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India’s US trade gamble

Asia Times, Hong Kong

31 August 2004

India’s US trade gamble

By Arun Bhattacharjee

NEW DELHI - Following a series of unpublicized negotiations with the US Department of Commerce, the Treasury Department, Department of State and the Pentagon, India feels the time has come for a comprehensive bilateral treaty with the US in the service sector.

This development comes as Delhi announced its new long-term foreign trade policy late on Tuesday. This will replace the country’s half a century old exports-imports policy, which has a tenure of only one year and deals with excise and taxes without any long-term trade strategy. The new policy contains far-reaching measures for large employment-generating export sectors like agriculture, textiles and handicrafts, all part of efforts to capture 2% of global trade by pushing up annual exports to US$300 billion by 2009. At present, India contributes a mere 0.8% to global trade.

Aimed at achieving over 16% annual trade growth on the back of 25% growth in the first quarter, the policy contains a slew of measures to boost India’s special economic zones, 27 of which have already been approved for operation.

Given India’s lofty goals, it makes strategic sense for New Delhi to sign a comprehensive bilateral trade agreement with the US, regarded as the most preferred trading destination for Indian industry and outsourcing companies by the Confederation of Indian Industry (CII). At stake is $1.5 billion in outsourcing business and $5 billion in textiles and other trading, beyond January next.

That is not all. A bilateral trade agreement, which by all indications is welcomed by the US, will beat hands down the 122 formidable and pending federal and state legal cases involving India against business process outsourcing (BPO) before US legislators.

India is also encouraged by the US gesture to finally release sensitive defense equipment and systems such as radars and airborne early warning systems worth $3.5 billion - a figure that nearly equals that of the military hardware recently sanctioned for Pakistan by the US. Surprisingly, the announcement was made by US charge de affaires Robert Blake while addressing officers of the Indian army last week at one of the country’s premier training centers for tactical warfare.

In addition, with the Pentagon outsourcing the CAD (computer-aided design) for its next generation supersonic F35 fighters to a Pune-based company in collaboration with Dell, India has a strong case as a BPO destination for hi-tech jobs that do not necessarily "steal" employment from the US.

According to government sources, the bilateral agreement will address India’s concern over tariff and non-tariff barriers imposed on off-shore BPOs by the US. In return, the US is asking India to open services sectors such as accounting, auditing, legal and insurance - a request strongly opposed by the communist allies of the Congress-led United Progressive Alliance government. But India also believes a bilateral agreement will open new technology horizons for its technology savvy companies, as the US has the largest outsourcing economy in the world, covering diverse sectors such as financial, human resources and design.

Another reason India is pushing for the agreement is the directionless progress being made in World Trade Organization negotiations. India feels it is worthwhile to sign a bilateral agreement with the US, which in spite of ups and downs in diplomatic relations has been India’s largest trading partner for nearly a decade and a half.

With an unbelievable 57% of India’s gross domestic product (GDP) contributed by the services sector, and commercial services accounting for another 25% of the country’s exports, India feels a long-term re-assuring trade policy is essential for securing its future economic growth, says Professor Tapas Mazumder, former dean of economics at the Jawaharlal Nehru post-grade university in Delhi.

With an 18% growth in exports, and the country’s top 10 information technology companies posting an average profit rate of 25% in the 2003-2004 financial year, combined with a lower debt-equity ratio, Indian industries are ready to take aggressive moves in boosting the country’s exports, while the government is trying to address the remaining trade-related anomalies in taxes, infrastructure and delivery.

Meanwhile, to further reduce complaints from trade and industry sectors, the Indian government has broken the rigid rule of keeping the country’s planning commission under strict government hegemony, and agreed to include its industry representative in the commission.

And in another first, Prime Minister Manmohan Singh is planning to address Wall Street hot-shots during his upcoming visit to the US and project India’s moves towards increasing its status as a global economic player. The Prime Minister’s Office refers to this as "a professional talking to other professionals". Singh is an acclaimed economist from the London School of Economics and holds a degree from Harvard, where his daughter is now studying economics.

However, it will be a gigantic task for the government to hone India’s competitiveness to match global demand. For instance, World Competitive Year Book 2004 of the International Institute for Management Development placed India 34th out of 60 countries by using 287 criteria, and the World Economic Forum placed India 53rd after a survey of 59 countries, and a World Bank survey of 46 countries for competitiveness placed India at 40th position.

Yet India has achieved faster growth in services exports than any other country in the world, posting an average annual growth of 17% during the 1990s and today accounting for 1.4% of global exports in services.

While premier institutions such as Deloitte Research regard India as a distant leader in "lane one services exports", an estimate by the Economist stipulates that "if half of India’s 50 million English-speaking population start earning $10,000 annually from IT and IT-related services, it will more than double the country’s GDP from the current $450 billion." Not a wrong assumption, as nearly 60-70% of India’s IT professionals earn an average of $9,600 annually.

But there are many hurdles that India needs to cross first, an important one being political consensus among its allies, including the communists, who, failing to prevent the decision to privatize India’s airports, are now trying to stop the country’s insurance sector from being privatized. India’s organized trade unions and non-privatized infrastructure sector are controlled by the communists, the effects of which were demonstrated by a recent nationwide strike by all bank employees and a strike by India’s truckers, which brought the country’s economy to a standstill for a day. The Congress Party relies on communist support in its governing coalition.

This is why not everyone feels consensus is possible. As a senior bureaucrat in the Commerce Ministry commented, "Don’t worry, with the communists as our friends, the present government does not need enemies."

Arun Bhatttacharjee, post graduate in mass communication from the University of Calcutta and Minnesota. Authord Indian Press From Profession to Industry, Dateline Mujibnagar (Indo-Pak war of 1971), Chasing the Missing Link, Communication Technologies, Gender Bias in Reporting: A Journalist’s Handbook.