India Under Modi: Reducing the Trade Trust Deficit

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Washington, DC – India’s deficit in goods trade continues to decline. The country’s goods trade deficit for Fiscal Year (FY) 2017 will likely reach around $105 billion, down from $118 billion in FY 2016 and $137 billion in FY 2015. India is thus poised to have consecutive years of a strengthening balance of goods trade for the first time since the 1991 reforms. International businesses hope that this trajectory results in the Narendra Modi government warming up to trade integration.

In the three years prior to the Bharatiya Janata Party’s (BJP) victory in the 2014 national elections, India’s goods trade deficit averaged around $170 billion per year, with a peak deficit of $190 billion in FY 2013—around 12 percent of India’s GDP at the time. This worsening trade position strengthened the hands of senior policymakers in the Manmohan Singh government who were already reluctant to pursue deeper trade integration, resulting in a slowdown of India’s global trade negotiations and the establishment of domestic manufacturing requirements in a range of sectors.

Table 1 with Rossow Byline

The Modi government has not altered the nation’s course on trade since coming to office. In fact, it has taken specific steps to slow India’s trade integration, including:

Decelerating pending bilateral trade talks: India has ongoing trade agreement discussions with multiple partners, including the European Union, Canada, Australia, and New Zealand, among others. In recent years, these partners have questioned India’s desire to complete forward-leaning trade deals.

Postponing global implementation of the World Trade Organization’s Trade Facilitation Agreement: The Trade Facilitation Agreement was one of the first major global agreements confronting the Modi government. The government’s reaction was to postpone implementation and initiate side talks on maintaining the country’s agriculture subsidies.

Maintaining/expanding local manufacturing rules: Several sectors saw local content mandates during the Manmohan Singh government, such as solar, electronics, communications, and information technology. The Modi government has maintained these rules, and expanded them, notably with the National Capital Goods policy approved by cabinet in May 2016. The National Capital Goods policy calls for local content mandates and directs India’s trade negotiators to focus future trade talks on weaker countries.

India’s balance of trade has strengthened considerably in recent years, largely due to low oil prices. Low oil prices cut both ways, however, as India exports refined oil products, in addition to importing crude. In fact, over the last 10 years, India’s exports of oil products equaled around 36 percent of its import bill for crude oil. More recent gains in the last part of FY 2017 are linked closely to increased exports, a welcome sign during a period of global headwinds on trade.

India’s reluctance to embrace trade integration is not purely tied to its balance of trade, so stronger numbers are not likely to immediately equate to a different approach. Other factors include the belief that trade barriers help local job growth, in addition to simple protectionism from Indian firms that fear competitive markets. But if this improvement is sustained across a few more years, it will reduce one of the fundamental reasons Indian leaders have been reluctant to embrace trade liberalization.

Table 2 with Rossow Byline

Richard Rossow
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Richard Rossow is a senior fellow and holds the Wadhwani Chair in US-India Policy Studies at CSIS.

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