Trade between the US and India has increased since India gained Independence in 1947. Right after independence, during the early 1950s and 1960s, the US and India had been big trading partners. About a third of India’s imports came from United States (Martin). Nonetheless, trade between the two countries decreased when India intensified its relations with the Soviet Union, right after the Indo-Pakistani war which happened in 1965 (Martin). Economic relations between the two countries later became rather cool in the following four decades (Gupta 8).
However, George W. Bush’s government has pursued improved economic ties with India, based on shared interests especially after 2004. India is currently one of the most rapidly expanding economies in the world and the US views it as a lucrative market for foreign investments. India on the other hand trades with foreign partners as part of its expansive economic plan of 1991 and also as part of its quasi-sociologist economy (Martin).
Data published by US government statistics pit the bilateral trade between the two countries on an upward trend. Trade between the two countries was recorded at $10billion in 1996 and $31 billion in 2006 (Martin). In 1996, trade between the two countries had greatly improved, with India deemed the 32nd biggest export market for the US. It was also deemed the 25th largest import source for the United States. In 2006 after trade initiatives from the US under the Bush government, India rose from the 32nd position to the 21st biggest market for US exports. At the same time, its import market ranking rose from 25th to the 18th position (Martin). This improvement even pit India and US bilateral trade relations above that of Nigeria, Israel and Thailand. This study seeks to establish whether an improvement of trade between India and the US has lead to increased trade benefits between the two countries.
Growth in Trade
India and the US have observed a substantial growth in trade between the periods of 1990-2009. Between1990 and 1999, the trade in mercantile almost doubled in value while the trade in services also trebled in value.
The year that marked a significant increase in trade with the US was in 1999; where India’s trade in mercantile and service imports from the US and other major Western countries almost tripled in value. Moreover, the export of its service also quadrupled in the same year (Martin). However, with increased foreign trade developments in India, the country has suffered an unfavorable balance of trade deficit.
India’s main exports have been oil, ores, metal, machinery and motor vehicles. However, these exports have not been exclusive to the United States because some of its products have also been directed to other export destinations. Nonetheless, the country has been exporting a lot of jewelry to the US and other European markets; though in 2006, oil displaced jewelry as the number one export (Martin). The export of oil, ore, ash and slags were noted to increase from slightly lower than $500 million in the year 2000 to $4.6 billion in 2006 (Martin). These figures attribute the significant increase of India’s economic development to its exports.
As compared to its exports, India’s imports have remained relatively stable especially in the period between 2000 and 2006. Oil is India’s number one import despite the fact that it has considerable oil reserves (Martin). Increased economic development, facilitated by international trade has been identified as the likely drivers for oil demand (Olarreaga, p. 1). To supplement India’s vibrant jewelry industry, the second biggest import for the country is jewelry. Gold and diamond are the main commodities. India also imports a lot of electrical machinery and equipments from the US. Specifically, these are the importation of computers, telephones and televisions. Intermediary goods imported from the US are hard disc drives and circuits which are integrated. India’s trade relation with the US is also complimented by service exchange between the two countries.
Signs of an Improving Economy
Declining Poverty and Emerging Middle Class
With the inception of trade relations between India and US in 1991, and especially in the early 2000s, there has been declining poverty levels especially among the Indian rural population. However, the economic condition for most people in India still remains quite meager (Martin). According to a survey done in 2006 by United Nations Development Program (UNDP), India ranked position 126 out of a possible 177 countries according to a human development index survey. This was an improvement from its ranking in 2005 where it was position 127 (United Nations, p. 4).
With these improvements directly linked to economic relations with foreign countries, there has been a significant increase in the number of wealthy people in India; especially those involved in the imports and exports trade. There has also been an increasingly number of wealthy people in India’s middle class. This has been directly linked to an improvement in economic developments attributed to India’s resilient and vibrant trade relations in the international trade market that has contributed to increased employment opportunities for India’s population either directly or indirectly. This has been witnessed in both urban and rural settlements (Martin).
The reasoning behind increased wealth among the Indian population is that, apart from the country gainfully increasing its employment opportunities, it has increased its volume of trade by finding an increased foreign market (US) for its local products hence a stimulation of the domestic production to cope with the international demand. At the same time, the US has enabled India to improve its service industry for the greater benefit of the Indian population because it has improved competition in the local service industry; hence the market has been geared towards better service delivery for the population.
The same also goes for the standards of goods being imported from the US because high quality goods imported from the US has necessitated Indian domestic producers to improve their quality of production to match the high quality goods in the market. The end beneficiary has been the Indian population through purchase of better quality goods and services.
In a survey index carried out in 2007, India was rated the country that hosts the largest number of billionaires in the Asian economies, squarely beating Japan (Martin). Nonetheless, its middle class was relatively low in number as compared to Japan. According to studies done to estimate India’s middle class population in the mid 1980s, it was established that the middle class constituted a meager 10% of the population. However, with the onset of economic reforms to improve economic relations with foreign markets, which included the bilateral trade with America, a substantial increase in the middle class population was noted (Martin). Current estimates project varying data though less than 20% of the population is in the middle class (Martin). This therefore means that there has been a substantial growth in the number of wealthy people in the country as a result of increased trade.
Economists have pointed out that India’s rising inflation is a sign of increased economic development. In fact, there is a rising concern that India’s economy is growing too fast, such that it maybe very detrimental for the economy if it experiences a downturn (Martin). In the past, India has been experiencing modest inflationary tendencies at 4%. The consumer price index for the country was observed to be among the highest in the world, at 7%. This was observed in 2006 and a good part of 2007. In the year 2007, the consumer price index for industrial workers was up 6.6%, compared to the previous year’s estimates (International Monetary Fund, p. 96). An increase in consumer price index for agriculture was also noted at 8.2%. The Indian government has been trying to bring down inflation by a significant margin; between 4%-5%, though economists are pessimistic that the consumer price index may stay up at 6% (United Nations, p. 4).
The Reserve bank of India has also increased its interests rates hoping to curb increasing inflationary pressure in the country but these efforts have apparently done little to slow down the economic growth of the country. India’s economic growth is projected at 9% for the year 2010 and beyond. The International Monetary fund also recorded India’s economic growth rate at 7% in 2008 and a minimum 7.8% in the year 2009 (Martin). Higher interest rates eminent in the Indian market have also contributed to the appreciation of the Indian rupee against the US dollar.
Both the US and India have enjoyed increased markets for their domestic goods. India for example has enjoyed an increased market for its agricultural goods and textile products. In 2006 for example, the US exported $300 million worth of agricultural goods to India alone and imported $ 1.3 billion worth of agricultural goods from India (Martin). The US has also been noted to increase its textile imports from India over the past few years.
The same trend has also been noted in the procurement of military ware between India and the US. The two countries also enjoy the dual use technology in military operations through the bilateral relations. India has therefore been perceived as a large market for US military exports. It has also been seen as a leading purchaser in arms equipment among the less developed nations. India has of late signed arms transfer agreements worth over $20.6 billion (Martin). The defense budget for arms procurement is slated at over $35billion in the next decade and this translates to increased market and revenue for the US military industry (Congress, p. 21).
Increased Investment Opportunities
Despite India having restricted foreign ownership in certain industrial sectors, it has greatly increased investment opportunities for most American companies. In 1990, India recorded $500million in foreign direct investments and $11billion in 2006. About a third of all these investments were made by American corporations either directly or indirectly (Martin). In recent years, major US companies like Microsoft, Dell, Oracle and IBM have announced prospects of significant increase in investments in India (Martin).
A closely watched investment sector in India lies in the retail sector which American companies such as Wal-Mart are closely eyeing. This comes out of the commission of a retail FDI report on the sector (Martin). However, the Indian government has laid down restrictions limiting this type of investment to increasing economic activities already underway in the sector and not substituting ongoing efforts. India in particular has a large number of small mercantile shops in the country. In fact, it is deemed to have the largest per capita worldwide; meaning that if the investment opportunity is opened up, it could have a positive impact on tens of millions of its citizens in the sector (Martin).
Economic integration increases economic security, especially in light of increased globalization which has eventually led to a scramble of the few world resources. Relations between India and the US in terms of economic security has majorly been evidenced in the energy sector where both countries seek to gain from a promotion of global energy security especially in the cooperation to diversify energy sources, stimulation of alternative energy fuels and the development of technology that supports the efficient use of coal and other energy types (US Department of State). An initiative to establish a civil nuclear relationship with India in terms of economic security has already been endorsed by the United States congress and the countries seek to benefit from this type of agreement (Levi, p. 3).
Trade between countries is a mechanism through which both parties can effectively improve their economic situation. In light of competitive tendencies in the world market, it is imperative that countries engage in international trade to stay afloat in light of this development. Increased trade is observed to improve the standards of living of citizens in trading countries. India has noted an increase in the number of wealthy people as well as an increase in the upper middle class. America on the other hand has enjoyed an increase in investment opportunities as well as increased markets (for both countries). Both countries also enjoy economic security as evidenced in the energy sector. Trade has therefore improved the economic landscape for both countries and these benefits are even projected to increase further in the near future. International trade is therefore expected to be the new frontier of economic development in the 21st century.
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