change debate may see India at loggerheads with the US.
India has not officially made its expectations from the Biden regime public. All we know is that Prime Minister Narendra Modi was among the early set of global leaders to congratulate Biden even before Trump accepted defeat. It can only create bonhomie.
@joecmathew
