CRISIL believes the withdrawal of benefits under the Generalized System of Preferences (GSP) effective June 5, as announced by the US earlier, will have limited impact on India’s overall export trade.

In calendar 2018, India’s goods and services trade with the US totalled $142.1 billion of which, exports were $83.2 billion. Within exports, that under GSP is estimated to be 7.5-7.8%, which translates into ~$260 million of leviessaved, tantamount to a 4% duty benefit.

While the gems & jewellery sector could be moderately impacted by the withdrawal of GSP, pharmaceuticals and textiles & apparel would be relatively unscathed.

Says Hetal Gandhi, Director, CRISIL Research, “The withdrawal of GSP will affect exporters of gems & jewellery the most because ~15% of such exports availed of its benefits in calendar 2018. Now there will bean additional duty of ~7% on exports of precious metal-based and imitation jewellery. That will reduce competitiveness of domestic exporters and put pressure on margins.”

To be sure, the gems & jewellery sector is already under pressure on account of stringent lending rules and workingcapital crunch. India tops the list of exporters to the US in this category, with more than 15% share. However,increasing competition from Israel, Mexico and Canada remains a monitorable.

Indian companies also face intense competition for exports of pharmaceutical products to the US from the likes of Ireland, Germany and Switzerland. The US market accounts for 35-37% of Indian formulation exports. However, theimpact of GSP withdrawal on pharmaceuticals is minimal.

In apparels, developing nations such as Vietnam, Indonesia and Bangladesh have been increasing their share in overall exports to the US. The impact of GSP withdrawal on apparel exports is minimal. Given this, the 4% subsidyoffered by the government under the Merchandise Export Incentive Scheme (MEIS) remains a monitorable in this category. If MEIS benefits are not renewed, it would lead to deterioration of export competitiveness, thereby impactingexports to the US.

That said, there have been instances of the US reinstating GSP status after withdrawing it – such as for Argentina, Liberia and Myanmar – based on certain criteria.

The bigger issue, however, is the spectre of trade tightening for India that the move raises.

The US accounts for over 15% of India’s exports of goods, though from a US perspective, imports from India are barely 2% of the pie. The US’s trade deficit with India has declined continuously over the past five years, from $31billion in calendar 2014 to $24.2 billion in calendar 2018. This is because India’s exports to the US have logged a compound annual growth rate of 6%, while its imports from the US have run up at 11%.