The Two-Step Trump Dance

It seems India-US ties will primarily be a two-track exercise: with one track chugging along smoothly and the other full of bumps and speed breakers

India has witnessed 16 years of progressively intensifying partnership with the US under the George W. Bush and Barack Obama presidencies. With Donald Trump moving into the White House soon, predictions about future India-US ties swing between hope and trepidation. Indeed, both sides may have to reset many existing markers in ongoing negotiations.

Everybody is trying to figure out Donald Trump the president versus Donald Trump the candidate. On the campaign trail he confused observers with his wildly oscillating undertakings. The scope for speculation is greater in his ramblings about India; he waxed effusive about India’s business opportunities but issued grim warnings about Indian software engineers in the next breath.

The question uppermost then is: Where does India figure in his plans? For one, Trump’s campaign arc has seen many flip-flops and this may well continue till he finds his feet in the Oval Office in January 2017; the post-victory phase has seen policy reversals, such as second thoughts on completely discarding Obamacare and scrapping the nuclear deal with Iran.

The clue to Trump’s India policy may lie in the document ‘Republican Platform 2016’: “India is our geopolitical ally and a strategic trading partner… We encourage the Indian government to permit expanded foreign investment and trade, the key to rising living standards for those left out of their country’s energetic economy. For all of India’s religious communities, we urge protection against violence and discrimination.”

Parsing the paragraph, it seems the India-US relationship will primarily be a two-track exercise, with one track chugging along smoothly and the other full of bumps and speed breakers. For instance, as the first sentence suggests, security and strategic ties will remain cordial. The second sentence points to the craters: unfulfilled trade and investment demands. In short, it’s business as usual.

The first reset button, though, will have to be pressed by Prime Minister Narendra Modi. He assiduously built a close working relationship with Obama: They had three bilateral meetings and numerous one-on-one engagements in the past 30 months. Modi will now have to figure out the unknown quantity called Trump and see if they can share a working relationship.

So, while there are no safe bets, hopefully the institutional architecture of the current bilateral framework—especially ministerial negotiations under the Strategic and Commercial Dialogue (S&CD)—will hold under the new leadership.

For instance, the civil nuclear partnership and defence acquisitions will be pursued as aggressively by the incoming administration as the outgoing one. Security, strategic affairs, defence cooperation are likely to be smooth sailing because both countries have some convergence of interest here.

To be sure, there’s still uncertainty about Trump’s outlook towards Pakistan, Russia and China and their knock-on effects on India, but it is clear that the India-US geo-strategic alliance will persevere in some form.

The problem area, as in the past, will be trade and investment. Both sides have painted themselves into intractable corners with numerous trade barriers. While Trump’s trade-related campaign tirade was largely restricted to the Trans-Pacific Partnership (TPP) and US-China trade relations, the new administration might train the arc lights on India’s $30 billion trade surplus with the US. India-US trade in goods and services touched $108 billion during the 2015 calendar year.

Interestingly, during Modi’s first state visit to the US, the joint statement set a $500 billion trade target without mentioning any end date. And while under the S&CD and its predecessor, the India-US Trade Policy Forum has held 10 ministerials so far, progress has been at a glacial pace.

Large parts of each year’s communiqué read like the one from the previous year. There are many pain points developing. For instance, in agriculture market access, India wants to export grapes, rice and honey while the US wants market access for cherries, alfalfa hay and pork.

The US has issues with subsidies in the Indian textile sector. India and the US have dithered over signing a bilateral investment deal, the main trip-wire being the contentious investor-state dispute settlement mechanism.

The other sensitive area is intellectual property rights; both sides have been gingerly circling each other with communiqué politesse masking the underlying stress. There are serious differences of opinion in services trade.

There is one redeeming feature though. Under the Obama regime, India was left out of the three large trade arrangements being shepherded by the US: the TPP, the Transatlantic Trade and Investment Partnership (TTIP) and Trade in Services Agreement (Tisa). While Trump has publicly expressed his distaste for TPP (with TTIP presumably falling in the same category), Tisa remains the odd one out.

This is one area where India will have to be vigilant, given India’s strategic advantage in services. India should also use this opportunity and leverage its relationship with the US to prise open the Asia-Pacific Economic Cooperation for a membership. This is a grouping that works well for India, given its flexibility, advantages and non-binding commitments.

It is unlikely that the Trump administration will roll over on trade any time soon; neither should India, because strategic autonomy will continue to be an asset. While the love-hate relationship can continue, both sides must endeavour to find some middle ground in the meantime.

This article originally appeared as part of my column, General Disequilibrium, in Mint on November 16, 2016. It can also be read here.

Book Review: The Wrong Idea of America

A former White House aide and economist makes a surprisingly sloppy appraisal of US’ problems

The Price of Prosperity: Why Rich Nations Fail And How To Renew Them
Todd G Buchholz
Harper, an imprint of HarperCollins Publishers
367pp; $29.99

Brexit has eloquently demonstrated what a terrible bummer nostalgia can be. Wallowing in a sense of persecution and aching for long-lost days of glory, British leaders ceaselessly campaigned to leave European Union; and, nostalgia made for a good tool to rouse, exhort and even to delude. But with “leave” leaders and campaigners increasingly abandoning ship, it is quite evident that nostalgia has limited currency in good governance.

Author Milan Kundera was rather cutting about it: “In the sunset of dissolution, everything is illuminated by the aura of nostalgia, even the guillotine.” When former empires and superpowers refuse to go gently into the fading light or remain steadfast in denial about reality biting their heels, nostalgia is a helpful analgesic that numbs the pain.

Todd G Buchholz uses this anaesthesia to quite remarkable effect. His latest adds to the growing list of works harking back to an imagined ideal period, keen to revive an illusory greatness. This sense of “greatness” is also quite unidimensional, with some of modernity’s post-War distortions embedded deep.Greatness of another kind

The author’s mission is simple: he sets out to diagnose what’s gone wrong with his great country — and here greatness is primarily a shorthand for prosperity — and how it can be revived. But do not be misled by the words “Rich Nations” in the title; this book is mostly about the US. His prescriptive analysis also betrays his politics, which often dips into partisan territory; ironically, he remains blissfully unaware of just how much this limited political worldview has eroded his “great’ nation.

For example, he laments how the Barack Obama administration has not taken advantage of current low interest rates by issuing long-tenor bonds of, say, 50 or 100 years’ maturity. Locking into long-maturity bonds at rock-bottom rates does indeed make sense. Instead, he sees White House opting for the shorter end of the yield curve because interest rates are usually lower at that end. And, here comes the conspiracy theory: lower interest rates help deflate debt-to-GDP ratios and provides an illusion of a lower budget deficit, “flattering the president’s fiscal profile”.

Strangely, the author ignores how a partisan Congress has dogged President Obama’s executive actions. Is there a possibility that the Obama administration issued short term bonds to avoid a combative and obstructionist Congress, which needed any excuse — including bonds longer in maturity and higher in interest rates — to trip up the president?

It’s also funny that Buchholz should complain about short term holdings: as former managing director of Tiger hedge fund, he should know a thing or two about them.The immigrant’s case

Buchholz’s starting hypothesis posits that as nation-states get prosperous, their birth rate drops. Consequently, there are more elderly than young working people. Who does all the work then? The immigrant, of course. And, then he remits his earnings home. Ergo: the immigrant should be integrated better into the American society, so that he can look up to George Washington as a forefather, even if he surrounds his Thanksgiving turkey with some ethnic dishes.

So there it is, Solution No. 1: a strange nationalistic formula that can cure numerous economic ills. His nationalism is also time-stamped: it must pay obeisance to only cultural icons adopted in the past 240 years; whatever existed before July 4, 1776, is not worth knowing. Nationalism also means regaining GMC — grit, mobility and confidence — which defined American exceptionalism in the past.

This is a strange salmagundi of suggestions, which flirts with patriotism without trying to sound too reactionary, strains to accept immigrants without sounding xenophobic. Anecdotal evidence makes up for actual facts, poor research leads to hypotheses, history is used to suit pre-determined conclusions.

Let’s look at poor research: “Traditional Hindu culture honours boys above girls, since the religion requires that parents be buried by a son.” Will somebody please educate Mr Buchholz on Hindu funeral rites, especially since Hindu Americans make up almost 1 per cent of the country’s population.Missing in action

And that’s exactly the nub of everything that’s wrong with this book. While dwelling upon patriotism and nationalism in good motherhood, apple-pie American style, Buchholz misses the US’ main fault-lines — growing inequality — or the myriad reasons behind stagnating real incomes.

It is glib to point fingers at outsourcing but how do you sort out Corporate America, with its flawed governance structures and undue focus on three-monthly profits (which rewards large-scale retrenchment if it helps nudge up stock prices)? Buchholz is silent. Not a single word about how strong, public institutions made the US a true liberal democracy and how their decay is perhaps an important cause behind the slip from “greatness”.

There is also no mention about the US’ hegemonic role in global negotiations, which has systematically eroded multilateralism. The US was one of the principal founders of the post-WWII global multilateral architecture which was then successfully subverted to suit narrow, partisan, private corporate interests. And, of course, Buchholz refers to the 2008 meltdown as a “global” financial crisis, which in itself is symbolic of how blinkers have narrowed the fabled American vision.

In trying to attempt a broad-brush future manifesto for the US, Buchholz may have bitten off a bit too much. There is a lot of research, but some of it fails to meet strict academic rigour and some of it is pointless. The book is readable, written in fast-paced prose and that is it’s only saving grace.

This book review was originally published in The Hindu BusinessLine. It can also be read here.  

India’s five-cornered trade strategy

Five rather unfavourable trends define India’s trade performance over the past two years; these trends also provide useful pointers as to where India’s future trade strategy can go over the next three years as it deals with a global economic slowdown, the rise of megatrade agreements and a pivot to a more intensive trade relation with the U.S.

The Narendra Modi government’s trade policy has been marked by five noteworthy, but rather unflattering, trends: declining trade volumes, unsuccessful diversification of trade destinations, continuing deadlock in U.S.-India commercial ties, India’s services strength remaining underutilised in trade agreements, and, lack of a national strategy for mega trade agreements.

This then shapes the government’s trade agenda for the next three years.

The first element, the dismal state of India’s trade, impacts Indian industry. In the two years of the current government, exports have contracted by almost 17% — from $314.405 billion in fiscal 2013-14 (April 2013 to March 2014, a couple of months before Modi and his Cabinet were sworn in) to $261.136 billion in 2015-16. Even imports have dipped by a considerable 16% during the same period: from $450.12 billion to $379.6 billion.[1]

To be fair, exogenous factors are behind the drop. The global slowdown has eroded demand for manufactured goods. But, while global trade in 2015 expanded – albeit marginally, by 2.8%[2] — India’s trade shrunk. In addition, lower commodity prices have impacted volumes and values for both exports and imports. However, the fall in imports has another worrisome aspect – it could signify lower demand for raw materials and intermediate products from Indian manufacturing sector. Combined with lower merchandise exports, which also affects broad swathes of industry, contracting trade volumes adversely impact employment, incomes, investment, consumption and economic growth.

                        Exports                                      Imports

2013-14:    $314.405 billion USD        $450.199 billion USD
2014-15:    $310.338 billion USD        $448,033 billion USD
2015-16:    $261.136 billion USD        $379.596 billion USD
Source: Department of Commerce, Ministry of Commerce & Industry

Undoubtedly, trade performance has to be improved urgently. One reason for India’s continuing indifferent trade performance is lack of integration with regional and global supply chains. Foxconn’s decision to set up a handset manufacturing unit in India is an improvement but it will require many similar initiatives to markedly improve India’s trade profile.

This brings up the second aspect. India has been trying for some years to diversify its export destinations, away from the developing countries of North America, Europe and Japan where demand and consumption levels have dropped appreciably. India saw in Africa a key trade and investment partner and fixed a $90-billion trade target for 2015. It finalised similar trade targets with ASEAN, other regional groupings and individual countries. Unfortunately, most of these trade targets remain unattainable.

For example, trade between Indian and Africa fell short of the $90-billion target – two-way trade dropped from $71.5 billion during 2014-15 to $ 56.67 billion by 2015-16. One of the reasons for the shortfall is the steep drop in commodity prices, leading to the oil import bill from Nigeria (India imports about 15% of its oil from that country) shrinking. However, that still does not explain the lack of a concerted thrust at creating alternative markets for Indian goods and services in either Africa or Latin America. It’s not too late, given India’s strategic and civilizational ties in these two continents.

The third facet is a visible pivot over the past two years towards a more intense trade and investment relationship with U.S., though the results are mixed[3].

India’s engagement with U.S. froze under UPA-II regime. However, the past two years have seen considerable energy invested in the relationship. Trade ties between the two nations is conducted through the Trade Policy Forum (TPF, set up in 2005), under the broad rubric of the US-India Strategic and Commercial Dialogue. The forum’s ninth meeting was held in October 2015 and like other previous rounds, the outcome remained wedged between on familiar issues – agriculture market access, intellectual property rights, trade in goods and services. Strategy firm Albright Stonebridge Group comments: “Will the TPF continue to be a talk shop where issues are raised, discussed and shelved for discussion next year…Over the last few years a meeting would be called successful if both sides simply showed up to the meeting at the agreed place and time, discussed the agenda and closed by agreeing to disagree.”[4]

One of the perennial sticking points in the India-U.S trade negotiations is services, the fourth pillar of India’s trade profile and unarguably a competitive advantage. The Economic Survey for 2015-16 states: “WTO data shows that India’s services exports grew from $16.8 billion in 2001 to $155.6 billion — which constitutes 7.5% of the GDP — in 2014, making the country the eighth largest services exporter in the world. The share of India’s services exports in global services exports at 3.2% in 2014, is nearly double its share of merchandise exports in global merchandise exports at 1.7%.”[5]

But, India has failed to utilise this competitive trade advantage, specifically cross-border movement of professionals, in various trade agreements.

For instance, India signed a Free Trade Agreement (FTA) with ASEAN for goods first, and then followed it up five years later with a FTA on services. In the interim, India suffered a negative trade balance given the SE Asian region’s superior manufacturing capability and integration with global supply chains. Strategically, if India had signed an FTA for both goods and services simultaneously, the outcome might have been different.

The past lessons seem to have been learnt and, in various FTA talks, India is now insisting on inclusion of freer movement of professionals in return for demands to lower customs tariffs.

The fifth corner of India’s future trade strategy relates to mega trade agreements. The largest – Trans Pacific Partnership – promises to change how trade is conducted. India and China are noticeably absent from the pact; in fact, if the other mega agreement under discussion (Transatlantic Trade and Investment Partnership, between USA and Europe) is finalised, India and China could find themselves in trade hibernation.

Opinion is divided[6] [7] on whether India should join TPP, even though scholars are unanimous that such mega agreements will definitely result in trade diversion for India. Excluded by both TPP and TTIP, India has now set its eyes on completing the Regional Comprehensive Economic Partnership (RCEP), a trade and investment agreement between ASEAN members plus India, China, Japan, South Korea, Australia and New Zealand. Simultaneously, President Obama is pushing for India’s membership in Asia Pacific Economic Cooperation, a 21-country regional economic forum. In fact, APEC membership is a stepping stone for TPP inclusion.

India’s strategy on mega agreements should be to first conclude RCEP without compromising on its strengths. Alongside, India should also try and finalise FTAs with individual states, such as Australia. At the same time, the government must initiate a broader public discussion on India’s trade strategy, specifically to clarify the country’s stand on TPP and its focus on “beyond-border” issues, such as domestic labour laws or environment rules.

This feature was exclusively written for Gateway House: Indian Council on Global Relations. It can be read here also
References

[1] India’s Foreign Trade: March 2016; Ministry of Commerce and Industry, Govt of India; April 18, 2016; http://pib.nic.in/newsite/erelease.aspx?relid=0

[2] Trade Statistics and Outlook: Trade growth to remain subdued in 2016 as uncertainties weigh on global demand; Press Release No Press/768; World Trade Organisation; April 7, 2016; https://www.wto.org/english/news_e/pres16_e/pr768_e.pdf

[3] Elliot, Mark and Linda Dempsey; Stalled Progress on U.S.-Indian Trade; The Washington Times; January 12, 2016;www.washingtontimes.com/news/2016/jan/12/mark-elliot-linda-dempsey-stalled-progress-on-us-i/print/

[4] India Newsletter; Determining Success or Failure of United States-India Trade Policy Forum; October 28, 2015; Albright Stonebridge Group;http://www.albrightstonebridge.com/news/determining-success-or-failure-united-states-india-trade-policy-forum

[5] Page 158, Services Sector (Chapter 7), Economic Survey 2015-16, Vol 2, Ministry of Finance, Govt of India

[6] Banga, Rashmi & Pritish Kumar Sahu; Trans-Pacific Partnership Agreement (TPPA): Implications for India’s Trade and Investments; Working Paper CWS/WP/200/24; October 2015; Centre for WTO Studies; http://wtocentre.iift.ac.in/workingpaper/Trans%20Pacific%20Partnership%20Agreement_Implications%20for%20India.pdf

[7] Bergsten, Fred C; India’s Trade Gains From Joining An APEC-Wide TPP; September 18, 2015; Peterson Institute for International Economics;https://piie.com/research/piie-charts/indias-trade-gains-joining-apec-wide-tpp

Byte But No BIT

Behind the hullabaloo and grand optics that will accompany PM Narendra Modi’s visit to the U.S. will be laser-focused discussions on enhancing the strategic trade and investment relationship

The agenda for Prime Minister Narendra Modi’s 5-day visit to the U.S. starting September 24, much like his previous trip, is brimming with activity. Apart from attending the United Nations General Assembly, he is travelling to San Francisco to burnish his Digital India credentials, then returning to New York to meet President Barack Obama for a bilateral dialogue and closing by catching up with key U.S. businessmen and CEOs for a closed-door conversation.

But behind Modi’s headline-grabbing California spectacle are other Indian ministers and businessmen who will be rolling up their sleeves and getting down to business in Washington DC.

High on the list is the first meeting of the newly-crafted India-USA Strategic and Commercial Dialogue (S&CD) on September 22, which was upgraded from India-USA Strategic Dialogue this January during Obama’s Republic Day visit[i]. The moniker change reflects the strategic importance of trade, economic and investment to the bilateral ties. The roll-call of the meeting attendees also reveals what will be discussed and what’s off-the-table.

On the Indian end of the table will be External Affairs Minister Sushma Swaraj and Commerce and Industry Minister Nirmala Sitharaman, with Secretary of State John Kerry and Secretary of Commerce Penny Pritzker on the U.S. side. On September 21, a day before the Dialogue, Vice President Joe Biden, Kerry and Swaraj will address the U.S.-India Business Chamber’s anniversary celebrations. Other ministers, including energy minister Piyush Goyal, will be present and when the Dialogue commences the next day, Goyal will meet his U.S. counterpart, Ernest Moniz, for the Sixth India-U.S. Energy Partnership Summit.

U.S. Vice President Joe Biden will be present at the bilateral talks between Modi and Obama. If Biden does indeed make a bid for the presidency, as has been widely rumoured, his involvement becomes significant.

So far, one thing is clear from the agenda: the Bilateral Investment Treaty (BIT) is not in the picture. That inference arises from Finance Minister Arun Jaitley’s absence from the proceedings. The hypothesis becomes even more compelling because the finance ministry has crafted India’s model draft agreement and placed it in the public domain for stakeholder inputs. There are numerous sticking points between India and the U.S. over the draft that will take time to discuss, debate and disentangle. Among them are the investor-state dispute system, intellectual property rights (IPR) and expropriation. Given that the Obama presidency is fast entering the “lame-duck” zone, the BIT might have been kept out because it is still a work-in-progress.

The Dialogue will focus on four areas, according to undersecretary of commerce for international trade, Stefan M Selig’s briefing to reporters September 16 at the American Chamber of Commerce in New Delhi in August 2015[ii]:

Building tomorrow’s smart cities in India and the related infrastructure: The U.S. will participate in “smartening up” three cities — Ajmer, Allahabad and Vizag — and the talks will identify U.S. companies that can deliver on the promise.

Participating in strengthening India’s business climate to the benefit of both Indian and American businesses: This is an euphemism for tackling all the current pain-points in the relationship, especially for the U.S.: IPR, contract laws, the Indian legal system. Strangely, pre-Dialogue chatter seems to centre only on the business climate in India, without any mention of the non-tariff barriers and curbs on movement of skilled people from India to the U.S.

Harmonizing product standards to increase trade and further deepen our industries’ integration into global supply chains: Creating and developing common standards – safety, environmental or labour – in manufacturing that will help integrate India’s trade outreach with both the Asia Pacific Economic Community (APEC) and the Trans Pacific Partnership (TPP). India is not a member of either grouping. Included will also be trade in agricultural goods and the future of the Doha Round at the upcoming WTO ministerial at Nairobi.

Developing best practices around innovation and entrepreneurship: Among the many issues on the table, renewable energy will likely find mention.

What’s different this time is that the talks could depart from the transactional nature of previous rounds and instead identify credible milestones, especially ones that help stretch the annual bilateral trade volume from $100 billion currently to $500 billion. Beyond that, both sides will look to elevate trade into a strategic and diplomatic tool, one that aligns Modi’s “Look East, Act East” policy with Obama’s Asia Rebalance strategy. The nuts and bolts of this tool are likely to be identified on September 22.

Another clue to the future direction of the bilateral and the Dialogue is the equal, if not larger, role that the private sector is expected to play over the public sector in strengthening mutual ties. That’s why the USIBC event has been scheduled a day prior to the Dialogue, so U.S. corporations can voice concerns that can be discussed at the Dialogue the next day.

A disconcerting element: apart from the fanfare around Modi’s public appearances, there hasn’t been much forthcoming from the Indian delegation, the exception being a recent and bare-bones press release from the Ministry of External Affairs[iii]. For the moment then, policy-watchers we will have to remain content with Modi’s grand shows.

ENDNOTES

[i] Department of Commerce, Statement from U.S. Commerce Secretary Penny Pritzker on U.S.-India Strategic and Commercial Dialogue; January 26, 2015; <https://www.commerce.gov/news/press-releases/2015/01/statement-us-commerce-secretary-penny-pritzker-us-india-strategic-and>

[ii] International Trade Administration, Speech (as prepared for delivery) by Under Secretary of Commerce for International Trade, Stefan M Selig; August 11, 2015; New Delhi; <http://www.trade.gov/press/speeches/2015/selig-081115.asp>

[iii] Ministry of External Affairs, Press Releases, September 18, 2015 <http://www.mea.gov.in/press-releases.htm?dtl/25817/First_Ministerial_of_the_IndiaUS_Strategic_and_Commercial_Dialogue>

Originally published in Gateway House (http://goo.gl/13YfW4)

Do Trade Targets Work?

India has used two-way trade targets as a proxy for judging the temperature of its key bilateral and plurilateral relationships. But a deeper understanding is needed of the extent to which physical targets can help accomplish qualitative objectives

The government of India’s new Foreign Trade Policy (FTP) for 2015-2020 has set a $900-billion goods and services export target, to be achieved by 2020. Compared with the $465.9 billion achieved during 2013-14, the target is almost double of current levels.

The policy document prefaces the target with a rare pithy statement: “A vision is best achieved through measurable targets.”[1] But the fact is, most of India’s key diplomatic engagements—at bilateral, plurilateral, or even multilateral levels—are defined by targets.

Targets are ubiquitous in India’s economic diplomacy. There are many ways to judge the breadth and depth of a relationship between two countries, including cultural exchanges, defence cooperation, people-to-people interaction, and historical ties. But trade and investment targets lay out vector paths for future growth, and set concrete milestones against which progress can be gauged.

The target-driven approach is now spreading to bilateral ties with even smaller nations; for example, India and Vietnam recently agreed to a trade target of $15 billion, to be met by 2020. [2]

But targets are essentially cut-and-dry, and temporal. There is no definitive research showing whether targets have succeeded in imparting additional meaning to an existing relationship, or whether they have been effective in bringing two disparate nation-states closer. In other words, there’s no conclusive evidence showing that quantifiable bounds improve the qualitative facet of an engagement.

India’s Free Trade Agreement (FTA) with ASEAN is a good example. It has been a source of anxiety within government and key stakeholders. India signed the FTA for goods in 2009, but the one on services and investment—arguably India’s strong point—is yet to come into force. Even in the goods trade, India suffers a chronic trade deficit with ASEAN: it imports more than it exports.

In the face of this, the target for India-ASEAN bilateral trade—$100 billion by 2015—looks unattainable, especially since two-way trade (exports plus imports) between the two regions amounted to only $70.5 billion during April-February 2014-15. [3]

Confronted by this glacial pace of trade growth, India has done the next best thing: it has stretched out both the physical target as well the end-date. The India-ASEAN relationship will now be measured by a new target without having to necessarily address performance vis-a-vis the earlier target. External affairs minister Sushma Swaraj announced the new target at the inaugural session of Delhi Dialogue VII on March 11: “However, we need to make a special effort to achieve our target of enhancing trade to $100 billion by 2015, and our aspiration is to double it to $200 billion by 2022.” [4]

India has recast other targets in other strategic relationships as well. During Prime Minister Narendra Modi first state visit to the U.S. in September 2014, the joint statement he issued with President Barack Obama stated: “Noting that two-way trade has increased five-fold since 2001 to nearly $100 billion, President Obama and Prime Minister Modi committed to facilitate the actions necessary to increase trade another five-fold.” [5] In other words, to take trade to $500 billion, though the statement refrained from mentioning a target year.

In the other strategic relation with neighbour China, there is some clarity of objectives on both investments and trade. A joint statement issued by Modi and President Xi Jinping in September 2014 announced: “The Chinese side would also endeavour to realise an investment of $20 billion in India in the next 5 years in various industrial and infrastructure development projects”. [6] During the same trip, a five-year Trade and Economic Development Plan signed between the two countries has, among other targets, an unquantified over-riding objective: reduce the trade imbalance India suffers in its $65-billion bilateral trade with China. [7]

Even with Africa, the $90-billion target set for 2015 is likely to be missed. [8] It is also quite likely that the target will be bumped up—both the volume as well the year. This might be announced at the Third India-Africa Summit scheduled for October 2015.

When the foreign trade and investment landscape is suffused with a surfeit of targets, the logical questions are: How are targets fixed? What is the strategy for meeting them? No one knows the answers.

For one, there is no clarity on who should set and announce targets—the commerce ministry or the external affairs ministry? While think tanks and academic experts are known to have been engaged by both ministries to finalise targets, the research output is not available to civil society, either for viewing or for providing inputs. Inviting public comments before finalising targets, or even to assess the methodology used, can probably infuse some realism into these exercises.

Second, once the targets are announced, there is no detailed analysis of how these will be met, and no outlining of strategy, at least not in the public domain.

Finally, this year’s Foreign Trade Policy also raises a crucial issue that has bedevilled India’s trade practices: the lack of coordination between different economic agents as well as ministries operating in silo-like structures. But then the policy stops short of mentioning how “Make in India” or “Digital India” or even the policy on smart cities can be integrated with the FTP to deliver higher exports of both goods and services. That remains the biggest challenge for India’s trade regime.

References


[1] Ministry of Commerce and Industry, Government of India; Foreign Trade Policy Statement, <http://dgft.gov.in/exim/2000/FTPstatement2015.pdf>, p.14

[2] Ministry of External Affairs, Government of India, Joint Statement by Indian Prime Minister Narendra Modi and Vietnamese Prime Minister Nguyen Tan Dung,28 October 2014, <http://www.mea.gov.in/Speeches-Statements.htm?dtl/24143/Media+Statements+by+Prime+Minister+of+India+and+Prime+Minister+of+Vietnam+in+New+Delhi+October+28+2014>

[3] Ministry of Commerce and Industry, Government of India, Trade Statistics, <http://commerce.nic.in/ftpa/cntq.asp>

[4] Swaraj, Sushma, Keynote Address at Inaugural Session of Delhi Dialogue VII,Ministry of External Affairs, Government of India, 11 March 2015,

<http://www.mea.gov.in/Speeches-Statements.htm?dtl/24899/Keynote_Address_by_External_Affairs_Minister_at_the_Inaugural_Session_of_Delhi_Dialogue_VII_New_Delhi>

[5] Ministry of External Affairs, Government of India, Joint statement by Indian Prime Minister Narendra Modi & U.S.A. President Barack Obama, 30 September 2014,

<http://www.mea.gov.in/bilateral-documents.htm?dtl/24051/Joint_Statement_during_the_visit_of_Prime_Minister_to_USA>

[6] Ministry of External Affairs, Government of India, Joint Statement between the Republic of India and the People’s Republic of China on Building a Closer Developmental Partnership, 19 September 2014,

<http://www.mea.gov.in/bilateral-documents.htmdtl/24022/Joint_Statement_between_the_Republic_of_India_and_the_Peoples_Republic_of_China_on_Building_a_Closer_Developmental_Partnership>

[7] Ministry of External Affairs, Government of India, List of Documents signed during the State Visit of Chinese President Xi Jinping to India, 18 September 2014, <http://www.mea.gov.in/incoming-visit-detail.htm?24012/List+of+Documents+signed+during+the+State+Visit+of+Chinese+President+Xi+Jinping+to+India>

[8] Singhal, Rajrishi; Indian Banks in Africa: Change Agents; Policy Perspective No 8, Gateway House: Indian Counmcil on Global Relations, 9 January 2015, 

<http://www.gatewayhouse.in/wp-content/uploads/2015/01/Policy-Perspective_Economic-diplomacy-with-Africa.pdf>

India-U.S. BIT: Not A Done Deal Yet

India is revising the model draft agreement of its existing bilateral investment treaties. Some of the new clauses are unlikely to be accepted by either U.S. negotiators or U.S. corporations without substantial dilution

U.S. President Barack Obama’s second visit to India has resurrected hopes that the two countries will revive talks on the dormant but in-progress Bilateral Investment Treaty (BIT). A BIT is being eagerly sought by both sides—from the U.S., to provide comfort to American companies that they will not be treated unfairly, and from India in the belief that it will help increase foreign investment inflows into India.

But negotiating the many tripwires of the BIT will take time and effort. It may therefore be wise to rein in the optimism that is usually generated by high-profile state visits and the associated optics. More so because every significant India-U.S. bilateral visit in recent times—by Prime Minister Narendra Modi to Washington DC in September 2014, by U.S. Secretary of State John Kerry to India in June 2014 and January 2015, and by U.S. Trade representative Michael Froman in November 2014—has rekindled expectations about the abandoned BIT.

Talks on a BIT between the two countries have been on hold since February 2014. [1] Preparations to restart the conversation resumed in the backrooms soon after Modi’s swearing-in on 26 May 2014. Kerry discussed the pending BIT agreement with Modi on the sidelines of the Vibrant Gujarat Summit earlier in January. Diane Farrell, acting president of the U.S. Indian Business Council, confirmed this in a press statement. [2]

However, many hurdles will have to be cleared before any real progress can be made on the BIT. One of the obstacles is that India’s own BIT regime—the Bilateral Investment Promotion and Protection Agreement (BIPPA)—is in cold storage. India is currently reviewing the draft of the existing model agreement and is yet to produce a blueprint that is acceptable to all stakeholders, including different ministries (such as Finance, Commerce, Law and External Affairs). India has signed 83 BIPPAs since 1994 and enforced 72 of these agreements.

The existing text has been under review since early 2013 because many international companies have initiated overseas arbitration against the Indian government—17 new arbitration proceedings over issues as varied as Supreme Court’s cancellation of 2G licences and retrospective taxation notices were filed in the past two years alone. The companies which have sued the Indian government include Deutsche Telecom, Vodafone, and White Industries, under India’s BIPPAs with Germany, The Netherlands, and Australia, respectively.

Another speed-breaker is conflict within the government. The Department of Industrial Policy and Promotion (DIPP, in the Ministry of Commerce and Industry) is opposed to BIPPAs in general [3, 4]. The DIPP is responsible for framing India’s foreign direct investment (FDI) strategy, as well as promoting, approving, and facilitating FDI. The DIPP believes that a conducive economic and legal environment is sufficient to attract foreign investments. It also believes that the existing BIPPAs are likely to result in increased lawsuits and has suggested that the sunset clause in these agreements be invoked to annul them. On the other hand, India’s finance and external affairs ministries are both in favour of an overhaul of the existing template, which will then have to be applied to all existing 83 agreements.

The conflict also arises from the government’s duality in matters of foreign investment—while the DIPP is responsible for FDI, the Ministry of Finance is responsible for administering the BIPPAs.

Talks could face headwinds due to certain new clauses in the draft model agreement. There is a proposal to dilute the “investor-state dispute settlement” (ISDS) system. Unlike the existing contract, henceforth foreign investors will not be able to take the Indian government to international arbitration unless they have first exhausted all legal and administrative options within India.

Clearly, this is a reaction to the spate of offshore arbitration proceedings. It is likely that this defensive move was inspired by external developments. Brazil has eschewed ISDS and South Africa is likely to follow. Australia is under pressure from its civil society to drop ISDS from all its agreements (especially the one with U.S.) and not from a select few, as is the case currently.[5]

The entire ecosystem of perverse incentives built around the international arbitration system could have also compelled the Indian government to dilute ISDS—armies of highly-paid, ambulance-chasing lawyers who have created an entire business model out of arbitrations and arbitrators who keep dragging cases on because they get paid handsomely by the hour—all operating in a highly secretive system. [6] The reworked BIPPA draft tries to ensure a transparent arbitration system by stipulating certain conditions.

But a BIT bereft of ISDS is bound to be opposed by American negotiators and potential U.S. investors. The popular narrative has portrayed the Indian judicial system as slow and inefficient. Indian authorities, on the other hand, are wary of biases in the overseas arbitration tribunals. Achieving a consensus between India and the U.S. on this count is going to be tricky, but India seems to have global precedent set by Brazil, Australia and South Africa in its favour.

A deal-breaker could be intellectual property rights (IPR), a vexed issue on both sides. The U.S.’s private sector has been persistently lobbying with its government for extracting concessions from India, with the National Association of Manufacturers even pushing the U.S. Trade Representative to label India as a “priority foreign country”, an epithet reserved for the worst IPR offenders.

India’s counter-argument has been that its IPR regime is compliant with the World Trade Organisation’s TRIPS (Trade-Related Aspects of Intellectual Property Rights) multilateral agreement, and it considers the U.S.’s Special 301 report—an annual publication from the United States Trade Representative (USTR) identifying trade barriers to U.S. companies and countries which do not provide “adequate and effective” protection of intellectual property rights—unilateral.

Several other prickly issues could sabotage talks—a proposal to drop the most favoured nation status from the agreement, re-phrased expropriation clauses, and re-worded text that ensures that the BIT/BIPPA does not end up favouring foreign investors while discomfiting domestic ones.

Negotiations are all about give-and-take, ceding some strategic space while appropriating critical concessions. This is, admittedly, a time-consuming process. A lot will, however, depend on American corporations and their attitude to doing business in one of the world’s biggest and fastest growing markets in the world.

REFERENCES

[1] Parashar, Sachin, ‘India, U.S. Agree to Restart Talks on Bilateral Investment Treaty’, Times of India; 12 January 2015, <http://timesofindia.indiatimes.com/india/India-US-agree-to-restart-talks-on-bilateral-investment-treaty/articleshow/45846021.cms>

[2] US India Business Council, USIBC Members Brief John Kerry, Secretary of State, and Catherine Novelli, Under Secretary of State for Economic Growth, Energy, and the Environment at Vibrant Gujarat 2015, 13 January 2015, <http://www.usibc.com/press-release/us-india-business-council%E2%80%99s-delegation-vibrant-gujarat-hosts-us-secretary-state-john>

[3] Sidhartha, ‘Finance ministry to move Cabinet for clearing new BIPA text’, Times of India, 24 June 2014, <http://timesofindia.indiatimes.com/business/india-business/Finance-ministry-to-move-Cabinet-for-clearing-new-BIPA-text/articleshow/37108910.cms>

[4] Press Trust of India, ‘Finance & Commerce Ministry to discuss draft BIPA model tomorrow’, Business Standard, 13 August 2014, <http://www.business-standard.com/article/pti-stories/fin-min-com-ind-min-to-discuss-draft-bipa-model-tomorrow-114081300432_1.html>

[5] Chan, Gabrielle, ‘Bill to ban investor-state dispute settlements garners support’,The Guardian, 14 April 2014, <http://www.theguardian.com/world/2014/apr/14/bill-to-ban-investor-state-dispute-settlements-garners-support>

[6] The Economist, The arbitration game, 11 October 2014, <http://www.economist.com/news/finance-and-economics/21623756-governments-are-souring-treaties-protect-foreign-investors-arbitration>

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Reprinted with permission from Gateway House: http://www.gatewayhouse.in/india-u-s-bit-not-a-done-deal-yet/
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Quartz India: http://qz.com/332427/the-biggest-investment-deal-between-india-and-the-us-is-nowhere-close-to-completion/