Delhi must wake up and smell the opportunity

Anupam

Deepening competition between the US and China over trade and technology is bringing forth a new set of economic and strategic challenges for India. Navigating these successfully requires New Delhi to mitigate and manage the threats, while leveraging the opportunities that arise. Doing so, however, requires the Indian government to undertake key reforms and adopt a strategic outlook with regard to certain domestic policies.

On the trade front, Sino-US frictions offer India with an opportunity to bridge the deficit with China and attract new investments from companies seeking to shift out of China. In terms of the former, little has been achieved. This is largely owing to persistent Chinese market restrictions, along with the nature of Indian exports to China. Primary commodities continue to dominate India’s exports to China, while electrical and electronic equipment along with pharmaceuticals comprise the bulk of Indian imports.

The failure to capitalise on the latter has much more to do with policies at home, which accentuate the threat from the Donald Trump administration’s hardened approach on issues of trade. The most recent manifestation of this is Trump’s decision to terminate India’s designation as a beneficiary developing nation under the Generalised System of Preference (GSP) trade programme, which allowed duty-free exports of over 3,000 items from the country. This move, effective from 5th June 2019, would increase import duties on about $5.6 billion worth of exports from India. The GSP is a programme designed to benefit predetermined developing countries by waiving import duties and tariffs on select goods. India was one of the biggest beneficiaries of the GSP, accounting for over 25% of the total volume of goods allowed under the programme.

India’s response has been on predictable lines -- the newly constituted Commerce and Industry Ministry of India is mulling retaliating with counter-tariffs on around $10.6 billion worth of American imports. Simultaneously, the ministry is formulating plans to cushion the negative effects of this move on India’s export sector, which includes providing tax rebates to the affected companies. Any such plan will only be a band-aid solution and in the long run, India must address some of its own domestic policies which have provoked the US to act in this manner.

A statement by the White House said that India had not assured the United States that it would provide “equitable and reasonable access” to its markets, which was what prompted the Trump administration’s move. The US Trade Representative has appealed multiple times to the Modi government to not create rules that unfairly discriminates against US firms and US imports. This largely fell on deaf ears.

It would be tempting to argue that India must stand its ground and not acquiesce to US demands on market access. However, correcting distortions in the domestic market is in India’s own interest and must not be viewed as “giving-in” to the US’ demands.

There are three main points of contention between the US and India on trade related issues and it is argued here that solving these points of contentions not only serves a greater strategic purpose of maintaining friendly trade relations with one of our biggest partners but is also beneficial to India.

First, the National Pharmaceutical Pricing Agency (NPPA) capped the price of surgical implants, such as coronary stents and knee implants, resulting in a steep price drop of about 85%. The big American manufacturers, whose profitability was severely hurt, proceeded to withdraw their latest and sophisticated products from the markets, leaving a void for Indian consumers.

Second, American retail giants, such as Amazon and Walmart (which has a majority stake in Flipkart), were disallowed from owning private labels and selling on their platform. This means that Amazon cannot be both a retailer and a marketplace platform in India. The new rules also placed significant constraints on pricing and promotions by the retail companies. A related point of contention was the rules on data localisation - foreign e-commerce firms must store and process all data in India itself, which would require massive investments in setting up data servers in the country.

Funnily, enough the e-commerce rules do not apply to Indian firms. Finally, India has banned US dairy imports, unless it is given a certification specifying that imported dairy items were not from animals raised on feed made of bovine extracts.

All of these policies not only hurts US companies, but also Indian consumers and producers. It results in reduced consumer choice, higher prices, lower competition, and lower investment and employment generation. Given the trade war between the US and China, India could have ideally made use of the opportunity to strengthen its trade and investment relationship with the US. Some of the China-US trade could have been diverted to India and even more importantly, India could have invited US firms to manufacture in India and export to the rest of the world. By squabbling over trivial and self-defeating issues, India is unfortunately losing this opportunity.

One hopes that New Delhi does not continue to adopt such a short-sighted approach in the context of changing global environment regarding the development of new technologies and innovation. The Sino-US trade war is rapidly morphing into a tech war with geoeconomic and geostrategic implications.

The Trump administration’s ban on the sale of Huawei equipment in the US market in May and its threat of imposing export restrictions on the Chinese telecommunications giant along with 68 of its affiliates was the first serious shot in this direction. The decision came after months of US lobbying of allies and partners, including India, to follow its lead in decoupling from the Chinese technological development and innovation ecosystems. This is essentially a race between the incumbent global innovation leader and a rising challenger to dominate technologies of the future, which will fuel growth and ensure military preponderance in the decades to come.

A worsening Sino-US tech war poses certain near- and long-term challenges for countries like India. Given the limitations of Indian technological and innovation base, the immediate impact is likely to be in the realm of second order effects. These include access to cheap yet quality Chinese products like smartphones and hardware and possibly the shrinking of Chinese tech investments in the country. The long-term implications are strategic in nature.

In other words, a protracted Sino-US tech war could limit India’s room to maneuver, with the possibility that the global cyberspace and technology and innovation ecosystems could splinter into spheres of influence.

This necessitates the adoption of a strategic outlook towards domestic policies, say with regard to data storage and transfer, cybersecurity, intellectual property rights protection, opening up to foreign educational institutions and talent and the role of foreign firms in the telecommunications sector. That should be India’s roadmap going forward rather than catering to narrow-minded domestic constituencies and interests.

(The writers are researchers at the Takshashila Institution, Bengaluru)