Skip to main content

Advertisement

Advertisement

Modi should do more to improve economic ties with US

The breathless excitement that surrounded Indian Prime Minister Narendra Modi’s recent visit to Washington was not completely undeserved. By pushing forward Indo-United States defence and strategic ties — in spite of considerable domestic opposition to any de facto alliance — Mr Modi can claim to have made India stronger. Yet unless he puts similar effort into fixing economic relations between the two nations, much of that progress could be at risk.

The breathless excitement that surrounded Indian Prime Minister Narendra Modi’s recent visit to Washington was not completely undeserved. By pushing forward Indo-United States defence and strategic ties — in spite of considerable domestic opposition to any de facto alliance — Mr Modi can claim to have made India stronger. Yet unless he puts similar effort into fixing economic relations between the two nations, much of that progress could be at risk.

Speaking to the US Congress during his visit, Mr Modi celebrated the fact that the strategic relationship between the two countries had moved beyond the “hesitations of history”. India is now one of the biggest markets for US arms makers; a long-delayed US$2.5 billion (S$3.4 billion) deal to buy military helicopters from Boeing was recently finalised. The US has now named India a “major defence partner” (subject to approval by Congress) and the two countries have agreed to grant each other access to spare parts, services and supplies from their respective military bases.

All this represents a victory for Mr Modi over an Indian diplomatic corps and bureaucracy generally sceptical of closer ties with the US. At the same time, though, as former Indian Foreign Secretary Shyam Saran recently wrote, “the growing closeness in the security realm runs parallel to a lengthening distance on both bilateral and multilateral trade-related issues”.

I would argue that Mr Saran is understating the problem, which goes well beyond trade. Even the biggest economic headline to come out of Mr Modi’s trip — news that preparations would begin for six new Westinghouse nuclear reactors in India — concealed continuing problems. Already delayed for years by disputes over liability law, the project remains vulnerable to Indian courts and regulators. There is a reason Westinghouse’s own statements about the deal sound considerably more restrained than those from the two governments.

Nor will the new defence ties automatically boost Indian manufacturing, as some hope. Foreign companies still cannot own a controlling stake in defence production ventures in India. Understandably, they remain reluctant to invest for fear of losing control over intellectual property (IP). And without high-spillover investment in cutting-edge technology, Mr Modi’s “Make in India” programme is likely to struggle.

Progress has stalled on a bilateral investment treaty, something India and the US have been working on since at least 2008. The two countries continue to clash over intellectual property rights, in spite of Mr Modi’s promise to come out with an IP policy to which the US could not object. Indian bureaucrats are taking various arbitrary steps against “excessive” royalty payments to developed-world companies. And, yes, trade frictions continue: After losing a World Trade Organization case over its solar panel procurement policy, India recently threatened to retaliate by filing 16 cases against the US.

Indian bureaucrats have long fought to insulate the country’s notoriously slow and arbitrary decision-making processes from challenges by US companies and investors. One can see why Mr Modi, who has had to expend political capital in his bid to draw closer to the US strategically, might want to demonstrate India’s “independence” in other spheres.

At the same time, the government seems to imagine that a savings-rich China can provide a ready alternative to the West, especially when it comes to plugging India’s nearly US$1 trillion infrastructure gap. This should not be a surprise: As Chief Minister of the western state of Gujarat, Mr Modi’s preferred development model — government-led infrastructure investment and business-friendly intervention in markets — suggested he was far more comfortable with “Asian” economic paradigms. Vastly impressed by Chinese progress and methods, he talked often of turning Gujarat into “India’s Guangdong”.

Yet such attitudes only make India weaker, not stronger. Western companies are less embedded in state structure and policy than Chinese ones, and are thus a much safer bet for a big infrastructure build-out. Time and again, big-ticket Chinese investments in developing nations have gone sour, leading to difficult renegotiations and, often, a heightened tension in bilateral relations. Chinese leaders have also shown little compunction about pressuring other governments in an effort to protect investments abroad. A strategy of wooing Chinese investment while isolating China geopolitically seems too incoherent to succeed.

More importantly, pressure from Western investors and governments is crucial to the Indian economic reform process. Updated intellectual-property laws, greater transparency on infrastructure regulations, more open trade with less red tape — all these would benefit Indian entrepreneurs even more than US companies. To get foreign investment up to the scale he wants, Mr Modi will have to do more to reduce regulatory and judicial risk. That would improve economic efficiency more broadly.

A closer and less prickly economic relationship with the US is as much in India’s interest as is enhanced defence cooperation, perhaps even more so. Mr Modi has successfully whipped the Indian bureaucracy into line on the latter. He needs to do more to make the former a reality. BLOOMBERG

ABOUT THE AUTHOR:

Mihir Sharma is a senior fellow at the Observer Research Foundation and author of “Restart: The Last Chance for the Indian Economy,” which was long-listed for the 2015 Financial Times-McKinsey Business Book of the Year. A trained economist, he’s been a columnist for both the Indian Express and Business Standard newspapers.

Read more of the latest in

Advertisement

Advertisement

Stay in the know. Anytime. Anywhere.

Subscribe to get daily news updates, insights and must reads delivered straight to your inbox.

By clicking subscribe, I agree for my personal data to be used to send me TODAY newsletters, promotional offers and for research and analysis.