All eyes will be on Prime Minister Narendra Modi’s visit to the United States starting tomorrow, especially on how the economic component of the bilateral engagement gets added depth and content. There are no prizes for guessing that economic cooperation remains the weakest link in the evolving India-US relationship. With the loss of India’s growth momentum, the relationship is marked by bitter disputes over trade, taxation and intellectual property rights (IPR) protection. India, too, has its concerns about US policies on outsourcing and visa issues for its software professionals.
Strengthening India-US ties is imperative. Modi is heading to the US after having recently visited Japan and hosted the Chinese head of state at home. His economic vision is to kick-start India’s growth story by emulating East Asian economies: Encouraging manufacturing-led export growth and infrastructural development. He is aware that this strategy cannot succeed without greater access to the US market. These East Asian countries, like South Korea, are termed miracle economies as they achieved rapid rates of economic growth for long periods of time, thanks to booming exports to the US.
Although the US has expressed its desire to build India into a global power, the relationship has remained at a sub-optimal level. The Obama presidency was expected to build on the considerable progress generated during the Bush presidency. But this hasn’t happened, especially since the global crisis of 2008-09. Modi has the opportunity to take matters forward in a way his predecessor couldn’t. Although Manmohan Singh’s most important legacy was the civil nuclear deal with the US, the rest of the Congress did not fully support him on the strategic partnership.
The good news is the realisation on the part of two vibrant and mature democracies that their economic relationship needs to gain more ballast. Scarcely a day passes without visits by CEOs and top brass of US auto and tech giants who openly admit that India is vital to their global plans. In a game-changing move that bids fair to dampen bilateral frictions over IPR, a leading US pharma company has agreed to sell its medication to tackle hepatitis C at 1% of its US price in India. It has also plans to voluntarily licence seven local companies to produce cheaper versions of the same for sales in 91 countries.
Not to be left behind, investments by Indian companies in the US are fast rising, pointing to growing interdependencies between the two economies. The stock of such investments amounted to $7 billion last year according to the US Bureau of Economic Analysis. The stock of US’ investments in India were $24 billion, although this was a mere 0.5% of their worldwide investments in 2013. So long as US investments here remain a negligible fraction of the global total and two-way flows of goods and services remain at only $100 billion, all this talk of making India a world power is besides the point.
If more US investors are to participate in India’s growth story, their concerns must be seriously addressed during the Modi visit. A good occasion to do so is during his scheduled breakfast meeting with top American CEOs, besides one-on-ones with six of them who have openly expressed their frustrations about the India story. To be sure, there are a lot of serious problems that have been festering. Although the Modi government has raised FDI caps in insurance and defence, multi-brand retail is still a no-no for FDI. Investors are also concerned that the threat of retrospective taxation still remains in law.
Like other investors, if American companies perceive their concerns are not being addressed, they will shift their attention elsewhere. Of late, they are increasingly pivoting to Asean. Last year, the US committed one-third of its investments to this bloc, more than its combined investments in China, India, South Korea, Hong Kong, Taiwan and New Zealand according to the Financial Times. Leading companies whose business has slumped in this country have doubled their business in South-East Asia between 2012 and 2013. If India doesn’t open its doors, opportunity will knock elsewhere.
The Modi visit is also an occasion to fix persisting problems faced by Indian businesses in dealing with the US. A version of a Bill passed in the US Senate adversely impacts Indian companies, as it stops them from bringing in high-skilled personnel into the US. The same Bill, however, doubles the number of these workers who can enter that country on temporary visas. Pharma in India has concerns with the US Food and Drug Administration, with many facilities found wanting on manufacturing practices. This is bound to adversely impact their ability to compete in the generic space.
Modi has secured huge investment commitments from Japan and China to help build infrastructure, such as high-speed and bullet trains, industrial parks and freight and industrial corridors. The US must also be made an integral part of the narrative to fix the India growth story, especially in boosting manufacturing with an export-orientation. India is already emerging as a global hub for mini-SUVs, for instance. The US can contribute to our energy security by supplying LNG from 2017 onwards. But these investments will not fructify unless there is an improvement in India’s business environment on the ground and a stable tax regime is in place. There appears to be some distance to cover in this regard.
N Chandra Mohan is an economics and business commentator
The views expressed by the author are personal