The GSP is a trade preference program directed at the world’s poorest countries and aims to promote development by eliminating duties on imports from beneficiary countries. In doing so, the program also helps increase competitiveness in the US by significantly reducing the costs of imported inputs for local businesses.
The GSP program enabled duty-free entry of about 3,000 Indian product lines into the US, consisting largely of goods from the textile, engineering and precious gems and jewellery sectors. India has been one of its biggest beneficiaries, exporting about $5.6 billion worth of goods to the US under the program in 2017, which was about a quarter of total goods imported by the US under the program. GSP-related Indian exports form a considerable chunk of total Indian exports to the US, which usually hover around the $45 billion mark annually.
Trump administration’s decision to end key trade preferences for India does not come as a surprise: India’s continued eligibility for the GSP status had been under review since April last year, when the United States Trade Representative’s office had cited lack of market access and technical barriers to trade for US products in India as a cause of grave concern, especially in the dairy and medical equipment sectors. Soon after the review was announced, other developments took place that put US businesses at a further disadvantage in India: new e-commerce rules restricted business opportunities for Amazon and Walmart-backed Flipkart, demands were made to Mastercard and Visa to move their data to India and higher tariffs were imposed on electronic products and smartphones coming in to the country.
The direct and most obvious impact would be on the external sector, as the loss in exports would cause a deterioration of the trade deficit, increasing pressure on the Indian rupee
Much to the delight of financial market investors, the news has not had any immediate impact and both the rupee and the stock market rallied last week, even after the news broke. Nevertheless, we have seen time and time again that financial markets are a weak barometer of the impact of long-term policy decisions. The government also did well to calm any panic by downplaying the significance of the withdrawal, announcing that the total benefits to exporters from the trade preference program amounted to only $190 million. It is clear that election driven, “political calculations” led to this overly modest figure, rather than sound economic calculations taking into account the macroeconomic effects of the withdrawal.
It is clear that the move is bound to have longer-term ripple effects on the Indian economy. Indian goods that were imported into the US under the GSP scheme consisted predominantly of intermediary, semi-manufactured products, such as mechanical spare parts, electronic parts such as wires and motors, food products, and precious gems. One would expect employment risks to rise in these sectors, especially since a good chunk of these exports came from labour-intensive small and medium enterprises (SMEs).
The direct and most obvious impact would be on the external sector, as the loss in exports would cause a deterioration of the trade deficit, increasing pressure on the Indian rupee. The export sector has already been hit hard by rising input costs and shortage of bank credit after the BJP government launched a national sales tax regime in 2017. The worsening trade deficit does not fare well for a government going into election in a few weeks, especially a government that had set the ambitious target of doubling India’s share of world exports and reducing its dependence on imports to create jobs, when it came into power.
Then there are opportunities lost. Following the China-US trade war (that put over $200 billion of Chinese exports to the US in jeopardy), India arose as a favourite for most global businesses looking to relocate their operations. The largest South Asian economy had much to gain from this rearrangement of global value chains. Ministers in New Delhi were enthusiastic about increasing the country’s global share of merchandise exports, which stood at 1.7 percent in comparison to China’s 12.8 percent. While withdrawal of a trade preference status will not cause much damage to this opportunity, it points to a bigger problem, that India is not bothered about changing its notorious reputation of being a difficult place to do business - one that will always look to protect its local industries. As the country chooses not to address the grievances of its trade partners and continues to put up barriers, foreign businesses have already begun to move to countries like Cambodia, Sri Lanka, Vietnam and Bangladesh. Unless Indian policy makers do not undertake substantial structural reforms, the country would fail to realize the very likely possibility of being the next factory of the world.
In such a situation, the obvious response of the government would be to offer fiscal help to the affected sectors as a short-term measure. A rebate of all embedded state and central taxes has already been approved for the apparel and textile segments last week, in order to provide some sort of relief following withdrawal of the GSP status. India could also choose to lodge a formal complaint with the World Trade Organization, but that would risk further retaliation from the Trump administration, and the government cannot afford that at this point given that elections are only weeks away. Perhaps the BJP government would be better of choosing to fold for now, rather than following its usual strategy of playing an aggressive hand in such a scenario.
The writer is an economist