S. Majumder

With rising interdependence between the US and India, the BPO spat is turning out to be a hurdle in furthering economic relations. In this context, entering into an FTA would help bring the countries closer and result in two-way gains.

Flag off an FTA for better US-India economic relations. — Kamal Narang

AS TRADE among countries rises so does the chance of conflict. In the 1980s, for instance, Japan faced the US' wrath for excessive exports. A similar sort of trade dispute arose between China and the US in the 1990s. And, now, India seems to be a target, blamed for pushing itself onto the US service market.

Statistics show that the US is India's largest trade partner, accounting for 27 per cent and 70 per cent, respectively, of India's total merchandise and software (including services) exports. Taken together, the US accounts for 28 per cent of these exports, a substantial contribution to India's economy. In value terms, the US throws open an export market of $18 billion a year to India. With such economic dependence and with over two lakh Indians earning their livelihood from business process outsourcing, much of it from the US, can New Delhi afford to antagonise Washington however much its backlash on BPO seems unreasonable and against the tenets of free trade?

Although arguments have been made that the US backlash on BPO would mean losing a big Indian market, the fact is that India's trade and investment dependence on the US is much more than the other way around; India accounts for less than 1 per cent of US' global trade.

India is shining, nevertheless. It is surging ahead with a robust 8 per cent GDP growth this fiscal. Exports have contributed significantly to this shine. They have played a pivotal role in the revival of the industrial sector, which was off-colour for over two years. The country's coffers are brimming with foreign exchange. As the US accounts for a large share of India's basket of exports, it would not do for New Delhi to make much of the so-called BPO backlash which anyway relates to government procurement only.

India-US trade relations got a boost following the launch of reforms in 1991. Merchandise exports to the US doubled during 1993-94 to 2002-03 and software and services rose four-fold during the five-year period ending 2002-03. Again, the US is the biggest investor, contributing to 20 per cent of total foreign direct investment (FDI) in India.

On the other hand, the potential gains to the US from India are also high. India has a huge untapped retail market. This is estimated at $180 billion and is expected to double in 2010. At present, the share of the organised retail sector of this market is a mere 2 per cent, offering, thereby, a huge potential for investment by American companies.

India's biggest asset, it is well-recognised, is human resource. While China too has abundant cheap labour, India is holding its own in the global market with cheap, yet high quality, workforce that also speaks English. Also, there are increasing doubts about China's ability to provide cheap labour on a sustained basis.

The large Indian diaspora has contributed significantly to the growth of US-India relations. Over 40 per cent of IT professionals in Silicon Valley are Indians. Currently, more than 170 Indian IT companies have set up shop in the US. Indians have already established themselves in the medical field; 35,000 Indian doctors are practising in the US. Also, Indian pharmaceutical firms are headed for the US market with bulk drugs. Applications to the US FDA (Food and Drug Administration) have zoomed in the past five years.

In this milieu of rising interdependence, the BPO spat is turning out to be a hurdle in furthering economic relations between the two countries. And as a quid pro quo, the US is forcing India to open up the economy further. The US Trade Representative, Mr Robert Zoellick, has said that India has no right to complain, as BPO does not come under the government procurement code of the WTO. It is also absurd to rest on assurances that the BPO conflict will be quashed permanently after the US election in November.

In this context, a free trade agreement (FTA) will probably be best way to settle the BPO dispute. FTAs have now become a key route for many countries to enhance trade and investment relations. Both the US and India are also on an FTA spree.

While the attention of US trade policymakers has increasingly shifted from multilateral to regional arrangements, India's FTAs have been mainly to restrict China's expansion in Asia. One of the most successful FTAs, where all members have gained regardless of their economic strengths, is NAFTA (North American Free Trade Area).

The lessons from NAFTA can be a guiding force to resolve the BPO issue. Since NAFTA's launch in 1994, Mexico has gained much with its labour migrating to the US but without sparking tensions. This is because NAFTA covers the migration issue.

The US Department of Labour certified more than 500,000 job losses to Mexico in 10 years, many of them in the manufacturing sector. California alone lost 116,000 jobs since 1994. The US preferred to turn a blind eye to the job issue. Mexico-US trade jumped from $88 billion in 1994 to $350 billion in 2001. And Mexico's export to the US trebled from $52 billion in 1994 to $142 billion in 2002, turning the trade balance in favour of the former. But Mexico proved attractive for US capital, drawing $15 billion in investments in 2001 compared to $1.3 billion in 1992.

American companies made inroads into Mexican markets and used the abundant cheap labour, helping raising their own competitiveness in the global market. NAFTA helped the US pressure Mexico into accepting a number of commitments on intellectual property rights that were escaping Mexican laws. Besides, NAFTA not only helped create political stability in Mexico, especially along the US-Mexico border, but also covered the facility of government procurement. Thus, the gains have been two-way.

FTAs are, therefore, a more persuasive way of arbitration and trade negotiation. They bring countries closer to understanding the benefits of co-operation much better than multilateral negotiations. Few Americans are aware of the BPO windfall that has accrued to the US.

The adverse political propaganda has overshadowed this. Outsourcing has pushed up productivity levels in the US. With low-value-add jobs shifting to low-cost countries such as India, the US workforce is retraining and moving to higher value-add jobs. The average growth in labour productivity has been higher in the US than in the G-7. It is a misconceived notion that BPO has driven up unemployment in the US. According to one report, during 1991-2002, less than 10 per cent of the unemployed in the US remained without jobs for more than a year. In comparison, about 25-30 per cent of them in G-7 were unemployed for more than a year.

A shortage of workers is affecting the US healthcare market. It is predicted to worsen because the US population is ageing. India has a large and rapidly growing healthcare industry, churning out more than 30,000 nurses a year. Can they not provide low-cost service to the ageing US population?

Hence, constant dialogue between the two countries is imperative to remove misunderstandings, and this is possible through an FTA. Thus far, trade dialogues have not been a real stimulus. Only when disputes arose did the countries sit down to negotiate. In fact, both seem to have followed the `eye for an eye' dictum when it came to trade. There is no regular platform at the government level to motivate both sides to improve trade ties. In the absence of this, only an FTA can act as springboard to achieve better relations.

(The author is a Senior Researcher with a New Delhi-based Japanese multinational.)

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