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The Elephant Stumbles? Are India's trade policies hurting its growth prospects?
Date: 7/2/2013
Written By: John Howes, NFTC, jhowes@nftc.org

Recently in Congress there has been a deluge of concern regarding India’s inward economic policies. At the Georgetown Center for Business and Public Policy’s panel discussion, “The Elephant Stumbles? Are India’s trade policies hurting its growth prospects?”, moderator Bob Vastine, the Senior Industry Fellow at the Georgetown Center for Business and Public Policy, questioned leading scholars – Rick Rossow, Director for South Asia at McLarty Associates, J. Bradford Jensen, Professor of Economics at Georgetown University, Rob Atkinson, President of the Information Technology and Innovation Foundation, Chris Moore, the Senior Director for International Business Policy at the National Association of Manufacturers, and Swaminathan Aiyar, a Research Fellow at the CATO Institute –in regard to their views as to what impact India’s protectionist economic policies might have on trade between the US and India.

Rick Rossow discussed the excitement in Washington surrounding the high level political interactions between the US and India. Rossow argued that India’s future policy decisions will be determined by Indian officials’ allocation of political capital, noting that 52% of India’s voting population is comprised of farmers. Indian farmers petition local governments for the basics, like food and water, and never request anything on the US’ agenda. Acting as normal politicians, Indian Congressmen design their respective agendas to give them the best possible chance at reelection. As a result, Rossow pointed out that social issues are likely to dominate the political agenda, especially with upcoming elections. Moreover, Indian politicians are not pushing across the reforms that will have significant long-term economic impacts because the Indian Congress Party is content with its position in the polls. However, Rossow conveyed the notion that there are still opportunities to make changes at the margins, which both the US and India can agree are win-win’s.

While Jensen did not contribute to the Q&A section of the panel discussion, he offered his opinion that trade in services is as a huge opportunity for US business exports to the Indian market. He thinks both countries could gain a lot from a multilateral services agreement, citing the fact that India is a relatively low-scale labor value country despite the concentration of technology skills in Bangalore. The US’s relative abundance of highly skilled labor creates the potential were Indian immigration policy to be liberalized, for technology transfer by US workers that would benefit Indian infrastructure. Unfortunately the current Indian tariff on services, approximated at 70%, limits trade in services with India. However, Jensen made the point that appropriate liberalization of select Indian trade in services policy could prove beneficial to long-term growth.

Rob Atkinson echoed the thoughts of the first two panel members, expressing deep concern about how rising trade barriers in India will significantly hurt American manufacturers that export finished goods to Southern Asia. As one of the most visibly opposed panel members to India’s inward economic policies, Atkinson explained how India has reverted to mercantilist policies. He views India as jealous of China’s economic success in recent years and thinks India is adopting the Chinese strategy in a desperate attempt to regain the remarkable economic growth it achieved until recently. From Atkinson’s point of view, India is attempting to accomplish this feat by replacing low growth industries with high growth industries, such as replacing textile factories with IT factories. However, Atkinson believes the only way for India to develop its manufacturing sector is to remove regulatory barriers, improve infrastructure, expand labor mobility, and emphasize education to increase the amount of domestic skilled labor.

Senior Director for International Business Policy for the National Association of Manufacturers (NAM), Chris Moore, was another strong opponent of the new Indian economic policies. Similar to Atkinson, Moore identified rising trade barriers in India as a threat to American manufacturers that export to Southern Asia, specifically India’s weak protection of Intellectual Property Rights (IPR’s). Furthermore, the new barriers heavily favor Indian domestic manufacturers and severely jeopardize US trade with India. Ultimately Moore labeled the evolving trade scenario with India as “lose-lose-lose”. Moore announced that the NAM is committed to working with the US government to address these concerns. Finally, he highlighted the importance of John Kerry’s most recent visit to India and explained that visits between high level officials needs to be frequent to improve the situation.

In contrast to the American perspective, Swaminathan Aiyar (Swami) offered a slightly different outlook on the future of the Indian economy. However, he agreed with the panel that India’s decision to implement more protectionist trade policies will have a negative outcome for both countries.

When asked, “At what point will India’s farming industry or others want stronger IPR protection?” Swami responded that there is plenty of collaboration over this, but India will not give product patents in the near future. Nevertheless, India is interested in genuine innovation. Atkinson rebutted by recounting a communication he had with an Indian executive director of a biotech company that was genuinely interested in innovation. The executive director stated that the vast majority of the market solely produces generic pharmaceuticals and that they have no desire to create new products. Atkinson finished by saying he does not see Indian industries making a request to enhance protection of IPRs for at least a decade. Moore reiterated the notion that Indian generics benefit from exportation to the US, whereas US exporters are severely limited due to high Indian tariffs. For example, compulsory licenses for green energy manufacturing are readily given to Indian manufacturers by the Indian government, which Moore suggested could flood the American market and hurt American manufacturers in the future. However, Swami told the panel that even if the US files a lawsuit against India in the WTO, India will most likely win. In Swami’s words, “IPR on generics is crap.” In a more moderate tone, Rossow suggested that a bilateral investment treaty might be a good place to improve relations at the margin, as opposed to tackling the major issues.

In regard to IPRs, someone asked, “how does the innovation process work and how essential are IPRs for that process?” Atkinson immediately responded by saying that, from a game theory point of view, it makes sense for India to ignore innovation because they can sell generics at lower prices and maximize profits. However in general, this hurts global innovation because it encourages pharmaceutical companies to focus more on the production of generics, while trade policy is supposed to foster global innovation. Only Atkinson commented on this question.


 

 

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Advancing Global Commerce for Nearly A Century- The National Foreign Trade Council (www.nftc.org) is a leading business organization advocating an open, rules- based global trading system. Founded in 1914 by a broad-based group of American companies, the NFTC now serves hundreds of member companies through its offices in Washington and New York.
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