Explained | The concerns about India-U.S. digital trade

Analysing the policy barriers in trading with India flagged by the U.S. Computer & Communications Industry Association

The story so far: During Prime Minister Narendra Modi’s U.S. state visit, cooperation on technology emerged as a prominent talking point and yielded some of the most substantive outcomes, according to Foreign Secretary Vinay Kwatra. However, digital trade is also the area where some of the biggest U.S. tech companies have recently flagged multiple policy hurdles, including “India’s patently protectionist posture”. Earlier this year, the Washington D.C.-headquartered Computer & Communications Industry Association (CCIA), with members like Amazon, Google, Meta, Intel, and Yahoo, flagged 20 policy barriers to trading with India in a note titled “Key threats to digital trade 2023”.

Notably, in FY2023, the U.S. emerged as India’s biggest overall trading partner with a 7.65% increase in bilateral trade to $128.55 billion in 2022-23. However, digital or technology services did not emerge as one of the sectors at the forefront of bilateral trade. The CCIA points out in its report that “despite the strength of the U.S. digital services export sector and enormous growth potential of the online services market in India, the U.S. ran a $27 billion deficit in trade in digital services with India in 2020”.

In the recent past, however, the two countries have been ramping up their tech partnership through moves like the Initiative on Critical and Emerging Technology (iCET) announced by President Joe Biden and Prime Minister Narendra Modi last year. Under the iCET, India and the U.S. agreed to cooperate on critical and emerging technologies in areas including artificial intelligence, quantum computing, semiconductors and wireless telecommunication. Additionally, under the iCET, India and the U.S. also established a Strategic Trade Dialogue with a focus on addressing regulatory barriers and aligning export controls for smoother trade and “deeper cooperation” in critical areas.

The joint statement released on the first day of Mr. Modi’s visit, also mentions the ambitious MoU signed between the two states on the Semiconductor Supply Chain and Innovation Partnership, which includes a combined investment valued at $2.75 billion. On the telecommunications front, the two leaders launched two Joint Task Forces to focus on the Open RAN network and research and development in 5G/6G technologies. Besides, the two countries are bullish on future tech such as AI and Quantum Computing, having put in place the Quantum Coordination Mechanism and a joint fund for the commercialization of Artificial Intelligence.

The CCIA, while appreciating the reinvigorated efforts to ramp up trade through bilateral initiatives, has flagged in its note, the “significant imbalance” and “misalignment” in the U.S.-India economic relationship. “The U.S.’s extension of market access, trade and openness to Indian companies to operate and succeed in the U.S. has not been reciprocated by the Indian side,” it reads, adding that the Indian government has deployed a range of “tools to champion their protectionist industrial policy”, tilting the playing field away from U.S. digital service providers in favour of domestic players.

To describe these “discriminatory regulation and policies”, it cites the example of India’s guidelines on the sharing of geospatial data, which it accuses of providing preferential treatment to Indian companies. It has also expressed discontent over India’s veering away from “longstanding democratic norms and values, and seeking greater government censorship and control over political speech”, which it argues has made it “extremely challenging for U.S. companies to operate in India”. Notably, concerns about India’s democratic values in comparison with those shared by the U.S. and cited as the bedrock of the bilateral partnership were also raised during Mr. Modi’s state visit.

One of the taxation tools that U.S. tech firms have long taken exception to is the expanded version of the “equalisation levy” that India charges on digital services. India in 2016, with the goal of “equalising the playing field” between resident service suppliers and non-resident suppliers of digital services imposed a unilateral measure to levy a 6% tax on specific services received or receivable by a non-resident not having a permanent establishment in India, from a resident in India who carries out business.