Order Code RS21502
Updated July 28, 2003
CRS Report for Congress
Received through the CRS Web
India-U.S. Economic Relations
Wayne Morrison and Alan Kronstadt
Foreign Affairs, Defense, and Trade Division
Summary
India’s economy has shown relatively healthy growth since 1991 when an
economic crisis caused the government to implement various economic reforms. Yet
many analysts view India’s economy as falling below its potential, especially when
compared to a country such as China, which has achieved far greater economic success
over the past decade. The United States is India’s largest trading partner. India is a
relatively minor U.S. trading partner, although U.S. officials argue that it could be a
potentially large market if India implemented further economic reforms. This report will
be updated as events warrant.
India is a country with a long history and a large population (more than one billion
people, nearly half living in poverty). Given that it is the world’s most populous
democracy, a U.S. ally in anti-terrorism efforts, and a potentially major export market,
India’s economic development and its trade relations with the United States are of
concern to Congress.
India’s Economy
Upon achieving independence from British rule in 1947, India pursued policies that
sought to assert government planning over most sectors of the economy and strove to
promote relative economic self-sufficiency.
These policies included extensive
government spending on infrastructure, the promotion of government-owned companies,
pervasive regulatory authority over private sector investment, and extensive use of trade
and investment barriers to protect local firms from foreign competition. While these
policies achieved some economic goals (such as rapid industrialization), the overall effect
was to promote widespread inefficiency throughout the economy (e.g., unprofitable state-
run firms and a constrained private sector) and to greatly restrict the level of foreign direct
investment (FDI) in India. India’s real GDP growth was relatively stagnant during the
1970s, averaging about 2.7%. Piecemeal economic reforms and increased government
spending during the 1980s helped boost average real GDP growth to 6.0%.
1991 Economic Crisis and Reforms. India suffered a major economic crisis
in 1991, largely due to the effects of oil price shocks (resulting from the 1990 Gulf War),
the collapse of the Soviet Union (a major trading partner and source of foreign aid), and
a sharp depletion of its foreign exchange reserves (caused largely by large and continuing
Congressional Research Service ˜ The Library of Congress

---

CRS-2
government budget deficits).1 The economic crisis led India, under the Indian National
Congress (INC)-led government of Prime Minister Narasimha Rao, to cut the budget
deficit and implement a number of economic reforms, including sharp cuts in tariff and
non-tariff barriers, liberalization of FDI rules, exchange rate and banking reforms, and a
significant reduction in the government’s control over private sector investment (by
removing licensing requirements). These reforms helped boost economic growth and led
to a surge in FDI flows to India in the mid-1990s (annual FDI rose from about $100
million in 1990 to $2.4 billion by 1996;
more than one-third coming from U.S.
companies). Reform efforts stagnated, however, under the weak coalition governments
of the mid-1990s. The 1997/1998 Asian financial crisis, and U.S.-imposed sanctions on
India (as a result of its May 1998 nuclear tests), further dampened the economic outlook.
Following the 1999 parliamentary elections, the new Bharatiya Janata Party (BJP) — led
government, under Prime Minister Atal Vajpayee, launched second-generation economic
reforms, including major deregulation, privatization, and tariff-reducing measures. During
the 1990s, real GDP growth averaged 5.6%; from 2000-2002 it averaged 4.7%.
Current Economic Conditions. By some measurements, India is among the
world’s largest economies. While on a nominal basis, India’s 2002 GDP was $485
billion, on a purchasing power parity (PPP) basis, it was $2.7 trillion, making it the
world’s 4th largest economy (after the United States, China, and Japan).2 However, its
per capita GDP on a PPP basis (a common measurement of a nation’s living standards)
was $2,610, equal to only 7.2% of U.S. levels. Poverty is perhaps India’s greatest
problem. According to the World Bank, India has 433 million people (44.2% of the
population) living below the international poverty measurement of less than $1 per day.3
According to official Indian trade data, its 2002 exports and imports were $43.6
billion and $51.1 billion, respectively.4 The World Trade Organization (WTO) indicates
that, in 2001, India was the world’s 30th largest merchandise exporter and the 27th largest
importer.5
India’s principal exports in 2002 were textiles (22% of total), gems and
jewelry (16.8%), and chemicals and related products (14.5%). Its top three imports were
petroleum (27.4% of total), pearls and precious and sem-precious stones (9.0%), and gold
and silver (8.9%). The top three trading partners were the United States, the United
Kingdom, and Belgium. India’s top three destinations for its exports were the United
1 The central government’s budget deficit as a percent of GDP averaged over 7% from 1980 to
1990. The high level of government debt became unsustainable as the high right of government
borrowing raised real interest rates, sparked inflation, and undermined faith in the currency.
2 PPP data reflects foreign data in national currencies converted into U.S. dollars, based on a
comparable level of purchasing power these data would have in the United States.
3 The World Bank notes that India has made significant progress in reducing poverty, especially
in recent years. It estimates that India’s poverty rate in the 1970s was over 50% Official Indian
government poverty rate measurements differ from World Bank data; it estimates that the poverty
rate at 26% (at the end of the 1990s), down from 36% in 1993/1994.
4 India reports its trade data according to fiscal year, which runs from April-March. The cited
data are for April 2001-March 2002. Source: Indian Ministry of Commerce.
5 The World Bank estimates that, based on the size of India’s economy, its level of trade should
be $150 billion higher than it currently is.

---

CRS-3
States (19.5% of total), the United Arab Emirates, and Hong Kong, and its top sources for
imports were the United States (6.1% of total), Switzerland, and Belgium.
Comparisons Between India and China. Many analysts argue that India’s
economy has failed to live up to its potential, especially relative to other developing
countries, such as China, which has a comparable population size, but has enjoyed far
greater economic development in recent years. Table 1 indicates that both India and
China experienced significant growth in population, GDP and per capita GDP (both
measured on a PPP basis), trade, and FDI over the past 12 years. However, on several
economic fronts, India lost significant ground to China.
Table 1. Selected Comparative Data for India and China:
1990 and 2002
India’s Size
India
China
Relative to China
1990
2002
1990
2002
1990
2002
Population (millions)
850
1,046
1,139
1,284
74.6%
81.5%
GDP, PPP basis
1,189
2,732
1,583
6,032
75.1%
45.3%
($billions)
Per Capita GDP in $PPPs
1,400
2,610
1,390
4,700
100.1%
55.5%
Exports ($millions)
17,975
46,232
62,090
293,753
28.9%
15.7%
Imports ($millions)
23,438
55,035
42,354
278,151
55.3%
19.8%
FDI stock ($millions)
1,592
26,255
68,513
445,287
2.3%
5.9%
Note: PPP refers to purchasing power parity. Such data reflect the purchasing power of foreign data in
U.S. dollars.
Source: Economist Intelligence Unit (EIU).
In 1990, India’s economy (GDP on PPP basis) was about three-quarters the size of
China’s, but by 2002 it was less than half. India’s living standards (per capita GDP on
PPP basis) was slightly greater than China’s in 1990, but by 2002 it had fallen to 55.5%
of China’s. India’s exports relative to Chinese exports fell from 28.9% in 1990 to 15.7%
in 2002, while imports dropped from 55.3% to 19.8%. India made small gains in FDI
flows relative to China over this period (rising from 2.3% to 5.9%), however, the total
level of FDI stock in China was substantially higher than that going to India in both
periods. In fact, FDI flows to China in 2002 alone (nearly $53 billion) were more than
double the cumulative stock of FDI in India through 2002 ($26 billion). Many economists
attribute the sharp widening economic gaps between India and China to differences in the
pace and scope of economic and trade reforms undertaken by each country, where China
has substantially reformed its trade and investment regimes (which has contributed to
sharp rises in GDP growth, trade, and FDI flows), India’s economic reforms have been
far less comprehensive and effective. For example, China’s average tariff has fallen from
43% in 1992 to12% in 2002.
India’s average tariff during this period dropped
substantially, from 128% to 32%, but still remains among the highest in the world.
U.S.-Indian Economic Relations
In 2002, U.S. exports to and imports from India totaled $4.1 billion and $11.8
billion, respectively (see Table 2), resulting in a $7.7 billion trade deficit. India was the

---

CRS-4
27th largest U.S. export market and the 19th largest supplier of U.S. imports.6 Major U.S.
exports to India included computers, aircraft, and electrical machinery. Top U.S. imports
from India were non-metallic manufactured minerals (mainly processed diamonds),
clothing and apparel, and textile yarns and fabrics. Because India is a developing country
and meets other criteria set in U.S. law, $2 billion worth of its exports entered the United
States duty-free under the Generalized System of Preferences (GSP). According to Indian
government data, the United States is India’s second largest source of FDI (after
Mauritius7), accounting for $3 billion (or 16%) of total FDI flows to India from 1991
through July 2001.8
Table 2. Major U.S.-Indian Trade Commodities: 1998-2002
($millions)
1998
1999
2000
2001
2002
Total U.S. Exports
3,545
3,707
3,663
3,764
4,098
Office machines and automatic data processing
175
218
367
349
371
machines (i.e., computers)
Transport equipment (mainly aircraft and parts)
454
424
312
394
331
Electrical machinery, apparatus, appliances,
214
213
264
311
306
and parts
Total U.S. Imports
8,225
9,083
10,686
9,738
11,818
Nonmetallic mineral manufactures
2,062
2,499
2,768
2,180
2,931
Articles of apparel and clothing
1,642
1,646
2,002
1,934
2,064
Textile yarns and fabrics
893
988
1,119
1,050
1,260
Source: U.S. Department of Commerce.
Major U.S.-Indo Trade Issues
India’s sizable population and large and growing middle class make it a potentially
large market for U.S. goods and services.9 However, a number of factors hamper
increased economic ties. First, in addition to maintaining high tariff rates on imports
(especially on products that compete with domestic products), India also assesses high
surcharges and taxes on a variety of imports. Major non-tariff barriers include sanitary
and phytosanitary restrictions, import licenses, regulations that mandate that only public
6 In May 1998, the United States imposed a number of economic sanctions against India (and
Pakistan) for conducting nuclear tests. Such sanctions dampened somewhat U.S.-Indo economic
relations over the past few years, although some were removed shortly after they took effect and
all were lifted after the September 2001 terrorist attacks on the United States. See CRS Report
RS20995, India and Pakistan: U.S. Economic Sanctions.
7 Many foreign firms invest in India through Mauritius for tax purposes.
8 U.S. Commerce Department data on U.S. FDI flows to India differ from Indian data. Commerce
estimates total U.S. FDI in India at year-end of 2001 (on a historical cost basis) at $1.7 billion.
9 Estimates of the size of India’s middle class widely differ. Using Indian standards, estimates
of the middle class run as high as 300 million people. The Commerce Department estimates that
India has 20 million “well-off consumers” with annual incomes exceeding $13,000, and 80
million people with incomes over $3,500, and 100 million people with incomes over $2,800.

---

CRS-5
sector entities can import certain products, discriminatory government procurement
practices, and the use of export subsidies.10 A variety of restrictions are placed on foreign
services providers and on the level of permitted FDI in certain industries. Second, India
continues to maintain a number of inefficient structural policies which affects it trade,
including price controls for many “essential” commodities, extensive government
regulation over many sectors of the economy, and extensive public ownership of
businesses, many of which are poorly run. Third, despite India’s attempt to develop
internationally competitive information technology industries (such as software), U.S.
government officials charge that India has a poor record in protecting intellectual property
rights (IPR), especially for patents and copyrights. The International Intellectual Property
Alliance estimates that IPR piracy in India cost U.S. firms $468.1 million during 2002.11
India’s extensive array of trade and investment barriers has been criticized by U.S.
government officials and business leaders as an impediment to its own economic
development, as well as to stronger U.S.-Indian ties. For example, the Deputy U.S. Trade
Representative asserted in February 2003 that progress in transforming the U.S.-Indian
economic relationship has been “slow,” due in part to India’s “grudging attitude” toward
imports that produces “multiple, onion-like barriers” to potential exporters. He also noted
that “India’s tariff and tax structure undermines its commitments in the WTO,” and that
its high agricultural support prices encourage overproduction in that sector.12 Some U.S.
interest groups have expressed concern that closer U.S.-India economic ties could
accelerate the practice by some U.S. firms of outsourcing information technology and
customer service jobs to India.
Prospects for India’s Further Economic Reform
India faces a number of significant challenges to its goals of sustaining healthy
economic growth and further reducing poverty. Many economists argue that India needs
to substantially liberalize its trade and investment regimes, accelerate privatization of state
firms, cut red tape and crack down on corruption, and substantially boost spending on its
in physical and human infrastructure.13 However, large and continuing government
deficits, and the high level of public debt (equal to 80-90% of GDP) severely hamper the
ability of the government to boost spending for needed infrastructure projects, without
major reforms to the tax system and significant cuts in government subsidies. A July
2003 report of the World Bank lauded India’s “impressive progress” in increasing
incomes and living standards, but warned that the trend cannot be sustained unless there
10 Historically, India maintained extensive non-tariff barriers on many imports, based on balance-
of-payments reasons. However, in 1999, a WTO dispute resolution panel ruled that these
restrictions were no longer justifiable, which prompted India (in 2001) to remove many of its
quantitative import restrictions (although many of these barriers were replaced with high tariffs).
11 Concerns over India’s poor IPR protection record led the United States in 1992 to impose
economic sanctions against India by suspending GSP benefits for certain imports. Some GSP
benefits were restored in 2001after some improvements were made. However, IPR piracy remains
a serious problem in India.
12 Remarks by Ambassador Jon Huntsman, Deputy U.S. Trade Representative, February 5, 2003.
13 On the political front, tensions with Pakistan and continued violence in the disputed territory
of Kashmir pose serious threats to India’s long-term economic health.

---

CRS-6
is “an acceleration of reforms.”14 However, Prime Minister Vajpayee stated in May 2003
that India “cannot simply push through reforms as shock therapy.”15
Organized resistance to many of the desired reforms comes in large part from Hindu
nationalist groups that are increasingly influential since the BJP’s ascendance in 1998.
The “Forty Points of Hindu Agenda,” as outlined by the World Hindu Council in 1997,
includes an explicit call for an Indian economic policy “based on Swadesh” (or self-
reliance). As a “sister organization” to the Rashtriya Swayamsevak Sangh (RSS) — itself
the major Hindu nationalist organization — the Swadeshi Jagaran Manch (SJM) has taken
the lead in efforts to forward the Swadeshi cause. According to the SJM, “The Western
notion of a global market does not fit into the Swadeshi approach,” nor does the “Western
notion of individual freedom, which fragments and compartmentalizes family, economy,
culture, and social values ...” The SJM is resolved to oppose any further globalization of
India’s economy, claiming that the “invasion” of FDI has caused “unprecedented
unemployment” and the closure of thousands of small-scale industries. Another affiliated
group, the Bharatiya Mazdoor Sangh, lobbies in opposition to any further liberalization
of India’s labor laws. Protection of India’s agriculture and textile industries is viewed as
especially vital. These kinds of anti-globalization policies continue to enjoy limited, but
still substantial backing among Indians.16
Despite the sometimes considerable resistance to further progress with India’s
economic reforms, most analysts believe that state elections in 2003 and national elections
in 2004 will not alter New Delhi’s policy direction in any meaningful way. Top BJP
figures appear eager to move forward with privatization and the main opposition INC,
while posturing itself as a protector of public sector jobs, has assisted in the reform
process. Still, many observers argue that a sometimes fractious national coalition
government is unlikely to amass the parliamentary votes necessary to push through
legislation on controversial major economic reforms (such as those dealing with the
financial and agricultural sectors), or to significantly reduce the government’s budget
deficits, barring a major economic crisis. Thus, New Delhi’s movement on key reform
issues could remain slow in the near- and medium-term.17 Despite this, India’s near-term
economic prospects appear to be positive, according to various international economic
forecasting firms. Global Insights projects India’s real GDP will rise by 5.6 in FY2003
and by 5.7% in FY2004, while the EIU projects growth at 5.9% and 6.7%, respectively.18
14 “India Urged to Reduce High Debt Burden,” Financial Times, July 21, 2003; “India: Sustaining
Reform, Reducing Poverty,” World Bank India Development Policy Review, July 19, 2003.
15 “India For Reforms, But No Shock Therapy,” Times of India (Delhi), May 30, 2003).
16 See the Swadeshi Jagaran Manch at [http://www.swadeshi.org]. During the autumn of 2002,
New Delhi’s efforts to move forward with the privatization of the country’s two largest oil
concerns — Bharat Petroleum and Hindustan Petroleum — ran into considerable resistance from
the so-called Swadeshi lobby.
17 “India Risk: Government Effectiveness Risk,” Economist Intelligence Unit, April 9, 2003;
“Govt Win in Gujarat May Revive India’s Selloff Program,” Dow Jones International News,
December 5, 2002; Rajesh Ramachandran, “Cong Get Economic Slogans to Take on BJP,” Times
of India (Delhi), March 31, 2003.
18 Global Insight, India, July 23, 2003, and EIU, Country Outlook: India, July 2003.

---