AI: A friendship whose time has come

America-India partnership stands poised to reshape the world's dynamics if both sides play their cards right

The America-India (AI) relationship, which until 2000 lacked trust and was sometimes even hostile, has now come full circle. A process of closer relations started under President Bill Clinton and has progressed since then under Presidents George W Bush, Barack Obama, and Donald Trump. But the recent welcome accorded to Prime Minister Narendra Modi by President Joe Biden, with a state dinner and a speech to the US Congress, has taken the AI relationship to a much higher level. While the China threat is the immediate boost for this relationship, it has many legs, from trade, technology, defence production, space, and climate-related initiatives to the growing role of the Indian diaspora, now the US’ richest ethnic group.

In today’s piece my focus is on trade. The US is now India’s largest trading partner, with bilateral trade reaching $192 billion in 20221, much larger than the China-India trade of $136 billion. Moreover, while India runs a trade surplus with the US of over $30 billion in merchandise exports, it runs a huge trade deficit of over $80 billion with China. Despite the Galwan clash, after which India banned several Chinese companies, over 10 per cent of India’s imports still come from China alone. In addition to bolstering defence ties, increasing trade, technology and investment with the US are to India’s advantage. The US, too, gains hugely with India providing the only large counterweight to China in the Indo-Pacific region and its rapidly growing economy projected to be the third largest by 2030.

India’s goal of reaching exports of $2 trillion — $1 trillion in goods and $1 trillion in services — by 2030 (see table) would require growing at 12.6 per cent per annum (in goods 10.5 per cent and in services 15.2 per cent, respectively) over the next eight years. India did see a resurgence in exports between 2019 and 2023 after a slump during the decade from 2010-2019. But during 2000-2010, India’s goods and services exports grew by 20 per cent  per annum, with service exports rising by 23.2 per cent per annum and goods at 18.2 per cent per annum. Even in constant dollar terms, goods and services exports grew at 14 per cent per annum in the 2000-2010 decade. Whether the world will look more like the period 2010-2019, when global trade slumped, or more like 2000-2010, when it exploded, remains to be seen. With rising geo-political cleavages, global trade may not see a repeat of the growth seen in 2000-2010. Based on past trends, service exports are projected to do better than goods exports but there is a word of caution here. The other AI (artificial intelligence), which is now upending many business models, may have a large effect on India’s low-cost routine IT service exports on which its IT success is based. Indian IT companies must move up the value chain if they are to replicate their past success.

But one fact stands out; since 1990, India’s exports have grown faster than global exports, and since 2000, twice as fast. As a result, India’s share of global exports, which was 0.5 per cent in 1990, has risen to 2.5 per cent in 2022. But it remains small compared to China’s (12 per cent), Germany (6.6 per cent) or even the UK (3.2 per cent). If India can continue to increase its global share of exports to around 4 per cent by 2030, it could hope to reach its target of $2 trillion, despite slower growth in global trade.

India will not benefit from increased trade with China with whom our deficits will only keep rising. India exports only a little over $20 billion to China versus over $100 billion to the US. India’s exports to the US doubled in the last seven years and could reach $300 billion by 2030. The EU market is potentially huge for India, with goods and services exports at around $75 billion in FY 2022-2023. But with the EU, India must deal with the threat of a climate border adjustment mechanism (CBAM) looming and heavy phyto-sanitary regulations. Trade agreements with the UK, coming on top of agreements reached with Australia and the UAE, will help. Latin America also offers a huge market — its imports exceed $1 trillion, with Mercosur countries importing close to $0.5 trillion. But even with all these efforts, the key to achieving India’s ambitious export targets will be growing US-India trade, which, as the Union Commerce Minister Piyush Goyal said, should reach $500-$600 billion by 2030.

The US-India friendship may yet turn out to be the most consequential one for both countries — for that matter, the world — in this century if both sides play their cards right. There is commentary on who got more out of this visit and even some that suggest India will never be an ally of the US. But in the long arc of America-India relations, this visit will be a marker for the fact that India may not be a formal ally, but is for sure becoming a close friend of the US, and both sides have much to gain from each other.

The writer is a distinguished visiting scholar, Institute for International Economic Policy, George Washington University.

1. According to the joint US-India statement issued after the PM’s visit