Interview with Rajiv Biswas, APAC Chief Economist, IHS Markit
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Rajiv Biswas is the Asia Pacific Chief Economist for IHS Markit, here he discusses Indian exports, the relationship with the US and impact of the US China trade war on India.
Which industries are the greatest exporters from India (globally and in the US)?
India’s export structure is unusual compared to many other Asian industrial economies due to the high share of services sector exports, which accounted for around 38 per cent of total exports in the 2018-19 fiscal year. This is due to the importance of IT and Business Processing Outsourcing (IT-BPO) exports, which were estimated to have reached USD 137 billion in the 2018-19 fiscal year. India’s IT-BPO exports amounted to around 26 per cent of total Indian exports, making the IT-BPO sector by far the largest export sector for the Indian economy. India’s exports of goods reached USD 331 billion in 2018-19, or around 62 per cent of total exports. The largest goods exports are refined petroleum products, gems and precious metals, machinery, autos, chemicals and pharmaceuticals.
The US is India’s largest export market, accounting for around USD 83 billion of Indian exports in calendar 2018. The US is a key export market for Indian exports of services, which reached an estimated USD 29 billion in 2018. The US is a very important market for Indian exports of IT-BPO services, with many US multinationals having IT-BPO captive operations or using IT-BPO outsourcing services located in India.
What friction has there been between the US and India around trade practices in recent years?
Trade frictions between the US and India have escalated in the recent past, with a key concern for India being the Trump Administration’s decision in March 2019 to end India’s status as a beneficiary of the US Generalised System of Preferences (GSP), which gave preferential tariff access for Indian exports to the US. The US decision was made based on its assessment that India had not provided equitable and reasonable access for US products into the Indian market. Around 12 per cent of Indian exports of goods to the US have been impacted by the loss of GSP tariff preferences. Following the US implementation of the removal of GSP preferences for India in June 2019, India retaliated by hiking tariffs on 28 US exports, including several key US agricultural exports to India, such as almonds and apples. The US Administration’s decision in 2018 to impose higher tariffs on imports of steel and aluminium from many countries also hit India’s exports to the US, although Indian exports of steel and aluminium to the US prior to the tariff hikes was relatively modest in value, amounting to just over 1 per cent of total Indian exports to the US.
The US government and many US multinationals also have significant concerns about India’s draft e-commerce policy, with its potential data localization requirements and impact on cross-border data flows seen as discriminatory and distortive to trade. The US Administration also has concerns about the effectiveness of India’s intellectual property protection system. This has resulted in some policy discussions in the US about whether India should be the target of a Section 301 action as the US applied to China in 2018 to protect US intellectual property rights, which resulted in punitive US tariffs on a wide range of Chinese products.
Can India generally be considered to be becoming more or less protectionist?
Prior to 1991, India had a highly protected economy with very steep tariffs as well as restrictions on foreign direct investment into many sectors of Indian industry. Since that time, India has significantly lowered tariff barriers on a wide range of imports and has also substantially lowered barriers to foreign direct investment in a wide range of industry sectors. This has made the Indian economy far more globalized, with rapid growth of foreign direct investment into India over the past decade. Total annual FDI inflows into India are estimated to have reached USD 64 billion in the 2018-19 fiscal year, compared with just USD 4 billion in fiscal 2000-01.
Therefore recent Indian trade policy measures that have impacted adversely on trade flows need to be seen in the broader context of the far-reaching trade and investment liberalization process that has occurred over the past three decades in India.
How have tariff increases from the US impacted Indian exports and how do you see this developing?
Despite the upturn in bilateral trade frictions during 2019, total Indian merchandise exports to the US rose by 9.6 per cent year-on-year during the first seven months of 2019. Some evidence of trade diversion effects are evident, such as in the textiles sector, as US buyers switch their import orders away from mainland China towards other Asian manufacturing hubs such as India.
US-India trade relations may also be helped by bilateral trade negotiations underway to try to reach a trade deal that would restore India’s access to US GSP tariff preferences in exchange for greater US access to the Indian market. However, the trade negotiations are complex, covering a wide range of issues regarding trade protection in various industries, such as steel, aluminium, agricultural products, pharmaceuticals and e-commerce. Bilateral trade talks held on the wings of the UN General Assembly in New York in September 2019 did not reach any agreement, so the negotiations could be protracted into 2020.
What affect does the US China Trade War have on India and how might this progress? Are there opportunities for Indian exporters?
With China facing a combination of rapidly rising manufacturing wage costs as well as the impact of the US-China trade war through higher US tariffs, many multinationals are diversifying their global manufacturing supply chains towards other Asian manufacturing hubs. India may be able to benefit from this trend over the medium term, by attracting greater foreign investment into Indian manufacturing, particularly with global manufacturers increasingly focused on the rapidly growing Indian domestic consumer market. For example, Foxconn Technology Group has opened a factory near Chennai this year in order to assemble new model Apple iPhones, and already has two other facilities in India for assembly of Xiaomi and Nokia smartphones. Due to the escalating US tariffs on China, US buyers are also looking to source their supplies from other nations to avoid the high US tariffs on mainland Chinese products. Indian exporters will be potentially able to capture some trade diversion effects in a wide range of industry sectors, such as textiles, footwear, as well as electrical and electronics goods.
Interview conducted by Amy Wevill