Renewed U.S.-India Economic Relations: What to Watch

by Persis Khambatta

By Persis Khambatta

President Barack Obama showing Prime Minister Narendra Modi of India the Martin Luther King Jr Memorial in Washington on September 30, 2014. Source: Wikimedia, image in public domain.

President Barack Obama showing Prime Minister Narendra Modi of India the Martin Luther King, Jr. Memorial in Washington on September 30, 2014. Source: Wikimedia, image in public domain.

Prime Minister Modi’s successful September trip to Washington, D.C., wrapped up a very busy month of bilateral engagement – including with Japan, China and Australia. Each round of meetings resulted in large investments to India, including a reported $35 billion by Japan, $20 billion by China and a landmark civilian nuclear deal with Australia. His U.S. visit reportedly resulted in pledges of over $40 billion of investment. The trip was seen as an opportunity to reinvigorate the relationship, which had recently been overshadowed by an increasingly negative narrative over the past two years, casting a cloud over the myriad routine official meetings that take place throughout the course of each year.

The good news is that government-to-government relations are back on track, and the meetings between President Obama and Prime Minister Modi went better than expected. The president’s decision to personally escort Modi to the Martin Luther King memorial in Washington was a pleasant surprise, and augurs well for official relations moving forward. However, one key aspect of the relationship, responsible for much of the recent rancor, cannot be brushed aside: what are American investors looking for in India? Where are the opportunities for improved economic relations? For this, there are clues in both the style and substance of the prime minister in recent weeks.

Beginning with the style – it was hard not to notice that though the trip was planned meticulously by both sides, neither was quite ready for the charm offensive that Modi launched on both the Indian-American and corporate communities. He was greeted warmly by massive crowds at both Madison Square Garden and Central Park in New York – both appearances departed from the routine visits by any head of state, and definitely broke from tradition with past Indian heads of state.

Modi also departed from previous prime ministerial visits by meeting directly with CEOs from America’s leading corporations in a bid to curb flagging interest in a country that has become a byword for the most difficult places in the world to do business. In these meetings, his vision for the country and direct style managed to convince some that he is serious about improving the business climate. But the proof, as ever, will be in the implementation of pro-consumer and pro-market policies.

American companies are familiar with Prime Minister Modi, having met with him in his role as chief minister of Gujarat, and poured investments into that state over the past decade because of the priority his government placed on the ease of doing business. Now the questions are: Can he replicate Gujarat’s business climate in New Delhi? Will red tape and aggressive tax policies continue to burden the system? Will new legislation and regulations offer a level playing field? If so, will American companies respond? Expectations are sky high.

For these important questions the answers are less clear. What we do know is where the near-term opportunities lie. For example, there is renewed vigor in the defense relationship, including sales of hardware, and the co-production and co-development of future equipment. The country’s push for modern military equipment, modern infrastructure, smart cities, liquefied natural gas and sanitation systems all signal opportunities for American firms.

In addition to the immediate opportunities, the prime minister has a mandate for change, a majority in the lower house of parliament and is transforming the way the bureaucracy works. His party won a majority in two major state elections last week – Maharashtra and Haryana, home to two major financial centers, Mumbai and Gurgaon. The wins will help the party gain more seats in the upper house of parliament, critical to passing the tougher structural reforms that will result in a more friendly business climate. He is working directly with line ministries to ease the process of investing in India (with InvestIndia, 3P India, an online environmental permitting process and other initiatives), ease labor restrictions via a single window clearance and welcome foreign investors to Special Economic Zones and industrial parks.

Some of the smaller changes being made in New Delhi have been called “tinkering” by analysts, who expect India’s economic reforms 2.0 to be as big and bold as those in 1991. Those expectations miss the underlying and important fact that Modi is pushing to transform the bureaucratic culture in New Delhi – which contributes greatly to the difficulty of doing business – and clearing away the old legislative cobwebs that have hampered faster growth.

The message to potential investors is that what seems like painfully incremental reform today is in fact aimed at paving the way for faster, more significant economic reforms in the medium- to long-term.

If the Modi government can seize the moment in U.S.-India relations, communicate effectively about the many small reforms underway and how they will directly and positively affect the business climate, investors will continue to see India as a high priority market. Clear communication and effective implementation are key to raising India’s place in global competitiveness and business rankings, and are key to attracting the direct investment that the government seeks.

This post was initially published on India Incorporated, and is re-posted with permission.

Ms. Persis Khambatta is an adjunct fellow with the Wadhwani Chair in U.S.-India Policy Studies at CSIS. Follow her on twitter @Pkhambat.

Beginning with the style – it was hard not to notice that though the trip was planned meticulously by both sides, neither was quite ready for the charm offensive that Modi launched on both the Indian-American and corporate communities. He was greeted warmly by massive crowds at both Madison Square Garden and Central Park in New York – both appearances departed from the routine visits by any head of state, and definitely broke from tradition with past Indian heads of state.Modi also departed from previous prime ministerial visits by meeting directly with CEOs from America’s leading corporations in a bid to curb flagging interest in a country that has become a byword for the most difficult places in the world to do business. In these meetings, his vision for the country and direct style managed to convince some that he is serious about improving the business climate. But the proof, as ever, will be in the implementation of pro-consumer and pro-market policies.American companies are familiar with PM Modi, having met with him in his role as chief minister of Gujarat, and poured investments into that state over the past decade because of the priority his government placed on the ease of doing business. Now the questions are: Can he replicate Gujarat’s business climate in New Delhi? Will red tape and aggressive tax policies continue to burden the system? Will new legislation and regulations offer a level playing field? If so, will American companies respond? Expectations are sky high.For these important questions the answers are less clear. What we do know is where the near-term opportunities lie. For example, there is renewed vigor in the defense relationship, including sales of hardware, and the co-production and co-development of future equipment. The country’s push for modern military equipment, modern infrastructure, smart cities, liquefied natural gas and sanitation systems all signal opportunities for American firms.

In addition to the immediate opportunities, the prime minister has a mandate for change, a majority in the lower house of parliament and is transforming the way the bureaucracy works. His party won a majority in two major state elections last week – Maharashtra and Haryana, home to two major financial centers, Mumbai and Gurgaon. The wins will help the party gain more seats in the upper house of parliament, critical to passing the tougher structural reforms that will result in a more friendly business climate. He is working directly with line ministries to ease the process of investing in India (with InvestIndia, 3P India, an online environmental permitting process and other initiatives), ease labor restrictions via a single window clearance and welcome foreign investors to Special Economic Zones and industrial parks.

Some of the smaller changes being made in New Delhi have been called “tinkering” by analysts, who expect India’s economic reforms 2.0 to be as big and bold as those in 1991. Those expectations miss the underlying and important fact that Modi is pushing to transform the bureaucratic culture in New Delhi – which contributes greatly to the difficulty of doing business – and clearing away the old legislative cobwebs that have hampered faster growth.

The message to potential investors is that what seems like painfully incremental reform today is in fact aimed at paving the way for faster, more significant economic reforms in the medium- to long-term.

If the Modi government can seize the moment in US-India relations, communicate effectively about the many small reforms underway and how they will directly and positively affect the business climate, investors will continue to see India as a high priority market. Clear communication and effective implementation are key to raising India’s place in global competitiveness and business rankings, and are key to attracting the direct investment that the government seeks. – See more at: http://www.indiaincorporated.com/guest-article/item/3943-renewed-us-india-economic-relations-what-to-watch.html#sthash.U0RjGWWx.dpuf

Share

1 comment for “Renewed U.S.-India Economic Relations: What to Watch

Leave a Reply

Your email address will not be published. Required fields are marked *