Indian PM Modi visited the US in June this year to strengthen ties between the two countries. The visit saw landmark deals across sectors, but a free trade agreement is unlikely in the near term.
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- Indian PM Modi visited the US in June this year to strengthen ties between the two countries. The visit saw landmark deals across sectors, but a free trade agreement is unlikely in the near term.
- Geopolitics and global security play a major role in this strategic partnership. The US sees India as a strong counterweight to China and key partner in the Indo-Pacific region.
- Indian exports to the US will likely rise over the next 3-5 years. Also, India’s share in global manufacturing output (3%) will likely rise at the expense of China’s (29%) due to foreign investments and the Make in India and China Plus One initiatives.
Modi Visit Deepens US-India Ties
PM Modi’s visit to the US in June marked an important milestone between the US and India. India’s key initiatives like Make in India and Digital India align with the US’s focus on reshoring and boosting domestic manufacturing, providing a solid base for an India-US bilateral partnership. Here, we explore the strategic interests of each country and examine the short- and long-term implications of the visit.
What Is the US’s Interest?
India acts as a strategic counterweight to China and a significant partner in the Indo- Pacific region. As America actively seeks to counter China, India becomes an important nation given its strategic location and cultural ties with the US.
Additionally, India’s rise as a low-cost manufacturing hub makes it an attractive option for the China Plus One policy. Supported by the government’s push to Make in India and the availability of cheaper labour, India could become an alternative manufacturing hub for Western countries.
There are significant economic and trade synergies with India. India’s current share in US’s total goods imports remains very low at 2.7% versus China’s 16.5% share. However, the US depends on India’s software services and is a major buyer of Indian goods, such as precious gems and jewellery and textiles.
India’s macroeconomic fundamentals such as demographics and its domestic consumption story remain robust. The Indian economy is projected to grow by 6-6.5% in the next few years, and the GDP is expected to touch $5tn by FY2027.
What Is India’s Interest?
The US is a very important trade and investment partner for India. The US surpassed China to become India’s largest trade partner in 2022-23, with bilateral trade worth $128.5bn. US-India bilateral trade is projected to rise even further to $500-600bn by 2030 (US, India Government sources). The US is also the third-largest source of FDI inflows into India.
A combination of the following factors will help India boost its exports further and increase its share in the global supply chain in the next 3-5 years (Table 1):
What Are the Near- and Long-Term Implications?
The near-term implications (up to one year) may not be very rewarding for the US, particularly regarding China. India has always maintained a non-alignment strategy and is unlikely to throw its full weight behind the US if the tensions escalate. However, the partnership is likely to send a strong message to China. India will be a strategic ally in ensuring a free and prosperous Indo-Pacific region.
India still faces challenges in fulfilling its promise of becoming the next manufacturing hub and cashing in on the China Plus One strategy. India’s share of global manufacturing output is only 3%. The domestic infrastructure is still underdeveloped, and there is a skill shortage with a low labour force participation rate. There is also competition from South Asian peers such as Taiwan for electronics, Vietnam and Bangladesh for textiles. Despite significant growth in trade and FDI between India and the US, a free trade agreement that reduces trade barriers is not up for discussion.
The primary focus of the bilateral partnership will be increasing market access and ease of doing business between the US and India. The US and India are also partners on key forums such as the Indo-Pacific Economic Forum (IPEF), which aims to maintain security and ease supply chains in the region.
The long-term story (in the next 3-5 years) is promising with further improvement in infrastructure. India is also poised to gain a larger share in the global supply chain with proactive policy reforms and a stable economy.
India and the US may have different visions of benefitting from the recent meet, but a long-term win-win from this bilateral relationship is certainly possible.