# India-U.S. Economic and Trade Relations > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/crs%3ARL34161 ## Record - **Collection:** Congressional research report - **Document type:** CRS Report - **Published:** August 31, 2007 - **Citation:** RL34161 ## Text India-U.S. Economic and Trade Relations -name redactedAnalyst in Asian Trade and Finance -name redactedSpecialist in South Asian Affairs August 31, 2007 Congressional Research Service 7-.... www.crs.gov RL34161 CRS Report for Congress Prepared for Members and Committees of Congress India-U.S. Economic and Trade Relations Summary After decades of strained political relations, the U.S. and Indian governments are currently pursuing a “strategic partnership” based on numerous overlapping interests, shared values, and improved economic and trade relations. India is in the midst of a rapid economic expansion, and many U.S. companies view India as a lucrative market and a candidate for foreign investment. For its part, the current Indian government sees itself continuing the economic reforms started in 1991, aimed at transforming a quasi-socialist economy into a more open, market-oriented economy. However, the U.S. government is concerned that India’s economic reforms are progressing too slowly and unevenly. Bilateral merchandise trade has grown from $6 billion in 1990 to $33 billion in 2006. Although India was only the 21st largest export market for the United States in 2006, the United States has become India’s leading trading partner, mostly due to the growth in India’s exports to the United States. However, recent increases in trade with China have made it a close second to the United States. In 2006, the U.S. bilateral trade deficit with India totaled $13 billion. In 2006, India’s gross domestic product (GDP) grew by 9.2%, a growth rate second only to China among Asian nations. India’s economic growth has also brought about the emergence of a sizeable “middle class” and the largest number of billionaires in Asia, but the country’s mostly rural population remains comparatively poor and largely isolated from the benefits of growth. In addition, there is growing concern that the economy is “overheated,” as evidenced by rising rates of inflation. Moreover, despite several years of strong growth, investment in infrastructure is lagging, creating a potential bottleneck for long-term economic expansion. Finally, attempts at additional economic reforms aimed at resolving these and other economic problems are constrained by India’s political dynamics. Despite the significant liberalization of India’s trade and foreign investment policies, there remain a number of bilateral and multilateral trade issues between the United States and India. The United States seeks greater market access to India’s agricultural market and key service sectors for its exports and for foreign direct investment. The United States is also concerned about “outsourcing,” and would also like to see improvements in India’s intellectual property rights protection. India, for its part, calls for the lowering of perceived U.S. barriers to agricultural and service imports, as well as an expansion of the H-1B visa program. Many of the more prominent Indo-U.S. trade issues may have indirect implications for Congress. The growth of India’s services exports to the United States has contributed to congressional consideration of possible legislation to provide greater assistance to displaced U.S. workers. Also, India’s growing demand for crude oil has raised the possibility of boosting bilateral energy cooperation. Finally, the passage of the Hyde Act in 2006 (P.L. 109-401) has led to the negotiations of a bilateral peaceful nuclear cooperation (“123”) agreement, which cannot go into effect without congressional approval. For a broader review, see CRS Report RL33529, IndiaU.S. Relations, by (name redacted). This report will be updated as warranted. Congressional Research Service India-U.S. Economic and Trade Relations Contents Introduction ................................................................................................................................1 India’s Political and Economic Climate .......................................................................................2 Overview ..............................................................................................................................2 Brief Political Economic History of India ..............................................................................4 Current Political Climate for Economic Reform ..........................................................................6 Key Political Figures and Institutions ....................................................................................7 Major Political Parties and Coalitions....................................................................................8 The UPA and the Indian National Congress .....................................................................8 The NDA and the Bharatiya Janata Party.........................................................................9 The Left Front and the CPI-M ....................................................................................... 10 Regional Factors and Variations .......................................................................................... 11 The West....................................................................................................................... 11 The North ..................................................................................................................... 11 The South ..................................................................................................................... 11 The East........................................................................................................................ 12 Maoist Insurgency............................................................................................................... 12 India’s Current Economic Condition ......................................................................................... 13 Sectoral Shift to Services .................................................................................................... 13 Declining Poverty, Emerging Middle Class ......................................................................... 14 Rapid Growth in Trade........................................................................................................ 15 Balance of Trade ........................................................................................................... 16 Top Merchandise Exports.............................................................................................. 16 Top Merchandise Imports.............................................................................................. 18 Trade in Services........................................................................................................... 18 Risk of Overheating? .......................................................................................................... 20 India’s Current Economic and Trade Policies............................................................................. 21 Economic Policies of the UPA Government......................................................................... 22 UPA Budgets................................................................................................................. 22 Privatization.................................................................................................................. 23 Labor Reforms .............................................................................................................. 24 Infrastructural Development.......................................................................................... 24 Special Economic Zones ............................................................................................... 25 India’s Trade Policies .......................................................................................................... 26 Tariff Rates and Enforcement ........................................................................................ 27 Import Restrictions........................................................................................................ 27 U.S. Trade Barrier Assessment ...................................................................................... 28 India-U.S. Economic and Trade Relations ................................................................................. 28 Trends in Merchandise Trade .............................................................................................. 28 India’s Merchandise Trade with the United States.......................................................... 28 U.S. Merchandise Trade with India ............................................................................... 30 Top Traded Commodities .............................................................................................. 32 Emerging Competition from China................................................................................ 33 Trade in Services................................................................................................................. 34 Foreign Direct Investment................................................................................................... 35 Bilateral and Multilateral Trade Relations ........................................................................... 37 Congressional Research Service India-U.S. Economic and Trade Relations Bilateral Agreements and Relations ............................................................................... 37 World Trade Organization and Other Multilateral Relations........................................... 40 Key Economic and Trade Issues ................................................................................................ 42 Agricultural Goods.............................................................................................................. 42 Clothing and Textiles .......................................................................................................... 44 Dual-Use Technology and Military Trade ............................................................................ 47 Foreign Direct Investment................................................................................................... 49 Intellectual Property Rights ................................................................................................. 50 Jewelry ............................................................................................................................... 51 Oil ...................................................................................................................................... 52 Trade in Information Technology and Other Services .......................................................... 52 H-1B Visas ................................................................................................................... 53 Implications for the 110th Congress ........................................................................................... 54 Energy Cooperation ............................................................................................................ 54 Immigration ........................................................................................................................ 54 The Farm Bill ..................................................................................................................... 55 Foreign Direct Investment................................................................................................... 55 Outsourcing and Displaced Workers.................................................................................... 55 Figures Figure 1. India’s Nominal Gross Domestic Product, 2002-2007................................................. 13 Figure 2. Growth in India’s Merchandise and Service Trade, 1990-2005.................................... 15 Figure 3. India’s Trade and Current Account Balance ................................................................ 16 Figure 4. Growth in India’s Services Exports, 1990-2005 .......................................................... 19 Figure 5. Growth in India’s Services Imports, 1990-2005 .......................................................... 20 Figure 6. India’s Merchandise Trade with the United States, 1958-2006 .................................... 29 Figure 7. U.S. Share of India’s Merchandise Trade, 1958-2006.................................................. 30 Figure 8. U.S. Merchandise Trade with India, 1958-2006(U.S. $ Billions) ................................. 31 Figure 9. India’s Share of U.S. Merchandise Trade, 1958-2006.................................................. 32 Figure 10. India’s Trade with the United States and China, 2000-2006....................................... 34 Figure 11. Growth in U.S. Investments in India, 1990-2005....................................................... 36 Figure 12. U.S. Textiles and Clothing Imports from India, 2000-2006 ....................................... 45 Figure 13. Exchange Rate: Indian Rupees per U.S. Dollar, 2005-2007....................................... 46 Figure 14. Map of India............................................................................................................. 56 Tables Table 1. Sectoral Breakdown of India’s GDP............................................................................. 14 Table 2. India’s Top 10 Merchandise Exports, 2000 and 2006.................................................... 17 Table 3. India’s Top 10 Merchandise Imports, 2000 and 2006.................................................... 18 Congressional Research Service India-U.S. Economic and Trade Relations Table 4. Top Five Traded Commodities: U.S.-Indian Bilateral Merchandise Trade, 2006 ........... 32 Table 5. Indo-U.S. Trade in Services, 2000-2005....................................................................... 35 Table 6. Trade in Agricultural Goods: India and the United States, 2006 .................................... 43 Table 7. U.S. Trade Balance with India, 2000-2006 ................................................................... 45 Contacts Author Contact Information ...................................................................................................... 57 Congressional Research Service India-U.S. Economic and Trade Relations Introduction Economic and trade relations between the United States and India have experienced a number of ups and downs since India’s independence in 1947. During much of the 1950s and early 1960s, the United States was a leading trading partner for India, providing the nation with about a third of its imports. However, those economic ties quickly subsided when India fostered closer ties with the Soviet Union following the Indo-Pakistani War of 1965. For the next 40 years, political and economic relations between India and the United States were rather cool. Since 2004, Washington and New Delhi have been pursuing a “strategic partnership” based on numerous shared values and improved economic and trade relations.1 India is in the midst of a rapid economic expansion, and many U.S. companies view India as a lucrative market and a candidate for foreign investment. For its part, the current Indian government sees itself continuing the economic reforms started in 1991, aimed at transforming a quasi-socialist economy into a more open, market-oriented economy. However, the U.S. government is concerned that India’s economic reforms are progressing too slowly and unevenly. According to official U.S. trade statistics, bilateral merchandise trade with India has grown from under $10 billion in 1996 to nearly $31 billion in 2006—a trebling in a decade. In 1996, India was the 32nd largest market for U.S. exports and the 25th largest source of imports. By 2006, India had risen to be 21st biggest export market for the United States and the 18th biggest supplier of imports. The United States’ total trade with India in 2006 exceeded that with Israel, Nigeria, and Thailand. Both governments appear to be committed to improving trade relations. On March 2, 2006, President George W. Bush and Indian Prime Minister Manmohan Singh endorsed the goal of doubling bilateral trade in three years.2 On December 18, 2006, President Bush signed into law H.R. 5682, the Henry J. Hyde United States-India Peaceful Atomic Energy Cooperation Act of 2006 (P.L. 109-401), signaling an intent to waive restrictions on civil nuclear cooperation with India. Despite the growth in bilateral trade and the improvement in trade relations, there are still a number of economic and trade issues between India and the United States. Both nations seek greater market access to the other’s domestic markets, as well as the lowering of perceived trade barriers. In addition, both India and the United States would like to see changes in the other nation’s legal and regulatory policies to help protect and promote exports and foreign direct investment. Moreover, there are significant differences in the stances of the two countries in various multilateral trade fora, including the current Doha Round of negotiations. For Congress, resolution of some of the key economic and trade issues may involve alterations in current federal law. In particular, changes in laws pertaining to agricultural goods, pharmaceuticals, nuclear and dual-use technology, and immigration may be considered as part of an effort to foster closer trade relations with India. Plus, Congress may consider heightened oversight of U.S.-India trade relations. 1 For a broader discussion of the bilateral relationship, see CRS Report RL33529, India-U.S. Relations, by (name re dacted). 2 “U.S.-India Joint Statement.” Office of the Press Secretary, The White House, March 2, 2006. Congressional Research Service 1 India-U.S. Economic and Trade Relations This report provides a summary of India’s current political climate (with a focus on its effects on the nation’s economic and trade policies), its economic condition and policies, the recent trends in bilateral trade and foreign direct investment, and key economic and trade issues between India and the United States. Where suitable, the report also compares India to China to provide a different perspective on U.S. relations with both nations. India’s Political and Economic Climate Overview India is the world’s most populous democracy and remains firmly committed to representative government and the rule of law. With a robust and working democratic system, India is a federal republic where the bulk of executive power rests with the prime minister and his or her cabinet (the Indian president is a ceremonial chief of state with limited executive powers). As a nationstate, India presents a vast mosaic of hundreds of different ethnic groups, religious sects, and social castes. Most of India’s prime ministers have come from the country’s Hindi-speaking northern regions and all but two have been upper-caste Hindus. Larger than Alaska, Texas, and California combined, India is a land of great demographic, geographic, and climatological variety. From stark deserts in the west to thick jungles in the northeast, the towering Himalaya mountains of the north to the vast tableland of the Deccan Plateau of the south, and with the fertile Indo-Gangetic plain between, India dominates the Asian Subcontinent and shares long borders with its six other continental states. About one-third of the population lives in urban areas; an overwhelming majority of the remainder is engaged in the agricultural sector. Most of India’s people inhabit either the alluvial soil of the Indo-Gangetic plain across the north, or the eastern and western coasts of the southern Deccan Peninsula. About 290 million Indians live in the densely-populated northern states of Uttar Pradesh and Bihar; another 100 million live in the western state of Maharashtra. These three states account for more than one-third of the country’s total population. The 543-seat Lok Sabha (People’s House) is the locus of national political power, with directly elected representatives from each of the country’s 28 states and 7 union territories. A smaller upper house, the Rajya Sabha (Council of States), may review, but not veto, most legislation, and has no power over the prime minister or the cabinet. Although India’s political stage is crowded with numerous regional and caste-based parties, recent years have seen an increasingly dyadic battle between two major parties that vie for smaller allies in a system that now requires coalitional politics. No party has won a national election outright since 1984. India has one of the largest and fastest growing economies in the world. India’s real gross domestic product (GDP) rose by 9.2% in 2006—a growth rate second only to China among Asian nations. The strong GDP performance in 2006 capped five years of rapid economic expansion, transforming India into the third largest economy in Asia (after Japan and China). Its recent economic success is generally attributed to a combination of internal and external factors. Internally, a series of economic reforms (begun when the current prime minister was finance minister) have stimulated solid growth of India’s manufacturing and service sectors. Externally, a relatively strong global economy, combined with India’s trade and investment liberalization policies, have stimulated increased trade and investment flows to and from India. Congressional Research Service 2 India-U.S. Economic and Trade Relations Despite the recent growth, India’s economy confronts several challenges to its future prosperity. First, although the nation’s manufacturing and services sectors have grown rapidly, there has been relatively little job creation. Second, its agricultural sector has experienced relatively slow growth for many years. With more than half of Indian households still reliant on agriculture for their income, the standard of living for much of the country’s population remains relatively low. There are indications that most of the Indian populace remains untouched by and thus unimpressed with the country’s widely touted economic boom.3 Third, the standard of living of India’s rural and urban poor is being threatened by an emerging economic challenge—inflationary pressures. After seven years of modest inflation at or below 4% per year, inflation in 2006 was nearly 7% and has risen to about 8% in the first part of 2007.4 India’s poor have been especially hard hit by major increases in the cost of food in recent years. In the longer run, India faces three additional barriers to economic growth—lack of infrastructure, bureaucratic obstacles, and environmental degradation. India’s economy is already hindered by its inadequate transportation system and electricity shortage. Similarly, India’s complex and entrenched bureaucracy frequently creates a barrier to implementing new economic policies and programs. At the same time, its large population and recent rise in industrial output are putting more and more pressure on India’s environment, exacerbating existing problems in providing its people with clean, potable water, as well as clean air. Even with the continued strength of the economy and the Singh government’s attempt to balance its economic policies, many analysts see India facing a number of economic challenges and believe there are still several important economic reforms that India should make to increase the benefits generated by its restructured economy. In particular, critics of the current economic policies point to the unequal distribution of the benefits of the economic reforms, noting that the rapid economic growth has not brought a corresponding reduction in poverty in India, particularly in rural areas. For some, the solution is to press forward more aggressively with the economic reforms by greater liberalization of India’s domestic economic and international trade policies. For others, the solution is reverse elements of the reform and refocus agriculture and India’s rural population. In March 2007, Prime Minister Singh addressed a roundtable hosted by the Economist magazine. In his remarks, Prime Minister Singh provided a fairly comprehensive overview of his administration’s view of the current status of the Indian economy, arguing that India’s economy will probably continue its rapid growth for another decade or more.5 However, Singh also pointed out India’s need for additional reforms, including changes to its banking and financial system, its labor markets, and its “public service delivery mechanisms.” In light of India’s past and planned reforms, he stated, “I find it surprising when I continue to hear complaints about our economy still being a relatively inward-looking economy.” The Bush Administration seems to hold a different view of India’s economic conditions, maintaining that the Singh government ought to push forward more actively with its economic 3 See, for example, Somini Sengupta, “Economic Boom Fails to Generate Optimism in India,” New York Times, August 16, 2007. 4 Data based on price indices released by India’s Labour Bureau. 5 “Prime Minster’s Address at ‘The Economist’ Round Table on India,” The Economist, March 13, 2007. Congressional Research Service 3 India-U.S. Economic and Trade Relations reforms. In September 2006, U.S. Ambassador to India, David Mulford, said to an audience in New Delhi: Today’s business environment in India is more favorable to trade and investment. But there are signs of a pause in the reform process in recent months. Privatizations have stopped, and political reality suggests that reform of other key sectors and policies of central interest to investors will take longer than envisioned. It is important to bear in mind there are serious economic costs to any loss of momentum on the reform front.... The solution to attracting much greater private sector investment in energy and infrastructure development is a blend of policies that includes better governance, market sensitive regulatory regimes, continued liberalization of the financial sector that enables foreign and domestic private capital to finance major projects, and the timely resolution of investor-state disputes.6 One U.S. trade official opined that it is only through meaningful reforms in India’s vast and poorly performing agricultural sector that the country’s true economic potential can be realized. This, he says, will require rural infrastructural improvements, land reform, and changes that will allow foreign direct investment in the farm sector.7 Brief Political Economic History of India A review of India’s economic and trade policies over the last 60 years reveals a pattern of conceptual economic theory moderated by pragmatic political and economic considerations. Major shifts in economic policy were typically initiated with significant changes and then followed by a period of gradual adjustments. Following its independence in 1947, the government of Prime Minister Jawaharlal Nehru of the Indian National Congress Party (INC) adopted an economic policy emphasizing rapid industrialization, import substitution, and relatively high levels of government participation in economic production. Monopolies were granted to state enterprises in a number of industries considered of economic or strategic importance. Private companies in other industries were often subject to licensing requirements and legally constrained in their size of operation. The agricultural sector was a key focus of the First Five Year Plan, with the implementation of various subsidy programs, food price controls, and restrictions on the transport of agricultural crops. Labor laws provided workers with protection from managerial misconduct, but also significantly reduced labor mobility. Both exports and imports were controlled by licenses and tariffs. Foreign direct investment was also severely restricted both by industry and size. Successive Indian governments, still headed by Prime Minister Nehru, remained relatively true to these policies for both its First and Second Five Year Plans (1951-56 and 1956-61) with moderately successful results. Real GDP grew at an average annual rate of 3.6% for the First Five Year Plan, and 2.5% for the Second Five Year Plan. Agricultural production rose 44% and manufacturing output increased 144%. However, the economic policies were also leading to growing merchandise trade and current account deficits that were depleting India’s foreign reserves. 6 See http://www.state.gov/p/sca/rls/rm/2006/72175.htm. Authors’ interview with Ambassador Douglas Hartwick, Assistant U.S. Trade Representative for South and Southwest Asia, Washington, DC, May 24, 2007. 7 Congressional Research Service 4 India-U.S. Economic and Trade Relations For the Third Five Year Plan (1961-66), Prime Minister Nehru and the INC made an adjustment in its economic policies, shifting focus away from “rapid industrialization” over to a program of “self sustained growth.” At the same time, India’s trade policy shifted from “import substitution” to “efficient substitution of imports,” which in effect opened up new trade opportunities for goods considered crucial to economic growth and development. This adjusted economic policy remained in effect until the end of the Seventh Five Year Plan in 1990. In 1990 and 1991, India was struck by a number of political and economic shocks. On the political side, the INC refused to form a coalition government following a poor showing in the elections of 1989. The next largest party, the Janata Dal, was able to form a coalition government, headed by Prime Minister V.P. Singh, but it proved unstable and collapsed in December 1990. During the election campaign of 1991, ex-Prime Minister Rajiv Gandhi was assassinated, and P.V. Narasimha Rao was selected as the new leader for the INC. Following the INC’s success in the 1991 elections, Rao became prime minister. During the political tumult of 1990 and 1991, the combined effects of rise in oil prices (precipitated by Operation Desert Storm in the Persian Gulf) and the demise of the Soviet Union, a major trading partner and a key source of foreign aid, led to a rapid devaluation of the rupee, a depletion of India’s international reserves, and fears of an impending severe recession. In response, Prime Minister Rao made a major and controversial change in economic policies designed to restore faith in the rupee, replenish the nation’s international reserves, and stimulate economic growth. These reforms were overseen by his finance minister, Manmohan Singh. The initial round of reforms included several elements. First, efforts were made to reduce India’s perpetual fiscal deficits at both the federal and state levels. Second, the number of sectors reserved solely for the public sector were reduced from 18 industries to just three—military aircraft and warships, nuclear energy generation, and railway transport. Third, India liberalized international trade by reducing import tariffs, eliminating import restrictions, and opening up India to foreign direct investment. Fourth, India liberalized its financial markets, by dismantling its interest rate controls, reducing government regulations and permitting greater competition. Following the initial round of economic reforms, India’s real GDP growth rate accelerated from around 3-4% per year in the 1980s to 5-7% during the early 1990s. However, toward the end of the decade, India’s economic growth began to slow. Some analysts attributed the economic slowdown to a failure of the federal government to continue and to complete the economic reforms initiated at the beginning of the decade. Other analysts argued that economic problems generated by the reforms were creating structural barriers to continued growth. The ensuing debate over the merits of the 1991 reforms contributed to a second period of gradual economic reform in the second half of the 1990s and into the current decade. Since 1991, India has made a number of significant changes in the structure of its economy, including: • The termination of state monopolies for all but three industries; • The elimination of the “License Raj”—prior to the reforms, there was a rather elaborate system of licenses and regulations governing the establishment of a business in India, making it a very timely and expensive process to start a new concern; • The abolition of import licenses for most commodities; • A major reduction in average and peak tariff rates for imports; Congressional Research Service 5 India-U.S. Economic and Trade Relations • A reduction in domestic price controls for key consumer goods; and • A restructuring of many of the nation’s various subsidy programs. However, some analysts argue that many Indians are skeptical about economic reforms in general, thus posing a “marketing” problem for the government in a democratic system. Some suggest that even segments of the private sector oppose reform efforts.8 Still, representatives of the Indian business community insist that all of New Delhi’s progress in economic reform has been voluntary and is not made under external pressure, and that the general path of liberalization will continue to be followed regardless of what party or coalition is in power.9 Current Political Climate for Economic Reform New Delhi’s current ruling United Progressive Alliance (UPA) coalition was seated in May 2004, when the INC, long associated with the Nehru-Gandhi families, won 145 of the Lok Sabha’s 543 seats and built a ruling coalition with the support of 14 smaller parties. The election unseated a National Democratic Alliance (NDA) coalition led by the Bharatiya Janata Party (BJP), which had been in power under Prime Minister Atal Vajpayee since 1998. Some analysts saw in the election results a rejection of the BJP’s neo-liberal economic reform program. 10 INC President Sonia Gandhi surprised supporters and opponents alike by declining to assume the office of prime minister, instead nominating her lieutenant, Manmohan Singh, a former finance minister. The May 2004 poll results were notable for the best-ever national showing of a leftist alliance— commonly known as the Left Front—led by the Communist Party of India (Marxist) (CPI-M). Although this Left Front is not part of the UPA coalition, it provides crucial parliamentary support from the outside and was described as being “militant” in its opposition to the BJP’s privatization efforts. The CPI-M seated the third largest number of parliamentarians in 2004 (43), but its vote bank is almost wholly limited to the states of West Bengal and Kerala. Immediately following the election, investor fears that a coalition government including communists might curtail or halt India’s economic reform and liberalization process apparently led to huge losses in the country’s stock markets. Market recovery began when INC leaders quickly offered assurances that the new government would be “pro-growth, pro-savings, and proinvestment.”11 Indian industrial leaders also sought to assure foreign investors that Left Front members are not “Cuba-style communists,” but could be expected to support the UPA reform agenda. The Chief Minister of West Bengal, Buddhadeb Bhattacharya, a CPI-M member, has himself actively sought corporate investment in his state. 12 However, since coming to power, the 8 Pranab Bardhan, “Why is Reform Unpopular?,” Outlook (Delhi), October 6, 2006; V. Jayanth, “Why Economic Reforms Are Unpopular,” Hindu (Chennai), January 21, 2006; N. Chandra Mohan, “The Anti-Reform Mindset,” Outlook (Delhi), November 10, 2005. 9 Authors’ interview with Confederation of Indian Industry staff, Washington, DC, May 24, 2007. 10 See, for example, C.P. Chandrasekhar, “The Verdict and the Way Ahead,” Frontline (Chennai), June 18, 2004. See also CRS Report RL32465, India’s 2004 National Elections, by (name redacted). 11 “Communists to Call Shots in India’s New Government,” Agence France Presse, May 14, 2004; Myles Neligan, “India Election Takes Economic Toll,” BBC News, May 17, 2004; “No More Bear Hugs, Warns Congress,” Business Standard (Bombay), May 18, 2004. 12 Edward Luce, “Communists Set to Back Delhi’s Reformist Budget,” Financial Times (London), June 17, 2004; “India Inc Homes in on Red Citadel,” Indian Express (Delhi), May 21, 2004. Congressional Research Service 6 India-U.S. Economic and Trade Relations Congress-led coalition has slowed certain aspects of its economic reform program, including suspending major disinvestment and special economic zone initiatives. These moves are widely viewed as gestures to the Left Front.13 While there are indications that both Prime Minister Singh and party chief Gandhi remain fairly popular figures in India, February 2007 state elections in Punjab and Uttaranchal saw INC candidates decisively defeated by the main opposition BJP and its allies, causing some pundits to suggest that national economic policies and rising inflation may be damaging the ruling coalition’s standing. Some analysts saw the “neoliberal policies” of the UPA as harming its electoral position.14 In June, eight regional parties formally launched a new “Third Front” that might emerge as a national alternative to the UPA and NDA. Well-known Tamil Nadu leader Jayalalithaa is likely to lead.15 August 2007 political wrangling between the UPA and its Left Front allies over planned U.S.-India civil nuclear cooperation (the leftists oppose the plan) has added to political instability in New Delhi and led some to foresee early national polls if Singh’s coalition loses Left Front support.16 Key Political Figures and Institutions Several governmental figures and trade-related institutions wield influence over India’s economic policies. The following is a selected listing of key economic players in the current government: 13 14 • Prime Minister Manmohan Singh, INC member and widely-respected Oxfordeducated economist who, as finance minister from 1991-1995, was the architect of a comprehensive set of national economic reforms; • INC President Sonia Gandhi, the Italian-born widow of former Prime Minister Rajiv Gandhi, while not formally a member of the central government, oversaw the UPA’s 2004 poll victory and wields considerable influence over the coalition’s policy making; • Finance Minister Palaniappan Chidambaram, a Harvard-educated lawyer from the southern state of Tamil Nadu (and member a regional affiliate of the INC) who served as finance minister in the late1990s, is considered to be a highly-competent, pro-market fiscal manager; • Commerce and Industry Minister Kamal Nath, an INC stalwart from the eastcentral Madhya Pradesh state, has launched major trade policy initiatives and is a key interlocutor for the U.S. government; • Planning Commission Deputy Chairman Montek Singh Ahluwalia, a widelyrespected, Oxford-educated economist who works directly under Prime Minister Singh and has close ties to Washington; Pramit Mitra, “India’s Economic Millstone,” South China Morning Post (Hong Kong), June 22, 2005. Venkitesh Ramakrishnan, “Mid-Term Challenges,” Frontline (Chennai), March 23, 2007. 15 The new front includes such regional powerhouses as the Telugu Desam of Andhra Pradesh, the AIADMK of Tamil Nadu, and the Samajwadi of Uttar Pradesh. 16 Sanjoy Mamunder, “Is the Indian Government Going to Last?,” BBC News, August 20, 2007. Congressional Research Service 7 India-U.S. Economic and Trade Relations • Oil Minister Murli Deora, INC member and former mayor of Mumbai who was appointed in 2006, by some accounts due to pressures for a more pro-business, pro-U.S. oil minister; • Power Minister Sushilkumar Shinde, an INC stalwart and former Chief Minister of Maharashtra; • CPI-M General Secretary Prakash Karat, a vocal critic of many economic reforms and of India’s warming relations with the United States, is the most notable leader of the UPA-supporting Left Front; • BJP President Rajnath Singh, a Hindu nationalist from the Uttar Pradesh state who served in the government of former Prime Minister Vajpayee, is seen as a new-generation leader for India’s main opposition party and has been critical of the UPA for slowing the process of economic reform; • The Federation of Indian Chambers of Commerce and Industry (FICCI), a nationwide grouping of corporations, chambers of commerce, and business associations that claims to speak directly or indirectly for more than 250,000 Indian business units; and • The Confederation of Indian Industry (CII), a nongovernmental industry group with a membership of more than 6,300 private and public sector organizations that employs advisory and consultative processes aimed at improving India’s business climate. Major Political Parties and Coalitions For many years, political power in India was monopolized by the Indian National Congress. However, starting in the 1970s, INC dominance was challenged by the emergence of other, increasingly influential political parties. In 1977, nearly 30 years after independence, the Janata Dal Party’s Morarji Desai became India’s first-ever non-INC prime minister. Later, in the 1980s, political party fragmentation in India led to an era of coalition governments, variously led by the INC, the Janata Dal, or the BJP. As noted above, no party has won a national election outright since 1984. India’s political landscape offers no clear division between proponents and opponents of economic reform. Prime Minister Nehru and the INC oversaw decades of centralized economic planning—and today the UPA coalition relies on leftist forces that strongly oppose liberalizing policies—yet it was also later INC governments that launched India’s major reform and liberalization programs. At the same time, the main opposition BJP accelerated “second generation” economic reforms during its time in power from 1998 to 2004, even as the BJP is home to some Hindu nationalist and “swadeshi” (self-reliance) forces that maintain a deep scepticism of neo-liberal economic systems. The UPA and the Indian National Congress Generally perceived as being a center-left coalition, the UPA is an alliance among the INC and 14 smaller regional parties, including the Bihar-based Rashtriya Janata Dal (RJD) and the Dravida Munnetra Kazhagam (DMK) of Tamil Nadu. INC members hold about two-thirds of the coalition’s 219 Lok Sabha seats, as well as all of the four major cabinet posts (External Affairs, Defense, Home, and Commerce). In forming a government, the UPA coalition created a Congressional Research Service 8 India-U.S. Economic and Trade Relations “Common Minimum Program,” a document providing the basic principles of governance that would guide the UPA, along with a policy framework for specific issue-areas.17 Left Front support for the UPA—which is necessary for the coalition to maintain majority status in the Parliament—has been predicated on government strategies that were seen as compatible with the provisions of the Common Minimum Program. In addition to taking credit for India’s dramatic economic growth during the 1990s and criticizing the BJP for “mismanaging” the economy in general and reform efforts specifically, the INC’s economic agenda for the 2004 elections, entitled “An Expanding Economy, A Just Society,” called for achieving up to 10% annual GDP growth, while also seeking a shift of emphasis from a rapid rate of growth to “a specific pattern of growth” that would benefit all segments of the population, with ambitious (and far from realized) promises to “abolish” an array of societal ills, including hunger, unemployment, poverty, and illiteracy. A major aspect of this proposed effort would involve creating “a congenial atmosphere” for both domestic and foreign investment. The INC also blamed the BJP-led government for abject failure in the agricultural sector (which employs more than two-thirds of India’s workforce), vowing major public investments in rural infrastructure.18 The NDA and the Bharatiya Janata Party The right-leaning NDA, which held power in New Delhi from 1998-2004, is dominated by the BJP, which holds nearly three-quarters of the alliance’s 189 Lok Sabha seats (12 smaller regional parties hold the remainder). The surprise emergence of the BJP as a national political force in the early 1990s gave voice to a repudiation not only of the Nehru-INC secular version of Indian nationalism, but also of its concepts of state-directed economic planning. Instead, the BJP called for major liberalization efforts, including abolition of India’s complex system of permits and licenses, as well as a selling off of most public sector enterprises. Many early BJP economic policy recommendations were, in fact, adopted by Prime Minister Rao’s INC government in the early 1990s. However, the BJP subsequently moderated some of its liberalization policies, and also had to deal with tensions between Hindu nationalism and the entry into India of major multinational corporations, which some feared would lead to an erosion of “Hindu culture.” This led to measured support for trade protectionism and what the party called “calibrated globalization.”19 While also asserting a goal of “complete eradication of poverty and unemployment,” the BJP’s 2004 economic agenda was more enthusiastic about unfettered continuation of economic reform efforts and did not place the same degree of emphasis on “social justice” as did the INC. The NDA’s premier statement in 2004 promised an energetic continuation of economic reforms across a multitude of sectors.20 BJP leaders subsequently have been critical of the INC-led government for significantly slowing the reform process, sometimes accusing the UPA of buckling under pressure from leftist parties. Moreover, the BJP has been critical of the way in which the Singh government has entered into an agreement on civil nuclear cooperation with the United States, claiming that provisions of such an agreement will constrain India’s nuclear weapons program. 17 See the UPA’s May 2004 Common Minimum Program at http://pmindia.nic.in/cmp.pdf. Congress Party 2004 Economic Agenda at http://aicc.org.in/economic_agenda.php. 19 Craig Baxter, op. cit, p. 113-114; “More Globalization,” Indian Express (Delhi), January 30, 2004. 20 BJP 2004 Economic Agenda at http://bjp.org/Press/mar_3104a.htm; NDA 2004 Agenda at http://www.bjp.org/Press/ NDA%20Agenda.htm. 18 Congressional Research Service 9 India-U.S. Economic and Trade Relations Organized resistance to proposed economic reforms has come from Hindu nationalist groups that were influential under the BJP government from 1998 to 2004. As a “sister organization” to the Rashtriya Swayamsevak Sangh—a leading Hindu nationalist organization—the Swadeshi Jagaran Manch (SJM) has taken the lead in efforts to forward the swadeshi (self-reliance) cause. According to the SJM, “The Western notion of a global market does not fit into the swadeshi approach,” nor does the “Western notion of individual freedom, which fragments and compartmentalizes family, economy, culture, and social values....” Such anti-globalization policies continue to enjoy limited, but still substantial backing among Indians. The swadeshi lobby did, however, welcome the UPA’s Common Minimum Program document in 2004.21 The Left Front and the CPI-M Long-time and bitter rivals of the INC, India’s major communist parties now provide outside support to the INC-led ruling coalition as part of their mutual efforts to keep the BJP from power. The current Left Front alliance is dominated by the CPI-M and, secondarily, the Communist Party of India, which combine to account for about 85% of its 60 Lok Sabha seats. During the 1950s— and in correspondence with growing Soviet support for the new Indian state—India’s various communist groups resolved to abjure revolutionary ideology and work within the parliamentary system. These parties, however, remain proponents of government-directed economic and industrial development, moderate land reform programs, and strong labor protection laws. Initially and still nominally opposed to the essence of New Delhi’s reform and liberalization efforts since 1991, communist party leaders in their stronghold of West Bengal have continuously sought both domestic and international investments in their state, thus demonstrating a willingness to compromise in some areas of economic policy. Still, such leaders maintain an intensive focus on caste-based and poverty issues, styling themselves as the champions of minority groups and farmers, along with a deep-seated scepticism about the intentions and goals of U.S. and Western political, military, and economic interests in India. On economic policy, the Left Front has taken firm stands against raising limits of foreign direct investment, against government efforts to privatize public sector enterprises, and against the government’s initial plans to launch hundreds of Special Economic Zones in India. Along with its considerable influence at the national level, the Left Front wields administrative power in the states of Kerala and West Bengal, where important trade unions have caused disruption in the course of major strikes and protests over inflation and unemployment.22 Since 2004, the Left Front has accused the UPA government of “serious violations” of the Common Minimum Program, including its planned disinvestment from a major public sector undertaking (PSU) in the summer of 2006. Communist parties characterize such moves as “antiworking class, neoliberal” policies being pushed by the UPA coalition. Moreover, these parties view New Delhi’s apparent pro-U.S. foreign policy tilt as accentuating such neoliberal initiatives.23 It is the Left Front’s opposition to “alliance” with the United States that is at the root of its vehement opposition to planned U.S.-India civil nuclear cooperation. 21 Swadeshi Jagaran Manch at http://www.swadeshi.org; “Swadeshi Sings Cong Praise,” Telegraph (Calcutta), June 2, 2004. 22 “Strike Shuts Down Indian States,” BBC News, December 14, 2006. 23 Venkitesh Ramakrishnan, “Challenging Neoliberalism,” Frontline (Chennai), June 30, 2006. Congressional Research Service 10 India-U.S. Economic and Trade Relations Regional Factors and Variations24 India’s political and economic situation is complicated by sharp regional contrasts in its economy. While some cities and states are relatively prosperous and modern, many others are seriously underdeveloped with significant poverty. These regional disparities not only have substantive impact on economic policies, they also influence the nation’s politics. What follows is a brief summary of India’s major geographic regions. (See Figure 14, “Map of India.”) The West Western India is a relatively prosperous region of the country. The state of Maharashtra, home to Mumbai (formerly Bombay)—a megacity, the world’s third most populous and India’s business and entertainment capital—is among the most urbanized of states, with some 42% of its citizens living in cities, more than half of these in slums. Despite an abundance of urban poor, the state ranks relatively high in measures of health, education, and infrastructure, and Mumbai itself has some of the world’s highest real estate prices. Further to the west, the state of Gujarat has a particularly productive agricultural sector and is said to be the region’s most lucrative investment environment, with social and infrastructure measures nearing those of Maharashtra. Other western states of Rajasthan and Madhya Pradesh rank in the middle-range on such measures. In the southwest, the small state of Goa—a former Portuguese colony—has the country’s highest per capita income. The North The Delhi National Capital Territory is another Indian megacity. It is also the most affluent of India’s administrative districts, with a per capita income double the national average. In fact, along with Delhi, the medium-sized northern states of Punjab, Himachal Pradesh, and Haryana form India’s most prosperous region, as well as its largest market for many products and services. However, immediately to the east, Uttar Pradesh is the most populous and among the poorest of Indian states, consistently ranking low in development measures. Further to the north and isolated by mountainous terrain is the Jammu and Kashmir state, which has been suffering the effects of a religious-based insurgency since 1989. Still, “J&K” has relatively low poverty rates. The South Much of the recent global attention on India has focused on its fast-growing states of Karnataka and Andhra Pradesh, which (along with Delhi) have been at the forefront of the country’s widelytouted software and information technology boom. Their respective capital cities—Bangalore and Hyderabad—have earned fame as emerging hubs for high-technology research and services, as well as for business process outsourcing (BPO) centers which serve many of the world’s largest corporations. Other major southern states are Kerala, known for its social infrastructure and a 91% literacy rate, and Tamil Nadu, with its major commercial and industrial capital of Chennai (formerly Madras), said by some to be India’s best-governed state. Despite the massive infrastructural and environmental problems caused by the rapid growth of its cities, India’s southern region has been dubbed the country’s most livable by India Today magazine. 24 Much of the state-specific information in the regional overviews comes from “The State of the States,” India Today (Delhi), September 11, 2006. Congressional Research Service 11 India-U.S. Economic and Trade Relations The East The numerous states of India’s east and northeast face historical and geographical disadvantages that include inaccessibility and several ongoing armed insurgencies. This region thus continues to be India’s least developed and its infrastructure remains quite poor. Bihar, India’s poorest state, consistently ranks at or near the bottom of most development indices, and Orissa, Jharkhand, and Chhattisgarh are similarly challenged. West Bengal, with the megacity and former British colonial capital of Calcutta (now officially called Kolkata) is eastern India’s fastest-growing and most important commercial and industrial center, even as jute and tea represent major cash crops. A stronghold of India’s communist parties, West Bengal was also the site of major and lethal March 2007 protests against the establishment of a new special economic zone (SEZ). The “Seven Sisters”—smaller northeastern states connected to the rest of India by a 20-mile-wide “Chicken Neck”—are relatively sparsely populated and are distinguished by considerable religious and ethnic diversity. One result has been armed tribal and separatist conflicts, some of which pre-date Indian independence, that present major obstacles to economic development. Maoist Insurgency India suffers from an increasingly lethal and disruptive conflict with “Naxalites”—Maoist insurgents ostensibly engaged in violent struggle on behalf of landless laborers and tribals. As many as 20,000 armed rebels, active mainly in inland areas of southern, eastern, and central India, claim to be battling oppression and exploitation in order to create a classless society. Their opponents call them terrorists and extortionists. The groups get their name from Naxalbari, a West Bengal village and site of a militant peasant uprising in 1967. In 2006, Prime Minister Singh identified a worsening Maoist insurgency as “the single biggest internal security challenge” ever faced by India, saying it threatened India’s democracy and “way of life.” The U.S. State Department’s Country Reports on Terrorism 2006 warned that actions of the Maoist insurgents “grew in sophistication and lethality” during 2006.25 Naxalites now operate in about half of India’s 28 states; Andhra Pradesh and, more recently, Chhattisgarh have been particularly hard hit (Naxalites were behind a 2003 landmine attack that nearly killed the chief minster of Andhra Pradesh). Related violence caused more than 700 deaths in 2006, including nearly 300 civilians, and has not waned in 2007. The insurgents are seen to have a detrimental effect on economic development in some regions of India. During his first visit to Hyderabad in 2005, U.S. Ambassador to India David Mulford reportedly said that he and potential U.S. investors had been concerned about Maoist violence in Andhra Pradesh, but received “good answers” about the investment climate from area business leaders.26 Still, Maoist attacks on roads, railways, and other infrastructure targets can retard development in affected areas, and the rebels are most active in those Indian states that contain the great bulk of the country’s coal supplies, raising a further threat to energy security.27 25 “A Specter Haunting India,” Economist (London), August 17, 2006; Department of State report at http://www.state.gov/s/ct/rls/crt/2006/82734.htm. 26 “Indo-US Ties at All-Time High: Mulford,” Economic Times (Delhi), January 29, 2005. 27 Mark Sappenfield, “In Heart of India, A Little-Known Civil War,” Christian Science Monitor, May 1, 2007. Congressional Research Service 12 India-U.S. Economic and Trade Relations India’s Current Economic Condition Over the last five years, India has been one of Asia’s fastest growing economies. Figure 1 shows India’s nominal gross domestic product (GDP) for the years 2002 to 2007. In nominal terms, India’s GDP grew from 24.5 trillion rupees in 2002 to 40.3 trillion rupees in 2006—an increase of 64% in four years—and is projected to reach 45.6 trillion rupees in 2007. When converted into “real” GDP using a purchasing power parity conversion,28 India’s GDP rose from $3.2 trillion in 2002 to $4.4 trillion in 2006, and is projected to increase to $4.7 trillion in 2007. Figure 1. India’s Nominal Gross Domestic Product, 2002-2007 50,000 45,000 40,000 Billion Rupees 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 2002 2003 2004 2005 2006 2007 (proj.) Nominal GDP Source: Global Insight Sectoral Shift to Services Much of India’s economic growth has been the result of the expansion of its manufacturing and service sectors. Table 1 provides a sectoral breakdown of India’s real GDP for fiscal years 1996, 2001, and 2006.29 Although the value of all three sectors increased, growth in the services sector exceeded that of the manufacturing sector, and the manufacturing sector grew faster than the agricultural sector. As a result, the portion of GDP contributed by the agricultural sector fell, the share of the manufacturing sector declined slightly, and the contribution of the services sector rose. 28 Purchasing power parity converts one currency into another by using an exchange rate designed to equalize the relative purchasing power of the two currencies relative to a defined set of commodities. The simplest and best known “purchasing power parity” conversions is The Economist’s “Big Mac Index” that compares currencies based on the relative prices for a Big Mac in different nations. 29 India reports its official economic data using its fiscal year, which runs April-March. Congressional Research Service 13 India-U.S. Economic and Trade Relations The dominance of the services sector in India’s GDP hides the continued importance of agriculture to the Indian population. An estimated 71% of India’s population in 2006 lived in rural areas, with over half of those people living in villages of less than 5,000 people.30 While there has been growth in non-agricultural employment in India, about two-thirds of India’s male population in 2004 continued to work primarily in agricultural activities.31 Table 1. Sectoral Breakdown of India’s GDP FY1996 FY2001 FY2006 Agriculture 28.0% 23.9% 19.7% Manufacturing 28.1% 27.2% 26.2% Services 43.9% 48.9% 54.1% Source: Ministry of Statistics, India Another worrying aspect of the recent restructuring of India’s economy has been a surprising lack of job creation. In other nations, when the economy exhibited rapid economic growth, along with a shift from agriculture to manufacturing to services, there was a corresponding rise in manufacturing and service employment. However, in India’s case, the level of job creation has been low. According to a recent International Monetary Fund country study of India, “employment in the organized sector has remained roughly unchanged at about 27 million over the past decade and a half.”32 Some analysts attribute this to the nature of the manufacturing and services that dominate India’s economic growth, claiming that they are typically higher-skilled, professional jobs in contrast to the low-skill work generated in nations that previously experienced rapid economic growth. Others point to India’s restrictive labor laws as being a major barrier to job creation. Declining Poverty, Emerging Middle Class The living conditions for much of India’s rural population have improved, but conditions for many remain quite meager. As of 2002, only 27% of India’s rural households had access to tap water; over half relied on tube wells or hand pumps for water. Nearly half of India’s rural household do not have electricity for lighting, and less than 10% possess a telephone, either landline or cell phone. One government study found that 77% of Indians—more than 830 million people—live on less than 20 rupees (about 50 cents) per day.33 The U.N. Development Program ranked India 126th out of 177 countries on its 2006 human development index (between Namibia and Cambodia), up from 127th in 2005. 30 Selected Socioeconomic Statistics India 2006, p. 14. 31 “Employment and Unemployment Situation in India, 2004-05,” National Sample Survey Organization, India, September 29, 2006. 32 IMF Country Report No. 07/63, p. 26. The “organized sector” refers to non-government salaried or wage employment in the following sectors: agriculture, hunting, forestry, and fishing; mining and quarrying; manufacturing; utilities; construction; wholesale and retail trade; tourism; transportation, storage, and communications; and various services. 33 “Nearly 80% of India Lives on Half Dollar a Day,” Reuters, August 8, 2007. Congressional Research Service 14 India-U.S. Economic and Trade Relations At the other end of the income scale, India has a substantial number of wealthy people and a large and growing urban middle class. A byproduct of India’s growth is the emergence of a relatively prosperous and substantial middle class. India has long had a small wealthy sub-population in both its urban centers and rural communities. In a notable indicator of its growing wealth, India in 2007 beat out Japan as the home of the most billionaires in Asia, with 36.34 However, its middle class was comparatively small in number. According to one estimate, India’s middle class in the mid-1980s constituted less than 10% of the population.35 Since the implementation of economic reforms, India’s middle class has grown in size and affluence. Current estimates vary, but most studies indicate that less than 20% of India’s households are in the middle class.36 Rapid Growth in Trade The sectoral shift of India’s domestic economy is partially driven by the rapid growth in the nation’s trade in goods and services. Figure 2 shows the increase in both merchandise and service trade from 1990 to 2005. Between 1990 and 1999, India’s total merchandise trade doubled in value and its trade in services trebled in value. Since 1999, India’s international trade growth has accelerated. Between 1999 and 2005, India’s total merchandise trade and imports of services nearly tripled in value, and its exports of services quadrupled in value. Figure 2. Growth in India’s Merchandise and Service Trade, 1990-2005 140 120 US$ Billion 100 80 60 40 20 Merchandise Trade Exports Imports Services Trade Exports Imports 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 0 Source: World Trade Organization 34 “India Leads Asia Billionaire Club,” BBC News, March 9, 2007. Das, Gurcharan, “India’s Growing Middle Class,” The Globalist, November 5, 2001. 36 Ibid. 35 Congressional Research Service 15 India-U.S. Economic and Trade Relations Balance of Trade The overall growth of international trade has also created a potential economic problem—a growing trade and current account deficit (see Figure 3). From fiscal year (FY) 1997 to 2004, India’s merchandise trade balance—exports minus imports—generally ran a deficit of less than $20 billion. However, since FY2004, India’s merchandise trade deficit has grown from $13.7 billion to a projected $63.7 billion in FY2007. Along with this rise in India’s balance of trade deficit, its current account balance has gone from a surplus of $14.1 billion in FY2004 to an estimated deficit of $14.1 billion in FY2007. Figure 3. India’s Trade and Current Account Balance (U.S. $ Billions) 20 0 -20 -40 -60 Balance of Trade FY07 FY06 FY05 FY04 FY03 FY02 FY01 FY00 FY99 FY98 FY97 -80 Current Account Balance Source: International Monetary Fund Top Merchandise Exports The recent rise in India’s merchandise exports has been led by the production of oil, ores, metals, motor vehicles, and machinery (see Table 2).37 In 2006, oil displaced jewelry as India’s top exported commodity. Nearly three-quarters of India’s oil exports in 2006 were high-speed diesel and other fuels. Also, India’s exports of ores, slag, and ash increased from less than $500 million in 2000 to almost $4.6 billion in 2006, when more than four-fifths of the value came from exports of iron ore, and more than 86% of these iron ore exports went to China. 37 Merchandise trade data is reported according to the Harmonized Commodity Description and Coding System (HS) of tariff nomenclature, an internationally standardized system of names and numbers for classifying traded products developed and maintained by the World Customs Organization (WCO). Both India and the United States utilize the HS code. Congressional Research Service 16 India-U.S. Economic and Trade Relations Table 2. India’s Top 10 Merchandise Exports, 2000 and 2006 (U.S. $ millions) HS Chapter Description 2000 2006 Percent Change 71 Jewelry 7,827.5 16,203.4 107.0% 27 Oil 1,410.7 10,479.6 642.9% 62 Non-Knit Clothing 3,744.7 5,061.2 35.2% 29 Organic Chemicals 1,615.3 4,450.8 175.5% 26 Ores, Slag and Ash 451.6 4,348.4 862.9% 72 Iron And Steel 1,175.0 4,151.6 253.3% 84 Machinery 1,221.0 4,066.0 233.0% 87 Motor Vehicles & Parts 851.6 3,204.2 276.2% 61 Knit Clothing 1,724.8 3,016.8 74.9% 73 Articles of Iron or Steel 909.6 2,749.8 202.3% 42,299.4 121,259.3 186.7% Total Exports Source: Global Trade Atlas The buildup in India’s exports of motor vehicles and parts has several elements. Nearly a third of the exports—$1.257 billion in 2006—are automotive parts, with the United States as the largest export market, purchasing almost $340 million. The second segment of India’s chapter 87 exports are automobiles, worth $1.501 billion in 2006, and shipped principally to Europe. In addition, India also exported a large amount of motorcycles—nearly $319 million worth in 2006.38 Another notable aspect of India’s recent export growth is the relatively poor performance of its past leading exports—jewelry and clothing. In 2000, India’s top four exports were jewelry (HS Chapter 71), non-knit clothing (HS chapter 62), cotton cloth and yarn (HS Chapter 52), and knit clothing (HS Chapter 61). By 2006, non-knit clothing had slid to third place and knit clothing had dropped to ninth, despite the expiration of the quotas under WTO Agreement on Textiles and Clothing on January 1, 2005.39 Despite the rise and fall of other commodities, jewelry remained India’s top export in 2006. Within jewelry, India continues to be primarily an exporter of diamonds. In 2006, two-thirds of India’s jewelry exports were cut, unmounted diamonds. India’s top markets for its diamonds were, in order: Hong Kong ($3.2 billion), the United States ($2.5 billion), Belgium ($1.4 billion), and the United Arab Emirates ($1.2 billion). 38 The top five destinations for India’s motorcycle exports in 2006 were, in order: Sri Lanka, Colombia, Bangladesh, Nepal, and the Philippines. 39 For details on clothing and textile trade after the expiration of the WTO Agreement on Textiles and Clothing, see CRS Report RL34106, U.S. Clothing and Textile Trade with China and the World: Trends Since the End of Quotas, by (name redacted). Congressional Research Service 17 India-U.S. Economic and Trade Relations Top Merchandise Imports In contrast to exports, India’s top 10 Are India and China Export Rivals? merchandise imports remained relatively Given their similarities, one might expect China and India stable between 2000 and 2006 (see Table 3). to be direct competitors in the global commodity Oil was and remains India’s top import, and markets. However, their respective official export data over three-quarters of its oil imports are crude provides only modest support for this idea. oil. Jewelry remains India’s second biggest India and China share only one category—non-knit import, consisting of nearly equal amounts of clothing—among their top five exports. Expanding the gold and diamonds to be used by India’s comparison to their top 10 exports, three more categories are added—machinery, knit clothing, and jewelry manufacturing industry. The next two articles of iron and steel—which are India’s seventh, top import categories—machinery and ninth, and tenth largest exports, respectively. electrical machinery—incorporate both consumer goods (televisions, telephones, and computers) and intermediate goods (hard disc drives and integrated circuits). Finally, the fastest growing import category among the top ten, iron and steel, was more than 90% copper imports. Table 3. India’s Top 10 Merchandise Imports, 2000 and 2006 (U.S. $ millions) HS Chapter Description 2000 2006 Percent Change 27 Oil 17,535.0 45,880.0 161.6% 71 Jewelry 9,953.3 23,462.7 135.7% 84 Machinery 4,195.1 12,839.8 206.1% 85 Electrical Machinery 2,679.4 11,051.4 312.5% 72 Iron and Steel 1,000.4 5,318.3 431.6% 29 Organic Chemicals 1,594.2 5,112.1 220.7% 90 Laboratory and Medical Equipment 939.1 2,565.1 173.2% 39 Plastics 675.8 2,427.5 259.2% 15 Edible Oils 1,380.6 2,343.3 69.7% 28 Inorganic Chemicals 1,148.7 2,126.12 85.1% Total Imports 50,577.5 172,876.3 241.8% Source: Global Trade Atlas. Trade in Services The rapid rise in India’s merchandise trade has been outdone by even faster growth in trade in services. The value of India’s services exports increased 250% between 2000 and 2005, while the value of its services imports increased 176%. In 2005, the total value of India’s services trade was $108.3 billion, or nearly half the size of its total merchandise trade. India’s services trade surplus in 2005 was $3.9 billion. Figure 4 shows the sharp increase in India’s services exports from 1990 to 2005. Although both transportation and travel services experienced strong growth over this time period, much of the rapid expansion in services exports occurred in other service sectors. Over the 15 years in Congressional Research Service 18 India-U.S. Economic and Trade Relations question, India’s services exports increased from $4.6 billion in 1990 to $56.1 billion in 2005— more than a 12-fold increase in size. Figure 4. Growth in India’s Services Exports, 1990-2005 60 US$ Billions 50 40 30 20 10 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 0 Transportation Services Travel Services Other Commercial Services Source: World Trade Organization Figure 5 presents the growth in India’s services imports between 1990 and 2005. The sectoral composition of growth for services imports is similar to that of exports—transportation services and travel services both increased, but the greatest growth was in the import of other commercial services. Between 1990 and 2005, the value of India’s services imports grew almost nine-fold, from $5.9 billion in 1990 to $52.2 billion in 2005. Congressional Research Service 19 India-U.S. Economic and Trade Relations Figure 5. Growth in India’s Services Imports, 1990-2005 60 US$ Billions 50 40 30 20 10 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 0 Transportation Services Travel Services Other Commercial Services Source: World Trade Organization Risk of Overheating? The structural changes in India’s economy, the decline in poverty, the emerging middle class and the rapid growth in foreign trade are all seen as stoking the engines of economic growth in India. In fact, there is rising concern that India’s economy may be growing too fast, raising fears of that its recent success may soon be followed by a sharp economic downturn. Commentators often point to India’s rising rate of inflation as evidence that its economy is growing too fast. After several years of very modest inflation—about 4% per year—the consumer price index (CPI) in India topped 7% in 2006 and remained high in the first half of 2007. In May 2007, the CPI for industrial workers was up 6.6% over the previous month, and the CPI for agricultural workers was up 8.2%.40 The official government target is to bring inflation down to 4.0-4.5% in 2007, but some analysts project that the consumer price index will stay above 6%. While Reserve Bank of India (RBI) increased interest rates and raised reserve requirements to dampening inflationary pressures in 2006 and 2007, the efforts apparently have not significantly slowed economic growth. The United Nations Economic and Social Survey of Asia and the Pacific project India’s economy would grow by 9.0% in 2007, down only 0.2% from its 2006 growth rate.41 In 2007, the International Monetary Fund (IMF) projected India’s GDP would grow by 8.4% in 2007 and 7.8% in 2008.42 IMF recommendations on how to reduce the risk of the 40 Ministry of Statistics, Government of India. 41 United Nations Economic and Social Commission for Asia and the Pacific, Economic and Social Survey of Asia and the Pacific 2007, April 2007, p. 4. 42 International Monetary Fund, World Economic Outlook 2007, chapter 1, p. 2. Congressional Research Service 20 India-U.S. Economic and Trade Relations economy overheating focus on lowering the public debt (currently about 80% of GDP), continuing to reduce the general government deficit, and promoting greater job growth. 43 Where the anti-inflationary efforts of the RBI may have affected the economy is India’s exports.44 According to some economists, the higher interest rates have contributed to a significant appreciation of the rupee against the U.S. dollar and the Euro. The stronger rupee, these analysts maintain, is making India’s exports less competitive. As will be discussed later in this report, the strength of the rupee is supposedly hitting India’s jewelry and clothing exports especially hard. India’s Current Economic and Trade Policies The UPA coalition came into office promising sustained economic growth “in a manner that generates employment.” It set out to enact guaranteed employment (for minimum 100-day periods), and major public investment in social programs and in the agricultural and rural sectors. The UPA also vowed to give a high priority to the development of physical infrastructure such as roads, ports, power, railways, water supply, sewage treatment, and sanitation, even offering “explicit” subsidies to bring private sector participation in this area. Economic reforms were to be continued, but with a “human face”: The UPA reiterates its abiding commitment to economic reforms with a human face, that stimulates growth, investment, and employment. Further reforms are needed and will be carried out in agriculture, industry, and services. The UPA’s economic reforms will be oriented primarily to spreading and deepening rural prosperity, to significantly improving the quality of public systems and delivery of public services, to bringing about a visible and tangible difference in the quality of life of ordinary citizens of our country.45 The UPA economic priorities were largely welcomed by analysts calling for India to “get over its obsession” with GDP growth and FDI so as to better attend to the needs of common citizens, especially those in the rural, agricultural economies. These observers warn that a single-minded focus on economic expansion facilitates significant damage to the environment and to human health, as well as encouraging corruption. 46 The UPA economic program also addresses many of the economic challenges listed in a July 2006 World Bank report. According to the World Bank, India’s most pressing economic issues are: • improving the delivery of core public services such as healthcare, education, and power and water supply for all India’s citizens; • making growth more inclusive by diminishing existing disparities, accelerating agricultural growth, improving the job market, and helping lagging states grow faster; 43 “Booming India at Risk of Overheating,” IMF Survey, April 11, 2007, p.s 96-97. For more details on the impact of appreciating rupee and India’s exports, see “The Rising,” by Shankkar Aiyar, India Today, June 4, 2007. 45 See the UPA’s May 2004 Common Minimum Program at http://pmindia.nic.in/cmp.pdf. 46 See, for example, Prashant Bhushan, “Get Over the GDP-FDI Obsession,” Outlook (Delhi), January 5, 2006. 44 Congressional Research Service 21 India-U.S. Economic and Trade Relations • sustaining growth by addressing its fiscal and trade deficits, and pushing ahead with reforms that facilitate growth; and • addressing HIV/AIDS before the epidemic spreads to the general public.47 Economic Policies of the UPA Government Prime Minister Singh took office in 2004 insisting that development would be a central priority of the UPA government, with reforms aimed at reducing poverty and increasing employment. He also emphasized that privatization was not part of UPA ideology and that major public sector concerns would not be sold off. The appointment of Harvard-educated lawyer and economic reformer Palaniappan Chidambaram to head the Finance Ministry, and a UPA Common Minimum Program emphasizing economic growth and increased investment, were welcomed by most business interests, even if the pace of privatization and labor reform efforts was expected to slow. In brief, from the start, the Singh government has attempted to walk a tightrope of economic policies designed to maintain its informal coalition government. Any sharp shift, either to the left or the right, might bring about sufficient political opposition from coalition members to destabilize the government. As a result, economic policies over the last three years have been characterized as being modest in scope and uneven in implementation. Eighteen months after taking power, for example, the UPA government was coming under fire for not pushing through a single major economic reform initiative.48 Many analysts have attributed the government’s sidelining of reform initiatives to the influence of the Left Front, yet resistance to economic reform may run deep among a broader spectrum of ordinary Indians, many of whom are distrustful of the motives of an oftentimes corrupt political class.49 This pattern of fitful gradualism is demonstrable by reviewing the key areas where the Singh government has attempted to make substantive changes in the Indian economy. UPA Budgets Because India’s government continues to be a major economic force even after the economic reforms of the 1990s, the federal budget is an important indicator of government priorities. In FY2006/2007, the federal expenditures were 11.2% of GDP, and the fiscal deficit was 3.8% of GDP. By comparison, U.S. government expenditures for FY2006/2007 were 19.9% of GDP, and the fiscal deficit was 1.3% of GDP.50 The UPA’s first budget, released in July 2004, generally was lauded by Indian industrial groups as “progressive and forward-looking.”51 Subsequent budgets were similarly greeted by business 47 http://siteresources.worldbank.org/SOUTHASIAEXT/Resources/DPR_overview.pdf. 48 Clay Chandler, “India’s Bumpy Ride,” Fortune, October 31, 2005; N. Chandra Mohan, “The Anti-Reform Mindset,” Outlook (Delhi), November 10, 2005. 49 Anjana Pasricha, “India’s Communist Parties Slow Pace of Economic Reform,” VOA News, June 18, 2006; Pranab Bardhan, “Why Is Reform Unpopular?,” Outlook (Delhi), October 6, 2006. 50 Congressional Budget Office figures. 51 “Reformers Take Control,” Far Eastern Economic Review (Hong Kong), June 3, 2004; “CII Applauds UPA’s Maiden Budget,” Confederation of Indian Industry Press Release, New Delhi, July 8, 2004. Congressional Research Service 22 India-U.S. Economic and Trade Relations interests, even as the prime minister and finance minister were seen to be tempering some of their more reformist instincts with heavy social and anti-poverty spending. 52 India’s federal budget for FY2007/2008 is an apparent response to the criticisms of economic reforms from both ends of the political spectrum. In part, the budget continues the past program of liberalization, while also giving greater attention to the agricultural sector and efforts to provide more assistance to India’s poor. Such efforts are still viewed by the Left Front as being insufficient; this faction accuses the Singh government of prioritizing expenditure reduction over services for the poor. Meanwhile, opposition BJP leaders have criticized UPA budgets for slowing or even abandoning economic reform programs.53 One of the more difficult components of the government’s budget is its efforts on poverty reduction. In August 2005, the lower house of India’s Parliament passed a $9 billion jobs bill promising guaranteed work for up to 25 million of India’s poorer citizens. Some critics called the initiative the kind of “socialism” that diverts scarce resources to efforts that have failed in the past, with most funding being lost to administrative costs and corruption. Yet the World Bank supported the policy, predicting it would help sustain growth.54 Having rebuffed the previous critics, in February 2006 the Singh government formally launched the country’s most ambitious anti-poverty initiative that would provide guaranteed jobs for one member of each of India’s 60 million rural households. Another chronic budgetary problem is balancing needs with resources. As described below, India has seriously underinvested in infrastructure for decades. However, a culture of tax evasion limits funds for public services. One report has only 30 million Indians paying any taxes and only 15% of federal government revenue coming from tax collection.55 Privatization India continues to retain remnants of its pre-reform “democratic socialist” economy. Three strategic sectors of the economy—railroads, nuclear power, and military aircraft and warships— remain state monopolies and closed to the private sector. However, the Singh government is continuing the privatization policies of its predecessor, but at a more gradual pace. Within the government, the Department of Disinvestment of the Ministry of Finance oversees India’s privatization program. The privatization slowdown has not proven to be acceptable to elements of the UPA coalition. In July 2006, Prime Minister Singh announced that all government disinvestment decisions would be put on hold following opposition from the DMK party, a powerful Tamil Nadu-based member of the ruling coalition. The move was criticized by industrial groups. Barely a month later, the Singh government announced that it was abandoning plans to sell more than a dozen state-owned companies in what many analysts saw as a gesture to the Left Front parties which support the 52 Paranjoy Guha Thakurta, “Leftward Shift in Indian Economy,” BBC News, February 28, 2005; Paranjoy Guha Thakurta, “India’s ‘Left-of-Center’ Budget,” BBC News, February 28, 2007. 53 “Budget a Victim of Fiscal Fundamentalism: CPI-M,” Indo-Asian News Service, February 28, 2007; “Budget Weak on Reforms: Sinha,” Statesman (Delhi), March 5, 2006. 54 Anuj Chopra, “India Moves to Spread Wealth,” Christian Science Monitor, August 25, 2005; Paul Watson, “India Moves Toward Guaranteed Jobs Program for Rural Poor,” Los Angeles Times, August 25, 2005. 55 Sunil Jagtiani, “For Indians, the Tax Man Rarely Cometh,” Christian Science Monitor, March 8, 2006. Congressional Research Service 23 India-U.S. Economic and Trade Relations ruling coalition in New Delhi.56 However, the government appeared to be renewing its efforts in 2007 with a February decision to join a disinvestment process involving three publicly-owned power companies.57 Labor Reforms Domestic business interests and potential foreign investors complain that India’s labor laws are biased against employers and often prevent them from making high-risk investments. A culture of strict government oversight of the labor market is illustrated by the existence of 47 national laws and nearly 180 state-level laws meant to monitor its functioning. Work stoppages cause millions of lost human-days of labor each year and the country’s courts are clogged by hundreds of thousands of pending labor disputes. 58 In February 2005, Prime Minister Singh unveiled a blueprint for labor sector reforms. Singh later admitted that Indian labor laws were “rigid,” reportedly saying, “We cannot move straightforward to the Western or the American model of hire and fire, quite frankly. I don’t see that there is today a climate of opinion which will go to that extreme.”59 More than two years after it was announced, and despite the prime minister’s efforts to create a working consensus on the issue, the reform initiative has been effectively stalled by the UPA’s Left Front allies.60 Infrastructural Development The urgent need for extensive investment in India’s infrastructure is rarely questioned. The premiere report of the U.S.-India CEO Forum from March 2006 identified India’s poor infrastructure as one of two key impediments to increased bilateral trade and investment relations (the other being India’s dense bureaucracy).61 At a 2005 Economic Summit in New Delhi, Finance Minister Chidambaram acknowledged the problem, telling an audience of international business leaders and policy makers that India needs major investments in infrastructure such as roads, ports, and electricity generation. He asserted that a more liberal policy on bringing in foreign capital would be a key to this endeavor.62 Electricity shortages are especially acute and are widely believed to be seriously hindering the country’s economic potential.63 Reports indicate that massive flooding in Mumbai in the summer of 2005 further exposed what was called India’s economic “Achilles heel” (poor infrastructure). Another representative story describes the “utter chaos” common at New Delhi’s international airport and the deterrent effect this can have on foreign visitors.64 56 Saritha Rai, “In a Blow to Reform Plans, India Halts Privitizations,” New York Times, August 17, 2005. Jo Johnson, “Delhi’s U-Turn on Privatization Criticized,” Financial Times (London), July 7, 2006; “Disinvestment Back on Track,” Hindu (Chennai), February 9, 2007. 58 Rajesh Mahapatra, “India May Look Into Labor Law Changes,” Associated Press, July 6, 2006; Kaushik Basu, “Why India’s Labor Laws Are a Problem,” BBC News, May 15, 2006” “India: Need for Labor Reforms,” World Bank Press Release, February 26, 2007. 59 “Indian PM: Coalition Pressure Limiting Govt Reforms,” Dow Jones International News, August 25, 2005. 60 Henry Chu, “Rising Food Prices Hit Indians in Wallet, Politicians at Polls,” Los Angeles Times, March 10, 2007. 61 See http://planningcommission.nic.in/reports/genrep/USIndia.pdf. 62 Rajesh Mahapatra, “Finance Minister: India Must Be More Open,” Associated Press, November 27, 2005. 63 Somini Sengupta, “Electricity Crisis Hobbles an India Eager to Ascend,” New York Times, May 21, 2007. 64 Rajat Bhattavharya, “Can India Make Its Great Economic Leap Forward?,” Reuters, August 4, 2005; Muneeza (continued...) 57 Congressional Research Service 24 India-U.S. Economic and Trade Relations The Singh government is attempting to address decades of underinvestment in infrastructure, but financing problems continue to hinder this effort. New Delhi estimates that the country will need up to $350 billion in infrastructure investment over the next five years. Some of this funding may come from India’s record-high pool of foreign exchange reserves, and Indian officials hope that as much as one-quarter will come from foreign investors. Further reform in India’s financial sector may be key to raising capital for infrastructure projects.65 In FY2007/2008, the central government plans to spend more than $46 billion on infrastructure development. 66 According to the Indian Planning Commission’s Committee on Infrastructure (created in August 2004), current initiatives include a 15-year, multi-billion-dollar project to widen and pave 40,000 miles of national highways; a $5 billion plan to build a dedicated freight railway; extensive renovation of 276 seaports, including bringing 12 major ports up to “world-class standards”; the modernization and expansion of the New Delhi and Mumbai airports (which were privatized in 2006), along with other major airports such as those in Kolkata and Chennai; further expansion of telecommunication networks; and large-scale investment in new power plants.67 Some of these efforts are not without their opposition from well-entrenched stakeholders, however. 68 Special Economic Zones One of the more controversial elements of India’s recent economic reforms are the special economic zones (SEZs) across the country. Modeled in part after China’s SEZs, the goal was to develop new industrial areas near India’s rural population to create alternatives to agricultural employment. Firms operating in the SEZs are expected to be net foreign exchange earners. Investment may come from public or private companies; foreign companies may also operate in the SEZs. There are a number of tax, tariff, and regulatory incentives offered to companies that operate in the SEZs. At the time of this writing, a total of 234 SEZs have been approved by the Indian government. The most controversial aspect of the SEZ policy is the acquisition of land. Indian law grants the Indian states the power of eminent domain over land, with relatively little recourse for the land owner to appeal the compensation for appropriated land. In some cases, the land acquired for the SEZs was take from local farmers, rather than from fallow areas. Some farmers have complained about their displacement from the land, which they viewed as a source of economic stability and their primary store of wealth. (...continued) Naqvi, “Winter Chaos at New Delhi Airport Highlights India’s Infrastructure Woes,” Associated Press, January 3, 2007. A 2005 business magazine feature article called India “the global economy’s idiot savant” due to its ability to produce hundreds of thousands of well-educated engineers each year while still possessing a “chronically abysmal infrastructure” (Clay Chandler, “India’s Bumpy Ride,” Fortune, October 31, 2005). 65 Authors’ interview with Indian trade official, Washington, DC, May 25, 2007. 66 “Poor Infrastructure Hurting India’s Growth - Fin Min,” Dow Jones International News, May 8, 2007; Ben Klayman, “India Infrastructure May Need $80 Bln Foreign Funds,” Reuters, October 27, 2006; “India Boosts Infrastructure to Attract Foreign Investment,” Today (Singapore), March 1, 2007. 67 See http://infrastructure.gov.in. See also Surojit Gupta, “India Picks Up Infrastructure Pace, More Needed Analysts,” Reuters, November 13, 2006. 68 For example, recent efforts to clear slums in Mumbai and Bangalore were met with energetic and oftentimes successful resistance movements (John Larkin and Eric Bellman, “In India, the Path to Growth Hits Roadblock: Slums,” Wall Street Journal, March 17, 2006). Congressional Research Service 25 India-U.S. Economic and Trade Relations The SEZ policy has elicited energetic opposition from interest groups representing the political left and right, alike. Some critics says that building SEZs on fertile agricultural land will impoverish farmers without adequate compensation. Even INC chief Sonia Gandhi openly opposed exposing farmers to “unscrupulous developers.” Other opponents, including India’s finance minister, warn that the government will be denied billions of dollars in tax revenues lost due to special concessions offered to participating firms. In October 2006, the Left Front parties demanded extensive curbs on the SEZ initiative. 69 There have been a number of violent protests and deaths associated with the establishment of SEZs in India. In January 2007, at least seven people were killed during protests about the establishment of an SEZ in Nandigram, West Bengal. Reports implicate the local police and supporters of the ruling CPI-M Party in the deaths. Then, on March 14, at least 11 more protesters were killed in Nandigram, again during demonstrations against the SEZ. As a result of the continued protests and violence, the SEZ policy has been put on hold by Prime Minister Singh. India’s Trade Policies India’s trade policies have generally been coordinated with its overall economic policies. Prior to the economic reforms of the 1990s, India utilized a fairly comprehensive import licensing system to control the import of goods. The import of a number of products was banned and over 1,400 products faced quantitative restrictions. With the advent of the economic reforms, India started a gradual process of transforming its import control mechanisms from quantitative restrictions to a tariff-based system that favored the import of some types of products, but deterred the import of other types of products. In some cases, tariff rates were significantly raised when the import restrictions were lifted. A side effect of the change in trade policy was the rising importance of import tariffs for India’s federal budget. In fiscal year 1996/97, tariffs provided one third of India’s gross tax revenue.70 Over the last few years, India has been simplifying its import policies by lowering tariffs, reducing the variation in tariff rates, and eliminating import licensing requirements. The stated goal is to reduce tariffs towards levels found among Association of South East Asian Nations (ASEAN) members.71 However, while India has been lowering its various import barriers, it has become a leading nation in the filing of antidumping measures with the WTO. Following the passage of the 1995 amendment to its 1975 Customs Act, which established India’s antidumping and countervailing duty procedures, India began filing a large number of antidumping notifications. Between 1995 and 2001, India made 250 such notifications. As of June 30, 2006, India had 174 antidumping measures in force on products from 30 different WTO members, including 11 measures on U.S. products.72 69 Paranjoy Guha Thakurta, “Economic Zone Plans Polarize India,” BBC News, October 2, 2006; Jo Johnson, “Left Demands Put India’s SEZs in Doubt,” Financial Times (London), October 19, 2006. 70 “Trade Policy Review - India,” WTO Trade Policy Review Body, May 22, 2002, p. 31. 71 Ibid, p. 25. 72 “Semi-Annual Report under Article 16.4 of the Agreement - India,” WTO Committee on Anti-Dumping Practices, November 27, 2006. Congressional Research Service 26 India-U.S. Economic and Trade Relations Tariff Rates and Enforcement India’s tariff system has long had a reputation of being complex and opaque. Besides having a comparatively high average tariff rate, India also had a more dispersed range of tariff rates, even among similar types of products.73 Moreover, India had many exemptions or exceptions to the standard “most favored nation” (MFN) tariff rate, making it difficult for foreign companies to determine the correct tariff rate for their exports. Finally, there were frequent reports of uneven enforcement of existing tariff laws, as well as claims of arbitrary evaluation of imported goods. Most of these perceived problems with India’s tariff system have improved with the lowering of its average tariff rate and the simplification of its tariff schedule. In fiscal year 1991/92, just before the start of its economic reforms, India’s average tariff rate was almost 130%.74 According to the WTO, in fiscal year 1997/98, India’s average tariff rate was 35.3%, with a peak rate of 260%, but by fiscal year 2001/2002, the average rate had declined to 32.3%, with a peak rate of 210%.75 By 2005, India’s average tariff rate was down to 19.5%.76 Along with the lowering of tariff rates, India also reduced the number of different tariff rates it charged. For fiscal year 2006/07, the tariff rate became 30% for most agricultural goods and 12.5% for most non-agricultural goods. However, the peak tariff rates for agricultural goods is 100% and for non-agricultural goods is 182%. Two product categories that remain exceptions to India’s tariff reduction and simplification are textiles and clothing. Prior to the elimination of import licenses for textile and clothing imports in April 2001, India introduced specific duties for a range of fabrics and apparel. These duties generally involved the imposition of the higher of two tariffs—one calculated on a percentage basis; the other calculated by a fixed amount per kilogram or square meter. According to one estimate, depending on the unit price of the imported textile or garment, the implicit tariff rate could be as high as 63%.77 In fiscal year 2006/07, many products in HS chapters 50 to 63 still face this two-track duty system. Import Restrictions Although most of India’s import restrictions have been lifted, there remain a small set of goods that are either prohibited, controlled or monitored. Import bans are either due to existing international obligations (for example, the international ban on trade in ivory) or on health and safety concerns. In March 2007, India banned the import of live poultry, pigs, and pig meat products from countries with bird flu outbreaks.78 India also controls the import of some products by means of stringent regulations.79 Finally, India regulates imports by means of monitoring 73 For this report, the average tariff rate is the simple, unweighted average of the tariff rates. “India & Bangladesh: Bilateral Trade,” The World Bank, December 2006, p. 10. 75 “Trade Policy Review - India,” WTO Trade Policy Review Body, May 22, 2002, p. 31. 76 “2007 Trade Policy Agenda and 2006 Annual Report,” Chapter II - World Trade Organization, p. 7. 77 “India & Bangladesh: Bilateral Trade,” The World Bank, December 2006, p. 13. 78 “Government Bans Live Poultry from Bird Flu-hit Nations,” Reuters (India), March 13, 2007. 79 For example imported second-hand automobiles must meet the following conditions: 1. Be no more than three years old; 2. Comply with India’s Motor Vehicle Act of 1988; 3. Have right-hand controls and steering; 4. Register speed in kilometers per hour; 5. Be certified “road-worthy” for at least five years after import; and 6. pass an safety and emissions inspection. Even when the vehicle is approved for import, it can only enter via specific ports. 74 Congressional Research Service 27 India-U.S. Economic and Trade Relations import flows. Among these items are: milk products, fruits, nuts, coffee, tea, spices, cereals, oilseeds, edible oils, alcoholic products, silk, and toys. U.S. Trade Barrier Assessment In its 2007 report on foreign trade barriers, the United States expressed concern about several other aspects of India’s trade policy beyond its tariff rates and import restrictions.80 According to the report, India provides trade-distorting subsidies for di-ammonium phosphate (DAP) fertilizer. Also, the report is critical of Indian Customs for the “extensive documentation” it requires, as well as its apparent application of “discretionary customs valuation criteria to import transactions.” In addition, the United States is concerned about India’s standards and certification requirements, especially as they pertain to sanitary and phytosanitary measures. In some cases, the United States believes that the scientific basis of the standards is questionable; in other cases, it sees the certification requirement as forming a non-tariff trade barrier. India-U.S. Economic and Trade Relations Economic and trade relations between the United States and India have been problematic in the past, but are currently considered comparatively cordial. U.S. policymakers often identify in the Indian political system shared core values, and this has facilitated increasingly friendly relations between the U.S. and Indian governments. In addition, the trade and investment reforms implemented by India over the last 15 years have generally fostered improved trade relations. Indian officials opine that the two national economies present “complimentary business interests rather than a standard developed-developing relationship.”81 However, the improvement in trade relations has been punctuated by episodic problems, generally based on political—rather than economic—differences of opinion. A major divergence came on May 13, 1998, when the United States imposed trade sanctions on India in response to its nuclear weapons tests. Trends in Merchandise Trade Regardless of which nation’s trade statistics are considered, the value of merchandise trade between India and the United States has picked up dramatically over the last 20 years. In 1986, according to U.S. trade statistics, the total value of bilateral trade with India was $4.0 billion. By 2006, the total value of bilateral trade had risen to $31.9 billion—nearly an eight-fold increase. However, despite the rapid growth in the value of trade, the relative importance of the other nation to its total trade declined markedly in the late 1960s—a decline from which it has not recovered. India’s Merchandise Trade with the United States Figure 6 shows the value of India’s exports to and imports from the United States from 1958 to 2006, according to data reported by the Indian government to the International Monetary Fund (IMF). The graph shows that both India’s exports to and imports from the United States were 80 81 U.S. Trade Representative, “2007 National Trade Estimate Report on Foreign Trade Barriers,” March 31, 2007. Authors’ interview with Indian trade official, Washington, DC, May 25, 2007. Congressional Research Service 28 India-U.S. Economic and Trade Relations relatively low in value and subject to fluctuations from 1958 to about 20 years ago. However, since the mid-1980s, U.S. imports from India have steadily increased in value while India’s exports to the United States have shot up dramatically. Despite the recent strong growth in trade flows in both directions, the relative importance of the U.S. for India’s imports has actually declined over the last 40 years, while its share of India’s exports has rebounded (see Figure 7). In the mid-1960s, nearly one-fifth of India’s exports went to the United States, and the United States supplied India with over one-third of its imports. In 1981, the United States had declined in importance, purchasing just over 11% of India’s exports and supplying less than 10% of its imports. In 2006, the United States purchased 17.4% of India’s exports—almost the same percentage as in 1961—but only provided India with 5.9% of its imports. As a result, the United States was India’s largest export market in 2006, and its third largest source of imports. Figure 6. India’s Merchandise Trade with the United States, 1958-2006 (U.S. $ Billions) 25 20 15 10 5 India's Exports to U.S. 2006 2003 2000 1997 1994 1991 1988 1985 1982 1979 1976 1973 1970 1967 1964 1961 1958 0 India's Imports from U.S. Source: Direction of Trade Yearbook, International Monetary Fund, various years. Congressional Research Service 29 India-U.S. Economic and Trade Relations Figure 7. U.S. Share of India’s Merchandise Trade, 1958-2006 50% 40% 30% 20% 10% U.S. Share of India's Exports 2006 2003 2000 1997 1994 1991 1988 1985 1982 1979 1976 1973 1970 1967 1964 1961 1958 0% U.S. Share of India's Imports Source: Direction of Trade Yearbook, International Monetary Fund, various years. U.S. Merchandise Trade with India An examination of U.S. statistics for bilateral trade with India reveals a similar pattern as India’s data. Figure 8 shows official U.S. trade statistics for the same time period as Figure 6. In value terms, U.S. exports to India and India’s exports to the United States are comparatively low in value and flat until the mid-1980s. After a significant increase in the 1980s, U.S. imports from India rise rapidly starting in the early 1990s. U.S. exports to India also pick up in value starting in the early 1990s, but not at the same pace as imports from India. Congressional Research Service 30 India-U.S. Economic and Trade Relations Figure 8. U.S. Merchandise Trade with India, 1958-2006(U.S. $ Billions) 25 20 15 10 5 U.S. Exports to India 2006 2003 2000 1997 1994 1991 1988 1985 1982 1979 1976 1973 1970 1967 1964 1961 1958 0 U.S. Imports from India Source: Direction of Trade Yearbook, International Monetary Fund, various years. The role of India in U.S. merchandise trade flows has undergone a similar, but less dramatic, change as was seen for the importance of the United States for India’s trade (see Figure 9). In the mid-1960s, India provided the United States with about 3% of its imports and purchased about 1.5% of its exports. Both of these percentages slid to under 1% in the 1970s. Since then, India’s importance as a supplier of U.S. imports has risen slightly and slowly to 1.2% while India’s share of U.S. exports has increased modestly to 1.0% after falling to 0.4% in the early 1990s. As a result, India was the 21st largest export market for the United States in 2006 and its 18th largest supplier of imports. Congressional Research Service 31 India-U.S. Economic and Trade Relations Figure 9. India’s Share of U.S. Merchandise Trade, 1958-2006 4% 3% 2% 1% India's Share of U.S. Exports 2006 2003 2000 1997 1994 1991 1988 1985 1982 1979 1976 1973 1970 1967 1964 1961 1958 0% India's Share of U.S. Imports Source: Direction of Trade Yearbook, International Monetary Fund, various years. Top Traded Commodities There are some differences between official U.S. and Indian trade data on what the top traded commodities are between the two countries. In some cases, the difference is only in the value and ranking of the leading traded goods. However, in other cases, there are significant differences in the value of goods exchanged, leading to differences in the top traded items. Table 4 lists the top five commodities imported and exported according to U.S. and India trade statistics in 2006. Table 4.Top Five Traded Commodities: U.S.-Indian Bilateral Merchandise Trade, 2006 (U.S. $ Billions) Rank Exports (HS Code) Imports (HS Code) U.S. Data First Machinery (84) 1.671 Jewelry (71) 5.866 Second Aircraft (88) 1.623 Woven Apparel (62) 2.079 Third Electrical Machinery (85) 1.091 Electrical Machinery (85) 1.245 Fourth Jewelry (71) 0.924 Knitted Apparel (61) 1.163 Fifth Optical & Medical Equipment (90) 0.688 Misc. Textile Articles (63) 1.105 Congressional Research Service 32 India-U.S. Economic and Trade Relations Rank Exports (HS Code) Imports (HS Code) Indian Data First Jewelry (71) 4.760 Machinery (84) 1.814 Second Woven Apparel (62) 1.839 Electrical Machinery (85) 1.254 Third Knitted Apparel (61) 1.098 Optical & Medical Instruments (90) 0.764 Fourth Misc. Textile Articles (63) 1.014 Fertilizers (31) 0.685 Fifth Machinery (84) 0.940 Aircraft (88) 0.625 Source: Global Trade Atlas; HS chapter numbers in parentheses. The United States and India agree that the top U.S. exports to India in 2006 included machinery, electrical machinery, optical & medical instruments, and aircraft, but disagree on the value of those exports and their relative ranking. Similarly, both nations report that the top Indian exports to the United States in 2006 included jewelry, woven apparel, knitted apparel, and miscellaneous textile articles. There are differences between the two countries over the last commodity in their respective top five exports to each other. U.S. data indicates that missing commodity category for top five exports to India is jewelry, but Indian data says it is fertilizer. Similarly, Indian trade authorities list machinery as its fifth largest export to the United States, but U.S. trade figures place electrical machinery as the country’s third largest import from India. Emerging Competition from China While there are minor differences in the trade figures for bilateral U.S.-India merchandise trade, both nations recognize that China is a rising competitor to the United States.82 According to India’s trade statistics, China became India’s leading source of imports in 2004, displacing the United States (see Figure 10). In 2000, U.S. exports to India were worth nearly $2.9 billion— nearly twice the value of China’s exports to India. By 2004, China’s exports to India totaled $6.0 billion, and U.S. exports to India were $5.7 billion. In 2006, U.S. exports to India totaled $9.9 billion, but China’s exports to India had risen to $15.6 billion. The United States remains India’s leading trading partner on the strength of India’s exports to the United States. The value of such exports more than doubled from $9.3 billion in 2000 to $18.7 billion in 2005. Over the same time period, India’s exports to China increased from $0.7 billion to $7.8 billion—a more than 10-fold increase. As a result, India’s total trade with the United States rose from $12.2 billion in 2000 to $28.6 billion in 2006, while its total trade with China jumped from $2.2 billion to $23.3 billion. 82 For example, the U.S. International Trade Commission published a report in September 2006, “U.S.-China Competition in the Indian Market,” by William Greene, Office of Economics Working Paper No. 2006-09-A. Congressional Research Service 33 India-U.S. Economic and Trade Relations Figure 10. India’s Trade with the United States and China, 2000-2006 20 US$ Billions 15 10 5 0 2000 Imports from U.S. 2001 2002 Imports from China 2003 2004 Exports to U.S. 2005 2006 Exports to China Source: Global Trade Atlas. To summarize, from both the U.S. and Indian perspective, there has been a recent rapid increase in bilateral merchandise trade flows, with India’s exports to the United States our performing U.S. exports to India. However, despite the rise in the value of bilateral trade, the relative importance of the other country to the nation’s external trade volume has remained small and is well below levels seen in the decade immediately following India’s independence. Also, over the last five years, India’s trade with China has grown more rapidly than trade with the United States. As a result, China has already surpassed the United States as India’s leading source of imports, and may soon become India’s largest trading partner. Trade in Services According to the U.S. Bureau of Economic Analysis, bilateral trade in services in 2005 totaled just over $10 billion—about one-third the size of the nation’s merchandise trade with India (see Table 5). However, many analysts believe that bilateral trade in services has greater potential for rapid growth in the near future than merchandise trade. As a result, there is increased interest in service trade relations between the United States and India, including a proposal for a U.S.-India free trade agreement in services.83 In contrast to merchandise trade, bilateral service trade was nearly balanced in 2005, after a period of service trade surpluses for the United States. Between 2000 and 2005, bilateral services 83 “U.S.-India Free Trade Agreement in Services: An Analysis of Issues for Discussion,” by Dr. Jayanta Roy with Pritam Banerjee, Confederation of Indian Industry, July 2004. Congressional Research Service 34 India-U.S. Economic and Trade Relations trade increased 130%, compared to 90% growth in bilateral merchandise trade over the same five year span. Table 5. Indo-U.S.Trade in Services, 2000-2005 (US$ Billions) Year U.S. Exports U.S. Imports Total Trade Trade Balance 2000 2.539 1.898 4.437 640 2001 3.003 1.815 4.818 1.189 2002 3.255 1.809 5.064 1.445 2003 3.760 1.972 5.732 1.788 2004 4.461 2.889 7.350 1.572 2005 5.193 5.018 10.211 174 Source: U.S. Bureau of Economic Analysis. Trade in transportation services is a major component of the bilateral trade. In 2005, the United States exported about $1.5 billion worth of transportation services to India, and imported a nearly identical amount of such services from India. India and the United States also exchanged a large amount of professional services, with U.S. exports worth $462 million in 2005 and imports of $597 million. Foreign Direct Investment The recent growth in U.S. foreign direct investments (FDI) in India parallels the growth in bilateral trade. After steady, modest growth during the 1990s, U.S. investments in India rose dramatically between 2001 and 2005, according to official U.S. data (see Figure 11). Between 1990 and 2000, U.S. investments in India rose from $372 million to $2.4 billion—an increase of over $2 billion over 10 years. Over the next five years, U.S. FDI in India increased by over $6 billion to $8.5 billion. Over the 15 year period, the total value of U.S. FDI in India increased 22fold. Congressional Research Service 35 India-U.S. Economic and Trade Relations Figure 11. Growth in U.S. Investments in India, 1990-2005 10 US$ Billions 8 6 4 2 TOTAL Manufacturing Wholesale 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 0 Financial Source: U.S. Bureau of Economic Analysis Despite the rapid growth in U.S. investments in India, the nation remains a relatively small destination for overseas U.S. investors. As of 2005, less than one-half of one percent of U.S. direct investment overseas was located in India. U.S. investments in India are about half the size of its investments in China, less than a quarter of the size of U.S. investments in Hong Kong, and nearly a sixth the size of U.S. investments in Singapore. Overall, India ranked 31st in 2005 for locations for overseas U.S. direct investments. If the United States views India as a growing, but comparatively minor market for its overseas investments, the United States is an important source of foreign direct investment for India. According to India, the United States had $4.913 billion in investments in India as of December 2005, making the United States the second biggest investor in India and representing 16.1% of all foreign direct investment in India.84 There are, however, forces that may increase the importance of India for U.S. companies looking for overseas investment opportunities. With multinational firms anticipating increased labor costs and a growing labor shortage in China, India’s large, educated, English-speaking young workforce may become more appealing. Nearly two-thirds of the recent FDI in India went into the manufacturing rather than services sector.85 Meanwhile, Indian companies have in recent years been buying up overseas firms. An example of Indian company actively involved in overseas FDI is the Tata Group. In 2000, the Tata Group bought Britain’s Tetley Tea brand. In June 2006, a Tata subsidiary purchased Eight O’Clock 84 The largest source of FDI in India in 2005 was Mauritius. Keith Bradsher, “A Younger India is Flexing Its Industrial Brawn,” New York Times, September 1, 2006; Mark Sappenfield, “India’s Economy, Now With Muscle,” Christian Science Monitor, November 1, 2006. 85 Congressional Research Service 36 India-U.S. Economic and Trade Relations Coffee for $220 million, which has a majority share in the U.S. branded whole bean coffee market. 86 Then, in January 2007, Tata Steel took over Corus, a European steel company, for over $11 billion. 87 According to an IMF report, India’s overseas acquisitions for the first nine months of 2006 totaled over $7.2 billion.88 Bilateral and Multilateral Trade Relations Bilateral Agreements and Relations India and the United States have not signed either a bilateral trade agreement or bilateral investment treaty. Their bilateral trade relations are principally governed by the terms of their memberships in multilateral organizations, such as the World Trade Organization (WTO) and the International Monetary Fund (IMF). There are, however, four specific bilateral relationships that have affected or will likely affect trade relations between India and the United States. Civil Nuclear Cooperation89 India’s status as a non-signatory to the 1968 Nuclear Nonproliferation Treaty (NPT) has kept it from accessing most nuclear-related materials and fuels on the international market for more than three decades. New Delhi’s 1974 “peaceful nuclear explosion” spurred the U.S.-led creation of the Nuclear Suppliers Group (NSG)—an international export control regime for nuclear-related trade—and the U.S. government further tightened its own export laws with the Nuclear Nonproliferation Act of 1978. In a major policy shift, the July 2005 U.S.-India Joint Statement asserted that, “as a responsible state with advanced nuclear technology, India should acquire the same benefits and advantages as other such states,” and President Bush vowed to work on achieving “full civilian nuclear energy cooperation with India.”90 As a reversal of three decades of U.S. nonproliferation policy, such proposed cooperation stirred controversy and required changes in both U.S. law and in NSG guidelines. India reciprocally agreed to take its own steps, including moving 14 of its 22 nuclear reactors into permanent international oversight by the year 2014 and placing all future civilian reactors under permanent safeguards. After many months of deliberation and multiple hearings involving Administration and nongovernmental experts, the 109th Congress passed enabling legislation near the end of its term. President Bush signed the Henry J. Hyde United States-India Peaceful Atomic Energy Cooperation Act of 2006 (or “Hyde Act”) into law in December 2006 (P.L. 109-401). The final bill language made significant procedural changes to the Administration’s original legislative proposal, changes that sought to retain congressional oversight of the negotiation process, in part by requiring the Administration to gain future congressional approval of a completed peaceful nuclear cooperation agreement with India (this is often referred to as a “123 Agreement,” as it is 86 Anjana Pasricha, “India Companies Expand Overseas,” VOA News, April 2, 2006; “India’s Tata Coffee to Buy US Firm for $220 Mln,” Reuters, June 25, 2006. 87 Alam Srinivas, “Corus Takeover: Who is Ratan Tata?” BBC News, January 31, 2007. 88 “IMF Country Report No. 07/63,” February 2007, p. 9. 89 See also CRS Report RL33016, U.S. Nuclear Cooperation with India: Issues for Congress, by (name redacted). [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/crs%3ARL34161. Public record. Not legal advice.