US-India Trade Moderating: Good & Bad News

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Washington, DC – The US Census Bureau recently released data on our goods trade with India through June 2015. Surprisingly, the trend of reducing our trade deficit with India has continued—and even accelerated. In the first six months of 2015, the US goods trade deficit with India has shrunk 6.3 percent, largely fueled by a 14.3 percent increase in US exports to India.

While the moderating trade balance is great news to the United States, it indicates that Prime Minister Narendra Modi’s “Make in India” campaign, along with local content requirements adopted during the latter years of the Congress Party–led United Progressive Alliance (UPA) coalition, have not had a substantial impact on India’s desire to follow China’s path to become the workshop to the world. From India’s perspective, trade with the United States has historically been one of the few bright spots among its major trading partners.

As we reported back in June, India has one of the largest goods trade deficits as a percent of GDP among members of the G20. Despite softening oil prices and a more stable currency, in the 2014–2015 fiscal year India’s goods trade deficit hit $137 billion—nearly 8 percent of GDP. While below India’s all-time high deficit of $191 billion from FY 2013, the deficit remains a major factor in economic policymaking. Its impact on India’s leadership is particularly noticeable in the government’s reluctant attitude toward global trade talks, in the adoption of compulsory local manufacturing rules in a variety of industries, and in Prime Minister Modi’s highly visible “Make in India” campaign.

The United States’ sudden progress toward more balanced goods trade with India presents a unique challenge to US policymakers. Certainly increasing US exports is great for American firms. At the same time, it may augment India’s anti-trade sentiments and cause Indian policymakers to expand antiimport measures such as local manufacturing rules. In the midst of the key bilateral meetings in September, the US International Trade Commission (USITC) is scheduled to release an updated study on India’s trade policies during the first year of the Modi government. The first USITC report, issued in December 2014 and covering policies in place prior to Modi’s election, was quite critical of India’s trade policies.

In September, the United States and India will hold their first “Strategic and Commercial Dialogue,” and days later, Prime Minister Modi will return to the United States. The United States has already offered to help strengthen India’s manufacturing sector, including in strategic sectors such as defense. And foreign investments, both direct and portfolio, are quite strong and help to offset broader possible concerns about the trade deficit.

Recent economic engagement with India has tended to focus on negative aspects of our trade relationship, particularly in the US-India Trade Policy Forum. The concerns raised in these platforms are generally quite serious and deserve attention. But US policymakers must be mindful that we are experiencing a possible turning point. Despite concerns about India’s trade policies, US exporters are generally doing quite well right now. We do not want to appear to have a “tin ear” when it comes to India’s own needs to strengthen its economy.

The US trade deficit with India is still two-to-one, so we are not yet on a clear path toward balanced trade. But the sharp “correction” this year raises important questions. At some point, strengthening the Indian economy must be viewed through a strategic lens, rather than a purely commercial lens. Having a stronger economy is a critical precedent for Indian policymakers to show greater interest in global trade discussions. It will also empower India to provide alternative paths to the economic diplomacy for which China now enjoys regional primacy. And it will allow India to more quickly realize its full capacity to devote money and time to regional security matters, in whatever form this may take.

While the most important decisions that determine trade flows are made by private-sector entities, government discussions can play an important role. Such talks can result in formal trade agreements, remove trade barriers, expand critical government-facilitated training activities, encourage government-led trade missions, and highlight areas for future collaboration. But the recent goods trade data presents a conundrum to policymakers from both nations. Balanced trade is generally ideal, yet in the current environment it could prove damaging to our relationship in other ways.

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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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