A Modi Administration Report Card on the Eve of His Visit to the United States

Indian Prime Minister Narendra Modi’s historic election was viewed with a great deal of optimism by much of the world, including here in the United States. His campaign platform—putting economic growth front and center—championed the kinds of policies needed to get India’s economy back on track. With the Modi Administration having been in office for just about four months now, and as he embarks on his first official visit to the United States, it’s a good moment to take stock of the Modi Administration’s accomplishments to date—and areas where we hope to see continued progress toward improving the state of U.S.-India economic and trade relations.

On the positive side, the Modi Administration has announced a number of promising economic reforms. In particular, it has:

• Retired India’s Planning Commission, a vestige of centralized state planning;
• Eased some restrictions and limitations on foreign direct investment (FDI), notably in the defense and railway sectors (with the FDI ceiling in the former raised to 49 percent and in the latter to 100 percent);
• Committed to renewed infrastructure investment in power generation and transportation networks;
• Set a year-end target to complete long-pending implementation of a comprehensive goods and services tax;
• Introduced an investment allowance of up to 15 percent for small businesses that invest more than Rs 25 crore (@$4 million) in any year in new plant machinery and equipment, helping to spur much needed plant modernization and productivity gains;
• Announced it will promote financial inclusion by ensuring that every Indian household has both a bank account and at least minimum insurance coverage;
• Signaled it understands the importance of the digital economy and information and communications technologies (ICTs) by announcing Mr. Pranav Mistry as India’s first Digital Economy and Innovation czar and by announcing plans to establish a number of “Smart cities” throughout India;
• Signaled interest in greater defense, space, and counter-terrorism ties and initiatives with the United States;
• And brought a renewed sense of energy and purpose to India’s civil service, including a greater willingness by India’s bureaucracy to receive and consider the input and concerns of foreign enterprises in their rule-making processes.

In short, Modi’s Bharatiya Janata Party (BJP) platform said it sought to revive India’s economy through the 5Ts of Talent, Technology, Trade, Tourism, and Tradition, and Modi has made laudable and tangible progress on at least the first three of these.

However, at the same time, we’ve also seen the continuation of existing—and even the promulgation of some new—trade-distorting policies that do give us some pause. For example, the Modi Administration has:

• Given no indication that it intends to repeal forced localization policies such as India’s Preferential Market Access (or PMA) policy, which intends for 80 percent of Indian public sector procurement of ICT and electronics products to come from domestic sources by 2020. ITIF has estimated that, if the PMA is implemented as currently construed, it will cause U.S. exports of ICT products and services to India to fall by $1.7 billion annually by 2020, costing over 10,000 U.S. jobs.
• Carried through with implementation of its Compulsory Registration Order for ICT products, which requires new electronics equipment sold in India to go through health and safety certification testing in Indian laboratories, even if they have already been approved by internationally certified labs.
• Not signaled interest in joining negotiations to expand the Information Technology Agreement (ITA), a trade agreement that commits almost 80 nations to eliminate tariffs on trade in a wide range of ICT products.
• Continued to make it difficult for foreign intellectual property (IP) rights holders to secure and/or to maintain their IP rights in India. In particular, in July, India’s High Court upheld a ruling granting an Indian domestic manufacturer a compulsory license to the IP behind Bayer’s break-through anti-cancer drug Nexavar.
• This follows a spate of patent denials and even patent revocations—such as the Indian Patent Office’s decision in June to refuse issuance of a patent for the U.S. firm Abraxis Biosciences’ (now a division of Celgene) anti-cancer drug Abraxane—on the alleged grounds that Abraxis’s patent application failed to demonstrate an “inventive step.” Abraxis joins a lamentably growing list of firms—whose ranks now include Pfizer, Roche, Merck, and Allergan, among others—who have seen their life sciences IP rights in India denied on these grounds.
• Such continued difficulties in securing foreign IP rights contributed to the U.S. Trade Representative’s Office announcing an “out-of-cycle” review of India’s IP policies as part of its 2014 Special 301 report. If India is to truly transform itself into a modern innovation-based economy, it must place a far higher priority on the protection of both domestic and foreign IP.
• Maintained FDI limits in the multi-brand retail sector and, so far at least, in online retail;
• Failed to commence wide privatization of loss-making public sector units such as Air India, railway firms, and telecommunications sector companies such as BSNL and MTNL.
• Continued existing policy in India’s national solar program which discriminates against foreign solar equipment manufacturers by requiring Indian solar energy producers to use Indian-manufactured solar cells and by offering subsidies to those developers using domestic equipment instead of imports.
• Also, it’s disappointing that the Modi Administration has not yet taken a more proactive approach in resolving retroactive tax disputes with several foreign enterprises, including Nokia and Vodafone.

Perhaps more troubling, we have even seen the Modi Administration introduce several new trade-distorting, or, at least, trade-inhibiting, policies:

• Notably, as part of its first budget announced in July, the Modi Administration included new tariffs of 10 percent on a range of telecommunications products, despite the fact that India committed to eliminating tariffs on these very telecommunications products when it joined the original Information Technology Agreement in 1997. Unfortunately, this will be particularly harmful for India’s economy, because as the Indian economists Kaushik and Singh have shown, for every $1 of tariffs India imposes on ICT products, it suffers a $1.30 economic loss because it forces all ICT-consuming industries in India to have to acquire more expensive or technologically inferior ICT products.
• Also, in August, India played the lead role in scuttling the WTO’s Trade Facilitation Agreement, which would have reduced red tape and improved customs logistics, potentially generating as much as $1 trillion in increased global economic welfare and as many as 21 million new jobs, most of which would have flowed to developing nations, including India.

To be clear, the United States and India have had a tremendously productive economic and diplomatic relationship for a long time. However, that’s not to say that there isn’t room for improvement on both sides in order to maximize the potential for both of our economies. ITIF remains optimistic about the potential for improved U.S.-India trade and economic relations with the Modi Administration. But what we’d really like to see is a wholesale embrace of a new Indian approach to sustainable economic growth, one grounded in policies that:

• Don’t seek to advantage domestic producers at the expense of foreign competitors—as policy measures such as the PMA do—but one that emphasizes across-the-board productivity growth across all sectors of India’s economy—and not just in manufacturing—based on principles of competitive markets, liberalized trade, streamlined regulations, infrastructure investments, and robust productivity and innovation-enhancing policies.
• Further, as a share of GDP, India attracts one-third the level of FDI that China does; but India should play an attraction—not a compulsion—strategy when it comes to enticing FDI to India. Foreign firms want to invest in India—but they want to do so in the context of a welcoming environment with strong infrastructure and favorable regulatory, labor, and tax policies.
• And if India truly wants to bolster its manufacturing industries, the best way to do so is by integrating into global supply chains, not by raising tariffs or forcing localization.
• Ultimately, increased transparency and predictability will be key to developing a sustainable environment for growth and investment in India.

In conclusion, the moment is right for significantly improved business, economic, and trade relations between the United States and India, but there are still a number of challenges related to IP protection and localization barriers to trade that need to be addressed if the potential of that relationship is to fully flourish. We hope that President Obama and Prime Minister Modi are able to make progress on several of these fronts during the Prime Minister’s visit to the United States.