Economic windfall of a US-India trade deal to be significant for both struggling economies

Indian officials say they are closing in on a trade deal that will end two years of a standoff between the two nations

Workers inspect polished diamond in the city of Surat in Gujarat - exports to the US, which include diamonds, pharmaceuticals, and textiles, are critical for Indian economy. Bloomberg

The Indian government is edging closer to a new trade deal with the US, which if it manages to achieve, will culminate two years of acrimonious trade negotiations between the two countries.

The resultant boost to economic activity in the US, the world's biggest economy, and India, Asia's third-largest economic powerhouse, will be significant, analysts say.

“An India-US trade deal will obviously augur well for both economies, considering the vast market opportunities [available] for both parties,” says Divakar Vijayasarathy, the founder and managing partner at DVS Advisors, an international professional services company.

On Tuesday, India's commerce minister Piyush Goyal said that a deal was close.

“I believe we [will] have a quick trade deal. Some of the pending matters built up over the last couple of years, which we need to get out of the way quickly,” he said. “We are almost there, and I think another couple of calls and we should be able to sort that out.”

One of the benefits of a trade deal with the US could be the reinstatement of India's special trade status, which gave it duty-free access to the US for hundreds of products.

The coveted status was withdrawn by President Donald Trump on the grounds that India was not giving the US equal access to its markets.

Mr Trump has referred to India as the “tariff king” because of the high tariffs it charges on products coming into the country including motorcycles. Mr Trump's favourite example to cite is the impact that high tariffs have on exports to India of its Harley Davidson motorcycles. India last year reduced the tax from 100 per cent to 50 per cent, but Mr Trump said that this level was still “unacceptable”.

Hammering out even a limited trade deal, however, could help in resolving at least some of the outstanding issues between the two sides.

Reports suggest that under the deal, India is looking at opening up access to its dairy market to the US, while it is seeking concessions for generic drugs exports.

“The trade dialogue needs to move beyond visas, agriculture, and automotive, which always bog them down," Aditya Berlia, the co-promoter of Apeejay Stya Group and Svran Group, whose interests range from pharmaceuticals to retail, says.

"[It should] instead focus on the fields where there is broad agreement on both sides such as precision manufacturing, financial services, infrastructure development and open market access,” says Mr Berlia, who is also the chairman of the Confederation of Indian Industry.

There is a lot at stake for both economies, analysts warn.

The US is India's largest trading partner - although India is only the US' ninth-largest goods trading partner.

US trade with India stood at an estimated $142.6 billion (Dh523.34bn) in 2018, comprising $58.7bn of exports and $83.9bn of imports, pushing its trade deficit with India to $25.2bn for the year, according to US government data.

Top imports from India include precious metals and stones, as well as pharmaceuticals, while major exports from the US to India include mineral fuels and aircraft.

The US, with the new trade deal, would be looking to cut the trade deficit, which could have mixed results for India. New Delhi is eager to boost the sagging economy, which was hit hard by the outbreak of Covid-19 and resultant lockdowns to stem the spread of the pandemic. Analysts say India is particularly eager to strengthen relations with the US considering its strained ties with China after the recent border dispute.

“Indian pharmaceutical, aluminium, automobile, textile and steel industries would be benefitting from the trade deal,” says Mr Vijayasarathy. “Both countries are looking at closing in on a preferential trade agreement. [But the] ... agri and dairy products industry could facing the brunt [of the deal] since America is keen on access to Indian markets for these products along with [a] reduction in the retaliatory tariff levied by India last year on apples and almonds.”

The roots of the trade dispute between the two countries goes back to a 2018 US move of raising steel and aluminium duties on several countries, including India. New Delhi, angered by the move, threatened retaliatory tariffs. Trade tensions escalated further last year after both the US and India imposed tit-for-tat levies.

India under a preferential trade status exported a total of $5.6bn of products to the US in 2017. However, once the status was withdrawn by the US, New Delhi slapped retaliatory tariffs on 28 products imported from the US, including almonds and apples.

Ahead of Mr Trump's high profile visit to India in February, hopes were high for a mini trade deal, but it did not materialise at the time.

“We can have a trade deal with India, but I am really saving the big trade deal for later on. I don’t know whether we will have it before the election, but we will have a very big deal with India,” Mr Trump said before he visited India. He also said that the US is “not treated very well by India”, referring to bilateral trade.

Another issue that had irked Washington was the Indian government's surprise introduction of a new foreign direct investment policy for e-commerce last year, which included restrictions on discounting. The move affected US retail giants Amazon and Walmart, which have both invested heavily into the e-commerce sector in India.

The US, on the other hand, has upset India with its recent decision to impose a temporary ban on H1B visas. Widely used by Indian IT professionals to work in the US, Washington scrapped the visa to protect jobs for its citizens amid the pandemic-driven economic slowdown.

“[Recent] developments hint at a thawing in the bilateral relationship that became frosty over the past three years,” according to Shilan Shah, the senior India economist at Capital Economics. “And they take on more significance in the context of India’s deteriorating relationship with China since the border skirmish last month.”

Despite trade tiffs, the US and India enjoy warm relations in general.

India's prime minister, Narendra Modi, addressing a virtual US-India business summit on Wednesday, pushed for the US to invest in sectors in India, ranging from energy to infrastructure to agriculture.

Such investment could, however, partly depend on a trade deal materialising.

Mr Vijayasarathy says that “with both parties willing to ink the deal, it’s a matter of time before it becomes a reality”.

“There are some contentious issues, which both the governments are negotiating hard including access to Indian dairy and agri markets, data privacy and localisation and IP rights,” he says

Access to India's dairy market is a politically sensitive issue, he says, as it could directly affect dairy farmers in the country.

There are several factors, however, that are working in favour of a deal.

“With US presidential elections due this November, the Trump administration would be keen to clinch a favourable deal with India and make amends with the influential Indian diaspora back home.”

India, for its part, is eager to replace Chinese exports to the US, Mr Vijayasarathy says.

“A favourable trade deal with the largest economy is what the Modi administration would need to improve the sentiments of a Covid-infected economy.”

And in the longer term, India has made it clear it has far bigger ambitions for its trade relations with the US.

“The United States and India need to sit down on the negotiating table – I don't know if that can be done before the elections or after the elections,” commerce minister Mr Goyal said on Tuesday. “But we need to work towards a much more sustainable, a much more enduring, partnership in the form of a free trade agreement.”