The US – India Economic Relationship

June 30, 2017

India Briefing

On June 26, India’s Prime Minister Narendra Modi made his first visit to the White House under Donald Trump’s presidency. The Indian government billed the visit as a “no frills” meeting between the two leaders tasked with forging a new relationship predicated on reaffirming economic ties and shared security concerns.

While Modi’s American visit may have lacked the fanfare of his previous trips under the Obama administration, it was well-timed to greet the new Trump administration and maintain the positive economic and political relations cultivated over the last twelve years.

More importantly, Modi’s visit sought to address key grievances that have emerged in the bilateral ties due to President Trump’s socioeconomic priorities, namely, creating jobs and asserting American interests when drafting trade and business deals.

Further, in meeting with the CEOs of leading American companies, Modi took the opportunity to invite American businesses to partake of India’s improving business landscape.

With Trump’s new ‘America first’ international outlook, foreign investors are looking more closely at Asian economies, including India, to take advantage of concessions and increasingly relaxed trade barriers. At the same time, India is  keen on strengthening its economic and business ties with the US. Consequently, India can be expected to interact more directly with America’s private sector for the kind of support previously provided by the US government. 

India’s changing place in American foreign policy

The United States’ engagement with India has warmed up tremendously since the Cold War. Previously, America’s skepticism over India’s ‘non-aligned’ foreign policy and close relations with the Soviet Union ensured strained relations between the two nations. However, in 2005, President Bush was able to achieve a breakthrough in bilateral relations with India, which the Obama administration further developed. This rapprochement was guided by the belief that a strong, prosperous India was strategically important for long-term American interests. Unfortunately, Trump’s foreign policy seems to have moved away from this trajectory.

The Trump plan to revise the H-1B visa program, for instance, has dealt a serious blow to India’s information technology (IT) industry. Trump has criticized the Indian government for maintaining an unfair trade imbalance – a US$24 billion deficit – with the US. Further, he has accused India of receiving “billions” of dollars in return for signing onto the Paris climate change agreement.

Tellingly, in their joint press release on Monday, Modi made no mention of the proposed changes to the American visa regulations. Trump did, however, state that India would work towards removing trade barriers, and added that the two nations would collaborate in balancing the trade deficit. The coming months will reveal if this cautious presentation translates into any major policy departures.

When it comes to matters of national security, Modi and Trump both share similar concerns. The two countries agreed to cooperate on stabilizing Afghanistan and fighting terrorism more broadly.

Increased cooperation in defense was also proposed, and will automatically boost economic ties – given America’s huge defense industrial complex and India’s own ambitions towards developing its defense manufacturing sector.

The US has currently agreed to sell India 22 unarmed drones for its navy to use while patrolling the Indian Ocean to secure maritime trade channels. This is the first purchase of its kind by a non-member of the North Atlantic Treaty Organization (NATO).

In their joint press statement, the two leaders also implied that both countries viewed China’s expanding presence in the Indo-Pacific region as a geopolitical threat.

India’s renewed opportunities for American investors

Before Modi’s meeting with President Trump, the Indian Prime Minister facilitated a roundtable of American CEOs, including Jeff Bezos (Amazon), Tim Cook (Apple), and Sundar Pichai (Google) on Sunday evening.

Modi impressed upon the business leaders that India has liberalized its foreign direct investment (FDI) regulationsstreamlined labor laws, improved intellectual property laws, and is about to roll-out a major indirect tax reform in the goods and services tax (GST).

Nonetheless, for many business observers, Modi has yet to live up to the image of the economic reformer he campaigned on. American businesses still experience frustration when entering the Indian market. Conversely, new restrictions on foreign visas have created new obstacles for Indian businesses operating in the US, who currently generate roughly 90,000 jobs for Americans.

In both countries, the rise of right-wing politics has hampered the confidence in globalization – whether through isolationist policies in the US or in the religiously-motivated regulations in India that are antithetical to the expectations of foreign investors.

These changing political conditions present foreign investors and businesses in both India and the US with new challenges and opportunities.

For their part, American businesses and investors can wield more influence by encouraging the Indian government to continue with its economic reforms even as the US government focuses more inward.

In return, American investors and businesses can breathe new life into the Indian government’s array of economic initiatives, such as Make in IndiaDigital IndiaStartup India, and the Smart Cities Project.

Similarly, Indian and American businesses can create stronger partnerships – utilizing shared capital and entrepreneurial experience to maintain a hold in both markets. Ivanka Trump – President Trump’s daughter and key advisor – accepted Modi’s invitation to lead the American delegation to the Global Entrepreneurship Summit hosted in India this year. The move demonstrates both governments’ encouragement for private players to foster sustained cooperation, create new jobs, and ensure continued engagement beyond political borders

A positive first step for Modi and Trump

Modi’s first US visit under the new Trump administration has finished without any controversy or spectacle.

Both leaders praised one another publicly as well as on social media – a key diplomatic manoeuvre in itself as they both hold a keen online presence.

Modi highlighted both countries’ shared concerns over combatting terrorism and contesting China’s growing political overreach. Importantly, India and the US reaffirmed their defensive cooperation at a time when America is reconsidering many of its own strategic partnerships. 

Nevertheless, under the Trump administration, foreign investors will see the US continue to exert pressure on India over its trade barriers. While India may not act as boldly in asserting its geopolitical and economic agenda, cooperation between the Indian government and America’s private sector may speed up otherwise tabled economic reforms and lead to renewed collaboration.

Tags: america, economic relations, foreign policy, india, modi, trump, usa
Posted in Global, Macro Economics, Macro Economics