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Despite counter pulls, the two nations will find ground for common economic interests

Source: The Hindu Business Line

With a thumping win in the recent state polls, and a break of 8 to 10 months from local elections, the stage is set for the Modi government to roll out a string of foreign economic policy reforms.

An increase in flow of foreign institutional investments and a spike in the strength of the Indian currency couldn’t have come at a more opportune moment.

A key component of such reforms would be to reset priorities for foreign trade that accounts for 32 per cent of the country’s GDP as per the Economic survey 2017.

While the global trade environment remains subdued, given a shift towards protectionism and other geo-political issues over the past year or so, India will do well to pursue an open market policy, in view of its thirst for foreign investment and growth in share of international trade, which underpins its economic growth agenda.

With the US administration’s protectionist ‘America first’ stance, it may well have to adopt a wait and watch approach, at least in the short term, to absorb its impact on the policy initiatives of the Trump administration and on cross-border investment ties.

The most severe of Trump administration’s policy actions is its far-right stance on immigration, significantly impacting a sizeable population of Indian software professionals on H-1B and L1 visas in the US.

Indian citizens constitute the most of high-skilled workers, accounting for over 70 per cent of visa applicants. This clearly disrupts the burgeoning Indian IT industry, at large, as it loses its significant outsourcing opportunity.

Lease of life for pharma

Pharmaceuticals constitute India’s second biggest exports to the US ($7.4 billion in 2016) after gems and jewellery, and with the Trump administration’s failed attempt at repealing Obamacare, the Indian industry appears to have won a fresh lease of life.

Even a suggestion of replacing Obamacare with new drug pricing rules and social insurance programs had spelt anxiety for the majority of Indian pharma players.

One cannot lose sight of the fact that this industry contributes significantly to lowering healthcare costs in the US with quality affordable generic drugs. So, any material policy change will be counter-productive from the socio-economic standpoint.

On taxes, the Trump administration promises to cut the domestic corporate tax rate sharply down from 35 to 15 per cent, with an eye to bringing back investments and jobs to the US.

A lower tax regime would indeed provide fillip to businesses setting up their bases in the US; Fiat Chrysler, Ford Motors and General Motors have already followed suit.

Besides, the ‘Border Adjustment Tax’ which exempts income from exports and dis-entitles tax deductibility of manufacturing costs payable in offshore jurisdictions pursuant to imports, could potentially be detrimental to Indian trades exporting to the US, rendering Indian goods expensive and possibly uncompetitive.

The US’ recognition of India as a ‘Major Defence Partner’ and contributions to India’s ‘Make in India’ campaign shall be crucial as India promotes indigenisation of military manufacturing base. Boeing and Lockheed Martin have already begun manufacturing of fighter jets, heavy lift helicopters, Javelin missile system, etc, in India. The US, being a major supplier of defence equipment to India, shall also look to maintain close defence ties with India as this is an area of common interest for both the countries.

It appears that Prime Minister Narendra Modi and US President Trump share an uncanny commonality in so far as it relates to developing strong domestic capabilities by promoting indigenisation — whether it is ‘Make in India’ or the ‘America first’ flagship programmes of the respective governments. It is therefore believed that the two leaders will have common grounds of mutual interest to build on their traditional alliance relationships premised on reciprocity.

Though the initial stance of the new administration does raise an element of anxiety for Indian businesses, particularly for IT, pharma and manufacturing sectors, it is anticipated that the two large democracies will engage and find ground for common economic interests and growth with bilateral diplomatic and economic relationship.

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