Context

Recently US took decision to rescind the benefits Indian exports enjoy under the Generalised System of Preferences (GSP) programme.

Is India Responsible for this?

• It begins with the change in foreign direct investment (FDI) rules in India.

• The tightened norms that came into effect on February 1 place several restrictions on e-commerce companies, including Walmart-owned Flipkart and Amazon.

• The unexpected changes came after Walmart, the world’s largest retailer, paid over $16 billion to acquire Flipkart last May.

• Trump notified Congress of his intention to slap punitive action on India by ending preferential treatment for the country’s exports.

• Walmart’s reputation for killing small retail businesses influenced New Delhi’s decision to tighten the FDI rules.

• Economic diplomacy can still defuse the situation and prevent the removal of the GSP benefits .

Background of trade tensions between the two countries

• The simmering tensions go back to April 2018 when the United States Trade Representative (USTR) launched a review of New Delhi’s eligibility for the GSP programme.

• New Delhi, in response to Washington’s 25% tariff hikes on steel and 10% levies on aluminium, immediately accused it of unfair trade practices, and, seeking to signal a muscular approach.

• Bilateral talks since then have failed to ease tensions and India now stares at losing the GSP benefits.

•  U.S. medical and dairy industries complained that New Delhi is not providing them “equitable and reasonable access to its market.

•  Data localisation policies deepened the rift.

Tensions Due to Price control over drugs and medical devices

• New Delhi’s use of price control measures against imported drugs and medical devices has grown noticeably.

• US. manufacturers complain that in doing so, New Delhi has meted out differential treatment to them vis-à-vis domestic players.

• The U.S. medical device industry wants price controls on cardiac stents and knee implants withdrawn and would like products to be treated on parity with domestic medical devices.

• New Delhi has preferred to act against unreasonable price mark-ups through price controls when exactly the same  can be achieved through other types of policy alternatives.

• The USTR is right in pointing out that price capping counts as a trade barrier.

• New Delhi can easily address the concerns by replacing price controls with trade margin rationalisation measures.

Impact of losing GPS status

• India is the largest beneficiary of the GSP.

• The GSP is aimed at promoting economic development by allowing duty-free entry of products from designated beneficiary countries.

• The immediate loss for India is preferential access at zero or minimal tariffs to the U.S. in case of about 1,900 products, or about half of all Indian products.

• New Delhi has downplayed the impact of the proposed withdrawal of benefits, saying exports worth $190 million only are likely to be affected and that the tariff advantage was 4% or more on only 2,165 of a total of 18,770 tariff lines.

• The loss to the economy would be much larger than what the Department of Commerce is projecting.

• The actual loss will not be limited to the immediate tariff advantage.

• Indian exporters are competing for market share in the U.S. with other low-income countries in industries where margins are wafer thin.

• Even minor price hikes can drive significant drops in export volumes.

• In which case, losing GSP access will be costlier than the projections.

• Among price-sensitive products eligible for higher GSP benefits that risk losing out to competition from other countries are processed food, leather products, plastic products, building materials, tiles, hand tools, engineering goods, cycles and made-ups such as pillow/cushion sleeves and woven women’s apparel.