Title: U.S.-Indian Commercial Ties: Getting from Good to Great
India’s Promise as a Commercial Partner
India remains a devilishly difficult place for American firms to do business. Indian firms would increasingly say the same about the United States, particularly when it comes to technology services trade. Nevertheless, U.S.-Indian natural economic complementarities—augmented by an increasingly shared security worldview—will ensure the continued expansion of economic ties. However, as we have seen in recent years, the pace of our expanded economic partnership will depend to some extent on policy choices made in both our national capitals. American and Indian leaders must continue to work at removing real impediments while finding proactive ways to boost economic ties.
Business Ties Today
U.S.-Indian commercial ties are at historically high levels, albeit starting from modest beginnings. India’s began opening its market to the world in earnest in 1991, with a real acceleration in welcoming foreign investment and trade starting in the mid 1990’s. Today, the U.S.-Indian goods trade stands at over $92 billion per year, making India the United States’ ninth-largest trade partner. The United States is India’s top goods trade partner, while services trade between the two totaled around $54.8 billion in 2018. Overall the United States has a combined goods and services trade deficit with India totaling around $25 billion, though U.S. exports to India are growing faster than imports.
India remains one of the world’s top destinations for foreign direct investment (FDI). In the twelve months leading up to September 2019, India attracted over $48 billion in fresh FDI equity, in addition to over $19 billion in passive foreign portfolio investment (FPI). While well below the peak FDI inflows into China, India is slowly increasing its foreign investment inflows as the market matures and FDI policies are liberalized.
As the 2017 “Indian Roots, American Soil” report highlights, Indian firms are key investors in the United States. As of 2018, total Indian FDI into the United States amounted to $17.9 billion, and Indian firms employ over 113,000 people in the United States. These investments cross a range of sectors including information technology, healthcare, manufacturing, energy, and more.
Within the decade, India will hit important milestones. India will become the world’s most populous nation. India should become the world’s fifth-largest economy. And India could become America’s sixth-largest goods trade partner.
Impediments to Trade and Investment
Despite the substantial growth in U.S.-Indian economic ties, both sides have key impediments that deter a dramatic expansion. India’s steps to liberalize its foreign investment regime remain incomplete, and the Modi government is taking regular steps to impose new restrictions to guard against imports. Other domestic business policies, such as price controls in some product groups like pharmaceuticals and medical devices, have introduced new challenges for U.S. companies in these industries.
Protectionist sentiments in the United States have triggered increased pressure on India to relax trade restrictions. The United States has hit India with trade policies that have broad application globally, such as the increased steel and aluminum tariffs announced in March 2018. Due to India’s domestic market policies, the U.S. revoked a preferential trade program called the Generalized System of Preferences (GSP) in March 2019. And the United States is threatening to impose new immigration restrictions that could harm Indian firms’ ability to move technology workers to U.S. job sites.
Despite these impediments, U.S.-Indian commercial ties have expanded in recent years. As a result, the various points of discord have not yet defined actual business linkages. But our nations’ leaders must work hard to reduce friction when possible and avoid taking new steps that could harm commercial relations.
Opportunities for Asymmetrical Growth
With two large and growing economies, U.S.-Indian commercial ties are certain to grow across the board, barring an economic upheaval in either or both markets, but there are also opportunities to stimulate asymmetrical commercial growth. Key policy ideas include the following:
1) Removing Remaining Impediments to FDI: India maintains foreign ownership restrictions in a wide range of sectors including retail, insurance, ecommerce, pensions, defense production, and more. Removing these restrictions and offering foreign firms an even playing field should trigger substantially higher FDI inflows.
2) Getting “Make in India” Right: The U.S.-China trade fight does not have an easy solution. American firms are looking to shift global manufacturing out of China and into other low-cost markets. India has a substantial domestic consumption market, but still needs to improve its domestic manufacturing environment. India’s infrastructure is inadequate; tight regulations on labor and land acquisition deter investors; logistics costs are too high; and high customs duties on input goods makes manufacturing unappealing. India has a chance to position itself as the new “workshop to the world,” but the path is not easy.
3) Frugal Innovation: Most of the world’s growth in the coming decades will come from markets that bear more similarity to India than to Germany or Canada. American firms can partner with India’s engineering powerhouses—or establish their own engineering centers—to redesign products and services to make them more acceptable to emerging markets. This involves reducing cost, reducing size, reducing bandwidth, increasing ruggedness, and more.
4) Indian States Push for Growth: Most of the levers—such as access to electricity, business licenses, water and sanitation, and more—for India’s economic growth are, in practice, controlled by its twenty-eight state leaders. Voters still do not reward “economic reforms” with ballot success. If this were to change, India could easily move to double-digit economic growth.
5) India’s Urban Voters Begin to Dominate: With a few notable exceptions, India’s states have not devolved meaningful power to municipal authorities. With around two-thirds of voters coming from rural constituencies, India’s state leaders tend to use revenue generated by major urban industrial hubs to fund rural development—a worthy cause, but one which also deprives India’s cities of much-needed infrastructure to trigger faster economic growth.
6) U.S. Immigration Relaxation: India’s dynamic technology services sector remains the strongest economic bond between the United States and India, and an open immigration policy is a critical element of U.S.-Indian technology services trade. In particular, the United States could look at expanding our pool of H1B technical worker visas. The visa pool is currently at 65,000, which is well below the peak during 1999 and 2000 when the cap was temporarily increased to 115,000 visas per year.
7) Forging a Free Trade Agreement: While not currently under serious consideration, a free trade agreement (FTA) remains a potent option to boost U.S.-Indian commercial ties. As my colleague Raymond Vickery noted in February 2018, there have already been substantial studies showing a bilateral positive impact in signing a robust FTA.
Again, even without substantial movement on the issues highlighted above, U.S.-Indian commercial ties will continue to expand. However, removing major impediments and taking policy measures to improve our respective commercial environments will increase the momentum of this expansion. The two nations’ shared security outlook in the Indo-Pacific region should provide some impetus as well. Both nations are concerned about a regional economy dominated by China; strengthening our economic cooperation is an important way to balance.
Summation
India is quietly rising on the list of America’s top economic partners. While well below the scale of the United States’ economic ties with China, Canada, or Mexico, India’s population growth and economic prospects make for a compelling case. The U.S.-Indian economic relationship today is experiencing real turmoil, at least from the perspective of our respective capitals. Even if the two nations simply “muddle through,” India will still become one of America’s most important economic partners in the coming decades. This process will move considerably faster if we can avoid the current headwinds while simultaneously removing impediments and seizing opportunities for asymmetrical growth.
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Richard M. Rossow is a senior adviser and holds the Wadhwani Chair in U.S.-India Policy Studies at CSIS. Prior to CSIS, he served as director for South Asia at McLarty Associates, leading the firm’s work for clients in India and the neighboring region. From 2008 to 2012, Mr. Rossow was with New York Life Insurance company, most recently as head of International Governmental Affairs. From 1998 to 2008, Mr. Rossow served as deputy director of the U.S.-India Business Council (USIBC), the world’s leading advocacy group on behalf of strengthening economic ties between the United States and India.