The South Asia Channel

Open the Trade Gates: U.S., India Revive Ties With Enterprise

The world's largest democracies are closing doors on contentious issues of the past, and letting the trade gates wide open, unleashing a new wave of U.S.-India courtship not seen in years.

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WASHINGTON, DC - SEPTEMBER 30: U.S. President Barack Obama (R) shakes hands with Indian Prime Minister Narendra Modi (L) in the Oval Office of the White House September 30, 2014 in Washington, DC. The two leaders met to discuss the U.S.-India strategic partnership and mutual interest issues. (Photo by Alex Wong/Getty Images)

If U.S. President Barack Obama and Indian Premier Narendra Modi had written down national resolutions for 2015, they would have a lofty one in common: “ramp up bilateral trade again between the world’s largest democracies.” America’s top diplomat John Kerry just last week finished a two-day trip to the 7th annual “Vibrant Gujarat” investors summit – causing his absence at the Paris solidarity march for which the United States received heavy criticism – where he urged greater economic partnership and rapid reforms for a friendlier business climate. This week, a top Pentagon official will be making his fourth trip to India to hold crucial defense-related negotiations. And next week, Obama is expected to join Modi as chief guest for India’s Republic Day celebration in New Delhi – making him the first U.S. president to grace this grand occasion – where hopes are high for the announcement of major trade, energy, and defense deals, and a budding revival of bilateral ties.

They are moving fast, it seems, painting a “pivot” perfect impression of rapprochement, but given the often-rocky road of relations in decades past, what explains this sudden change of course? The answer is three-fold: political necessity for Modi’s mandate to revive India’s sluggish economy and poor infrastructure; economic opportunism for American firms to advance India’s development; and shared geopolitical risks on climate change, terrorism and a rising China that are binding old pals back together.

Political Necessity by Mandate

Modi’s economics story begins thirteen years ago in the western state of Gujarat, where Modi was Chief “Executive” Minister and transformed the coastal state into a business-friendly economic powerhouse. His feats lie in the state’s figures and lands: GDP growth under Modi’s Gujarat from 2001 to 2012 paced ahead of India’s at nearly 10 percent, state electricity generation moved from deficit to excess, water supply became abundant, and the state’s roughly 18,000 villages are now on the grid. Stacking piece against puzzle, Gujarat with only 5 percent of India’s population and 6 percent of its land mass claims nearly 10 percent of the workforce, 7.6 percent of national GDP, and 22 percent of national exports. Information technology (IT) also took root during Modi’s tenure through which he sought to streamline governance and drive accountability in Gujarat. It is thus here where Modi trialled and erred the pillars of what The Economist calls Modi’nomics – priority on basic infrastructure, public goods, honest governance, and investment – and earned a reputation for “clean government” and “economic competence.”

Fast-forward to 2014 to an India stuck in the quicksand of a corrupt Congress-party rule, an economy stalling in growth, a population stifled by chronic poverty, and a national infrastructure lagging behind populace needs. Modi played his Gujarat business card, and swept the national elections with a historic mandate. In his Independence Day speech a few months later, Modi made it monsoon with groundbreaking rhetoric on reigning in corruption, jump-starting the economy, promising banking access to the poor, announcing the “Make In India” campaign, and improving national infrastructure and sanitation. With 1.2 billion people, a growing middle class, and an increasingly educated populace, these reforms came to pass at the stroke of serendipity. But India cannot transform itself alone. Resuscitating India requires opening the trade gates to countries and companies with proven track records of entrepreneurship, abundant capital, technological know-how, and innovation. In other words, America is calling on Vonage – and they are lending a trading hand. Ring, ring.

America Fills Modi’s Prescription For Economic Recovery

Modi has not only picked up the phone, he has invited over top U.S. officials and industry titans to showcase the scope of India’s market potential – a major world economy whose growth is forecasted to outpace China’s by 2016 at 6.5 percent. And shown, they were. Modi’s Vibrant Gujarat summit spurred an influx of some 100 American business leaders – the largest-ever delegation present at the biyearly trade gala – to Ahmedabad where they filled Secretary Kerry’s entourage. “Under Modi, it has become clearer for American companies to invest in India,” Kerry said, referring to the vast investment opportunities created by what Nicholas Burns calls Modi’s “New Deal-type crusade” to reform Asia’s top-heavy but third largest economy. Infrastructure renewal projects in rails, roads, ports, energy, education, and IT are the major ticket items on Modi’s bucket list – an economic agenda that Indian planners say will come to fruition by building Chicago-sized cities every year to accommodate India’s growth. On particulars, Kerry expressed the U.S.’s desire to help Modi’s goal to supply 24/7 electricity across India and to reach a landmark climate change agreement in Paris this year. Pulsating other high-level meetings in Delhi and Washington ahead of Obama’s visit are negotiations on specific initiatives spanning several spokes on the trading wheels: the Digital India Initiative, which aims to enhance digital infrastructure and deploy e-government services; the U.S.-India Investment Initiative, which aims to facilitate foreign spending and easier capital mobility; and the Bilateral Investment Treaty, which seeks to attract more foreign direct investment (FDI) by way of increased transparency and greater intellectual property rights.

This diplomatic maneuvering and teeing up of trade deals are sure to begin lifting bilateral trade, which today sits at nearly $30 billion for U.S. flows to India – up nearly fivefold from $2.4 billion in the early 2000s. India-to-U.S. trade flows tally at $9 billion, up from $3 billion over the same period. Upping this figure “again” is not impossible, but it will require Modi to push major reforms through Parliament and will require American investors to commit to long-term investments. But conditions do apply. In the World Bank’s “Ease of Doing Business” survey, India ranks 142nd out of 189 countries and is infamous for thick commercial red tape for multinational firms setting up shop. “When a company applies for a zoning permit or a permission or land or any other thing, those decisions need to be made,” Kerry said, stressing that countries cannot be competitive “if bureaucracy sends people from door to door, window to window.” Other trade barriers concerning the United States include intellectual property rights protection and enforcement, strict capital controls, and an overburdened judicial system. Another major hurdle is India’s stance on the latest World Trade Organization agreements, to which India remains a member but not a party to crucial regional trade negotiations such as the Trans-Pacific Partnership and the Trade in Services Agreement (TiSA). For Delhi’s part, India has complained about the difficulty Indian nationals face with obtaining work visas in the United States and is also wary of joint ventures that are majority foreign-owned. To fill Modi’s prescription for transforming India’s economy, Delhi has to reform and Washington has to reciprocate. But there is more to discuss on the call.

Shared Geopolitical Realities and Risks

Beyond shared synergies of trade and twin values of democracy, India and the United States also increasingly share the modern ills of climate change, terrorism, and a growing but possibly unstable Asia – risks whose checks also lie in enterprise. Last year was Earth’s hottest on record, according to researchers at NASA and NOAA, causing worry of a planet in peril with rising sea levels, changing habitats, severe droughts, and other extreme weather patterns. The culprit lives in carbon emissions, of which China, India, and the United States are the world’s top three emitters. After China signed a landmark pact with the United States last year to reduce emissions, pressure is on for India to follow suit. Marrying Modi’s commitment to renewables with American enterprise, Kerry said this “enormous cloud hanging over all of us” creates opportunity for firms to develop “cutting-edge technologies, equipment, capital and know-how” for India and the world. More regionally, the trend lines of terror are reaching the Indian heartland from terrorist groups, state proxies, and separatist groups in Kashmir. The 2008 Mumbai attacks waged by the Pakistani militant group Lashkar-e-Taiba – India’s greatest foreign threat and a pan-Islamist jihadist group – paralyzed the city for three days, causing over 160 casualties including six Americans. Franchise forays by al-Qaeda and the Islamic State of Iraq and Syria into South Asia are also troubling New Delhi. India’s security concerns are also America’s, a reality the United States is taking seriously by sending U.S. Under Secretary of Defense Frank Kendall on his fourth trip to India to continue momentum on the 2012-born Defense Trade and Technology Initiative (DTTI). Two items on the negotiating table, according to an industry source, include forward-moving agreements on joint production of drone technologies and military aircraft equipment.

Looking farther East, a militarily growing China is too causing heartburn for New Delhi with Beijing’s disputing of land borders on India’s northern borders and its maritime encroachment in the Indian Ocean and South China Sea. As a vital seaway of global energy and container traffic, neither Delhi nor Washington wants to see China’s “string of pearls” naval strategy monopolize these waters. By way of trade and politics, the DTTI offers one of potentially several geopolitical tools that will, according to U.S. Department of Defense Spokesperson Maureen Schumann, “promote collaboration on defense technology and enable co-production and co-development of critical defense systems.” Tackling these risks alone is not the only option. Enterprise offers a window for cooperation on fighting climate change with renewable technologies, countering terrorism with joint military defense systems, and contending an increasingly assertive China with deeper strategic agreements like the DTTI; these give Washington the pivot it has been preaching, and Delhi the deterrence it has been desiring.

Keeping a new year’s resolution is not always easy – especially foreign policy ones – but Modi and Obama are teeing up 2015 for a bold resurgence of U.S.-India ties through enterprise. The frequent high-level meetings of late with the breathless pace of debate on trade, defense, climate change, and terrorism are only bringing these old friends closer together. Despite this dashing speed of progress, however, challenges do remain on domestic and foreign fronts: India’s stance on domestic social issues such as minority rights, religious tolerance, poverty, and rape; U.S. concerns over Indo-Pak tinderbox ties; Modi’s links to the right-wing Hindutva movement, the Rashtriya Swayamsevak Sangh; and Delhi’s silence on Russia’s incursion into Crimea. The ramp-up of relations suggests the United States is willing to overlook these and other contentious issues of the past – such as Modi’s role in the 2002 Gujarat riots, for which Indian courts and recently a U.S. court dropped lawsuits asserting his complicity, or the U.S. treatment of a senior Indian diplomat in 2013 that soured relations – for the lower-hanging fruits of trade. Discussion doors on these issues are closing while the trade gates are opening, unleashing a new wave of U.S.-India courtship not seen in years.

Jameel Khan is a South Asia research fellow at New America Foundation and also a graduate student at Johns Hopkins SAIS, where he serves as editor-in-chief of The SAIS Observer. Follow him at @jameel_m_khan.

Photo by Alex Wong/Getty Images

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