GSP withdrawal not to hit Indian exports much, but US firms may look for options, says veteran economist

By: | Updated: March 25, 2019 9:31 AM

India is clearly an important geopolitical alternative to China as far as the US is concerned, and it’s important that the relations between the two countries continue to get stronger, he also told Eram Tafsir of Financial Express Online.

The US decision to scrap the concessions to India under the Generalised System of Preferences (GSP) may not have much impact on the Indian exports. However, competition from cheaper alternatives is likely to pose challenge for domestic players as manufacturers in the US may look for them, said a veteran economist.

The GSP withdrawal is expected to raise costs for the American firms and hinder strengthening of the Indo-US relations, Bhaskar Chakravorti, professor and dean of global business at The Fletcher School and an advisory board member for the UNDP’s International Center for the Private Sector in Development, told Financial Express Online.

India is clearly an important geopolitical alternative to China as far as the US is concerned, and it’s important that the relations between the two countries continue to get stronger, he also told Eram Tafsir of Financial Express Online.

Here are edited excerpts of the interview:

How do you think the withdrawal of the GSP benefit from India by US would affect Indian exports?

The direct impact might be relatively small, the loss of $190 million worth of a tariff advantage out of $5.6 billion worth of goods that the US imports from India. However, it could have an adverse effect more widely as in making the Indian exports more expensive and vulnerable to increased competitiveness from alternatives across the board from cheaper locations. In particular, much of the products that India exports under the GSP is an intermediate good (an input into a finished product); so manufacturers in the US might be tempted to look for alternatives.

How do you think the move will impact India-US bilateral relations?

Both the countries have been short-sighted in their trade policies. India has been leaning towards greater protectionism and the US as well; in fact, the US is engaged in an outright trade war with China. India is clearly an important geopolitical alternative to China as far as the US is concerned – and it is important that the relations between the two countries continue to get stronger.

For its part, India is concerned about the longer run presence of China in its region and the more immediate flare-up with Pakistan. On both fronts, India needs a strong ally in the US. Net, I believe that there are larger interests in play that point towards stronger India-US relations and trade issues will be a minor irritant in the relationship. The main problem is, of course, that the US political establishment has an incoherent foreign policy and India is going through an election cycle, so its foreign policy will remain in suspended animation for the next several months.

What according to you should be India’s immediate response to this decision?

Engage in negotiations with the US trade representatives and make the case for why the decision is bad for both countries. It will certainly raise the costs for many American companies and is an unnecessary irritant to a more important cause of strengthening India-US relations.

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What could be the long-run impact of this decision on the Indian economy? Suggest a long-term strategy for India to follow?

The long-term impact on the Indian economy is not that much. Partly because India is still a relatively small player in the global trade and its manufacturing sector (the one that takes the biggest hit from the GSP change is still small. Under the Modi administration India has not made sufficient progress in growing its manufacturing sector. The long-run strategy is to actually have a more robust strategy for growing its manufacturing sector, which, in turn, will improve the dismal employment situation in India.

However, there is no point in focusing on low end manufacturing — the kind that is moving from China to other low cost locations. India needs to develop a framework and infrastructure for growing higher end and higher value manufacturing, e,g. the success it has had with auto parts, that would bring not only higher-paying jobs but also make its exports less vulnerable to changes in trade regimes and competition from other low-cost manufacturing countries.

 

First published on March 22, 2019 at www.financialexpress.com

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