Deepening US-India Trade Relations

by Arvind Subramanian, Peterson Institute for International Economics

March 13, 2013

This testimony draws upon my ongoing Peterson Institute for International Economics project with C. Fred Bergsten, "Deeper Trade Integration between the Democracies," supported by the US-India Business Council (USIBC) and the Smith Richardson Foundation (SRF).

Summary and Recommendations

1. India's economy has been growing rapidly, at about 6.5 percent for over three decades since 1980, and close to 9 percent in the last decade. As a result, it has emerged as a major power with an economy ($4.7 trillion) that in 2012 became the world's third largest (in purchasing power terms), surpassing Japan and now behind only China and the United States. Its trade in goods and services is close to a trillion dollars, and expected to double every seven years.

2. This dynamism has expanded opportunities for US business. US exports of goods to India have increased close to 700 percent in the last decade. Exports of services have doubled in the last four years. US foreign direct investment (FDI) has increased from $200 million to $6 billion. Moreover, trade and FDI flows between the two countries are balanced, minimizing the scope for macroeconomic and currency-related tensions.

3. However, India is currently encountering a bout of severe turbulence.  On the economic front, growth has decelerated sharply, from 9 percent to 4.5 percent. And macroeconomic vulnerabilities—high fiscal deficits (9 percent of GDP), stubbornly elevated (double-digit) inflation, and a deteriorating external balance (over 4 percent of GDP)—have been mounting. Politically, India is heading toward its next general election, which has to take place before the spring of 2014, complicating and imparting uncertainty to economic policy-making.

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