India and US trade relation has seen its ups and downs. From the time India got her independence to the present day, there have been so many twists and turns that it can put even the highly watched soap operas to shame. Even before India got her freedom from the British, American companies like Citibank and IBM India, a wholly owned subsidiary of the main IBM World Trade Corporation, was operating in the Indian subcontinent since the turn of the 20th century. As India became independent, the country that defined democracy as “of the people, by the people and for the people” was expected to come close to this new democratic nation on the rise. However, as the countries of the world started to group themselves around the two superpowers, USA and USSR, the then prime minister of India chose to stay neutral. He started the Non-Alignment movement, which was not viewed quite well by the US government.
The period from 1960s to 1970s was the most turbulent time for Indian and American manufacturers. The leaning of US towards Pakistan during the Bangladesh War of 1971 did not go down well with the Indian government. The personal dislike of the then government officials in both the countries hampered the foreign trade between them. The excessive licensing and permit system of the country hampered the American exporters as well as importers. The relation during this period was more of a donor-receiver as India became one the of the biggest US aid receiving countries in the world. But this was the time when Indians went to US to study and gradually build the Indian Diaspora in that country.
The nadir in the trade relation between India and US came in the mid-1970s when the infamous India’s Foreign Exchange Regulation Act (FERA) came into being. It sought to reduce foreign investment to 26%, which IBM did not adhere to. As a result, IBM along with Coco Cola had their license revoked by the Indian minister George Fernandez. As cold war raged on, the relationship between US and India remained somewhat frosty. The thawing of the relationship started in the last decade of the 20th century as the former alley and trading partner of India, USSR started to disintegrate and ultimately collapsed.
During the same time, the Indian government began the long needed economic reforms of its present laws. The present prime minister of India, Mr. Manmohan Singh, was then the finance minister under the Narshimha Rao led government who started the process of liberalization. The license policies were heavily reviewed much to the comfort of the companies doing business with India. Indian exporters as well as importers also cheered the changes the government started to implement; changes, which boosted international trade, and the several section of the market was opened for direct investment by American investors.
The government changed in both countries but the reform and liberalization started by the previous government continued. Clinton government was quick to notice the growing economic power and India and identified it as one of the top 10 emerging market. The trade relationship between India and US rode rapidly as American manufacturers found the burgeoning market of India as its middle class began to rise rapidly. Indian exporters were thrilled by the demand of Indian products specially shrimp and processed stones in the US market.
The nuclear test in 1998 saw a new change in relationship between USA and India. The test brought a host of sanctions, which affected both American exporters as well as Indian exporters. In the long run, it was seen that the Glenn Administration Sanction had a negative impact on the American exporters and manufacturers. That is why an amendment was brought and sanctioned by President Clinton, which lifted some of the sanctions boosting the trade relationship between the two countries.
A New Beginning
The new millennium brought a new chapter in the Indo-US trade relationship. The visit of President Bill Clinton saw the signing of the historical “Vision Document”. As a part of the agreement, a joint Indo-US Working Group on Trade was established with participation on the ministerial level from both sides. The focus of the group was to regularly discuss on issues important to the improvement of the trade relation between USA and India.
All these initiatives bore fruit and started a rapid increase in trade volume between the two countries. While in 1993 Indian exporters brought in $4,551, American exporters made $2,761. The same figure in 2000 was $10,686 and $3,663 respectively; and that too only in goods! If we add the software export, the two-way trade amount would be something near $18 billion dollar!
The next government change in both the countries continued with the improvement of the trade relation between USA and India. For President George Bush, India was a natural partner for USA as it was the world’s biggest democracy! The trade relation grew at an unprecedented rate and by 2004, the Indo-US bilateral trade reached a staggering $21.68 billion. The Bush government in 2001 restored 42 products in the GSP for India. GSP or Generalized System of Preference is a list of product specific to a country, which enjoys reduced duty access to the US market. These have doubled the volume of foreign trade between the two countries.
The Main Items of Trade
The first product on the list that has benefited Indian exporters very much is Jewelry. Indian manufacturers are bringing in the much needed foreign exchange by exporting precious stones, worked gold and diamond jewelries textiles, iron/steel products, textile floor coverings, organic chemicals and machineries like taps, valves, transmission lines, etc.
These are just the material things that are being exported by India. One of the biggest exports of India is perhaps in the IT sector. Since the last decade, India has emerged as a software giant thanks to the ingenuity, hard work, and technological prowess of Indians. The fact that most Indians can speak and converse in proper English have turned cities like Bangalore, Hyderabad and Gurgeon into “the back office of the world”. Through outsourcing the growing IT sector of India and companies like Infosys, Wipro, and others have not only developed a national presence, but made its foray into the US market as well. IT giants like Microsoft, Intel, IBM, and 3M have made India one of their hottest destinations.
Another big area where Indian exporters are thrilled with the rise of indo-us trade relation is agriculture and fisheries. The export of shrimp and other seafood have risen from $188 million in 1999 to $270 million in 2000. The amount has been going up since then as more and more Indian exporters comply with stringent safety and quality standard of US Food and Drug Administration. Besides these, other agro-based food products produced in India have also captured the US market. Mention can be made of Indian mangoes, which is one of the latest exports of India that have thrilled the American importers due to their demand. Indian mangoes, as claimed by the Indian Minister Kamal Nath, are much better in taste, flavor, and aroma than Mexican or South American varieties that were previously found in the US market.
As for US exporters, they have seen a steady rise in the demand for Engineering goods and machinery including electrical goods (30.20%), precious stones and metals (9.25%), organic chemicals (7%), optical instruments and equipments (also 7%). Furthermore, the aviation industry, which occupies 10.50%, got a further boost due to the new Boeing orders in both passenger and freighter category. The company is expecting an order of anything between $86 billion to $105 billion!
The growing middle class, which is nearly equal to the population of the USA, is a great market for USA exporters and manufacturers. The middle class of India today is flushing with money like never before. Companies like Proctor and Gamble, Pepsi, Coco Cola, General Electrical, Whirlpool, Ford have all scripted their success story in the Indian market. Beside these popular brands, multinational companies like McDonalds, Subway, and Yum! Group have a substantial presence in the Indian market.
In fact, many FMCGs have found success by adopting unique business methods like using the small sachet of popular items like shampoo, toothpaste, and detergent. It has helped them to capture the vast rural market of India where the demand is good but the purchase power of the people is very limited. Even luxury brands are eyeing their share of the market whether it is designer clothes, high-end cars, or the latest gadgets.
Other Areas of Investment
Foreign direct investment, which was previously as low as 26%, kept out major American investors. But one of the main changes brought by the economic reforms was the increase in the cap on FDI. It resulted in an unprecedented inflow of American investors who were interested in doing business with India. While the amount of FDI flowing from USA to India was $11.3 million in 1991, the figure was $4132.8 million by mid-2004! Today, USA is the second largest Foreign Direct investor in India after Mauritius and before Japan. USA is investing in all the arenas, which are open to foreign investment. It includes manufacturing investment as well as BPO and IT sector. Private foreign investment in banking is allowed up to 49% and many American companies like GE Capital, Citicorp, and American Express have found great success in the Indian market. Though FDI in insurance in limited to 26%, still companies like New York Life, Chubb and AIG have made quite a foray in the market.
The recent development of the outsourcing units in India has attracted more US companies than before. Many Fortune 500 companies like AT&T, Morgan Stanley, Reebok, Pepsi, Coco-Cola, have identified India as their preferred outsourcing partner. The future of FDI is also looking bright with the government opening up more sectors for private investment. Among them, telecommunication sector is one great area of investment; by mid 2006, US investment in this sector is $2.66 billion. Mobile cover and usage in the country is rapidly developing given the size and population of the country. Retail sales are also another arena where American companies doing international business are interested in investing. Wal-Mart, the biggest employer in USA is especially keen on entering the rapidly increasing market of India. It has already entered in a joint venture with Bharti Enterprise to start a “Cash-and-carry” outlet targeting the $180 billion strong retail sector.
Energy sector is another arena, which is attracting a fair amount of FDI. Again the growing economy and given the size of the country and the vast undeveloped nature of the sector means that there is a huge potentiality for development. The new indo-US nuclear deal is predicted to bring a great boost in this sector. Infrastructure is another area, which is being opened by the government for private investment. The investment from US companies doing business with India is going to increase from $24 billion in 2006 to $47 billion by 2009.
In keeping with US FDI in India, Indian companies keen on doing business with the United States, are also increasing their investment in the US market. In fact, a recent study is suggesting that in the business year of 2007-08 the FDI outflow is going to be more than FDI inflow! It is pegged to be around $45 billion worldwide with America taking in $10.25 billion in 2007. The companies that are investing heavily in the US market include the Tata Group, UB, Infosys, Wipro, Ranbaxy, and ONGC. Tata group has already brought TCS to Silicon Valley and is now all set to buy Jaguar and Land Rover from Ford. Both Ranbaxy and Dr. Reddy’s Laboratory have acquired pharmaceutical manufacturing units in US. Videocon, another Indian success story is looking forward to buying the mobile phone subsidiary of Motorola Company. Both Wipro and Infosys are setting up offices on the US soil to offer outsourcing jobs to companies that are keen on outsourcing but not to foreign shores. It is estimated that $10 billion investment of Indian companies has created 30,000 jobs in US!
The third kind of companies that are doing business with India are the portfolio investors. They differ from FDI because they do not open manufacturing units or transfer any technology in the Indian market. The bullish trend in the Indian stock market plus the robust and stable economy of the country has resulted in an overflow of investment from FII (Foreign Investment Institution). The recession in the US market turned these international investors to India to recover the loss in the US market. The US investment of $25.3 billion amounted for 40.5% of total FII net flow in India.
Future Trade Between India & United States
No international trade between two countries can be without hiccups. The same is between India and United States of America. Though at present USA is the second largest investor in India, but in the context of overall international FDI done by USA abroad, India only shares .24% as of 2002. In matter of doing business with India, it held the 24th position among US exporters, while Indian exporters stood at the 18th position. Both the countries are keen on improving the amount of international business transaction between them, but some barriers remain.
The high tariff barriers in some sectors, for example, distilled spirit and wine frustrate USA exporters. The fact that many commodities, especially, food products have to go through stringent checks and quality standards of Indian government forces. Many American manufacturers give up hope of conducting business with India. India’s patent law, which is not WTO-consistent and poor enforcement of Intellectual Property Rights Protection, makes many American manufacturers, especially in the biotechnology field, think twice before entering the market. The red tape and multiple layers of permits and certifications frustrate the American investors who are used to working fast.
Similarly, the caps in FDI in certain sectors like banking, retail and insurance does not go well with companies doing business with India. The slow progress of economic reforms especially in these sectors is holding back the much-needed FDI that can flow from US to India.
As for Indian exporters, the main contention against America and other developed nations is the subsidy they give to their farmers. It puts the economically weak farmers in India in a poor position. The Antidumping & Countervailing law of USA is hurting many Indian manufacturers.
The controversial decision of the American government of allowing the companies that complain against dumping by a foreign company, getting a part of the cash settlement, led India along with many other countries to complain in the WTO against US. WTO supported India and others’ arguments and termed the act inconsistence with WTO rulings. Earlier in another anti-dumping case, verdict of which was in US favor, the organization noted that the US government did not give legally sufficient justification and it chose to disregard certain facts from the Indian manufacturers and instead used the facts available to establish the anti-dumping margin of the manufacturers.
As said before, no foreign trade can run without any problem and as the ties between USA and India grows stronger these problems will be tackled head-on. India has to understand that the main criterion for doing business with United States is to bring more changes in its economic policies. US has to understand, that being a democratic country, India has to take in all the concerned voices and safeguard its own small markets and manufacturers from being swept away by international players. But the last word on Indo-US relationship can be borrowed from the poem “Stopping by Woods on a Snowy Evening” by the famous American poet Robert Frost: “And miles to go before I sleep” and substituting “I” by “We”.
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