Tim’s tiny plans

Interestingly,though the new forum is called an “Economic and Financial Partnership”,it is in effect a narrow financial partnership,rather than a broader economic one. Because any wholesome economic partnership must surely include trade on the agenda. This one does not. One of the reasons for this partiality may be that governments (in both the US and India) operate in silos. This partnership is an initiative of the respective finance ministries; trade/ commerce departments have been left out. But surely,if the larger agenda is to better economic relations,the respective trade departments ought to have been involved closely as well.

The stakes in trade are,after all,high. Barack Obama has pledged to double US exports in five years. There is only one way he can do this: by obtaining more market access in the world’s largest and fastest growing economies — China,India and Brazil. And while the US has little to complain about access for its industrial exports (except perhaps automobiles where the Indian government isn’t likely to concede ground),it would like India to open up a market for US agricultural exports. India,too,would like the US to ease market access for Indian agricultural exports — mangoes being a notable point of contention. And of course there’s the contentious issue of outsourcing.

However,let’s be clear that the stakes in Indo-US trade are nowhere close to the stakes in US-China trade. That is clearly the bilateral relationship which is much harder to navigate. The US press in general played up the issue of the undervalued yuan (and the continuing massive imbalance of trade between China and US) even in the run-up to the treasury secretary’s visit to India.

On the other hand,America’s trade deficit with India,which was never that large in the first place,has actually shrunk over the last two-three years. The Indian economy’s resilience compared with the US economy’s sharp decline ensured that imports from the US did not decline as sharply as India’s exports to the US did,once the crisis began.

So while the stakes are always high in trade (given the potential gains from more market access),and which is why it ought to be on the agenda of any economic partnership between the US and India,the two countries are nowhere near the kind of trade war that is looming between the US and China.

Without trade,the crux of the agenda is finance and macroeconomics. And Geithner’s real agenda in India? Pressing for financial sector liberalisation. In particular,he would have impressed upon Pranab Mukherjee to relax FDI caps,and other regulations that discriminate against foreign financial institutions — across the financial sector,but especially in banking and insurance.

Now,it is the considered view of your columnist that financial sector liberalisation is in India’s interest. Competition is always a good thing and it will ultimately benefit the consumers of financial services in India,who will get a better and cheaper range of products and services. So we should proceed with financial sector reform,no matter what Timothy Geithner said or didn’t say.

However,bilateral negotiations are guided by mercantilist interests,and not simply good economics; and it is therefore reasonable to have two concerns. First,it is important to keep in mind that many US banks and financial institutions have,in the recent past,been recipients of a large amount of almost free-of-cost government funds. This was done to shore up banks and financial institutions in the worst period of the crisis. And even though a number of banks have now paid back some or all of that money,there is a looming question about subsidies. Did government money give US banks an unfair competitive advantage and will that affect the competitiveness of Indian banks which did not receive the same support?

In the case of goods which are subsidised,countries are eligible to take countervailing action under WTO rules. But for subsidised services,there is no such protocol yet.

Second,if India is going to open up financial services as part of a negotiation with the US,then what will it get in return? Outsourcing is our obvious services sector interest. But Democratic Party politics may not allow Geithner or any other US official from offering any significant concession on this. Of course,the UPA’s political economy,and the RBI’s stubbornness,does not leave India inclined to financial sector reform. So,politics on both sides could effectively hobble the most important and most immediate agenda items,on financial services and outsourcing.

The other significant item on the agenda of the partnership is macroeconomics. This must obviously be analysed in a broader multilateral,rather than bilateral perspective. The US may or may not choose to solicit Indian support to put pressure on China to revalue its currency. But it is in India’s best interest to keep out of the US-China battle. While India would obviously gain from a revaluation of the Chinese currency,the gains will likely be smaller than bearing the brunt of a trade war. This is why no major player (including the EU) wants to step into the US-China battle. In any case,most of our concerns on trade with China happen to relate to non-tariff barriers which must be negotiated bilaterally.

There is also the G-20 agenda. Here too,the prospects for cooperation and progress depend on what unfolds in the US on financial regulation — America is notorious for staying out of any internationally binding regulations.

Of course,closer economic engagement with the US is in India’s interest. But the launch of this economic and financial partnership is nowhere near as momentous as say the start of negotiations on the civil nuclear deal was.

The writer is a senior editor at ‘The Financial Express’

dhiraj.nayyar@expressindia.com