Image may be NSFW.
Clik here to view.
While U.S.-India relations are unquestionably on the upswing, there are still some apparent disconnects between tangible outcomes and sentiments on both the strategic and economic fronts. Our strategic relationship has a new vision and vigor, but the measurable results will take some time to fructify. However, while sentiments about our economic relationship remain weak, the numbers already point to a powerful resurgence of investor interest. We will need continued progress on both strengthening the tangible gains in these areas, as well as the sentiments so that we do not lose momentum in the coming years. Future leaders in both countries need to view this relationship as both positive and productive to make sure it maintains its trajectory through political transitions.
On the strategic front, American policymakers have been pleasantly surprised at Prime Minister Modi’s interest in reshaping India’s strategic outlook. The BJP, which up until Modi’s election had governed India for only one full term, is not ideologically bound to the Congress party’s “non-alignment” strategy. However, there were few indications about what type of foreign policy Prime Minister Modi would deliver once in office, beyond a likely focus on “commercial diplomacy” akin to what he had done as chief minister of Gujarat. In the run-up to India’s 2014 election, many senior BJP leaders were quietly counseling their American friends that if he came to power, Mr. Modi would most certainly slow-walk relations with the United States due to the revocation of his U.S. visa nearly a decade before.
One year later, we are getting some notion of what a “Modi doctrine” on foreign policy looks like. He has actively courted the world’s “great powers” for investments and access to technology. He has pushed back against China’s expanding relations with India’s immediate neighbors including Bangladesh, Sri Lanka, Nepal, and Myanmar. And more recently he has worked to strengthen relations with a relatively new set of partners including Mongolia and South Korea to show, in part, the Chinese government that India, too, has reach. There are aspects of “commercial diplomacy” embedded in most of these relationships, but they also signify more than a simple search for trade and investment links.
On the bilateral front, our two countries have a great deal on the table. Negotiators are working hard to finally move forward with civilian nuclear trade, as well as revive our long-stalled “Defense Technology and Trade Initiative” projects. We have a new “Joint Strategic Vision for the Asia Pacific and Indian Ocean Region” that outlines a shared vision for security and prosperity across Asia. We also recently renewed our “Defense Framework Agreement,” which should be signed and released when Defense Secretary Ashton Carter visits New Delhi in June. These are all powerful signs of a new era of strategic cooperation. Yet the tangible payoffs from these initiatives will take time to gestate.
On the economic front, the divide between material progress and sentiments is reversed. Sentiments remain quite poor for a variety of reasons. Some investors want the Modi government to do more reforms, faster. Others want to see quick reversals of some of the damaging economic policies adopted in the waning days of the UPA government. A third group views India’s economic policies primarily through its bilateral and multilateral trade talks—and there has not been much to cheer on this front.
Despite these negative sentiments, the data shows a dramatic turnaround in the first year of the Modi government. U.S.-India trade is up 5.5 percent for the most recent 12-month period. Foreign direct investment into India is up 45 percent. Foreign institutional investment is up nearly 600 percent. The IMF is predicting India’s economic growth rate to be 7.5 percent this year and next, which would make it the world’s fastest growing major economy. A recent Japanese Bank for International Cooperation (JBIC) survey of 600 Japanese manufacturers placed India as the top investment destination. Meanwhile, Moody’s upgraded the outlook on India’s sovereign debt to “Stable” from “Negative” in April.
This upswing is not merely due to the business cycle. American firms have better market access today than they did a year back. We have already seen increased scope for foreign investment in areas as diverse as coal, defense, insurance, pensions, construction, and railways. Other domestic reforms such as mining licensing, spectrum auctions, and extending industrial licenses have improved the business environment for all investors, whether domestic or foreign. As I recently testified to the U.S. International Trade Commission (USITC), the Modi government has moved quickly to open new areas for investment, though been slower to amend policies adopted previously that harmed market sentiments.
A year ago, few would have dared to predict such a quick turnaround, as evidenced by this hard data. India is widely considered to be the fastest-growing large emerging market in the world, poised to overtake China’s economic growth rate this year. It is interesting to see these two stories emerging simultaneously—India’s resurgent growth story, and disappointment over the Modi government’s economic reform plans.
Bridging the divides on the strategic and commercial aspects of our relationship will be a real challenge in the year ahead. At least on the strategic front, we have a smaller set of powerful objectives that can turn the rhetoric into reality. These include finalizing the pending Defense Technology and Trade Initiative programs; finding a workable solution to the civilian nuclear liability issue; and concluding important new defense deals. Other tangible opportunities to advance strategic cooperation may arise during humanitarian assistance-disaster recovery (HADR) operations, akin to our cooperation in the immediate aftermath of the 2004 tsunami. India had a pair of notable successes in this regard in the last year with the successful evacuation of foreigners and Indian nationals from war-torn Yemen and earthquake-hit Nepal.
Improving commercial sentiments will also not be so easy. Some of the issues that have caused the most consternation, such as India’s different views on patents, the government’s commitment to offset its trade deficit through the creation of local manufacturing rules, and relative intransigence on multilateral and bilateral trade talks, are not likely to be handled differently by the Modi government during its second year in office. Progress in these areas will be incremental, if at all, and will continue to create and sustain negative sentiments within the business community. Even on cross-border taxation, where we have seen important progress in India, there have been a series of setbacks that have led to the incorrect view that this government has largely maintained the adversarial tax environment of its predecessors. When talking about cross-border taxation, success is not as easy to articulate as compared to concepts like patents and FDI caps.
Getting this relationship right is very important to the United States and, to an increasing extent, India. It requires the regular engagement of senior leaders. As we have seen over the last year, the roadblocks are innumerable and sometimes feel intractable. Sustained attention requires both tangible achievements as well as some level of public support for the relationship. Therefore, balancing progress and sentiments is critical for achieving both commercial and strategic gains.
Richard Rossow is a senior fellow and holds the Wadhwani Chair in U.S.-India Policy Studies at CSIS.
The post U.S.-India Relations Under Modi — Matching Outcomes and Sentiments appeared first on News India Times.