EVENTS

Date:	Wednesday, April 19, 2006
Time:	12:00 PM -- 1:30 PM
Location:	Wohlstetter Conference Center, Twelfth Floor, AEI 1150 Seventeenth Street, N.W., Washington, D.C. 20036

April 2006

The Economic Dimension: The United States and India

When Indian prime minister Manmohan Singh met with President George W. Bush in July 2005, the two leaders set forth a joint vision to “transform the relationship between their countries and establish a global partnership.” While most of the commentary following this meeting focused on the civil nuclear agreement, the summit also proposed a bold series of economic objectives. By promoting growth through increased trade and investment and furthering technological collaboration, the United States and India hope to deepen their bilateral economic relationship. This global partnership, however, raises a series of questions. How will India attract greater investment? To what extent will India’s infrastructure need to be modernized before there is significant progress toward greater economic and technological cooperation? How will the outcome of the nuclear agreement and debates over outsourcing affect the U.S.-India economic relationship? AEI hosted Montek Singh Ahluwalia, deputy chairman of the planning commission for the government of India and former secretary of finance and commerce, for an April 19 luncheon and foreign policy briefing to address these and other questions.

Deputy Chairman Montek Singh Ahluwalia
Planning Commission, India

The last fifteen years have brought unforeseen political and economic changes to India. In particular, the end of the Cold War brought global political changes that have left India and the United States with significant common interests.

On the economic side, India has joined the global consensus that lowering trade barriers is central to development, and it has undertaken reforms that will extend its integration into the global economy. Particularly important for India’s economy is the U.S.-Indian. relationship.

President Bush’s recent visit to India drew extensive media coverage, partly due to the signing of a civilian nuclear agreement. This agreement, unfortunately, diverted the media’s attention away from progress made on many other fronts, including agricultural modernization, nonnuclear energy technology, defense partnership, and scientific cooperation.

India values its economic relationship with the United States because trade with the United States is the linchpin of successful integration into the global economy. India has not long had an open market economy, but the process of removing trade barriers in India has gone relatively smoothly.

India has been experiencing record economic growth. In India’s last fiscal year, GDP grew 8.1 percent, just short of China’s staggering growth rates. Nevertheless, a 10 percent growth rate will be possible for India in the next few years. If the government wants to achieve this level of economic performance, it must avoid adopting a business-as-usual approach to economic policy.

Because India is a democracy, its politicians tend to bicker about reforms, but if one looks beyond the squabbling, one finds a consensus in favor of economic liberalization. The people of India appreciate liberal reforms because they have brought positive results. Of course, benefits have not been extended to all people in India; some districts have not yet seen improvement. Policy changes in three areas will make growth more inclusive.

First, India needs better infrastructure. A large amount of total investment is needed to improve infrastructure, on the order of 9 percent of GDP. Such large sums cannot be raised publicly in India--private investment will be necessary, and India is designing policies to attract it. Private investors have already successfully funded seaports, and a private-sector airport recently opened, with two more under construction. Private-sector turnpikes are also possible. Public money may be used most efficiently to fund rural projects where private investment is not possible.

Second, agricultural reforms are needed. The goal of modernizing Indian agriculture can be met with a new set of policies. Farmers need not worry about being driven out by corporations: India would like to foster contract farming, whereby corporations reach agreements with small farmers.

Third, India needs better institutions for education and public health. India’s social indicators are not yet comparable to those of East Asian countries. Despite the quality of its universities, India needs better primary and secondary education, and public health has become a priority of India’s government.

While India’s government will direct more public funding into education and health care, the private sector will account for improvement in other areas. All of this activity is happening inside an economy that attracts both foreign direct investment and portfolio investment. The predominance of the latter in the Indian economy can be attributed to the superior transparency of India’s stock markets.

AEI intern Jon Murray prepared this summary.