Noida, Uttar Pradesh, India
Jun 07, 2019, 06.13 PM
As of June 5, perhaps as part of his trade war, US President Trump ended the Generalised System of Preferences (GSP) for India. The GSP has been around since the mid-1970s and aims to help the “World’s poorest countries to use trade to grow their economies and climb out of poverty.” India has two options. First, it can appeal the withdrawal to the World Trade Organisation.
Second, India can simply wait; the US has re-instated the GSP in the past (case in point, Argentina, 2018). However, the decision to end the GSP is actually a great compliment towards India.
The nation should not go to the WTO or appeal the decision in any way. There are two major reasons for PM Narendra Modi’s ‘cool as a cucumber,’ indifferent attitude towards taking away the GSP.
First, India’s massive market is something that America just cannot look away from and do without. The USA needs to have access to India’s population. India currently carries 1.3 billion people and, more significantly, carries one of the strongest, most vibrant workforces in the world (over 65 per cent under the age of 35 years old). This is a goldmine for employability for American MNCs now present in India like Walmart, Facebook, Google, etc.
The list also includes future superstar MNCs like Netflix and Uber. When these companies first came to India, it was PM Modi that worked efficiently and placed regulations for business. This prevented companies from being too bullish and operating with too much autonomy in India. While foreign leaders were not happy with this, it did not really make much if a difference in terms of companies still pursuing business in India. Case In point, Apple. Despite restrictions hurting Apple phone sales, CEO Cook remains extremely bullish in India, still aggressively penetrating the Indian market. Similarly, it is not likely that MNCs are going anywhere no matter how stringent regulations are.
Second, India has garnered top levels of foreign direct investment with America being a heavy investor. Just recently, Goldman Sachs CEO David Solomon expressed confidence in the Indian market due to Modi returning and the accelerating pace of NDA reforms. Many foreign firms carry the same sentiment. These investors will continue to be involved in India’s rewarding market. The Modi 1.0 government saw record-high FDI levels which will continue to rise over the next five years. And FDI is not the only thing the USA wants to keep engagement in India with.
Just hours after the GSP was taken away, there was a statement by the USA: American plans on increasing the ‘scope, complexity and frequency of military engagement with India.’
The USA considers India a ‘major defence partner’ which has facilitated greater interoperability and information spending over the past few years. This is strategic for the Indian economy in multiple ways: it brings employment, technological development, research, strategy and innovation to name a few. Thus, the impact caused by taking away GSP will be offset by this engagement.
What is the real impact on India’s economy by the move? Out of about $36 billion worth of exports by India to the USA, $5.7 billion worth of exports are affected, or just about 15.83 per cent. Many Indian experts are expecting that the USA will likely reinstate the GSP because the products that are exported will be hard to replace with India’s competitive advantage: items like natural pearls, pharmaceuticals and machinery. Furthermore, even if the GSP does not get reinstated, it is not really a concern. India is steadily turning into a global manufacturing hub via reforms during the Modi 1.0 and now 2.0 government. For these reason along with reducing costs and diversifying, hundreds of US companies are looking to move their manufacturing bases from China to India. Likewise, the Modi 2.0 government is looking to export in new markets. All of these actions will offset any loss created by eliminating GSP. Lower crude oil prices will also minimise the blow.
The root reason why the GSP has been taken away is because Trump is frustrated at India’s regulatory restrictions that were placed by PM Modi during his first term. Otherwise, American firms would bully India by running unregulated and autonomous in the market which would fatally impact India’s economy at a crucial point.
What’s the best way to treat a bully? Indifference. Schoolyard taunts are not meant to get a response. India has spoken maturely on this matter and asked for a dialogue to reach mutual terms. If not, no biggie. India has stated that the two nations will continue to work together regardless.
With this unruffled response, India has shown its new strength and place as a frontrunner on the international stage. It is no longer a nation that can be bullied. Rather, it is a strong, stabilising economy that is expanding its domestic sectors and fostering lucrative international engagement through positive development. And with a strong, abled, young, dynamic workforce driving innovation and setting higher standards for New India, the nation’s economy is most definitely ‘the new place to be.’ It’s about time that the USA gets this message. Otherwise, their loss.
(Disclaimer: The opinions expressed above are the personal views of the author and do not reflect the views of ZMCL.)