ECONOMIC HIGHLIGHTS

NEW DELHI, 9 March 2006                                       

India-US Trade to Grow

ENERGY SECTOR HAS VAST POTENTIAL

By Dr Vinod Mehta

President Bush has come and gone.  Analysts and commentators will continue to read the fine lines in the India-US nuclear agreement for the next few months.  One thing which is, however, clear is that notwithstanding the reactions of other countries, the US has accepted the reality that India is a nuclear power by its own efforts, has never indulged in clandestine operations and that apart from its nuclear energy needs, it has legitimate defence needs.  It now realizes the futility of putting roadblocks in India’s economic growth and sees the advantage in encouraging India to realize a higher growth rate.

The sanctions against India in the wake of nuclear blasts in India were hurting the US economy as well.  With sanctions being lifted the so-called dual-purpose technology (critical technology for us) can now start flowing into India not only for our nuclear programme but also for our space programme.  The US can now supply nuclear technology for civilian use.

India is facing energy crunch, especially electricity.  Nuclear energy can help meet some of the gap in our demand for electricity.  If we can generate enough of electricity to meet the demand of our agriculture, industry and households we can hope to realize the proposed 10 per cent growth rate.  At the moment nuclear energy has an insignificant proportion in our total production of electricity.  As against this France meets 70 per cent of its requirement of electricity from nuclear energy.

Though the nuclear deal was the major highlight of the Bush visit, there were also agreements on doubling the trade turnover between the two countries in the next three years and an agreement in the field of agriculture especially in research.

The agreement on agriculture, if sincerely implemented, can help raise the agricultural productivity, which has been stagnating for the past many years. After the Green Revolution, which helped raise the wheat output no similar breakthrough has been achieved in the recent past. The Agricultural Universities have been doing a wonderful job in developing new seeds as well as raising productivity, yet much more needs to be done. 

Most of our agricultural research has centered round grain production for obvious reasons.  Here again we need a remarkable breakthrough especially in the production of rice and coarse grains like millet, corn, bajra etc. some of which constitute the staple diet of the poor.  What the farmers need is a steadily growing income which is possible only if the produce they bring to the market is really needed by the consumers, household and industry. 

Take the case of fruit.  The fruit produced in India has a short shelf-life and cannot be commercially processed on a large scale.  For instance, Guatemala banana has long shelf life than Indian banana, Californian oranges give more good quality juice than Nagpur oranges and so is the case with Thai pineapples compared to Indian ones. This also holds true for groundnut, which is a raw material for producing edible oil.

What we therefore need is intense research in improving the shelf life of our fruit and vegetables as well improving their quality, which can be commercially processed.  It is in this context that help from the US in agricultural research can help farmers raise their productivity and incomes.  The infrastructure in the form of Agricultural Universities is already there, what is needed at the moment is a change in our approach and in clearly defining our goals. 

The US produces 30 per cent of the world agricultural output, Japan 20 per cent while India produces only one per cent of the world agricultural output when it has more land area than Japan’s and can harvest two crops or three in certain areas in a year.  There is a vast potential in raising productivity and improving the quality of produce and with little help from US experience we can do wonders and put more money in the hands of farmers.

The most important gain will however be from trade with the US.  Because of the sanctions imposed by US in the wake of nuclear explosion by India, the trade between the two countries remained much below their potential.  Even today, the total trade turnover between the countries is around 27 billion US dollars compared to 285 billion US trade turnover between the US and China.  However, the US has a trade deficit with almost all the major countries including India.

According to the U.S. Commerce Department, America buys more goods from India than vice versa. Last year, the U.S. trade deficit with India was $10.8 billion.  But this is true of the US with some other countries also. The trade deficit of the US with other countries is much higher; for instance with China it is 201.7 billion dollars, Japan --- 82.7 billion dollars, Canada – 76 .6 billion dollars, Germany – 50.7 billion dollars, Mexico – 50.2 billion dollars and Brazil 9.1 billion dollars.

The issue however is not the trade deficit; it is that the two countries are not able to exploit the true potential of the trade opportunities.  With India aiming to push up its growth rate from eight per cent to 10 per cent in the next two years, we definitely need more investment especially in the infrastructure sector and FDI from USA can be of much help.  The US at the moment is the largest investor in China and Beijing is able to attract large FDIs from the US.  India's red tape and disastrous infrastructure--Roads, ports and utilities such as electricity and telephones are in awful shape — especially compared with rising economies such as China.  For this reason China is able to attract more FDI from India.

The US has been investing in India but its investments constitute about 11 per cent of the total actual FDI inflows into India. It is mainly concentrated in Fuels (power & oil) (35.93%), Telecommunications (radio paging, cellular mobile & basic telephone services (10.56%) Electrical Equipment (including Computer Software & Electronics) (9.50%), Food Processing Industries (Food products & marine products) (9.43%), and Service Sector (Financial & Non-Financial Services) (8.28%).

There are several areas where economic cooperation between India and the US can progress further. These include infrastructure, IT, Telecom sector, energy and other knowledge industries such as pharmaceuticals and biotechnology. 

The IT sector is India’s fastest growing sector with over 50 percent average annual compounded growth since 1991. Today, nearly two in five of the Fortune 500 companies outsource their software requirements to India.  Abundant investment opportunities exist for further strengthening the Indo-US economic ties in the IT sector, especially, in areas like communication infrastructure, optic fiber cable, gateways, satellite-based communication wireless, IT-enabled services, IT enable education, data centers and server farms, and software development.

India’s energy sector has been an important destination for US investment. The sector offers for exploitation a vast untapped potential to investors in hydro electricity, oil and natural gas and coal. Although several U.S. companies have been looking at the Indian energy market closely, progress has so far been limited.  With the introduction of Central Electricity Act 2003, the Government of India has now liberalized the power sector.  Private sector participation is now allowed in generation, distribution and transmission.  Considering the vast present and projected demand supply gap, there is tremendous potential for economic cooperation between the two countries in this area.

Again pharmaceuticals, biotechnology and chemical industries also provide great opportunities for closer cooperation. India is one of the largest manufacturers and exporters of pharmaceuticals.

Indian airports handle routine maintenance, but many airlines must fly their planes to Malaysia or Singapore when they are due for major overhauls.  This is an area where Americans companies can invest and make India a hub for airplane repairs in Asia.    The opportunities are there to be exploited and hopefully the new agreements will come in handy. -----INFA

(Copyright India News and Feature Alliance)