How America Can Unleash India’s Massive Economic Potential

President Barack Obama’s successful summit with Prime Minister Narendra Modi in New Delhi reminds us that India, no less than China, will help determine the future of Asia and the world – and that India and America are destined to be allies in support of peace and pluralism in the emerging global order.

Modi underlined this point when he said the U.S.-India partnership would be instrumental in “shaping the character of this century.” India, after decades of sitting on the sidelines of global politics, would now assume its “responsibility” within an Indo-U.S. “global partnership,” he said. This marks the demise of India’s vexed tradition of non-alignment, which may once have suited a country that was weak and poor but makes no sense for a country that is rising and strong.

After years of courtship, it appears Washington now has a partner in New Delhi it can do business with – and who is not embarrassed to align openly with the world’s superpower to advance India’s interests, as were previous leaders in New Delhi. The vision statement on Asian security agreed to at the summit aligns India with America and Japan in advocating a regional balance of power that is tilted towards Asia’s democracies rather than towards China. Indeed, the two leaders even discussed reconstituting the Quadrilateral Partnership comprising America, India, Japan, and Australia – a grouping China previously condemned as an “Asian NATO.”

Modi has argued that foreign policy starts at home, and that only a vigorous India that gets its domestic house in order will be respected abroad. The overarching objective of his grand strategy is to fuel economic growth at home so that India can improve both its people’s welfare and its security. Dramatic reforms to the country’s statist economy are essential to seed growth and produce the jobs necessary to employ what will become the world’s biggest workforce.

This is where partnership with America comes in. As a technology and innovation superpower, the U.S. can offer new technology partnerships in the realms of energy, environment, defense, health care, education, and other fields to supercharge India’s development trajectory. A 2008 civilian nuclear energy deal, which has been dogged by legal issues, is one such technology partnership. Happily, Obama and Modi seem to have arrived at an understanding on how to finally implement it.

India is teeming with human capital that is underutilized by its still-protected economy. It requires advanced technologies to unlock its productive potential, as well as massive foreign direct investment to help build infrastructure and a manufacturing base capable of generating large-scale employment. To this end, as a next step in strategic partnership, America and India should agree to leapfrog listless negotiations over a modest bilateral investment treaty in favor of a new kind of economic agreement that encompasses investment and trade in services as well as facilitating immigration of highly skilled workers.

As Modi and Obama discussed, Washington could also work with New Delhi to move India towards accession to the Asia-Pacific Economic Cooperation (APEC) forum. This would require substantial liberalization of the Indian economy, which would benefit India even more than it would APEC.

New Delhi’s record of obstructionism in trade liberalization talks at the World Trade Organization, and its exclusion from the pending Trans-Pacific Partnership and Transatlantic Trade and Investment Partnership negotiations, otherwise risk isolating it from the world’s most productive trade arrangements. Unlike in 1980, when imports and exports constituted about 15 percent of India’s GDP, today trade makes up almost half its economy. India’s competitiveness will slip if it is not anchored in liberalized commercial arrangements with the world’s leading economies.

The same is true of energy. India is dangerously dependent on hydrocarbon imports, and vulnerable to a range of energy shocks that could upend growth. The United States is the world’s new energy superpower. It could offer long-term supply arrangements that boost India’s energy security — if India commits to the necessary reforms to take advantage of such a partnership.

India and the United States enjoy a lopsided relationship in which the closest cooperation occurs in the areas of defense and homeland security. This was evident at the Modi-Obama summit, where the leaders renewed a 10-year defense pact, expanded defense technology-sharing and co-production plans, and committed to greater cooperation on counter-terrorism.

Yet U.S.-India trade and investment ties remain strangely underdeveloped — in striking contrast with China, whose U.S. trade is more than five times greater. This is somewhat perverse: whereas China is a strategic competitor to the United States, India is a strategic partner.

President Obama therefore has a compelling interest in helping Modi deliver on the promise of his overwhelming election mandate: to spur the rapid and sustained economic growth that is the only solution to India’s underdevelopment, the surest source of its future security, a stabilizer of the Asian balance of power, and a new engine of global prosperity.

A version of this essay appeared in the Nikkei Asian Review.

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