This testimony draws upon my ongoing Peterson Institute for International Economics project with C. Fred
Bergsten, “Deeper Trade Integrationbetween the Democracies,” supported by the US-India Business Council
(USIBC) and the Smith Richardson Foundation(SRF).
Summary and Recommendations
1. India’s economy has been growing rapidly, at about 6.5 percent for over three decadessince
1980, and close to 9 percent in the last decade. As a result, it has emerged as a major power with
an economy ($4.7 trillion) that in 2012 became the world’s third largest (in purchasing power
terms), surpassing Japan and now behind only China and the United States. Its trade in goods and
services is close to a trillion dollars, and expected to double every seven years.
2. This dynamism has expanded opportunities for US business. US exports of goods to India
have increased close to 700 percent in the last decade. Exports of services have doubled in the
last four years. US foreign direct investment (FDI) has increased from $200 million to $6 billion.
Moreover, trade and FDI flows between the two countries are balanced, minimizing the scope for
macroeconomic and currency-related tensions.
3. However, India is currently encountering a bout of severe turbulence. On the economic front,
growth has decelerated sharply, from 9 percent to 4.5 percent. And macroeconomic
vulnerabilities—high fiscal deficits(9 percent of GDP), stubbornly elevated (double-digit)
inflation, and a deteriorating external balance (over 4 percent of GDP)—have been mounting.
Politically, India is heading toward its next general election, which has to take place before the
spring of 2014, complicating and imparting uncertainty to economic policy-making.
4. In response to adverse developments, the government has undertaken, since late 2012, major
domestic economic reforms. Reforms have also included an ambitious opening up of the
economy to foreign direct investment and to foreign financial investors. Indeed, since the global
financial crisis, few countries have opened up to foreign capital to the extent that India has. 2
Significantly, and reflecting a domestic bipartisan consensus, there have been no major
macroeconomic reversals of opening to foreign trade and capital. These reforms have come
against the backdrop of a longer-term trend of surging Indian trade and foreign direct investment,
with enormous benefits for foreign and American business.
5. However, US business faces three major challenges in India. Two challenges common to all
foreign business are: first, the weak and uncertain regulatory and tax environment that affects the
civil nuclear industry, infrastructure, pharmaceuticals, and more broadly the operations of
foreign multinationals in India. Second, although the broad macroeconomic picture is one of
opening and surging trade and investment, protectionism in selected sectors has re-surfaced.
India isseeking increasing recourse to localization—in banking, telecommunications, retail, and
solar panels among others—which favors domestic providers of inputs and equipment over
foreign providers. Thus, broad trade and macroeconomic policies toward foreigners are moving
in the right direction but sectoral policies have experienced setbacks.
6. Third, American firms are increasingly facing implicit but substantial discrimination in India’s
large and growing market because of India signing (or on the verge of signing) free trade and
economic partnership agreements with its largest trading partners that are all major competitors
to the United States: Europe, Japan, Singapore, ASEAN, and possibly ASEAN-plus 6. Soon, if
not already, this discrimination may be the bigger challenge for US business than some recent
sectoral measures. These RTAs are neither as comprehensive in their coverage across and within
sectors as the FTAs negotiated by the United States, nor as expeditious in the time frame for
implementation. But they provide more favorable access to non-American suppliers and because
India’s tariffs and barriers can be high, the discrimination can be substantial. Combined with the
fact of India’s large and growing market, US suppliers can really be disadvantaged.
7. The enormous potential for US-India trade and investment remains enormous not least
because of India’s unexploited growth opportunities. And this potential will be determined and
realized, above all, by India’s domestic reforms to re-vitalize investment and growth and to
restore macroeconomic stability. Pro-growth trade and investment policies will also play an
important role.
8. The United Statesshould adopt the following multi-pronged strategy for solving trade
conflicts and maximizing the underlying potential. First, the United Statesshould address
frictions especially where Indian policies are demonstrably protectionist (as in the case of many
local content requirement policies) through multilateral (WTO) dispute settlement procedures.
The United Statesshould not be reticent in this regard. India has an excellent record of
compliance with WTO rulings against it. And one of India’s most sweeping trade reforms
occurred after a US-initiated WTO dispute panel found that India’s broad quantitative
restrictions on consumer goods violated WTO rules.3
9. Second, US initiatives such as the Trans-Pacific Partnership (TPP) and the Trans-Atlantic
Trade and Investment Partnership, by discriminating against India companies and exporters, will
exert natural pressure on India to open up either directly or by prodding participation in these
and other trade liberalizing initiatives.
11. Third, there is merit in initiating deeper bilateral trade integration between India and the
United States as a framework for giving recognition to the broader strategic imperative of closer
cooperation between the two countries, for pursuing further liberalization in both countries and
for reversing the discrimination that each is inflicting on the other. But this framework must also
be used for re-vitalizing the multilateral trading system and the WTO by moving beyond the
Doha Round and giving consideration to a broader “China Round.” A re-vitalized multilateral
system remains the best way of dealing with the rise of China and ensuring that it pursues
transparent, rules-based, and non-discriminatory policies.
12. Finally, India’s challenging regulatory environment is unlikely to see major improvements in
the short to medium term. US business will have to learn to move outside its comfort zone to
navigate an Indian market where rule of law and legal certainty cannot be taken for granted. If it
does not, it risks losing out to firms from other countriesin one of the world’s largest and most
dynamic markets. Unfortunately, to paraphrase the line from the great Italian novel, The
Leopard, the more things stay the same in India, the more American business will have to
change.
You can read the full text, here.
This was originally published by Peterson Institute of International Economics, here.
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