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Locating Priorities in India-US Strategic Economic Engagement

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  • June 19, 2009
    Fellows' Seminar
    Only by Invitation
    1030 to 1300 hrs

    Chair: Santosh Kumar
    Discussants: G Balachandran and Jayshree Sengupta

    The objective of this paper is to analyse the economic relations between India and United States. Dr. Samuel advocates taking a strategic approach to current economic relations between the two countries. This approach is necessary because of somewhat unique nature of India-US economic relations which is increasingly being built on synergies in knowledge based industries and services. The paper attempts to analyse the various components that make up overall India-US economic relations and locate priorities that can be taken up for dialogue under the bilateral engagement process.

    According to Dr. Samuel currently both countries are going through a transition process to emerge as knowledge based economies. The ongoing transition process results into trade in goods and services based on intellectual property. Therefore it necessitates the governments to take more pro-active role since the rules of a global economy based on transaction in services are still being worked out. The new economy industries need support in terms of infrastructure, government policies and availability of capital to enable a viable ecosystem to develop.

    Highlighting India’s emergence as a global economic player, Dr. Samuel pointed out that trade with the US, both export and imports, have been on an upward trajectory since 2002. The United States remained India’s largest trading partner on combined trade in goods and services, totaling $61 billion in 2007. While imports came to $27 billion, exports totaled $34 billion. The good and services trade deficit was $7 billion in India’s favour in 2007. While exports to the US stood at $12 billion in 2002, it had doubled to $26 billion (12.7 per cent of India’s total exports) by 2008. Against this, imports from the US went up by four times from $4 billion in 2002 to $18 billion (8.4 per cent of total imports) in 2008.

    Dr. Samuel identifies future growth areas which includes defence equipment and technologies, and nuclear equipment and technologies. However, trade in both these areas is contingent on the easing of restraints on high technology and dual-use items which were imposed during the cold war era. Despite the existing restrictions on the export of dual use technologies and items to India, imports of high technology goods from the US rose from $1.2 billion in 2002 to $8 billion (45.8 per cent of total imports from the US) in 2007. Similarly exports of high technology goods from India also rose from $198 million to $708 million in 2007 before crossing the billion dollar-marks in 2008.

    Dr. Samuel points out that mechanisms such as the High Technology Cooperation Group (HTCG) have met with only little success and the promised boost to bilateral trade is yet to materialize even after the civil nuclear agreement. Now there are clouds of suspicion over Obama administration’s continued commitment to the nuclear agreement. However as expected, defence trade between the two countries has gone up. Two defence deals have been concluded that for six Lockheed Martin Corp C-130J Super Hercules military transport planes and eight Boeing P-8I maritime patrol aircraft, worth in excess of $3 billion. Lockheed Martin and Boeing are also vying for the contract for multi-role fighter aircraft, estimated at $11 billion. India estimates that its military modernisation plans will entail the purchase of over $120 billion worth of defence equipment. Dr. Samuel points out a major obstacle that is the restraints imposed on technology transfer. It is in the interest of both India and United States to remove the obstacles inhibiting strategic trade.

    Trade in services has the most potential for growth. Imports of services from the US totalled $9.3 billion in 2007 while exports totalled $9 billion. Of this, exports of software services from India were in the region of $4 billion while imports of software services from the US stood at $193 million. However there are hindrances such as severe criticism of the provision of software services to US companies by Indian companies and complaints about rampant misuse of the H1B specialty visas. According to Dr. Samuel legislations such as Grassley and Durbin proposal in the Senate on visa reforms and American Recovery and Reinvestment Act signed by President Obama soon after assuming the presidency, effectively bar companies from recruiting workers through the H1B programme unless they fulfill stringent conditions. The recent bills have been construed as protectionist measures, which might lead to counter-measures. Even at a time of economic recession, Indian economy is expected to continue growing at a minimum of 5%. Markets such as India and China have provided as much as 75% of growth even if that translates only into 25% of sales at the moment. US companies have been major beneficiaries of the opening up of the Indian markets and the liberalization of the economy. At this juncture tit-for-tat approach would hurt both countries immeasurably. He opines the misuse of H1B visas can be countered through closer supervision. Outsourcing is an integral part of globalisation and denial of it may have harmful effects on mutual as well as global economic growth.

    While discussing investment positions in the two countries, Dr. Samuel pointed out that cumulative US investment in various sectors in India stood in the region of $13 billion at the end of 2007 of which 30% was in information technology services, and 21% in manufacturing. Finance and depository institutions together made up 24 % of the investment. However, Indian investment in the US has been more through the mechanism of mergers and acquisitions, with Indian companies acquiring over 83 companies in the US with a cumulative value of over $10 billion. The major deals of 2007 were Hindalco’s acquisition of Novelis for $6 billion, Rain Calcining’s acquisition of CII Carbon for $595 million, Wipro’s acquisition of Infocrossing for $568 million and FirstSource’s acquisition of MedAssist for $330 million.

    Dr. Samuel opines that the US and Indian economies are poised to help each other through the creation of an eco-system that transcends geographical boundaries through available technological means and promotes innovation and creativity, ultimately leading to wealth creation. The promotion of a culture of enterprise and innovation must be encouraged in India which would lead to the creation of intellectual property rather than merely using the IP created by others.

    Dr. Samuel suggested that to deal with the lack of venture capital investment currently, the two governments can adopt BIRD Foundation model of encouraging innovation as between Israel and the US where a bi-national fund has invested over $245 million in 740 projects, which have produced sales of over $8 billion. According to him this model can be replicated in other areas as well

    Dr. Samuel concluded that the unfolding strategic environment would play a large part in deciding the direction of India-US strategic trade despite insufficient strategic underpinnings to provide it a fillip. Policy actions are required to provide the conditions necessary for the creation of an eco-system conducive for the growth of an innovation-led economy.

    It would be a good strategy on the part of India to focus on removing the impediments to its services trade with the United States, which is relatively neglected despite its sizeable contribution to the bilateral trade pie. It should be impressed upon the US that the current moves towards protectionism are a detrimental step. There should be greater dialogue on easing the difficulties faced by entrepreneurs and service providers in travelling between the two countries as well as starting and sustaining businesses. A part of stimulus package in both the countries can be used to create public private venture capital funds to provide seed capital to start-ups in the new economy. In India returning professionals from the United States should be considered a resource, and a publicly accessible database should be created to enable greater networking. Government schemes to encourage entrepreneurship should be given greater publicity and lesser bureaucratic formalities. Dr. Samuel stated that the present time provides opportunity to turn the liberal-humanist rhetoric in the relationship into reality, given the similar ethos of the two ruling parties in both these democracies.

    Points raised during discussions

    • Despite much talk about the India-US strategic partnership, why are there so many hurdles in India-United States economic relations?
    • India ranks 17th among US trading partners with trade amount only US $ 44 billion.
    • US is closely watching India’s economic reforms. Reforms are required in other sectors as well. For example there are many obstacles in the labor sector. United States wants India to open its agriculture market. India is not ready to open it.
    • There is talk of free trade between the two countries but this idea is politically charged.
    • India-US Knowledge Initiative on Agriculture (AKI), which was signed by the Bush administration, is based on public-private partnership. Since India has population surge so Bio technology revolution is needed to enhance production. It is essential and helpful for India. It faced a lot of opposition in India because of the issues such as Bt cotton which was seen as the corporatisation of agriculture.
    • Companies in India and United States need to identify areas where they can invest. India has internal security requirements and US needs reforms in energy and health care sectors. It would be helpful if private sector companies focus on these identified areas.
    • There is cross-cultural communication gap between India and United States. India should focus on strategies to attract more businesses from United States.
    • States in India should open trade promotion offices.
    • On the H1B Visa issue, actually numbers do not mean much. What is more important is principles and what goes beyond it. The issue of H1B Visa should be looked in the broader context. The new bill introduced by Obama administration on H1B does not violate earlier rules but only tightens existing rules.
    • Indian companies need to be proactive. There are a lot of companies in the United States either looking for help or filing for bankruptcy. Indian companies should go for mergers and acquisitions in the United States. An information database should be created for failing US companies as research institutes such as Institute for Business and Finance (IBFR) do carry out such studies.
    • In high technology trade, there has been one way traffic. Indian companies are not in high technology development sector. It will take some time. Americans are very much methodological in their approach especially while dealing with high technology trade.
    • In service sector, India can play important role in R&D. Signing MoU between the two countries is easy but the important question is how it will be converted in to reality.
    • US is the biggest buyer of defence equipments. There are opportunities for Indian companies to invest in the US defence sector.
    • The contribution made by Indian diaspora in the United States should not be ignored. The role of Indian migrants should also be factored in while studying India-US economic engagement.
    • It is useful to create a common market in climate change and healthcare sectors if India wants to create a favorable environment to attract more companies.
    • When companies go for investment, they want to ensure IP protection.
    • There are problems in getting Indian Visas for US citizens as well.
    • Service sector covers 53% of the Indian business and 81% in the United States.
    • H1B Visa is important for the software sector. 45% professionals aspire for this Visa.
    • High Technology Cooperation Group (HTCG) is a very important mechanism for high technology trade. It is matter of analysis whether it has contributed for enhancing India-US trade relations.
    • The paper needs to clearly distinguish between what the government should be doing and what the corporate sector should be doing.
    • The importance of the Indo-US relationship can only be properly understood if it is considered in the context of the future, as well as in terms of comparative growth, market size, and market potential, which forms a fundamental motivation for US interest.
    • The United States has security interest in investing in a vibrant Indian economy.
    • India has the potential to balance economic order in Asia.

    Prepared by Sanjeev Kumar Shrivastav, Research Assistant at Institute for Defence Studies and Analyses, New Delhi.