Sanjeev Ahluwalia | India-US FTA: Ticking The Boxes, Or Boost To Growth?
There are two streams of opinion. The first is that putting in place a trade deal is like installing a rail track. Unless trains run on it, nothing is achieved. This is valid. Significant work is required even after a trade deal to get exports to surge, and we might have slipped on follow-up in the past
How dependent is India’s export growth on swiftly concluding a bilateral trade agreement with the United States? The US is the world’s largest consumer, with about 29 per cent of global household spending. The European Union accounts for about 16 per cent, China 12 and India four per cent. We already have an FTA agreed with the EU, so if market demand is a constraint for our exports, why not the US?
There are two streams of opinion. The first is that putting in place a trade deal is like installing a rail track. Unless trains run on it, nothing is achieved. This is valid. Significant work is required even after a trade deal to get exports to surge, and we might have slipped on follow-up in the past. But that should not preclude our creating a beachhead for our exports. Another problem with trade deals is the give and take involved. India’s farmers and manufacturing are vulnerable because they are not uniformly competitive but employ large numbers of workers.
The alternative argument is that reform is painful. Trade deals only become a win-win by opening doors for competitive sectors and exposing uncompetitive domestic sectors to imports. Of course, competition can be phased in over defined time and value limits so that the affected sectors become capable of facing imported competition. Without reforms, India cannot grow annually at 9-10 per cent in real terms USD, versus the 6.5 to 7 per cent annual run rate from 2000 onwards.
The demand momentum must come from exports to a large, developed economy growing faster than its peers, with high consumer demand. The US fits the bill on these counts. It remains the largest consumer economy, with GDP growing 0.5 per cent faster per year than the average for OECD economies and 1.4 per cent faster than Japan.
The US has trade agreements with just 20 countries, versus the EU and UK, which have about 80. India, a slow globaliser, has trade agreements with 27 countries, and more are in the pipeline.
Fear of import competition from China keeps India away from plurilateral agreements like RCEP -- a strategy which needs to be rethought or alternative plurilateral arrangements explored.
America and Europe with around 40 per cent of global GDP and about one-fourth of global imports are central to India’s growth.
We have an unresolved, problematic relationship with China, fluctuating between mutual respect to fear and unease as both are capable of “bleeding” the others’ resources. China is ahead in this game. It is five times the size of India’s economy, with a similar population -- albeit not as young as India’s. It is idle conjecture to imagine how cooperation rather than competition might have been better for mutual benefit. That ship has sailed.
America itself is under threat. The USD as a peg for global trade and financial transactions is being undermined by the increased use of unilateral sanctions to preserve US strategic dominance. It’s tech dominance is contested by China.
Upscaling the India-US friendship to a trade partnership fits US strategic interests. India seeks partnerships for investment inflows in technology, greater integration with US tech companies, access to best-in-class surveillance and domain intelligence systems and privileged tariffs for legacy exports.
Where does this leave Indian companies? And what about data sovereignty? Sovereignty is an inalienable vested right. But it can and should be traded if it advances growth and employment in the domestic economy. This should not be equated with opening the gates for the East India Company four centuries ago. The future belongs to collaborations.
A decade ago, the TRAI fended off an attempt by Meta (then Facebook) to “colonise” India with digital walled gardens, by offering free but limited, curated access to the internet. Indian industry countered with “near free” access to the Internet via Jio services -- an outcome of deep pockets, telecom infrastructure and business vision. UIDAI responded with universal digital identity (Aadhaar) and the NPCI -- a collaborative venture of financial sector entities -- built the India stack to universalise digital payments via UPI. These examples demonstrate that Indian industry and the government have the capacity to respond to competition and roll out home-built solutions to enhance competitiveness.
Cross-border collaborations can build confidence in the Indian growth story in digital technology, including AI, manufacturing and agriculture. India can be an efficient partner in space platforms, defence production, Digital Payment Infrastructure and clean energy technology. So, where does all this leave legacy manufacturing? Preferential access is the key to their survival, which is where FTAs fit in well. AI will enhance industrial competitiveness. As India moves up the per capita income ladder over the next two decade, legacy industries will remain relevant as a transition rail for the stock of over 150 million workers who need to move out of agriculture.
On labour standards, India has already notified compliance with international standards for imports. But India lags on improving service conditions in the domestic informal sector, where the bulk of the workforce is employed. Cost-effectiveness of domestic production at the cost of workforce benefits is incompatible with development goals and out of sync with future growth prospects.
On the environment and decarbonisation, India still remains compliant with the Paris Agreement targets and is on track for net zero in 2070. If anything, rollbacks on commitments are more likely in the United States, which has stepped away from climate action, and the EU, where access to cheap LNG from Russia is disrupted.
Concluding the ongoing BTA with the US is desirable as an emblem of India’s “can do” spirit. This is notwithstanding that the share in global GDP of the US has shrunk by 5 percentage points to 25 per cent since 2000, and that of the OECD by 20 percentage points to 60 per cent. Developing Asia increased its share in global GDP by 19 per cent over the same period. China contributed nearly three-fourths of this increase. Rebalancing of global value added will continue in favour of developing Economies, making deeper trade relationships with growth leaders necessary.
India must confront the reality, that there is a trade-off between either opting for higher export-led growth or preserving domestic output in uncompetitive sectors. For a young, aspirational economy, like India, choosing the future over the present, choosing deep reform and rapid growth over politically convenient, inherited economic faultlines, would be the prudent option.
The writer is Distinguished Fellow, Chintan Research Foundation, and was earlier with the IAS and the World Bank
