The relationship has often been described as the defining partnership of the 21st century. However, for this bilateral to achieve its full potential, the new Government in Delhi must work with Washington, DC, to restore trust at the highest political levels
While meeting with US Senator John McCain in the first week of July, Prime Minister Narendra Modi conveyed his desire to further deepen and expand the strategic partnership between India and the US. Subsequently, the visit of US Secretary of State John Kerry to India has revitalised India-US relations, which have been somewhat stagnant. Apart from strategic issues, US policymakers believe that a Rightist party like the BJP, led by Mr Modi, will accelerate commercial ties that are dependent on reforms, both economic and institutional.
Though in the past decade, trade and investment ties have grown between the US, the largest economy in the world, and India, the third largest, the volume is still much below potential. leaders on both sides hope that trade will grow substantially from the present $100 billion to $500 billion in the next 10 years. However, the target is too ambitious, as India is only the 11th largest goods trading partner of the US and, in 2013, accounted for just 1.4 per cent of overall US exports.
In comparison, China is the second largest goods trading partner of the US, with $562 billion in total goods trade during 2013. As for cross-border investment, US foreign direct investment in India stood at $28.4 billion in 2012 vis-à-vis $51.4 US billion to China. Indian outward FDI in the US totaled $5.2 billion, same as China’s FDI in the US in 2012, creating high value-added jobs, in the information technology and pharmaceuticals sectors. No wonder President Barack Obama has, on more than one occasion, acknowledged the role of Indian owned enterprises in American job creation.
The US India Business Council welcomed the maiden Budget of the Modi Government and the reforms measures it contained. The increase in FDI caps in defense and insurance sectors present substantial commercial and investment opportunities to US firms. Of course the US lobby sought 100 per cent FDI, or at least 51 per cent in defense, especially where transfer of special technology was involved. However, the increase in the FDI ceiling, from 26 per cent to 49 per cent, signals that further liberalisation is on the cards, and this is a step in the right direction.
As a Boeing representative said earlier this year, even a 49 per cent cap will see more US investment in the Indian defense manufacturing sector. India’s defense acquisitions from the US crossed nine billion dollars recently, and the scope for cooperation depends on the simplification of policies related to technology transfer with mutual interests in mind.
Despite the potential for growth of trade and investment relations in the coming days, a number of disagreements are currently being negotiated. In 2011, the US Administration was upset at American companies not winning an international bid to sell fighter jets to India. Recently, there have been concerns in the US and other developed countries over punitive retrospective tax measures, which should be allayed by the Union Minister for Finance who must clarify that no new retrospective tax will be levied.
Bilateral trade has also seen some trouble. In 2012, India launched a case against the US at the World Trade Organisation over steel duties and another one regarding work visas (after visa fees were raised). later, the Obama Administration filed a case against India at the WTO over New Delhi’s ban on US poultry products. Most recently, the US and India had a public spat over the global trade facilitation deal, which India refused to sign unless its concerns over post-2017 food subsidies and stock piling were met. This has damaged the Modi Government’s image somewhat because, according to the US, India’s move has undermined the WTO’s credibility.
The US trade representative to India has repeated concerns over tariff and non-tariff barriers, such as extensive investigations, valuation methodologies, excessive searches and seizures. India’s customs tariff structure is considered complex and opaque, especially in determining effective rates and charges. As for investment, the flip-flop over FDI in multi-brand retail has taken US firms by surprise. India’s rigid stand on nuclear safety and its domestic requirements for its solar power programme are some of the other contentious issues.
Despite these concerns, however, India and the US collaborate in civil nuclear energy, science and technology, defense, clean energy and education. This reflects the broadbased nature of the ties between the two countries. Following President Obama’s visit to India in 2010, Westinghouse and GE Hitachi signed memorandums of understanding with the Nuclear Power Corporation of India limited. Westinghouse and NPCIl signed the first commercial pact in 2013, known as the early works agreement, for six 1,000MWe reactors.
To foster clean energy cooperation, the US Department of Energy and the Government of India each committed $25 million over five years to support work by the US-India Joint Clean Energy Research and Development Center. The potential to further cooperation and harness the technological capabilities to shift to non-thermal energy production in view of climate change is large. Cooperation in the energy sector, including in conventional energy, is enabled by the US-India Energy Dialogue launched in 2005.
The India-US Trade Policy Forum was founded in 2005 to address issues affecting bilateral trade and investment. Every year, the TPF meets to discuss the contentious parts of agriculture, innovation and creativity, investment, services, and tariff and non-tariff barriers. It helped resolve controversial issues that led to a substantial increase in two-way trade and the doubling of US exports to India between 2005 and 2009.
The TPF has not met since 2010, due to India’s policy paralysis and a series of diplomatic spats, but is set to meet soon to discuss outstanding trade and investment issues, including Intellectual Property Rights. However, India-US commercial relations and Mr Obama’s vision of a strategic partnership with India depends on the Modi-Obama meeting in September.
Overall, the new Government in Delhi is determined to accelerate growth. The time is also ripe for US firms to do business in India, and Secretary Kerry’s visit is timely. But things will move only if outstanding issues are resolved and trust at the highest level is restored.
(The author is Associate Professor, Institute of Economic Growth, Delhi)