India-US Economic Relations in the Context of Ukraine War and Protectionism | Indranil De

by Indranil De *

India is US’s one of the most important trade partners, and their relationship has grown up steadily over a period. Between 2009 and 2019, the export, imports and trade deficit of US with India increased by 10%, 11% and 15%, respectively [1]. Hence, it is in India’s economic interest to maintain a healthy relationship with US. However, India’s economic march along with Russia through the troubled water of geopolitics in the wake of Ukraine war and American protectionism may weaken the Indo-US relations, especially with respect to trade and technology. It might put a damper on India’s euphoria over holding the G-20 Presidency. The prospect of collective actions and cooperation regarding trade, supply-chains, clean energy, decarbonization, tax and anti-corruption through US initiated Indo-Pacific Economic Framework for Prosperity (IPEF), where India is also a member [2], may go for a toss. The recent initiative of Critical and Emerging Technologies (iCET) may also become ineffective and irrelevant due to US’s lukewarm response.

To counter Russia’s Ukraine war, US and EU restricted access to Western insurance, finance and brokerage services for any third-party buyer that paid more than $60 per barrel for Russian crude oil. This price cap is failing to restrain profiteering by Russian oil companies due to a shadow trading system where the returns are adjusted through heightening freight charges rather than the oil itself. Indian refiners are sourcing Russian crude oil and then exporting refined petroleum to Europe. Russia has become India’s prime oil supplier accounting for around 28% of India’s crude oil imports [3]. Analyzing customs data, it is alleged that India paid more for the Russian Ural oil than widely thought [4]. Moscow has recently proposed to set up an India-based Russian-owned financial institution to evade western sanctions on financial transactions. Russia has urged to enable Indian credit institutions to use the Bank of Russia’s Financial Messaging System (SPFS) to bypass sanctions imposed on using SWIFT. The RBI is open to discussions on these matters. The recent meet of India’s National Security Advisor with Russian’s President Vladimir Putin regarding India-Russia strategic partnership is another instance which will distance US from India.

US wants friends to form groups to counter China, one of its emerging foes. China has emerged as the United States’ principal opponent, with a larger share of the global economy (18.58% in 2022) than the USs’ (15.47%). US is weaponizing the Foreign Direct Product Rule (FDPR) to control over trade of US technology to leash Chinese economic aggression. Using FDPR they have cut Huawei off from US technology ushering benefits to domestic chipmakers [5]. Furthermore, to counter China’s high-tech ambitions the United States has enacted the Creating Helpful Incentives to Produce Semiconductors (CHIPS) and Science Act, 2022, which incentivizes domestic semiconductor production. The recipients of incentives cannot build facilities in China and other countries of concern [6]. In addition, the Inflation Reduction Act of 2022 (IRA) was enacted to curb inflation through a variety of measures, including investments in domestic energy production and the promotion of sustainable energy [7]. This will minimise electric vehicle batteries’ reliance on China.

Both CHIPS and IRA would be successful if and only if other nations restrict their economic transactions with China along the same lines by forming a group. Otherwise, US’s endeavours will fail like sanctions on Russian trade. It is in India’s own interest to be part of such a group, which will also help counter China. But India’s transactional relations with Russia may disincentivise to consider India as a credible partner of US and US-centric groups. There are lessons to be learnt from Indo-Russia-US relations regarding economic planning and required computing technology during the Cold War days.

Prasanta Chandra Mahalanobis, Father of Modern Statistics in India and founder of Indian Statistical Institute (ISI), initiated in the National Sample Survey (NSS) from 1950 to gather and document comprehensive and ongoing data on the social, economic, and demographic situations of rural households of India [8]. Massive amounts of data were collected for planning and development purposes. Mahalanobis lobbied with Soviet Ambassador Menshikov, for a grant to purchase a computer from the British Tabulating Machine Company in 1956 [9]. The computer would increase efficiency in analysing NSS data and provide inputs to the Five-Year Plans. Through a grant from the United Nations Technical Aid Administration, ISI received its second Soviet computer, Ural, in 1958. Mahalanobis also persuaded US for getting a UNIVAC computer throughout in 1950’s, but to no avail. The cause of the failure to get US-made UNIVAC is extremely unexpected; it was Mahalonabis’ image to the US as a Soviet sympathiser during the Cold War. In actuality, what fascinated Mahalonabis was Russia’s planning exercise, not political ideology [10].

Trust is one of the most important elements for collective actions and reaping collective benefits. Trust is driven by past actions and generates expectations for the future. Lack of trust would be a hinderance for developing new rules for group ties. Violation of rules can undermine the rules and reduce trusts. The latter may have spill over effects on all other collective actions among the partners.

Elinor Ostrom, the 2009 Nobel Prize Winner in Economics, states that one of the basic principles of collective action is to define clear boundaries of groups to restrain free riding and follow mutually agreed-upon rules [11]. If these rules are not followed, then graduated sanctions should be imposed. For instance, in the September 2022, US imposed sanctions against an Indian petrochemical company for selling Iranian petroleum products, when in 2019 the government agreed to follow unilateral sanctions of US on oil imports from Iran [12]. These actions including the transactions with Russia would have negative implications on Indo-US trusts.

India’s self-maximizing free-riding behaviour may invite heavy penalties in the immediate future from the US or groups that are US-centric. These penalties may not come as a sanction but lukewarm actions even if there are formal ties. As an instance, through iCET US has transferred advanced technologies to other countries but not any significant one to India [13]. Deals like most recent Air India’s purchase of 220 Boeing aircrafts may not be affected which is likely to benefit US profusely and where chances of benefiting US’s rivals are less. For any meaningful trade and technological cooperation, especially in areas of strategic importance where it is important to restrain rivals from taking advantage of free trade, India should focus on enhancing trust with US by shunning free riding and exercising self-restraint. Given the world is moving towards protectionism drifting from free trade, forming group and being a reliable partner is most important.

* (Author: Indranil De is Associate Professor, Institute of Rural Management Anand; Views are personal)