India-U.S. Economic Relations

CRS Report for Congress
India-U.S. Economic Relations
Wayne Morrison and Alan Kronstadt
Foreign Affairs, Defense, and Trade Division
India is a country with a long history and a large population (more than one billion
people, nearly half living in poverty). Given that it is the world’s most populous
democracy, a U.S. ally in anti-terrorism efforts, and a potentially major export market,
India’s economic development and its trade relations with the United States are of
concern to Congress. This report will be updated as events warrant.
India’s Economy
Upon achieving independence from British rule in 1947, India pursued policies that
sought to assert government planning over most sectors of the economy and strove to
promote relative economic self-sufficiency. These policies included extensive government
spending on infrastructure, the promotion of government-owned companies, pervasive
regulatory authority over private sector investment, and extensive use of trade and
investment barriers to protect local firms from foreign competition. While these policies
achieved some economic goals (such as rapid industrialization), the overall effect was to
promote widespread inefficiency throughout the economy (e.g., unprofitable state-run
firms and a constrained private sector) and to greatly restrict the level of foreign direct
investment (FDI) in India. India’s real GDP growth was relatively stagnant during the
1970s, averaging about 2.7%. Piecemeal economic reforms and increased government
spending during the 1980s helped boost average real GDP growth to 6.0%.1
1991 Economic Crisis and Reforms. India suffered a major economic crisis in
1991, largely due to the effects of oil price shocks (resulting from the 1990 Gulf War), the
collapse of the Soviet Union (a major trading partner and source of foreign aid), and a sharp
depletion of its foreign exchange reserves (caused largely by large and continuing
government budget deficits).2 The economic crisis led the Indian government to cut the
budget deficit and implement a number of economic reforms, including sharp cuts in tariff

1 Unless otherwise noted, data on India are on a fiscal year basis that runs from April to March.
2 The central government’s budget deficit as a percent of GDP averaged over 7% from 1980 to
1990. The high level of government debt became unsustainable as the high right of government
borrowing raised real interest rates, sparked inflation, and undermined faith in the currency.
Congressional Research Service ˜ The Library of Congress

and non-tariff barriers, liberalization of foreign direct investment (FDI) rules, exchange rate
and banking reforms, and a significant reduction in the government’s control over private
sector investment (by removing licensing requirements). These reforms helped boost
economic growth and led to a surge in FDI flows to India in the mid-1990s (annual FDI rose
from about $100 million in 1990 to $2.4 billion by 1996; more than one-third came from U.S.
investors). Reform efforts stagnated, however, under the weak coalition governments of the
mid-1990s. The 1997/1998 Asian financial crisis and U.S.-imposed sanctions on India (as
a result of its May 1998 nuclear tests) further dampened the economic growth.3 Following
parliamentary elections in 1999, the government launched second-generation economic
reforms, including major deregulation, privatization, and tariff-reducing measures.
Current Economic Conditions. India’s economic growth has been relatively
robust over the past few years. Real GDP grew by 8.2% in 2003 and by an estimated

5.7% in 2004. Global Insight, an economic forecasting firm, projects India’s real GDP4

will rise by 6.3% in (FY)2005 and 6.0% in 2006. By some measurements, India is
among the world’s largest economies. While on a nominal U.S. dollar exchange rate
basis, India’s 2003 GDP was $577 billion. However, on a purchasing power parity (PPP)
basis (which factors in differences in prices across countries), India’s GDP is estimated
at close to $3 trillion. By this measurement, India is the world’s fourth-largest economy
(after the United States, China, and Japan).5 However, its per capita GDP on a PPP basis
(a common international measurement of a nation’s living standards) was $2,780, equal
to only 7.4% of U.S. levels. Poverty is perhaps India’s greatest problem. According to
the World Bank, India has 433 million people (44.2% of the population) living below the
international poverty measurement of less than $1 per day.6
India’s trade is relatively small. According to the World Trade Organizationstth
(WTO), India was the world’s 31-largest merchandise exporter, and the 25- largest
importer, in 2003.7 Merchandise exports and imports totaled $63 billion and $77 billion,
respectively. India’s principal exports were pearls and precious and sem-precious stones
(14.8% of total), textiles (10.8%), and clothing (10.5%). Its top three imports were
petroleum (27.0% of total), pearls and precious and sem-precious stones (9.6%), and gold
and silver (8.3%).8 India’s major export markets were the United States (18.1% of total),

3 Real annual GDP slowed from 7.1% in 1999 to 3.9% in 2000.
4 Global Insight projects that the overall economic effects of the Tsunami that hit India and
several other countries in December 2004, will be relatively minor. See Global Insight, India:
Current Situation: Highlights, January 17, 2005.
5 PPP data reflects foreign data in national currencies converted into U.S. dollars, based on a
comparable level of purchasing power these data would have in the United States.
6 The World Bank notes that India has made significant progress in reducing poverty, especially
in recent years. It estimates that India’s poverty rate in the 1970s was over 50% Official Indian
government poverty rate measurements differ from World Bank data; it estimates that the poverty
rate at 26% (at the end of the 1990s), down from 36% in 1993/1994.
7 In terms of trade in commercial services, India was the 21st -largest exporter ($25 billion), and
the 21st -largest importer ($22 billion) in 2003.
8 Much of India’s trade consists of diamonds. India imports rough diamonds, which are cut and
polished, then re-exported.

the United Arab Emirates, and Hong Kong, and its top sources for imports were the
United States (6.5% of total), China, and Belgium.
India’s IT Sector. The Indian government has made the development of India’s
Information Technology (IT) a top priority. Over the past few years, IT has been one of
India’s fastest-growing economic sectors and a major source of service exports.9 For
example, software and service exports in 2003 totaled $12.5 billion, 30% higher than the
previous year. The Indian government’s Information Technology Action Plan seeks to
boost software and service exports to$50 billion by 2008 and to increase the contribution
of IT to India’s GDP from the current level of 2% to 7.7%. Currently, more than 60% of10
India’s software and service exports go to North America, mainly to the United States.
Comparisons Between India and China. Many analysts argue that India’s
economy has failed to live up to its potential, especially relative to other developing
countries, such as China, which has a comparable population size but has enjoyed far
greater economic development in recent years. In 1990, India’s economy (GDP on PPP
basis) was about three-quarters the size of China’s, but by 2003 it had fallen to 44% of
China’s size. India’s living standards (per capita GDP on PPP basis) were slightly greater
than China’s in 1990, but by 2003 they had fallen to about half of China’s. India made
small gains in FDI flows relative to China from 1990 to 2003 (rising from 2% to 7%);
however, the total level of FDI stock in China remains substantially higher than in India.
In fact, FDI flows to China in 2003 alone (nearly $54 billion) were 54% higher the
cumulative stock of FDI in India through 2003 (about $35 billion). Many economists
attribute the sharp widening economic gaps between India and China to differences in the
pace and scope of economic and trade reforms undertaken by each country, where China
has substantially reformed its trade and investment regimes (which has contributed to
sharp rises in GDP growth, trade, and FDI flows), India’s economic reforms have been
far less comprehensive and effective. For example, China’s average tariff has fallen from
43% in 1992 to12% in 2002. India’s average tariff during this period dropped
substantially, from 128% to 32%, but still remains among the highest in the world.
U.S.-Indian Economic Relations
Trade between the United States and India is relatively small, but has risen sharply
over the past few years. In 2004, U.S. merchandise exports to and imports from India are
estimated to have totaled $6.1 billion and $15.5 billion, respectively (see Table 1),thth
making India the 24 largest U.S. export market and the 18 largest supplier of U.S.
imports.11 In 2004, U.S. merchandise exports to India rose by 22.6%, while imports rose
by 18.4%, over 2003 levels. Major U.S. exports to India included electrical machinery,
chemicals, unfinished diamonds. Top U.S. imports from India were non-metallic

9 According to the Indian government, India’s IT sector has grown at an average annual
compound rate of over 50% since 1991.
10 Global Insight: India Interim Forecast Analysis: Trade and External Accounts, January 17,


11 U.S. exports and imports of services to and from India were $3.7 billion and $2.2 billion,

manufactured minerals (mainly processed diamonds), clothing and apparel, and
miscellaneous manufactured items (mainly jewelry).
According to Indian government data, the United States is India’s second largest
source of FDI with cumulative FDI at $4.1 billion or 10.6% of total FDI in India. Major
sectors for U.S. FDI include energy, telecommunications, and electrical equipment.
Table 2. U.S.-India Merchandise Trade: 2001-2004*
($ millions)
2001 2002 2003 2004 2003/2004
% change
Total U.S. Exports3,7644,0984,9866,11322.6
Electrical machinery, apparatus, 31130634447538.2
Appliances, and parts
Organic Chemicals17422726748280.4
Non-metallic mineral manufactures162218297 45051.5
(mainly raw diamonds)
Total U.S. Imports9,73811,81813,05315,45518.4
Nonmetallic mineral manufactures2,1802,9312,9623,30911.7
(mainly finished diamonds)
Articles of apparel and clothing1,9342,0642,1562,37810.3
Miscellaneous manufactured products7521,0731,4241,76724.1
*Data for 2004 estimated based on actual data for January-November 2004.
Source: U.S. International Trade Commission DataWeb.
Major U.S.-Indo Trade Issues. India’s sizable population and large and growing12
middle class make it a potentially large market for U.S. goods and services. However,
a number of factors hamper increased economic ties. First, in addition to maintaining high
tariff rates on imports (especially on products that compete with domestic products), India
also assesses high surcharges and taxes on a variety of imports. Major non-tariff barriers
include sanitary and phytosanitary restrictions, import licenses, regulations that mandate
that only public sector entities can import certain products, discriminatory government13
procurement practices, and the use of export subsidies. A variety of restrictions are
placed on foreign services providers and on the level of permitted FDI in certain
industries. Second, India continues to maintain a number of inefficient structural policies
which affects it trade, including price controls for many “essential” commodities,
extensive government regulation over many sectors of the economy, and extensive public

12 Estimates of the size of India’s middle class widely differ. Using Indian standards, estimates
of the middle class run as high as 300 million people. The Commerce Department estimates that
India has 20 million “well-off consumers” with annual incomes exceeding $13,000, and 80
million people with incomes over $3,500, and 100 million people with incomes over $2,800.
13 Historically, India maintained extensive non-tariff barriers on many imports, based on balance-
of-payments reasons. However, in 1999, a WTO dispute resolution panel ruled that these
restrictions were no longer justifiable, which prompted India (in 2001) to remove many of its
quantitative import restrictions (although many of these barriers were replaced with high tariffs).

ownership of businesses, many of which are poorly run. Third, despite India’s attempt
to develop internationally competitive IT industries (such as software), U.S. government
officials charge that India has a poor record in protecting intellectual property rights
(IPR), especially for patents and copyrights. The International Intellectual Property
Alliance estimated U.S. losses of $420 million due to trade piracy in 2003 — nearly three-
quarters of this in the categories of business and entertainment software — and noted
“very little progress in combating piracy.”
India’s extensive array of trade and investment barriers has been criticized by U.S.
government officials and business leaders as an impediment to its own economic
development, as well as to stronger U.S.-Indian ties.14 For example, in September 2004,
Alan Larson, U.S. Under Secretary of State for Economic, Business, and Agricultural
Affairs, stated that “trade and investment flows between the U.S. and India are far below
where they should and can be,” adding that American exports to India “have not fared as
well” as have Indian exports to the United States and that “the picture for U.S. investment
is also lackluster.” He identified the primary reason for the suboptimal situation as “the
slow pace of economic reform in India.”
Some U.S. interest groups have expressed concern that closer U.S.-India economic
ties could accelerate the practice by some U.S. firms of outsourcing IT and customer
service jobs to India.15 Various proposals have been made in Congress and various State
governments to restrict outsourcing. work overseas. Bush Administration officials have
expressed opposition to government restrictions on outsourcing, but have told Indian
officials that the best way to counter such “protectionist” pressures in the United States
is to further liberalize its markets. Other U.S. interest groups have raised concern over
the outsourcing of financial services (such as call centers) to other countries that entail
transmitting private information of U.S. consumers.16 U.S. officials have urged India to
enact new privacy and cybersecurity laws to address U.S. concerns over identify theft.17
Prospects for India’s Further Economic Reform. India faces a number of
significant challenges to its goals of sustaining healthy economic growth and further
reducing poverty. Many economists argue that India needs to substantially liberalize its
trade and investment regimes, accelerate privatization of state firms, cut red tape and
crack down on corruption, and substantially boost spending on its in physical and human

14 In recent years, India and the United States have pursued a number of initiatives to improve
commercial ties: In March 2000, a framework for bilateral economic cooperation was created
through several working groups as a new U.S.-India Economic Dialogue; July 2003 saw the
inaugural session of the U.S.-India High-Technology Cooperation Group; and, in January 2004,
the “trinity” issues of dual-use high-technology trade, and civilian nuclear and civilian space
cooperation became subsumed under the Next Steps in Strategic Partnership (NSSP) initiative.
15 The 108th Congress passed H.R. 2673 (P.L. 108-199), which limits certain federal government
contractors from outsourcing work overseas.
16 See CRS Report RS21809, Financial Services Industry Outsourcing and Enforcement of
Privacy Laws, by M. Maureen Murphy and Angie A. Welborn.
17 In 2001, the U.S.-India Cyberterrorism Initiative was established to discuss a number of
cybersecurity issues. The latest meeting was held in October 2004.

infrastructure.18 However, large and continuing government deficits, and the high level
of public debt (equal to 62% of GDP in 2003) severely hamper the ability of the
government to boost spending for needed infrastructure projects, without major reforms
to the tax system and significant cuts in government subsidies. In October 2004, the
World Bank country director for India lauded the country’s economic achievements, but
called accelerating reforms “essential” for sustained growth and poverty reduction there,
and a top International Monetary Fund official said that “India remains a relatively closed
economy” and urged greater trade liberalization and regional economic integration.19
Organized resistance to desired reforms has come from Hindu nationalist groups that
were influential under the BJP government from 1998 to 2004. As a “sister organization”
to the Rashtriya Swayamsevak Sangh (RSS) — a leading Hindu nationalist organization
— the Swadeshi Jagaran Manch (SJM) has taken the lead in efforts to forward the
swadeshi (or self reliance) cause. According to the SJM, “The Western notion of a global
market does not fit into the swadeshi approach,” nor does the “Western notion of
individual freedom, which fragments and compartmentalizes family, economy, culture,
and social values ...” Such anti-globalization policies continue to enjoy limited, but still
substantial backing among Indians. Moreover, the surprise May 2004 election upset
defeat of the BJP seated a new national coalition led by the Congress Party that is
supported by a group of communist parties. Early alarm was sounded that the influence
of communists in New Delhi might derail India’s economic reform efforts; however,
Indian industrial leaders have sought to assure foreign investors that Left Front members
are not “Cuba-style communists,” but can be expected to support the UPA reform agenda.
The communist Chief Minister of West Bengal has himself actively sought corporate
investment in his state.20
Despite the sometimes considerable resistance to further progress with India’s
economic reforms, most analysts believe that the Congress-led coalition will not alter
New Delhi’s policy direction in any meaningful way. Prime Minister and Oxford-
educated economist Manmohan Singh served as finance minister from 1991-1996 and has
been the architect of major Indian economic reform and liberalization efforts. The new
government’s first budget, released in July 2004, generally was lauded by Indian industrial
groups as “progressive and forward-looking.”21 Still, New Delhi’s movement on key
reform issues could remain slow in the near- and medium-term.

18 On the political front, tensions with Pakistan and continued violence in the disputed territory
of Kashmir pose serious threats to India’s long-term economic health.
19 Remarks by Michael Carter, India Director, World Bank Group, October 19, 2004; and David
Burton, Director, Asia and Pacific Department, International Monetary Fund, October 21, 2004.
20 See the Swadeshi Jagaran Manch at []; Edward Luce, “Communists
Set to Back Delhi’s Reformist Budget,” Financial Times (London), June 17, 2004; “India Inc
Homes in on Red Citadel,” Indian Express (Delhi), May 21, 2004.
21 Joanna Slater, “Reformers Take Control,” Far Eastern Economic Review (Hong Kong), June

3, 2004; “CII Applauds UPA’s Maiden Budget,” Confederation of Indian Industry Press Release,

New Delhi, July 8, 2004.