PIB – May 6 , 2019


INTERNATIONAL RELATIONS

India and USA trade relations

Context

  • India and the United States held the India-U.S. Bilateral Trade meeting in New Delhi. India appreciated the US Trade Winds Indo-Pacific Business Forum and Mission initiative 2019, being held at New Delhi.
  • This is the first event of its kind and would pave the way for collaboration and partnership between the U.S. and Indian small and medium enterprises (SMEs) in the areas of manufacturing and services.

U.S.-India Trade Relations (A Brief Account)

  • India and The United States view one another as important strategic partners to advance common interests regionally and globally.
  • Bilateral trade in goods and services is 2% of U.S. world trade, and has grown in recent years.
  • The trade relationship is more consequential for India; in 2017, the United States was its second largest export market (16% share) after the European Union (EU, 17%), and third largest import supplier (6%) after China (17%) and the EU (10%).
  • India -U.S. foreign direct investment (FDI) is small, but growing.
  • Defense sales also are significant in bilateral trade.
  • Civilian nuclear commerce, stalled for years over differences on liability protections, has produced major potential U.S. supply contracts.
  • The US Govt., which views bilateral trade balances as an indicator of the health of a trading relationship, takes issue with the U.S. trade deficit with India, and has criticized India for a range of “unfair” trading practices.
  • Countering this view, India notes that the U.S. bilateral trade deficit dropped in 2018.

India’s Economy (Current Scenario)

  • India is one of the world’s fastest-growing economies (more than 7% growth projected for 2019), third largest economy on a purchasing power parity basis, and second largest country by population, with an expanding middle class.
  • Economic challenges include poverty, difficulty absorbing millions of young new workers joining the labor force, and infrastructure gaps.
  • India imports about 80% of its oil needs. Rising energy prices and other global factors have led to depreciation of the Indian rupee against the U.S. dollar, leading to inflation concerns.

The conflicting Issues between India-U.S. trade relations

Tariffs

  • Bilateral tensions have increased over each side’s tariff policies.
  • These include the U.S. 25% steel and 10% aluminum tariffs under the national-security based “Section 232” law.
  • India did not receive an initial exception like some trading partners, nor negotiate an alternative quota arrangement.
  • India supplied less than 3% of U.S. steel and aluminum in 2017.
  • India has delayed further imposing its planned retaliatory tariffs until May 2, 2019, in hopes of a bilateral resolution; these tariffs of 10% to 50% would target $241 million in U.S. goods such as nuts, apples, steel, and motorcycles.
  • India also is challenging the U.S. tariff increases in the World Trade Organization (WTO).
  • S. has called India “a very high-tariff nation” and criticized tariff imbalances, such as on motorcycles (which previously faced 100%, now 50%, Indian tariffs, compared to U.S. tariffs of 0% to 2.4%).
  • India has raised duties on certain “non-essential” consumer and other goods to stem its current account deficit.
  • The EU initiated WTO dispute settlement consultations, claiming that certain tariff hikes by India exceed bound rates.
  • S. concerns over Indian market access include price controls on medical devices, and investment and other non-tariff barriers.

S. Generalized System of Preferences (GSP).

  • On March 4, 2019, U.S. issued a notice to terminate India’s GSP eligibility, which gives duty-free tariff treatment to certain U.S. imports from eligible developing countries to support their economic development.
  • By law, the U.S. President must notify Congress at least 60 days prior to a GSP change taking effect.
  • India is GSP’s top beneficiary. In 2018, GSP represented 11% ($6.3 billion) of U.S. merchandise imports from India, such as chemicals, auto parts, and tableware.
  • GSP removal would reinstate U.S. tariffs, which range from 1% to 7% on the top 15 GSP bilateral imports.
  • India sought continuation of its eligibility, but since the President’s announcement, has downplayed the impact of the proposed change. India plans to treat retaliatory tariffs separately.

Services

  • India and U.S. are competitive in certain services industries.
  • Barriers to U.S. firms’ market access include India’s limits on foreign ownership and local U.S.-India Trade Relations presence requirements.
  • A key issue for India is U.S. temporary visa policies, which affect Indian nationals working in the United States.
  • India is challenging U.S. fees for worker visas in the WTO, and monitoring potential U.S. action to revise the H-1B (specialized worker) visa program. India also continues to seek a “totalization agreement” to coordinate social security protection for workers who split their careers between the two countries

Agriculture Sector

  • Sanitary and phytosanitary (SPS) barriers in India limit U.S. agricultural exports.
  • An ongoing issue is India’s purported compliance with a WTO decision against its ban on U.S. poultry imports and live swine due to avian influenza concerns; the WTO held that India’s measures violated WTO SPS rules.
  • Each side also sees the other’s agricultural support programs as market-distorting; India’s view of its programs from a broad food security lens complicates matters.

Intellectual Property (IP)

  • The two sides differ on how to balance IP protection to incentivize innovation and support other policy goals, such as access to medicines.
  • India’s IP regime remains a top U.S. concern, and India remains on the U.S. Priority Watch List for 2018, based on such concerns as its treatment of patents, infringement rates, and protection of trade secrets.

“Forced” Localization

  • The United States continues to press India on its “forced” localization practices.
  • Initiatives to grow India’s manufacturing base and support jobs include requirements for in-country data storage, domestic content (such as laws protecting India’s solar sector), and domestic testing in some sectors.
  • Adding to U.S. concerns are India’s new data localization requirements for electronic payment service suppliers (e.g., MasterCard, Visa).

Investment

  • India aims to attract foreign investment and has made FDI reforms, such as raising foreign equity caps for insurance and defense, and other strides to improve its business environment (World Bank, Doing Business Indicators).
  • S. concerns about investment barriers remain nevertheless, heightened by new Indian restrictions on how e-commerce platforms such as Amazon and Walmart owned Flipkart conduct business.
  • From the U.S. view, India’s weak regulatory transparency and other issues, such as India’s IPR and localization policies (see above), add to concerns about FDI barriers.
  • Two-way U.S.-Indian FDI is linked to U.S. jobs and exports in a range of sectors, yet U.S. FDI in India prompts some offshoring concerns.

Defense Trade

  • The two nations have signed defense contracts worth more than $15 billion since 2008, up from $500 million in all previous years combined.
  • Major anticipated sales include 24 MH-60 Seahawk multi-role naval helicopters and a potential commercial sale of AH-64 Apache attack helicopters.
  • India is eager for more technology-sharing and co-production; some reports indicate U.S. and Indian interest in producing F-16 combat aircraft there.
  • The United States, meanwhile, urges more reforms in India’s defense offsets policy and higher FDI caps in its defense sector.
  • India’s pursuit of a multibillion dollar deal to purchase the Russian-made S-400 air defense system may trigger U.S. sanctions on India under the Countering America’s Adversaries through Sanctions Act (P.L. 115-44).

Current Negotiations and Agreements Bilateral Engagement

  • The United States and India have held “intensive” negotiations to address the U.S. steel and aluminum tariffs, India’s GSP status, and other trade issues.
  • Dialogues include the government-to-government Strategic and Commercial Dialogue (S&CD) and Trade Policy Forum, and the private sector-based CEO Forum.
  • The United States and India do not have a bilateral free trade agreement (FTA).
  • India and U.S. has expressed interest in negotiating an FTA. Some India watchers advocate for an FTA, while others question India’s willingness to open its markets.
  • Past negotiations on a bilateral investment treaty are stalled.

Regional Integration

  • India is party to negotiations on the Regional Comprehensive Economic Partnership (RCEP) with China and 15 other Asia-Pacific nations.
  • Seven RCEP members (but not India) are among the 11 remaining parties of the proposed Trans-Pacific Partnership (TPP); they concluded a new trade agreement after President Trump ceased U.S. participation in the TPP.
  • Among other issues, India has long sought to join the Asia-Pacific Economic Cooperation (APEC) group of the United States, China, and 19 other economies.

WTO

  • Differing U.S. and Indian views have constrained multilateral negotiations to liberalize trade in the WTO.
  • The Trade Facilitation Agreement (TFA) to remove customs barriers, the first multilateral agreement concluded in over 20 years, entered into force in 2017 after India reversed its prior blocking of the TFA.
  • This change followed a U.S. – Indian understanding not to challenge specific food security programs until the WTO reaches a solution on public stockholding for food security, a top Indian priority. The WTO’s future direction is unclear amid institutional issues.

Way Forward

  • India appreciated the US Trade Winds Indo-Pacific Business Forum and Mission initiative 2019. The forum will bring together distributors, representatives and partners and enable them to increase sales by taking part in business-to-business meetings from 8-10thMay, 2019, across India.
  • India and U.S. also complimented the new bilateral private sector led Small Business Interaction initiative, the US – India SME Forum.
  • This is the first event of its kind and would pave the way for collaboration and partnership between the U.S. and Indian small and medium enterprises (SMEs) in the areas of manufacturing and services.
  • Both sides agreed to deepen economic cooperation and bilateral trade by ensuring greater cooperation amongst stakeholders, including Government, businesses and entrepreneurs.

What is the Generalised System of Preferences (GSP)

  • The Generalized System of Preferences (GSP) is a U.S. trade program designed to promote economic growth in the developing world.
  • It provides preferential duty-free entry for up to 4,800 products from 129 designated beneficiary countries and territories.
  • GSP was instituted on January 1, 1976, by the Trade Act of 1974.
  • GSP has been given on non-reciprocal basis yet the US has linked it with market access and tariff reduction which is against the basic tenets of GSP.

Why it is an issue?

  • US President has said he intends to end the preferential trade status granted to India and Turkey, asserting that New Delhi has failed to assure America of “equitable and reasonable” access to its markets, an announcement that could be seen as a major setback to bilateral trade ties.

Indian government response

  • India says GSP concessions by US amount to duty reduction of $190 million.
  • Federation of Indian Export Organisations (FIEO) has said that overall impact will amount to less than 0.4% of India’s exports to the U.S.
  • The export body also pointed out that the withdrawal of GSP benefits to Indian exporters will also impact the downstream industries in the U.S. that were using the cheaper inputs from India.

Developments

  • The review initiated by the United States in April 2018 on India’s GSP benefits.
  • A discussion has been initiated on various trade issues of bilateral interest for a suitable resolution on mutually acceptable terms.
  • The United States had initiated the review on the basis of representations by the US medical devices and dairy industries, but subsequently included numerous other issues on a self-initiated basis.

Impact on India on GSP duty benefit withdrawal by US

  • It will have a marginal impact on few domestic sectors such as processed food, leather, plastic, and engineering goods, exporters body FIEO.
  • India is predominantly exporting intermediate and semi-manufactured goods to the US under the GSP.
  • The same has helped in cost-effectiveness and price-competitiveness of American downstream industry.
  • Federation of Indian Export Organisations (FIEO) believe that as these sectors were availing higher GSP benefits, the government should look into providing fiscal support to these segments.
  • The removal of these duty concessions would make the above products relatively uncompetitive in terms of prices in the US market compared to exports from other developing countries.
  • Therefore, the GSP withdrawal will also impact the competitiveness of many manufacturing sectors and will hit the consumers at the same time.
  • The withdrawal of the benefits will also hit the import diversification strategy of the US where it is keen to replace China as the main supplier to other developing countries.
  • (FIEO) believes that India’s exports to the US will remain unaffected despite withdrawal.

Conclusion

  • The issue of Indian tariffs being high has been raised from time to time.
  • India’s tariffs are within its bound rates under WTO commitments, and are on the average well below these bound rates.
  • India’s trade-weighted average tariffs are 7.6 per cent, which is comparable with the most open developing economies and some developed economies.
  • India said it was able to offer a “very meaningful way forward” on the issue of market access for various agriculture and animal husbandry products.

POLITY

 15th Finance Commission

Context

  • 15th Finance Commission to hold meetings with RBI and Banks & Financial Institutions and Eminent Economists.

The Fifteenth Finance Commission

  • The Fifteenth Finance Commission was constituted by a Presidential Order in November, 2017, for a period of 5 years – April, 2020 to March, 2025.
  • Its chairman is Shri N. K. Singh.

What is the Finance Commission?

  • The Finance Commission is constituted by the President under article 280 of the Constitution,
  • It is formed to define the financial relations between the central government of India and the individual state governments.
  • The First Finance Commission was established by the President of India in 1951.
  • Article 280 of the Indian Constitution defines the scope of the commission
  1. The President will constitute a finance commission within two years from the commencement of the Constitution and thereafter at the end of every fifth year or earlier, as the deemed necessary by him/her, which shall include a chairman and four other members.
  2. Parliament may by law determine the requisite qualifications for appointment as members of the commission and the procedure of selection.
  3. The commission is constituted to make recommendations to the president about
  4. The distribution of the net proceeds of taxes between the Union and States and also the allocation of the same among the States themselves.
  5. To define the financial relations between the Union and the States. They also deal with the devolution of unplanned revenue resources.

Functions of the Finance Commission

  • It is the duty of the Commission to make recommendations to the President as to:
  1. The distribution between the Union and the States of the net proceeds of taxes which are to be, or may be, divided between them and the allocation between the States of the respective shares of such proceeds.
  2. The principles which should govern the grants-in-aid of the revenues of the States out of the Consolidated Fund of India.
  3. The measures needed to augment the Consolidated Fund of a State to supplement the resources of the Panchayats and Municipalities in the State on the basis of the recommendations made by the Finance Commission of the State.
  4. Any other matter referred to the Commission by the President in the interests of sound finance.
  • The Commission determines its procedure and has such powers in the performance of their functions as Parliament may by law confer on them.

Grants-in-Aid

  • Besides the taxes devolved to states, another source of transfers from the centre to states is grants-in-aid.
  • As per the recommendations of the 14th Finance Commission, grants-in-aid constitute 12% of the central transfers to states.
  • The 14th Finance Commission had recommended grants to states for three purposes-
    1. disaster relief
    2. Local bodies
    3. Revenue deficit.

Finance Commission Members Qualifications

  • As per the provisions contained in the Finance Commission [Miscellaneous Provisions] Act, 1951 and The Finance Commission (Salaries & Allowances) Rules, 1951, the Chairman of the Commission is selected from among persons who have had experience in public affairs.
  • The four other members are selected from among persons who
  1. are, or have been, or are qualified to be appointed as Judges of a High Court; or
  2. have special knowledge of the finances and accounts of Government; or
  3. have had wide experience in financial matters and in administration; or
  4. have special knowledge of economics

Procedure and powers of the commission

  1. The Finance Commission (FC) has the power to determine their own procedure.
  2. The FC has all powers of a civil court as per the Civil Procedure Code, 1908.
  3. The FC can summon and enforce the attendance of any witness or ask any person to deliver information or produce a document, which it deems relevant.
  4. The FC can ask for the production of any public record or document from any court or office.
  5. The FC shall be deemed to be a civil court for purposes of Sections 480 and 482 of the Code of Criminal Procedure, 1898.

Need for a Finance Commission

  • The Indian federal system allows for the division of power and responsibilities between the centre and states.
  • The taxation powers are also broadly divided between the centre and states.
  • State legislatures may devolve some of their taxation powers to local bodies.

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