Falling short: How bad economic choices threaten the US-India relationship and India's rise

Reuters

US President Barack Obama (R) shakes hands with Indian Prime Minister Manmohan Singh in the Oval Office of the White House in Washington September 27, 2013.

Article Highlights

  • US–India relations stand at a crossroads.

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  • For the US, a strong India is worth supporting.

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  • India needs to address long overdue reforms in land, taxes, labor, and power.

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Two decades after the end of the Cold War, US–India relations stand at a crossroads. Not so long ago, many in Washington viewed the signing of the historic US–India civil nuclear deal as the advent of a dynamic partnership with the potential to transform Asia and the world.[1] Today US–India ties are just as often characterized as unrealistic or oversold.[2]

To be sure, successive American and Indian administrations have chipped away at the mistrust that once characterized ties between the world’s two largest democracies. Washington and New Delhi talk to each other more often, about more things, and at higher levels than ever before. The two governments are engaged in more than 30 ongoing dialogues; they discuss everything from Afghanistan and counterterrorism to vocational education and clean cookstoves.[3]

Republicans and Democrats alike generally agree that the goal of a strong India—as a symbol of democratic capitalism, an implicit counterweight to Chinese hegemony, an ally in the long war against radical Islam, and an engine of global growth—remains worth supporting.[4] The United States also views stronger ties with India as an essential part of its “rebalance” toward Asia.[5]

A strategic partnership built on weak foundations will likely flounder, however. Economic and trade ties, which ought to be the lifeblood of a US–India partnership, have traditionally played second fiddle to strategic considerations and remain far below potential. Moreover, even as the United States remains India’s top trade partner (in goods and services), and US–India trade continues to grow, the importance of the United States to India’s economy may be declining.[6] Since 2004, the share of the United States in India’s total trade has fallen, as has the US share of foreign direct investment (FDI) inflows to India.[7]

Although FDI figures may be disputable—many firms route their investments to India through the tax haven of Mauritius—the lack of progress on a bilateral investment treaty is not. Simply put, neither country treats the other as a trade priority in Asia. More recently, disputes regarding potential US restrictions on services trade and Indian policies on intellectual property rights, preferential market access, and taxation have roiled the relationship. In June, more than 170 members of Congress wrote to President Obama to express concern about India’s failure to protect intellectual property adequately and its attempts to implement local content requirements in technology purchases.[8]

It does not help that over the past 18 months, India’s economic growth has plunged to 4 percent per year, the lowest level in a decade.[9] Slowing growth raises questions about whether India will live up to some of the forecasts that have underpinned its rise to strategic prominence in Washington. Last year, the National Intelligence Council estimated that “by 2030 India will be the largest driver of middle class growth on earth and will surpass China in economic dynamism.”[10] The Organisation for Economic Co-operation and Development (OECD) predicts that by 2060, India will account for 18 percent of global economic output.[11] Both predictions hinge on sustained high growth.

We argue that the key to fulfilling the strategic potential of the US–India relationship is to foster a vibrant, entrepreneurial Indian economy linked to America by ideas, capital, people, and technology. For the United States, this means remaining true to its own principles of economic freedom when it comes to issues such as services trade, liquefied natural gas exports, and the expansion of multilateral trading regimes. Washington should also recognize the shifting shape of India’s polity by stepping up engagement with India’s best-performing state governments.

For India, the continued deepening of its ties with the world’s sole superpower requires the firm repudiation of antimarket measures that have soured both foreign and domestic investors and a renewed commitment to the incomplete task of economic reform. In terms of relations with the United States, India ought to prioritize negotiating a high-quality bilateral investment treaty and improving protection for intellectual property rights, conditions for manufacturing and taxation policy. We cannot overstress the importance of commencing nuclear commerce, an unfulfilled promise of the 2008 US–India nuclear deal, to restore trust in India among Washington policymakers. The September 27 announcement by President Barack Obama and Prime Minister Manmohan Singh that India’s state-owned nuclear operator has commenced commercial negotiations with US firm Westinghouse to build a reactor in the Gujarat state is a belated but welcome start.[12]

Many of India’s most urgent tasks are domestic. Indeed, in interviews with Indian entrepreneurs and business leaders in six major urban centers, what emerged most clearly was near unanimity that they need no special encouragement, merely a government that provides a reasonable environment in which businesses are encouraged to thrive with sufficient infrastructure, minimal corruption and red tape, and a skilled and flexible workforce. In an increasingly federal country, economically backward states will need to take their cues from relatively prosperous and business-friendly states such as Tamil Nadu and Gujarat.

In addition, India needs to address long overdue reforms in land, taxes, labor, and power. We highlight these issues briefly in the second part of this report, based in part on an online survey of nearly 600 Indian businesspeople and entrepreneurs conducted in partnership with the British polling firm YouGov.

Against the backdrop of India’s economic slowdown, we urge both Washington and New Delhi to prevent temporary hiccups from derailing what ought to be a deep economic and strategic convergence. But we also recognize that although ultimately the United States and India should aim for a free trade agreement (FTA) and Indian membership in the Trans-Pacific Partnership, for now the more modest goals of a high-quality bilateral investment treaty and Indian membership in Asia-Pacific Economic Cooperation (APEC) are more achievable.

Finally, we recognize that time is not on India’s side. After nearly a decade of stuttering reforms, both foreign and domestic investors are looking at India with greater skepticism than at any time since the onset of liberalization in 1991. Whoever is elected to run India after next year’s general elections will have their work cut out for them. The country, which already lags most of East Asia in terms of both income and human development, can scarcely afford to slip behind further. If growth continues to stall, it will jeopardize both the US–India strategic partnership and India’s rise as a global power.

We make the following recommendations for the United States:

  • Services Trade: Amend the comprehensive immigration reform bill to address the concerns of Indian information technology firms.
  • Liquefied Natural Gas (LNG) Exports: Liberalize LNG export guidelines to allow exports to India (and other non-FTA countries) on a routine rather than case-by-case basis.
  • Asia-Pacific Economic Cooperation: Back India for full membership in APEC as a step toward eventual inclusion in the Trans-Pacific Partnership.
  • Focus on States: Recognize a trend toward greater federalism in the Indian economy and deepen relations with the fastest-industrializing states.
  • Bilateral Investment Treaty (BIT): Negotiate a high-quality BIT as a stepping stone toward a free trade agreement.

We make the following recommendations for India:

  • Bilateral Investment Treaty: Negotiate a high-quality BIT as a stepping stone toward a free trade agreement.
  • Intellectual Property Rights: Encourage innovation by increasing the protection of intellectual property rights in line with global norms.
  • Preferential Market Access: Allay investor concerns about draconian local content requirements for technology purchases by unambiguously scrapping the suspended preferential market access policy.
  • Taxation Policy: Reject retroactive taxation and end aggressive collection based on unpredictable and sometimes indecipherable rules.
  • Civil Nuclear Commerce: Create conditions that allow US firms to participate in India’s nuclear industry.

We make the following recommendations for next-generation Indian reforms:

  • Land: Revisit land acquisition to reflect business concerns about cost and complexity.
  • Goods and Services Tax: Create a unified Indian market by implementing a long-delayed goods and services tax.
  • Labor and Skills: Overhaul labor laws to bring more informal workers into the formal sector and revamp the education system toward the modern economy. 
  • Power: End India’s chronic power shortages by privatizing loss-generating state electricity boards and ending a government monopoly on coal.

Read the full report.

Notes

1.    See for example, Nicholas Burns, “America’s Strategic Opportunity with India,” Foreign Affairs (November–December 2007).   
2.    George Perkovich, “Towards Realistic US–India Relations,” Carnegie Endowment for International Peace, 2010, http://carnegieendowment.org/files/realistic_us_india_relations.pdf; “Is the US–India Relationship Oversold?” American Enterprise Institute, April 9, 2013, www.aei.org/events/2012/04/09/is-the-us-india-relationship-oversold/.
3.    Persis Khambatta, Guruamrit Khalsa, and Samir Nair, “The 2013 US–India Strategic Dialogue,” Center for International and Strategic Studies, June 21, 2013, http://csis.org/publication/2013-us-india-strategic-dialogue.
4.    US Senate, “Senate India Caucus,” www.cornyn.senate.gov/public/index.cfm?p=senate-india-caucus; US Senate, “Senator Warner to Co-Chair Bipartisan India Caucus,” November 19, 2010, www.warner.senate.gov/public/index.cfm/2010/11/senator-warner-to-co-chair-bipartisan-india-caucus.
5.    Aru Pande, “Biden’s India Visit Is Key in Asia ‘Rebalance,’” Voice of America, July 23, 2013, www.voanews.com/content/biden-meets-indian-counterpart-in-new-delhi/1707286.html.
6.    Hemant Krishan Singh and Tincy Sara Solomon, “BIT and Beyond: Advancing India-US Economic Relations,” Indian Council for Research on International Economic Relations, January 2013, www.icrier.org/pdf/bitandbeyond.pdf.
7.    Ibid.
8.    “Paulsen Leads Bipartisan Letter Pressing for Action on India’s Intellectual Property Violations,” Congress of the United States, press release, June 18, 2013, http://paulsen.house.gov/press-releases/paulsen-leads-bipartisan-letter-pressing-for-action-on-indias-intellectual-property-violations/.
9.    Press Trust of India, “Goldman Sachs Cuts India GDP Forecast to 4%; Sees Rupee at 72/USD,” Hindu Business Line, September 3, 2013, www.thehindubusinessline.com/economy/goldman-sachs-cuts-india-gdp-forecast-to-4-sees-rupee-at-72usd/article5088909.ece.
10.    National Intelligence Council, Global Trends 2030: Alternative Worlds, December 2012, http://info.publicintelligence.net/GlobalTrends2030.pdf.
11.    Organisation for Economic Co-operation and Development, “Looking to 2060: A Global Vision of Long-Term Growth,” OECD Economics Department Policy Notes, no. 15 (November 2012), www.oecd.org/eco/outlook/2060policynote.pdf.
12.    The White House, “US-India Joint Statement,” press release, September 27, 2013, www.whitehouse.gov/the-press-office/2013/09/27/us-india-joint-statement.

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