India’s Non-Aligned Strategy

The world’s fifth largest economy and most populous nation, a rapidly growing economic power in its own right, India has generally sought to avoid alignments and entanglements in great power politics, preferring to plot a middle, non-aligned course of its own and to seek to maintain good relations with most countries, whilst asserting its interests in a tense neighbourhood. Given this, and the recent coaxing by the USA and others into playing a more significant role in regional security, you can imagine how surprised India was by, and why it is still smarting from, its recent international trade tariff treatment at the hands of the U.S. Administration, which it regards as being unreasonable and hopes to be reversable over time. Perhaps with the help of India’s large USA diaspora.

On 27thAugust President Trump imposed an additional 25% duty rate on most goods imported into the USA of India customs origin, on top of the existing 25% generally applicable rate. This was apparently to penalise India for its continued purchases of energy products and of military materiel from Russia, something India is far from alone in doing. The additional duty takes the U.S. import tariff for most India goods up to 50%, one of the highest rates meted out to America’s trade partners to date.

This has significantly dented India’s hopes of developing its export manufacturing sector as a key driver of its economic growth in the short to medium term. The tariff hike seriously affecting India’s  manufacturing competitiveness in a number of sectors as compared with other countries in Asia, most notably its regional geo-political rival China and key textile and garment competitor, Vietnam. India had previously hoped to benefit from the former’s own trade tensions with America, as international firms look to diversify their supply-chains as a back-up, or to adopt a ‘China plus one’ sourcing strategy. The opportunities here have now dwindled in a number of sectors, with the notable exception of those sectors so far mercifully untouched by the additional tariffs, the most important being information communication technology, pharmaceuticals (though currently too reliant on China for its precursor chemicals) and electrical goods. Also unscathed for the moment is India’s large multifaceted international services sector (for example, software development / support, call centres, support services etc.) which exports almost as much as all other sectors combined.

There is a very real sense in which India’s capabilities and resilience are being tested by today’s less predictable international business environment. However, the impact of the USA tariff rises is thought to be manageable overall, for the time being at least, because India’s economy relies less on goods export than other Asian countries. Nevertheless, it is a blow to traders that have switched production there from China and for those hoping that more international companies will move their factories from China to India. Therefore, the latter is thought to be seeking closer economic ties with alternative markets, making a virtue of its traditional non-alignment, whilst embarking on a damage limitation exercise in respect of its relationships with the USA and China. For it is recognised that to grow India will continue to need to rely both on China and on the USA going forward, for solid flows of money, direct investment, know-how, technology, and as markets for its goods and services, though it is hoped proportionately less so in time.

The UK–India CETA Agreement

It is in this context that free trade agreement (FTA) negotiations between India and the UK found renewed impetus earlier this year culminating in the signing of the UK-India Comprehensive Economic and Trade Agreement (CETA) agreement in July (LINK to UK-India's CETA) , currently subject to a pre-implementation ratification process, which is expected to be completed by next summer, all being well. Under the FTA India and the UK have agreed to reduce applicable duties / taxes across a whole range of goods (see link above) to be phased in over a 10-year period. Note though, that quotas will remain in place for some of the goods covered.

Tariff cuts highlighted include - India reductions: mainly in drinks, automotive, cosmetics, aerospace, medical devices, electrical machinery, confectionary, and certain foodstuffs; UK reductions: tariffs which are already modest, are to be eliminated across a wide range of lines especially textiles, clothing, footwear, leather goods, sports goods, toys, jewellery, chemicals, engineering components and certain foodstuffs UK-India CETA Tariff Commitments . It is hoped the agreement will go some way to supporting economic growth in both countries in the coming years, not just through tariff reductions and trade efficiencies, but also through closer economic ties and increased investment flows.

However, the UK-India CETA can be seen as a rather complicated and cautious agreement, playing to each country’s competitive advantages whilst tending to steer clear of sensitive sectors where valuable political capital would likely have to be spent, but where the gains and benefits would be greatest. Nevertheless, the agreement provides an important framework for the continued evolution and development of trade and economic relations between India and the UK where there was none. Also, apart from the market access aspects of the bi-lateral agreement its provisions do break new ground in some ways, in addressing the efficiency of customs controls, good practices, standards and with its social and environmental provisions.

Despite the above headwinds and challenges currently facing India, it has recently  demonstrated that it has options, and that in general terms it is still considered to be the world’s most dynamic large economy, with economic growth for the medium term currently forecast to be in excess of 6% per annum, which on current projections could make India the world’s third largest economy by the end of the decade. So, the external tariff shock could prove to be just what India needed to continue to spur positive change.

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‍‍This article was written by Christopher Starns, Customs & Trade Advisor (BKR Consultants Limited).