Tensions between India and the US have ratcheted up at a steady pace in the last few weeks after India imposed tit-for-tat tariffs on 28 US products after the US decision to withdraw preferential status granted to Indian exports under the GSP. However, both sides are eager to avoid the prospect of a trade war, with the US already embroiled in one such conflict with China, and India having more to lose than gain from such a state. Hence, it is hardly surprising that there are high expectations from US Secretary of State Mike Pompeo’s visit to India next week. Officials with knowledge of the matter have said that they expect the US to push for some kind of trade deal to reduce tensions and resume the relationship between the two nations. The new Indian government, for its part, has already publicly stated that it does not see the GSP removal as a major cause for concern; hence, one can likely expect positive developments in Indo-US relations following Secretary Pompeo’s visit. The escalating trade conflict has already started to affect economic markers in India, with two separate reports predicting trouble for India’s gems and jewelry exports, and the wider GDP forecast, in the coming financial year. Meanwhile, in the domestic arena, the Indian government has begun a crackdown on exporters who have fraudulently claimed GST refunds on the basis of bogus invoices. Several “risky” exporters have already been identified, and the Central Board of Indirect Taxes and Customs (CBIC) has promised a full cleanup of the books while assuring genuine exporters that they would be unaffected by this process. As the government starts seeking to revitalize trade in the coming months, Indian exporters can likely expect further such streamlining and pruning of the country’s export-import sector.
Trade Update
22nd June
# 30
The ongoing India-US trade tensions are expected to be a major topic of discussion when US Secretary of State Mike Pompeo visits India for talks with his Indian counterpart S Jaishankar early next week, a senior government official told Moneycontrol. The Commerce Ministry is also anticipating that the US might push for a bilateral agreement after India slapped retaliatory tariffs on a few American products. “I don’t think we can call it a trade war. But the US might push for some kind of a trade pact and we are preparing for such an eventuality,” the official said.
India is bracing for pressure from the US to sign a bilateral trade pact with it after New Delhi slapped retaliatory tariffs on some American products. India-US trade relations came under stress in the last fortnight with Washington ending preferential benefits for Indian exports worth $6.35 billion and New Delhi raising tariffs on 28 American products on 16th June -- a year after announcing the levy. “We anticipate the US to ask us to sign some kind of a trade pact and we should be prepared for that. This is not a trade war,” said an official aware of the development.
The withdrawal of benefits under the Generalized System of Preferences (GSP) with effect from 5th June, as announced by the US earlier, will have limited impact on India’s overall export trade. That’s what Crisil suggests. The bigger issue, however, is the spectre of trade tightening for India that the move raises, experts feel. “The withdrawal of GSP will affect exporters of gems & jewellery the most because nearly 15%cent of such exports availed of its benefits in calendar 2018. Now there will be an additional duty of nearly 7% on exports of precious metal-based and imitation jewelry. That will reduce the competitiveness of domestic exporters and put pressure on margins,” said Hetal Gandhi, Director, Crisil Research.
DBS Bank has revised India’s GDP growth for fiscal year 2020 downwards to 6.8% year-on-year (YoY) from 7% projected earlier, citing headwinds for exports amidst a challenging trade outlook. “Growth headwinds swiftly turn attention to the likely policy response. We expect monetary policy to do much of the heavy lifting, given limited fiscal leeway,” the bank said in its report on the Indian economy on 20th June. The Reserve Bank of India’s policy stance was changed from neutral to accommodative, opening the door to further easing, wrote Radhika Rao, Economist at DBS Group Research, pointing out the 75 bps repo rate cut so far this year.
The government on 20th June said it has identified 5,106 “risky exporters” so far who have claimed GST refunds based on bogus invoices, and would manually check their claims before issuing refunds. According to sources, such fraudulent claims of Integrated GST (IGST) refunds by exporters could exceed Rs. 1,000 crore. The Central Board of Indirect Taxes and Customs (CBIC), in a statement, also assured genuine exporters that their refund claims would be processed in an automated environment and issued in a timely manner.