For decades, India was known more for its dire poverty and endemic disease than for prowess in high technology or the promise of an emerging consumer economy that has made it the “I” at the center of the bloc of BRIC nations.
But that was long ago. Bilateral U.S. trade with India totaled $62.6 billion in 2012, a 335 percent increase from $14.4 billion in 2000. Meanwhile, cumulative Indian investment in the U.S. recently reached $11 billion, helping to create 100,000 jobs in the U.S., according to the U.S.-India Business Council.
And yet this burgeoning bilateral relationship is coming under increasing pressure — not from a U.S. public critical of outsourcing to Indian service providers or from U.S. consumers disturbed by rising trade deficits with India, but from the U.S. business community itself.
When senior Indian officials including Finance Minister P. Chidambaram and Commerce Minister Anand Sharma traveled to Washington in July to woo U.S. corporate investors and discuss the country’s willingness to open talks on a bilateral investment treaty, executives from a variety of U.S.-based trade groups fired off a barrage of complaints about what they called India’s increasingly restrictive trade policies.
The extent of the troubled relationship only heightened last week, when Vice President Joe Biden visited India to pressure the government to improve investment conditions and remove barriers to U.S. products.
For Linda Dempsey, vice president of international economic affairs at the National Association of Manufacturers, the turning point came when India enacted its National Manufacturing Policy in October 2011. Initially embraced by the U.S. business community for its apparent market-opening appeal, the policy has defied U.S. expectations.
“During the last 18 months, there has been a concerted, broad-based (Indian) effort” to expand its manufacturing sector “at the expense of U.S. and other imports,” she said.
Rather than open its economy wide, India has adopted policies favoring its own companies in industries such as clean energy, technology and medical devices. India has imposed tariffs and local content requirements, and denied and revoked patents, Dempsey said. “We just do not believe that this is a responsible way to act,” she said. “This is a systematic and pretty blatant disregard of economic norms; it is pretty unprecedented.”
The largest retailers haven’t been immune to India’s sourcing requirements. Wal-Mart, which last year said it wanted to open its first supermarket in India within two years, told the government in July that it couldn’t meet requirements that it source 30 percent of its goods locally.
In many ways, India’s inward turn is reminiscent of China — the “C” in the BRIC bloc of emerging economies — but the two nations contrast greatly in makeup of their trade and infrastructure. While China has emerged as Asia’s manufacturing capital, and rapidly built the infrastructure to support it, India’s growth has centered around its services industry, and its transportation infrastructure has been painfully slow to develop.
And like China, India’s economic growth, the envy of much of the world over the last decade, is slowing — an ominous sign for trade and supply chain interests. After growing more than 11 percent in 2010, India’s GDP growth slowed to 7.7 percent in 2011 and 5 percent last year, its lowest rate of growth in a decade.
Worse, the country’s buying power is weakening, with the rupee hitting several record lows against the dollar in recent weeks. Although that could help propel the country’s exports, industrial production also is slowing.
For container shipping interests, that means U.S. imports from the Indian subcontinent could struggle to meet the 5 percent growth rate that JOC sister company PIERS expects for 2013. Containerized exports face a similar outlook, with forecasts for 5.3 percent growth this year after falling 2.3 percent in 2012.
To pressure India to reverse course, more than a dozen trade associations have established the Alliance for Fair Trade with India. They include the Telecommunications Industry Association, the Association of Electrical Equipment and Medical Imaging Manufacturers, the California Manufacturers & Technology Association, the Solar Energy Industries Association and the Association of Equipment Manufacturers. The diversity of industries “calling out” India for its trade practices is “pretty impressive,” Dempsey said.
The trade groups are focusing on three key sectors:
— Solar energy development: In 2010 India launched its Jawaharlal Nehru National Solar Mission, which requires developers of solar photovoltaic projects employing crystalline silicon technology to use solar modules manufactured in India. The country has since expanded the domestic sourcing requirement to crystalline silicon solar cells. The Indian government guarantees it will purchase a certain amount of solar power at a highly subsidized rate, provided the power supplier uses domestically made solar equipment.
The program has prompted the U.S. to initiate WTO dispute-settlement proceedings at the World Trade Organization. “While we applaud India’s National Solar Mission and its focus on growing a domestic solar manufacturing base, this program must also be consistent with India’s international trade obligations,” said Rhone Resch, president and CEO of the U.S.-based Solar Energy Industries Association. “Unfortunately, the National Solar Mission’s local content requirement unfairly discriminates against U.S. solar cell and module manufacturers.”
— Information technology: India’s “preferential market access” policy mandates 100 percent domestic Indian sourcing of “security sensitive” electronics and telecommunications products. In one of the biggest lost opportunities for foreign companies, India’s Department of Telecommunications has said 100 percent domestic sourcing is mandatory for the $3.9 billion National Optical Fiber Network project that will bring high-speed Internet connectivity to the country’s most remote rural areas.
— Pharmaceuticals: In April, the Indian Supreme Court denied a patent application for Glivec, a treatment for leukemia made by East Hanover, N.J.-based Novartis. Because there is no patent for Glivec in India, any generic drug manufacturer there can make and sell the drug, which will be priced at a far lower price than what Novartis charges in the rest of the world. Although Indian critics of Novartis pointed out that this would enable low-income Indians to take the drug, Novartis noted it already provides Glivec free of charge to about
95 percent of all Indians who need assistance through Novartis’s “Glivec International Patient Assistance Program.”
The Glivec situation is hardly unique. Generic drug makers in India also can produce cancer and diabetes drugs developed by Bayer, Merck, Roche and Pfizer.
“Because of the broad nature” of such complaints, “the trade associations have been in the lead” in pressuring the Obama administration to take action against India, Dempsey noted. In addition to a surge in recent private meetings with Indian officials and Biden’s visit last week, more than 200 U.S. congressional representatives have sent letters of complaint to Indian officials.
“These are tough problems, but they have to be negotiated and worked through to meet the potential of this relationship,” Biden, the first vice president to visit India in three decades, said during his visit. He noted that India’s “instinct to protect your industries is understandable. But we need to be candid with each other about the obstacles which exist when economies do business.”
The U.S. business groups stress that while they welcome India’s efforts to modernize its manufacturing, distribution and transportation, its top-down, restrictive approach isn’t the right way to attract U.S. and other foreign investors.
“There are many U.S. companies manufacturing in India, and they want to expand, but they want to do so based on market-based principles, including adequate infrastructure, business-friendly policies, and access to a skilled work force — all elements associated with a free-market economy,” said Ron Somers, president of the U.S.-India Business Council. A mandated approach will only drive job creators away.”
A former energy sector executive in India, Somers played a leading role in securing passage of the U.S.-India Nuclear Cooperation Approval and Non-Proliferation Enhancement Act in 2008, which allows India to purchase nuclear fuel and technology from the United States.
In the days following their U.S. visit, senior Indian officials hinted at softening some of their positions, such as delaying their preferential market access policy. Dempsey, however, said the comments were, by and large, “a great disappointment. They either said they had taken actions, or that there was no problem. This is not acceptable.”
Ajay Banga, president and CEO of MasterCard and chairman of the U.S.-India Business Council, said, “We want to broaden and deepen the economic and commercial ties between India and the United States. India has an opportunity to grow its pharmaceutical industry, foster innovation and create competition. It’s in everyone’s interest to find solutions with the private sector. But that prospect is jeopardized when IP is jeopardized.”
Policymakers in both countries, he added, should seriously consider a bilateral free trade agreement. When the U.S. and South Korea began their first discussions of a bilateral treaty between those two countries, Banga noted, such a pact “didn’t seem possible. But a U.S.-India free trade agreement could be equally or more important” than the U.S.-South Korea pact, which has helped boost bilateral trade between those two countries.
The USIBC, meanwhile, released a new publication, “Investing in America, How India Helps Create Jobs,” in July to demonstrate how the American economy is already benefiting from the growing bilateral and business relationships between the two countries.
For that relationship — and India’s economy — to return to the promising growth of years past, however, India will have to look outside its borders, rather than within. As E. Ashley Wills, a U.S. deputy chief of mission in New Delhi and assistant U.S. trade representative for South and Central Asia, said in a July 24 Wall Street Journal op-ed: “As far as India has come, it may fail to recognize its true economic potential if it doesn’t reform some of its protectionist policies.”
Contact Alan M. Field at email@example.com.