ISSUE: WHY TRADE WITH US MATTERS TO INDIA
In the backdrop of the global economic slowdown, where India’s global exports have fallen consistently, it is important for the country to diversify and strengthen bilateral relations with other markets.
It has set its sights on “large developed markets”, improved access to which would help its industry and services sectors. These include the US, which has, over the last two decades, become a crucial trading partner in terms of both goods and services.
In March 2017, soon after taking office following an election campaign focused on “making America great again”, Donald Trump ordered the “first-ever comprehensive review” of the trade deficits of the United States, and “all violations” of trade rules that harmed American workers. India was among the countries that exported more to the United States than it imported, and the latter was left with a trade deficit of over $21 billion in 2017-18.
While the US’s deficit with India is only a fraction of its deficit with China (over $340 billion in 2019), American officials have repeatedly targeted the “unfair” trade practices followed by India. These include the tariffs that India imposes, which the Trump administration feels are too high — and over which the President has personally called New Delhi out on several occasions.
India is a “tariff king” that imposes “tremendously high” import duties, President Donald Trump has complained repeatedly. He has cited the example of Harley-Davidson, the US motorcyclemaker. Even after India halved the duty on the bike to 50% in 2018, he has said the rate is “still unacceptable”.
Steel industry hit
In 2018, the US imposed additional tariffs of 25% on steel and 10% on aluminum imports from various countries, including India. While India’s government claims the impact is “limited”, they brought down the US share in India’s steel exports to 2.5% in 2018-19 from 3.3% in 2017-18. In March 2018, India challenged the US decision at the World Trade Organization (WTO). India held off on imposing retaliatory tariffs until the US struck again — by removing it from a scheme of preferential access to the American market.
GSP axe and response
In June 2019, the Trump administration decided to terminate India’s benefits under the Generalised System of Preferences (GSP) scheme, which provides preferential, duty-free access for over $6 billion worth of products exported from this country to the US. The decision followed a warning earlier that year, after negotiations on a potential trade agreement had broken down.
The US accused India of taking decisions over the previous few years that prevented “equitable and reasonable access” for Americans to its markets. These included a decision to slash maximum retail prices of life-saving cardiac stents and essential knee implants by 65%-80%, put tariffs on information and communication technology products, and demand that exporters of dairy products certify their produce was derived from animals not fed food containing internal organs.
India was the largest beneficiary of the US GSP programme. While duty-free benefits accrued to only around $200 million for the billions of dollars worth of exports, India is understood to have asked for restoration of these benefits in the ongoing trade negotiations. However, on February 10 this year, the USTR classified India as a “developed” country based on certain metrics. It is not clear whether the upgrade from “developing” will impact the restoration of benefits under the GSP scheme.
Removal from the GSP list amidst rising trade tensions prompted India to finally impose retaliatory tariffs on several American imports, including almonds, fresh apples, and phosphoric acid. This was a significant move — and the US approached the WTO against India.
India is one of the largest importers of almonds from the US, having imported fresh or dried shelled almonds worth $615.12 million in 2018-19. Imports from the US of fresh apples stood at $145.20 million, of phosphoric acid at $155.48 million, and of diagnostic reagents at nearly $145 million that year.
Farms, medical devices
The US has long demanded greater access for American agriculture and dairy products. For India, protecting its domestic agriculture and dairy interests was a major reason to walk out of the RCEP agreement.
Trade negotiations over the last one year have grappled with the issue of improved access for American medical devices firms to India. Commerce Minister Piyush Goyal even included the US ambassador, Kenneth Juster, in a discussion with government officials and multinational medical device firms on this.
India is working to finalise a proposal to move from caps on prices of medical devices to limiting the margins of those involved in the supply of the products. It is unclear whether this would mean the government might be willing to reconsider its earlier, widely publicised decision to slash, in the public interest, prices of stents and knee implants.
The health cess on imported medical devices announced in the Budget for 2020-21 too, may be seen as a negative for the American side, as the US is among the top three exporters of these categories of products to India.
While the United States is among India’s top trading partners for goods, India is its eighth largest. In comments on Wednesday, US President Donald Trump appeared to suggest that while no deal was imminent, work on a longer-term agreement was progressing well, and that his personal chemistry with Prime Minister Narendra Modi might help.
India’s trade surplus with the US came down to $16.9 billion in 2018-19, and the previous Commerce Minister, Suresh Prabhu, had said last year that the surplus could be reduced further through imports of products such as aircraft from American firms.
Experts feel that India and the US could begin with some “low-hanging fruit” to indicate their willingness for a deeper economic commitment. This includes the US reinstating India’s benefits under the GSP programme, and India doing away with duties on motorcycles.
ISSUE: RBI GOVERNMENT RELATIONS
Editorial highlights that with the new Governor Shaktikantha Das relations between the Government and RBI has improved.
When he took over the reins of the Reserve Bank of India, one of top priorities for new governor was to mend bridges between North Block and Mint Street.
WHY SUCH A MOVE WAS NEEDED?
Relations between the two deteriorated precipitously in the tenure of his predecessor, Urjit Patel. Patel’s abrupt departure, and the unfortunate events preceding it, had raised troubling questions over government interference in the working of the central bank and cast a shadow over its claims of independence and autonomy.
HOW RELATIONS IMPROVED UNDER DAS?
Das, a seasoned bureaucrat, has been quick to identify and address some of the contentious issues between the two. Under him, there has been a visible institutional recalibration on several issues.
The RBI has adopted a new capital framework, freeing up more funds that can be transferred as dividend to a cash-strapped government. It has now taken a less forceful approach towards resolving bad loans through the insolvency and bankruptcy process, and opted for greater regulatory forbearance for specific sectors.
It weighed in on the side of a looser monetary policy well before the extent of the current slowdown was apparent. But while all this has meant a more harmonious working relationship between the two, concerns over the central bank’s independence and autonomy remain.
Both parties should be mindful that public displays of differences help neither’s credibility. On its part, the Centre must respect the autonomy of institutions, and encourage their independence. At the same time, the central bank should be mindful of the impact of its moves on its perceived independence and autonomy. It must constantly seek, and safeguard, the right balance.
The inherent tension between the central bank and government is apparent in the current scenario. With growth sagging and inflation spiking, there is little the monetary policy committee can do, bound by a framework which gives priority to price stability.
Das, who has placed a higher premium on arresting the economic slowdown, has responded by adopting unconventional tools to push down yields. While this may work in the current scenario, it exposes the conflict between the RBI’s monetary policy and debt management objectives. In the interview, Das said that the RBI is reviewing this monetary policy framework.
Credibility of the central bank in controlling inflation takes years to build. Any attempt to alter the basic premise of this framework, therefore, must be carefully thought through.