U.S.-India Insight: Surprise! India is a Trading Nation!
March 12, 2019On March 4, the Trump administration notified Congress of its plan to remove India from the list of beneficiary nations of a special trade preference program called the “Generalized System of Preferences (GSP).” India’s anti-trade moves that led to this action have once again emphasized the nation’s general reluctance to integrate its economy with the world. However, despite the Indian government’s antipathy towards trade, India’s economy is becoming fairly trade dependent. Among the world’s seven largest economies, India ranks right in the middle when measuring trade-to-GDP ratio—even ahead of China.
The Modi government has triggered a moderate reversal of India’s nascent moves toward global trade integration. In 2014, his government delayed implementation of the World Trade Organization’s Trade Facilitation Agreement to force a carve-out for India’s agriculture subsidies. Other anti-trade steps in recent years include withdrawal from pending trade deals, hefty customs duty increases, and import substitution rules.
But these policy steps have not deterred India’s progress in trade integration. Few would be surprised to know of India’s continued progress in expanding services trade. India’s information technology services market is a world leader, contributing to a total services trade of $325 billion in 2018, with a solid $76 billion surplus in this period. India’s goods trade also continues to grow, albeit unevenly. In 2018 India had $832 billion in total goods trade, though with a $184 billion trade deficit. Looking at goods and services combined, India’s trade equates to around 40 percent of the nation’s GDP.
And looking purely at goods trade, China has a higher trade-to-GDP ratio than India. But if we were to add services to the mix, the ranking flips—India has a higher trade intensity, 40 percent to 38 percent. In fact, India’s trade ratio also ranks higher than the United States and Japan, though trails Germany, the United Kingdom, and France among the world’s largest economies. Of course, China’s gross domestic product today is nearly five times higher than India, $12 trillion to $2.5 trillion, so the denominator makes a difference.
Even when stripping out services, and looking purely at goods trade, India is becoming more trade intensive. In 2017 India’s goods trade-to-GDP rate was 28.7 percent. This is a bit higher than the United States (20.4 percent) and Japan (28.1 percent), and not far behind China (33.6 percent).
Not long after the death of the founder of modern China, Mao Zedong, China began to open its economy. Most analysts pin the “opening year” at 1978, under the leadership of the nation’s new leader Deng Xiaoping. Economic reforms in the ensuing years have helped great one of the world’s top trading nations, and the world’s second-largest economy.
India’s decision to begin integrating its economy with the world began about 13 years after China. Driven by a major foreign currency crisis, India began unilaterally liberalizing its economy in 1991. Foreign investment was welcomed in a growing number of sectors, and customs duty rates were steadily reduced from triple-digit rates common in the pre-reform period, though we do see a bit of an uptick in trade barriers in recent years. During their initial growth phases, neither India or China focused on robust trade deals to integrate with the world, though China’s stance on trade agreements is evolving.
There is a widening gap between the perception and reality in terms of India’s progress on trade integration. The Indian government is regularly taking policy decisions that should cause self-isolation on trade. But irrespective of government choices, India appears to be on a growth path that is trade-oriented. In fact, India ranks in the exact middle among the world’s largest economies in terms of trade-to-GDP ratio.