U.S.-India Economic Ties: Opportunity through Crisis
May 13, 2020
Leading up to the Covid-19 crisis, the Indian economy and U.S.-India economic relations were on a downward spiral. India’s growth rate was dropping, trade protectionism on both sides was causing friction, and real goods trade plummeted in the latter half of 2019. The Covid-19 crisis may cause both sides to take additional shortsighted steps on trade. But our respective leaders should take the time to see what we have learned about what is going right with our economic relationship, see the new opportunities for positive cooperation, and take steps to protect economic linkages from further crises.
Starting in 2011, India enjoyed five consecutive years of accelerating economic growth, peaking at 8.17 percent growth in 2016. But this course reversed itself, and growth rate decelerated to less than 6 percent in 2019. The causes for this deceleration vary but typically include a range of issues such as the increased recognition of bad bank loans, deepening scrutiny of lending by non-banking financial corporations, “teething difficulties” with policy changes like the new Goods and Services Tax, and the 2016 “demonetization” experiment. Many analysts predicted a return to accelerated growth in 2020, though such predictions have tended to be amended downward in the last year.
During this period of decelerating growth, India’s economic reform program noticeably slowed. Per our own India Reforms Scorecard, the Indian government was not able to carry through a single significant reform during the last two years of its 2014-19 term and has only initiated one reform from our tracker for 2019-24—a tax cut that helps make India’s corporate tax rate competitive with other emerging Asian economies. Even before the slowdown, the government of Prime Minister Narendra Modi showed an inclination toward trade protectionism; these instincts have increased as India’s economy cooled.
India’s protectionism seemed initially to have little impact on actual U.S.-India goods trade flows. In the 12 months leading up to March 2019, U.S.-India annual goods trade total surpassed $90 billion for the first time. During the 2019 calendar year, U.S.-India goods trade hit $92 billion, up from $88 billion the year before, though this annual boost hides the fact that trade flows saw those gains in the first six months of the year. Bilateral trade contracted in the second half of the year. Protectionism and India’s slowdown were finally impacting trade flows. India’s protectionist policies made an appealing target for the Trump administration, and the United States took steps to penalize India—most notably through the revocation of India’s trade privileges under the Generalized System of Preferences program in mid-2019.
India reacted cautiously as the Covid-19 crisis began to spread across the globe. India had a handful of reported cases in late January and February. Only in March was widespread community infection apparent. On March 24, the government called for a mandatory national lockdown, among the strictest of any nation in the world at that time. Businesses were forced to quickly adapt to the new reality, if possible. Even businesses deemed “essential” by government agencies in New Delhi or various state capitals had to work through local enforcement issues. Like several other nations, India also looked to ensure adequate domestic supplies of health care material such as active pharmaceutical ingredients, ventilators, and masks through export restrictions. While India is not normally recognized as a major player in global trade, potential disruptions to global supply chains and concerns about business operations in the United States harmed by interruptions in India’s ability to provide essential information-technology-enabled services provided a reminder that U.S.-India commercial ties are deepening.
The United States and India will take away valuable lessons ahead of a possible second wave of Covid-19 later this year, or the next pandemic. We have the start of a new, more positive workstream that could help protect important areas of commercial engagement during other periods of potential disruption:
- Defining essential services: Different Indian states had different definitions of “essential services.” And gaps can emerge between what the United States and India consider essential. This is important as it could cause disruptions in global supply chains. Complementary definitions may not be entirely feasible but ensuring we have defined processes for resolving such issues—and ensuring trade in related goods and services—will be important.
- Data controls: India is considering data controls under the Personal Data Protection Bill. This legislation as currently drafted could impair cross-border data traffic—even when that data is not for Indian nationals. But rolling international lockdowns due to Covid-19 highlight the importance of redundancies across multiple geographies. These redundancies can only be possible with reasonable rules around data flows.
- Workplace security: Along with flexible rules around data controls, companies themselves must ensure the security of a workplace so that critical data is safe. With Covid-19 we see technology services firms shift to “work at home.” At the very least, work from home entails less physical security and likely reduced cybersecurity in many cases. Even as various types of cybercrime “quadrupled,” according to the FBI, the United States and India continue to have a shared interest in combating cybercrime while also allowing leniency for contingencies, such as working from home.
- Smart infrastructure: Concerns about failing electric power and telecommunications grids have not come to pass during the Covid-19 crisis. However, this very real concern, paired with likely stimulus packages focused on public works projects, should open the door for some important conversations about “building back better”—how to create infrastructure that can sustain itself with minimal human intervention, heal itself during outages, and more. This is an important conversation for our subnational leaders, where much of the trial and error has already occurred.
It is difficult to see positive opportunities during a crisis. But U.S.-India trade ties were headed in a very negative direction prior to the Covid-19 crisis. Protectionist sentiments on both sides were driving the narrative and policy changes despite the promise of a “trade deal” in recent months. But the pandemic has reminded us that our commercial relationship is deep and somewhat fragile to an emergency. Finding ways to shore up commercial ties so they can more easily sustain such a crisis can be a new, more positive workstream that will benefit companies and employees in both nations.
Richard Rossow is a senior adviser and holds the Wadhwani Chair in U.S.-India Policy Studies at the Center for Strategic and International Studies in Washington, D.C.
Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).
© 2020 by the Center for Strategic and International Studies. All rights reserved.