Abstract
This paper documents stylized facts about the evolution of trade and foreign direct investment (FDI) between India and the United States over the last four decades. We ask the question: does India-US trade and FDI deviate from its potential i. e. the level that would have been predicted by standard determinants? Using an augmented gravity model and a large sample of countries over 1970–2009, we find that while India’s exports to the US are 34 % higher than predicted, US exports to India are in line with its potential. Notably, we find strong reversals in the nature of these trading relationships over time. India loses its over-trading status while US turns out to be under-exporting to India in the period after 1990. We also find significant variation in trade performance across product categories. For primary and intermediate goods during post-1990, US exports to India turn significantly below normal. Conducting similar analysis for bilateral FDI flows for the period 1985–2009, we show that while US direct investments in India are in line with predictions based on fundamentals, India has actually been an under-investor in the US market.
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