India, US aiming for cooperation on economic issues

Sushma Ramachandran

Senior Financial Journalist

THE economic ties between India and the US have come a long way. The situation has transformed from the era of US Public Law 480 in the 1950s when surplus foodgrains were sent to feed the population of the newly independent republic, to the present day when India is being feted as an emerging global economic power. Millennials will not remember that there was a full-fledged India Supply Mission in Washington DC to coordinate the flow of foodgrains against rupee payment. In contrast, my memories are vivid as my father, a government supply department representative, was posted in the Mission to help in the purchase of goods under PL480.

This situation did not recur as the Green Revolution in the 1960s helmed by agricultural scientist Norman Borlaug heralded the entry of high-yielding varieties of wheat and rice. These permanently solved the problem of feeding the nation though they may have thrown up other long-term farm problems, which are being dealt with even now. The problem of foodgrain availability became a distant memory while inventories of wheat and rice mounted relentlessly over the years.

In the 21st century, the entire gamut of India-US economic relations has undergone a transformation. The US is not only this country’s biggest trade partner, it is also the one with whom India has a surplus. Much unlike the situation with China where there is a gaping deficit. The fact that the US has displaced China in the quantum of bilateral trade — now estimated at about $128 billion in goods alone — is a sign of things to come as the two countries are trying harder than ever before to improve market access to each other.

At the same time, trade ties cannot be described as smooth, given the fact that tariffs were raised by the Trump administration on a wide range of steel and aluminium goods. It also removed India from the list of countries entitled to concessional tariffs under the long-standing Generalised System of Preferences (GSP), meant to aid developing countries. The Biden administration is clearly not interested in reversing these higher tariffs. The irritants could have been ironed out by entering into a free trade pact, but there is no interest even about this issue. Positive noises had been made in this direction by the previous Trump regime, yet nothing was formalised. It is no consolation that the US has similarly disappointed the post-Brexit UK government, which was equally eager to conclude a bilateral trade agreement.

As far as investment flows are concerned, things are on a different footing. The high-profile entry of Apple into the retail segment in this country, and sizable investments being made by its Taiwanese collaborators — Foxconn and Pegatron — in Karnataka and Tamil Nadu, have brightened the prospects of more American companies shifting here from China. This has come as a welcome development since the wide swathe of corporates adopting the ‘China plus one’ policy did not put India at the top of the list as an investment destination. Vietnam and Indonesia, even now, are seen as countries with easier business climates. But the well-publicised Apple move has definitely tilted the scales to some extent for those looking to spread their risks rather than concentrating only on China.

While Apple’s projects have already pushed up mobile exports from this country to record levels, another critical dimension has been added to US investments by the collaborations proposed on the semiconductor front. These emerged from the Quad summit talks in 2021 when four countries — India, the US, Japan and Australia — decided to cooperate in setting up a new semiconductor supply chain using expertise from each country. The outcome of those discussions has been an MOU between India and the US to set up a collaborative mechanism for the semiconductor chain. Obviously, the aim is to reduce the reliance on China, which is a chip manufacturing hub. The US has already barred export of advanced chips to that country. The tie-ups for production in India form part of the same effort.

The Gujarat-based Vedanta-Foxconn venture may be the most well-known semiconductor project, but several US companies are also in talks to set up fabs in this country. STMicroelectronics and IBM are also reported to be negotiating for a chip-making facility.

So, clearly the two countries are actively seeking economic engagement of a level not seen till now. One of the major reasons for the relative harmony despite several irritants is the perception on both sides that the reliance on China as a key link in global supply chains needs to be reduced as soon as possible. India saw the danger of putting its faith in imports from that country during the pandemic. The growing role of China’s Internet giants in funding this country’s unicorns has also been a matter of concern here. Along with increasing border incursions, this has made for a rising sense of uneasiness over the broadening of economic relations.

As for the US, the severe shortage of chips during the pandemic certainly sent up alarm signals and accelerated plans to set up alternative supply chains for this irreplaceable electronic component. The American industry is also wary of relying on China for all its needs after the zero-Covid policy led to repeated stringent lockdowns, impacting industrial output.

The US has even been unusually understanding about India’s need to import Russian oil, given its heavy import dependence for hydrocarbons. Apart from some initial sniping over this issue, it no longer appears to have reservations over the continuing purchases of the oil at discounted rates.

Prime Minister Narendra Modi’s visit to the US, thus, comes at a time when the two countries are trying to overcome their past differences on bilateral trade and investment issues. India has muted concerns over non-tariff barriers affecting exports as well as critical reviews of its intellectual property regime.

Similarly, the US has toned down previous criticism over India’s protectionist attitudes and the increasing oil imports from Russia. The fact is, these are large technology-driven economies and easier market access is beneficial for both sides. The icing on the cake is that a cooperative strategy could help the two countries achieve their long-term goal of reducing dependence on the global leviathan, China.

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