The otherwise warm India-United States relations suffered a few hiccups as Donald Trump became the American president mid-way into the previous tenure of Prime Minister Narendra Modi in India. One of the issues was oil import from Iran and the other was the US seeking trade parity with India (among some other countries), until today when the Treasury Department removed the name of this country, along with Switzerland, from its currency monitoring list. Concerned that India was intentionally undervaluing its currency by selling the rupee to drive down its value, making its exports cheaper and more competitive, the US had placed this country on the list in May 2018. The Americans held that Switzerland, China, Japan, South Korea, Germany, Italy, Ireland, Singapore, Malaysia and Vietnam were doing the same. Interestingly, while India, the US says, has met only one of the three criteria, a significant bilateral surplus, for two consecutive reports, it still got a lenient treatment from the Trump administration just like Switzerland did. India is more than reserve adequate, the IMF said, leading to this decision of the US. On the other hand, neither Switzerland nor India met the criteria of persistent, one-sided intervention. The October 2018 report had, of course, indicated that the US Treasury was preparing to remove India from the list of currency ‘manipulators’ when it noted that the Reserve Bank’s net sales of foreign exchange over the first six months of 2018 led net purchases over the four quarters through June 2018 to fall to $ 4 billion, or 0.2% of the GDP.
Clearly, the issue is less technical than what the US is officially making it out to be. Since some of the items on the American export list do not matter much in the Indian market — Harley Davidson motorcycles, for example — the Modi government is learnt to have assured the Trump administration that high import tariffs that apply otherwise to goods from some other countries could be waived off without inviting the ire of protectionist activists in India. Commerce between the two countries was affected last year when Washington slapped a uniform tariff of 25% and 10% on all steel and aluminium imports while India announced retaliatory measures and complained to the World Trade Organisation. Trump, in the meantime, made an interesting observation that the Indian tariffs were high because the US never requested India to lower them in the first place! Earlier in 2018, a report of the Hongkong and Shanghai Banking Corporation had advised policymakers in India to make firms focus more on their backyard and increase the share of trade with neighbouring economies even as the US is itself no less protectionist. A cheap Indian rupee, at the same time, was irritating the US as Indian products were flooding its market until the importers took countermeasures to block the floodgates. The only sufferers in this game are the consumers who are being deprived of the best of American goods in India and Indian goods in the US. Both the countries must hence draw closer for the larger section of the population in either democracy, which is not that of industrial sellers but ordinary buyers.
The geopolitical situation has contributed to the decision of the US Treasury Department, as Trump plans to take Modi and Japan’s Shinzo Abe along to corner China on the issue of right of passage through the Indo-Pacific region. This is an India-US-Japan axis getting formed to balance the regional heavyweight called China. While Modi aims at improving relations with Xi Jinping with a gesture reciprocal to Wuhan, the Indian prime minister wouldn’t mind a little nudge on the question of the South China Sea just like China maintains an irritant of India by coming in support of Pakistan at crucial junctures. As the US-China trade war rages on, Americans will start looking at a less volatile Indian market. Even the Chinese could hedge in an Indian subsidiary and transfer its skill of large-scale manufacturing. One way that the world will deal with the trade war is cap oil prices, which again will help India. Increasing Chinese interest will help sectors like mobile phones, other electronic gadgets, toys, etc. The US cutting off its supply of chips and processors to Huawei has already pushed Xi to a rare earths facility whose 17 chemicals have magnetic and optical properties useful in electronics. This could have positive implications for India as China could use this market as a manufacturing base to escape US sanctions even as the Americans move a percentage of its import requirements to India, too. India will then have to negotiate for greater access to the Chinese market along with lower tariffs and VAT. The US is likely also to move some of its manufacturing to India as its trade war with China refuses to end. If India can ward off dumping by both these countries — especially Chinese steel — we are entering a phase of unprecedented economic boom in India.
Foreign affairs, if not international commerce as well, has been one of the greatest achievements of the just concluded Modi government. While relations with all countries except Pakistan have improved, the management of bilateral relations with China from Doklam to Wuhan has been the most remarkable. While this must continue, the government must negotiate harder in matters of trade. India is fortunate at the moment that forces like the US are dealing with trade issues not based strictly on commercial considerations. The strategic leverage alone is but not a sustainable economic policy.