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India and US: A note on trade and commercial issues

Comprehensive note of the Commerce Wing of the Indian Embassy
July 10, 2002

Indian economy and economic reforms

Till a decade ago the Indian economy was characterized by a highly regulated business environment, an extensive licensing system and high tariff barriers. But sweeping reforms introduced since then have radically changed the course of the Indian economy.

Benefits of the economic reform process are visible in the form of better growth rates, besides higher trade and investment flows in the post liberalization era.

The inherent strength of the Indian economy is borne out by the fact that it has registered an average annual growth of 6% since 1992. With its GDP growing at 5.4% during 2001-02, India was one of only two major global economies to have topped 5% in GDP growth last year. Moreover, annual inflation is under control and in single digits - during financial year 2001-2001 the point-to-point inflation was 1.4% and the wholesale price index inflation was 3.6%. Prospects for continued growth during 2002-03 remain bright. India's key infrastructure sectors grew by 5.5% during May 2002 and the sectors spanning crude, petroleum refining, coal, steel, cement and electricity grew by 27% during April-May as per figures released by the Ministry of Commerce and Industry on June 20th, 2002.

India's foreign exchange reserves are a comfortable US$57 billion (up from less than US$1 billion in 1991) equivalent to over 10 months of imports. The Rupee has remained relatively stable against the major hard currencies and the exchange rate of the Rupee vis-à-vis the US dollar was Rs.48.90 as on June 25th 2002.

India's external debt situation has improved in recent years as a result of effective external debt management. The external debt-GDP ratio decreased from 28.7% at the end of March 1991 to 21% at the end of September 2001. The debt service ratio declined from a peak of 35.3% of current receipts in 1990-91 to 16.3% in 2000-01. For the first time the World Bank has classified India as a "less-indebted country".

Foreign trade as a percentage of GDP increased from 14% in 1991 to over 20% in 2000. Foreign Direct Investment remained constant during 1999-00 and 2000-01 at $5.2 billion and $5.1 billion respectively. However, if we compare the period April-December 2000-01 and 2001-02, FDI has risen from $2.5 billion to $3.7 billion, an encouraging growth of 48%.

In 2001-02, foodgrain production was 210 million tonnes. India is a net exporter of food.

Meanwhile, the Indian economy continues to open up at a good pace. Since 1st April, 2001, almost every item can now be imported into India without QR's, upon payment of the relevant customs tariff.

As benefits of reforms have spread, accelerating growth and bringing macro economic stability, the strong political consensus in favour of reforms (for implementing economic liberalization policies, development of infrastructure, and an expanded role for private enterprise) has transformed into a national consensus cutting across party lines. This has also encouraged the Government to embark on a second generation of economic reforms, which are now being implemented.

Today the Government's policies are relatively simple and transparent. With policy reforms undertaken in virtually every sphere (including trade, industry, foreign investment, finance, taxation and the public sector) the Indian economy is now firmly on the path of globalization. It has demonstrated its resilience and is now showing improved productivity, a higher degree of innovation and international competitiveness.

On March 31st 2002, the new EXIM Policy 2002-2007 was released. It encourages the establishment of Special Economic Zones (SEZ's) by permitting the opening of "Offshore Banking Units" (OBUs) in SEZs, permitting such units to undertake hedging of commodity price risks on stand-alone basis, and to permit "External Commercial Borrowings" (ECBs) for a tenure of less than three years in the SEZs. The Reserve Bank of India has been tasked to work out the detailed guidelines. Similarly, to adapt to the zero duty regime under the ITA-1 (Information Technology Agreement-1), the current Electronic Hardware Technology Park (EHTP) scheme is being modified.

India-US bilateral trade

India attaches great significance to its bilateral relationship with USA and expects it to strengthen further. India and USA have also entered a new and vibrant phase in their bilateral trade and economic relationship. The visit of the US President to India in 2000 and Prime Minister Vajpayee's visits to the US, in September 2000 and November 2001, have served to underscore the deep interest and commitment on both sides to develop strong trade and economic ties. Businesses of both countries have also shown a keen interest in forging a meaningful and mutually beneficial commercial partnership.

In keeping with the steady growth in overall bilateral relations, India-US bilateral trade also started to grow, even though it still remains a small fraction of USA's global trade. While US exports to India account for over 10% of India's non-oil imports and USA is the destination of close to one-fourth of India's exports, USA's trade turnover with India constitutes less than 1% of its global trade. India's share in US imports has remained at 0.9% of total US imports over the last few years. India is ranked 22nd among countries that export to the US. USA is India's largest trading partner and foremost export destination.

The composition of India's exports to USA has changed over the years. Indian exports to the US have risen over the years, mainly on account of significant increases in the exports of diamonds, textiles and ready-made garments, machinery, carpets, footwear and leather products, dyes, iron and steel products, chemicals, auto parts, edible fruit and nuts and spices, besides software. Cut and polished non-industrial diamonds, jewellery, textiles and clothing, carpets, shrimp and other marine products, footwear and leather goods, iron and steel, and cashew nuts, account for nearly 70% of total Indian merchandise exports to the US.

There has also been a change in the composition of India's imports from the USA. With India becoming self sufficient in foodgrains and PL 480 funds having been used up, regular imports of wheat and edible oil from USA have stopped. Crude oil, which was the second highest import item in 1985, has also been virtually phased out. Chief items presently imported from the US are machinery, including project items, fertilizers, aircraft and aeronautical equipment, medical equipment, and organic chemicals.

During 2001, India's merchandise exports to USA were over $9.7 billion and imports nearly $3.8 billion, for a total two-way merchandise trade of $13.5 billion. In addition, Indian exports to USA of software and IT related services grew from $3.5 billion in 2000 to approximately $4.8 billion in 2001.

In 2001, India's total exports to USA (merchandise and software) crossed $14.5 billion, while US exports to India were $3.8 billion. India-US trade in 2001 was US$18.3 billion. Yet huge untapped potential remains.

Latest trade data for January-April 2002 shows that although US imports declined by -8.9%, India's exports to US grew by +13.3% making it (with Ireland) the leading exporter to the US amongst USA's top 25 trading partners. For India, major export growth sectors include gold/diamond jewellery (+43%), iron and steel (+130%), frozen shrimp and other marine products (+41%), and pharmaceuticals (+419%). US exports declined to 21 of its top 25 export destinations. However, US exports to India increased marginally by 1.8%, due to increased exports of chemicals and soybean oil.

Prospects for further bilateral trade cooperation

A few years ago India was identified by USA as one of 10 major emerging markets. {7th largest country, 12th largest economy in GDP terms, 4th largest economy in PPP terms}. Given its potential and recent achievements it is difficult to ignore India now.

USA and India are presently establishing a closer and qualitatively new relationship, including in the trade and economic field. India's continuing economic reforms plus the two countries' complementary strengths and resources provide strong bases for expansion of bilateral economic ties. Not only are India and USA allies in the cause of democracy, but also in exploiting the promises of the new economy that have emerged in the information technology and biotechnology sectors.

India is fully committed to protection of intellectual property rights in the country, and this is reflected in the various laws recently put in place relating to industrial designs, geographical indication, copyrights, protection of plant varieties, amendment of the patents act, etc. In most of these areas, our laws are now both comprehensive and up-to-date. Moreover, there is a well-established statutory, administrative and judicial framework to safeguard intellectual property rights in India, whether they relate to patents, trademarks, copyright or industrial designs. The Patent (Second Amendment) Bill, 1999, amending the Patents Act, 1970, was passed by the Indian Parliament on May 14th 2002. The Bill not only seeks to make the Indian Patent law TRIPs compliant, but also incorporates safeguards for protection of public interest, national security, biodiversity traditional knowledge, etc. The US denies GSP benefits to India on nearly 800 product lines pertaining to chemicals, agro-chemicals and pharmaceutical products, ostensibly due to alleged lack of sufficient IPR protection in India. Though the volumes of Indian exports of these items to USA was earlier small, the restoration of GSP to India for these products would enhance our cooperation in the pharmaceutical sector.

There exist numerous opportunities for us to further strengthen our trade and economic linkages. The competitive advantages that India has to offer include a vast pool of trained manpower that is ready to be harnessed to mutual advantage. The scenarios for cooperation are particularly attractive in providing such IT enabled services as business process outsourcing (BPO) including data processing, data digitization, medical transcription, call centers, on-line education, and other back office operations.

Other areas with good prospects for Indian exports to the US include chemicals/petrochemicals, pharmaceuticals, herbal preparations, shrimps and other marine products, textiles and apparel. In turn, the lifting of all quantitative restrictions has provided fresh opportunities for US exports to India of a very wide range of products including textiles, frozen foods and fresh fruit, industrial products, etc. The US decision in October 2001 to lift economic sanctions imposed on India in the wake of the 1998 nuclear tests, may also lead to a marginal rise in US exports to India.

FDI - recent liberalisation:

An important reason for the growing interest of foreign investors in India has been the size and the potential for growth of the domestic Indian market. Rapid urbanization, growth of the electronic media, education and increasing domestic and foreign travel are changing the nature and composition of expenditure, with growing emphasis on brands, product quality, features and convenience. Moreover, increase in the number of households headed by salary earners, professional and business persons and the emergence of a thriving consumer finance business is leading to a rise in consumerism in the country. India is amongst the last remaining frontiers if one looks amongst countries with a substantial absorption capacity.

New thrust areas for FDI into India include the following sectors where the need for investment is self evident and where domestic capital generation is unlikely to suffice, e.g., Infrastructure: roads (toll highways, city bypasses, build and lease), ports and airports; Communications: telecom and information technology; and Energy: power, mining, coal, oil and gas. In most of these areas private sector involvement on a commercial basis is a relatively recent phenomenon in India.

Print Media: On June 25th 2002, the Government announced that foreign investors would be permitted to take a 26% stake in print media for news and current affairs and a 74% stake in technical journals and other non-news print publications. Tea Plantations: 100% foreign direct investment has been permitted in tea plantations (FDI approval would be subject to compulsory divestment of 26 percent equity of the company in favor of an Indian partner/Indian public within five years)

US trade and investment in India - some success stories

General Electric: A majority of GE's businesses worldwide have a presence in India - aircraft engines, broadcasting, capital services, lighting, medical systems, etc.. Nearly 19,000 GE professionals are based in India. GE has established its largest laboratory worldwide - the John Welch Technology Centre - in Bangalore. The multi-discipline laboratory covers research in hot-air gas paths, materials, design and computer science. GE annually generates well over $1 billion in revenues out of its India operations.

Whirlpool: The largest manufacturer of appliances in the world, it has already consolidated its position in the domestic Indian market by becoming the market leader in fully automatic washing machines and refrigerators. Now it plans to consolidate its position in the export market by doubling export sales to 20 per cent in the next couple of years from current level of 10 per cent of sales. It has already invested $200 million in the Indian market and plans to spend $20-80 million every year on new brands.

Ford (India): It has invested over $400 million in its Tamil Nadu plant and is now exporting its popular Ikon model to South Africa and Mexico. Ford expects to become profitable in India by the year 2004.

Owens Corning India: Its glass fiber manufacturing plant has developed in two years into the largest exporter in Maharashtra, with annual foreign exchange earnings of over $50 million. It employs 400 graduates, and is Owens Corning's most successful venture in Asia.

Tecumseh Products (India) Limited: Employs 2,500 workers in Haryana and Andhra Pradesh, and operates the only air-conditioning compressor manufacturing plant in India.

Pepsi: With 3000 employees and 43 plants (20 owned, 23 franchised), Pepsi sells upwards of 160 million cases annually through 750,000 retail outlets across India. It also has a growing snack food business "Frito Lay" and a presence in the packaged juice market with its "Tropicana" brand.

Proctor and Gamble (India): This fast moving consumer goods manufacturer with operations based in Mumbai, generated good profits in India last year.

Microsoft: It is investing over $50 million in its software development centre located in Hyderabad.

Intel: Intel Corp, the world's largest chip manufacturer, has announced on 9 April 2002 that India will be among five global markets on which it intends to focus its growth plans (besides Brazil, China, Mexico and Russia).

IBM Corporation: On 17 April 2002, IBM has signed a strategic partnership with India's Wipro Systems aimed at breaking into the global biotechnology market and also to increase IBM's market share in India and the Asia-Pacific region.

Sun Microsystems: has invested US$100 million in India for development of its engineering centre and expects that its India operations will this year add $1 billion in revenue flows.

Wal-Mart: Now the world's largest company, Wal-Mart has with effect from 1st February 2002 terminated its relationship with its third party sourcing agent based in Hong Kong and established a branch of its own sourcing operations (Wal-Mart Global Sourcing) in Bangalore.

Hertz: The car rental company Hertz, which recently began its operations in India, has already announced that in 2002 it will be focusing on expanding its product portfolio in India by aggressively promoting newer products, besides expanding to more cities. Hertz views the potential for the car rental business in India as immense.

Following sectors in India have also proved attractive for US investment:

Banking. FDI in banking is permitted up to 49%. Success stories in this sector include Citicorp, GE Capital, and American Express.

In March 2002, American Express announced plans to further expand its operations infrastructure in India with the establishment of a new service centre in Gurgaon, Haryana. American Express presently operates its "Financial Resource Center - East" in New Delhi, providing in-house back-office accounting support to Amex operations in the entire Asia-Pacific region.

IT enabled services/outsourcing. Many US companies have already started reaping the advantages offered by India's IT sector, such as a large pool of trained, English speaking personnel, offering huge cost benefits and a 12 hour time difference with USA and other major markets that enables India to offer virtually round the clock, year round (24 x 365) services

US companies taking advantage of the opportunities offered by India's IT Sector include American Express, Citicorp, Microsoft and Dell.

Fortune 500 companies such as Margin Stanley, AT&T, Reebok, GM, Boeing, Pepsi, and Coca-Cola have identified India as their outsourcing partner.

Information Technology. New opportunities in the Indian IT industry are emerging in embedded software development (use of "smart" devices in internet applications), Broadband Networking Solutions, Multimedia Content Management (TV platforms, set-top boxes, data mining), Bio-informatics (automated genome analysis, modeling of protein structures from primary sequences, creation of relational databases from unstructured pharmaceutical and clinical data), Health Insurance Probability and Accountability (to streamline US health care industry).

Telecommunications. India's 32.4 million line basic telephone network (and 3.6 million cellular mobile network) is the 8th largest in the world and third largest among the emerging economies (after China and Korea). It is growing annually at 22% for basic services and over 100% for cellular and internet services. Amongst major US companies that have entered the Indian market are AT&T and Qualcomm.

Internet Telephony. Deregulation of the national long distance and international long distance services in India in April 2002 provides an opportunity for service providers to enter the high-growth long distance market using Voice-over-Internet-Phone. US companies are rushing to grab market share, including Net2Phone.

Biotechnology. There are over 800 companies in India operating in various sectors of the biotechnology industry. A substantial portion of the Indian biotech industry would be focusing on research and technical services. Over 50 R&D labs are in place with over twenty of them conducting research in frontier areas of biotechnology. Several research laboratories are working on genome sequencing and genomics, pharmacogenomics, gene annotation and proteomics.

Bio-informatics (BI). India is expected to lead in BI. The value of the global BI market is estimated at $1-$3 billion, but is projected to grow exponentially over the next decade. BI involves extensive application of information technology for collating, organizing and analyzing large amounts of data pertaining to genomics, proteomics, drug screening and medical chemistry. India's attractiveness are its enormous potential in leveraging its well established core competencies in the IT area, its large resource pool of molecular biologists, statisticians and software engineers, that are expected to enable it to garner a large share of this market.

Insurance. The insurance sector has been recently opened up for up to 26% FDI. Untapped potential is huge. US companies that have successfully entered this field in India include New York Life, AIG and Chubb.

Privatization opportunities. The Government of India has more than $50 billion in investments in Public Sector Undertakings (PSUs), in the form of equity holdings in manufacturing enterprises, banks, insurance companies, etc. The policy on disinvestment (privatization) is being carried out in a transparent manner. The 2002-03 Budget gives a further impetus to it and seeks to accelerate transfer of ownership and management control to private entities. Tremendous opportunities exist for investment in key sectors such as tourism, shipping, telecommunications, petrochemicals, aviation, mining, etc.