Foreign and Defense Policy, India

Will bad economics sabotage US-India relations? Q&A with Sadanand Dhume

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The architects of American foreign policy view India as a vital strategic partner, and have espoused policies designed to buttress India’s role as an alternative role model to authoritarian China, a lynchpin of stability in a tumultuous region, and a bulwark against Islamist terrorism stemming from Pakistan and Afghanistan. Yet, in spite of measurable gains, it would be a mistake to assume that ties between the world’s two largest democracies will inexorably improve. Poor economic choices – in both Washington and New Delhi – could unravel existing progress and imperil the growth that underpins strategic cooperation. AEI Resident Fellow Sadanand Dhume recently sat down with AEIdeas to explain why it’s time to replace the panegyrics with hard-nosed assessments of the challenges that lie ahead. (For a more detailed look, see his most recent report, “Falling short: How bad economic choices threaten the US-India relationship and India’s rise.”)

Q: Indian and American strategic priorities align more closely than perhaps at any time in recent memory. Why emphasize economics?

Dhume: Put simply, a strategic partnership built on weak foundations will likely flounder. Business and trade ties, which ought to be the lifeblood of a US-India partnership, remain far below potential and have traditionally played second fiddle to strategic considerations. The key to fulfilling the potential of the US-Indian relationship is to foster a vibrant, entrepreneurial Indian economy linked to America by ideas, capital, and technology. Instead of the economic component taking a back seat to the strategic component, it ought to be the other way around.

Q: India’s economic performance has earned the country membership in the BRICS club and years of favorable press. Doesn’t the US have a good relationship with this emerging power?

Dhume: To be sure, when compared with the past, the economic relationship looks robust. Trade in goods and services has quadrupled since 2006 to nearly $100 billion, and two-way investments have surged. Nevertheless, even as the US remains India’s top trading partner in goods and services, the importance of the US to India’s economy is declining. Since 2004, the share of US trade as a proportion of India’s total trade has fallen, as has the US share of FDI inflows to India. (Not counting investments routed through tax havens such as Mauritius.) Neither country has the other at the top of its trade agenda. Moreover, over the past 18 months, as India’s annual economic growth has plunged to its lowest in a decade (4 percent), a series of economic disagreements have put a damper on the relationship. Slowing growth raises questions about whether India will live up to the economic forecasts that have underpinned its rise to strategic prominence in Washington.

Q: What can India and the US each do to optimize the relationship?

Dhume: At a philosophical level, India’s political elites need to recognize that the country’s recent economic troubles are traceable to a continued ambivalence toward free markets and private enterprise. For its part, the United States need to recognize that a belief in democracy, shared concerns about potential Chinese hegemony in Asia, and the spread of radical Islam aren’t enough to build a deeper relationship with India.

Q: Let’s unpack that a bit, starting with the US. What specific policy prescriptions would you suggest?

Dhume: First, Congress can start by amending the Comprehensive Immigration Reform bill to address the concerns of Indian IT firms. Rules that tilt the playing field against India’s arguably most competitive globalized industry – with no measurable benefit to the US economy – ought to be reconsidered. Second, ending restrictions on LNG exports offers a way for the US to underscore its traditional support for free markets, boost its own economy, and wean India off of energy from Middle Eastern countries such as Iran. Third, greater focus on Indian states and cities also makes sense for the US government and American businesses; as India grows richer and more urban, it is also growing more federal, creating opportunities for entrepreneurial dynamism in states with a business-friendly bent such as Gujarat. And finally, I also argue that the US should publicly back India’s candidacy for APEC membership and vigorously support a US-India Bilateral Investment Treaty.

Q: And on the other side of the equation, what helpful steps can India take?

Dhume: The advantages of a high-quality Bilateral Investment Treaty are self-evident, as the Indian government needs investments to meet infrastructure demands and to plug its gaping current account deficit. It also remains in India’s interest – in both economic and diplomatic terms – to establish an IPR regime in greater harmony with global standards rather than one that appears to be backsliding toward intellectual protectionism and regulatory capture by powerful local firms. And a final – and admittedly abstruse – proposal: I would advise India to scrap altogether its preferential market access policy. Any potential benefits derived from local content requirements (in the form of greater employment or more resilient manufacturing base, for instance) are outweighed by lagging productivity growth across the board. There are smarter ways to encourage local manufacturing.

Q: I just scrolled to the bottom of this page because my eyes glazed over when I saw big, blocky texts. What’s the bottom line?

Dhume: No offense taken. Here’s the skinny: A strong India is in America’s strategic interest, as this will enable it to play a more prominent role in Asia in ways that complement US goals. But for this to happen, the budding Indian entrepreneurial spirit must be encouraged to flourish and develop a deep and synergistic relationship with the American business community. Though India has made great strides, success is by no means guaranteed. Getting the economics right is a prerequisite for a robust strategic partnership and for successful US-India relations writ large.

2 thoughts on “Will bad economics sabotage US-India relations? Q&A with Sadanand Dhume

  1. Could not agree more.
    I would go one step further and suggest that India must be able to address its economic concerns without any American assistance. Indian success in doing so would be the catalyst for a genuine American interest in India.

    As of now, the Americans are only interested in India opening up its lucrative retail, Insurance and financial sector to them, but no technology transfer or co-production. They are interested to sell potato chips, not computer chips.

  2. The problem with India is that it is an incredibly disorganized and divided state. You’d be hard felt to find a country where people hate each other as much as they do in India. China, on the other hand, despite not being democratic, is not pulled back by ridiculous social differences and has a stronger national identity, which has allowed it to develop an economy almost three times that of India, despite having roughly the same population.

    India must embrace free market economics and social tolerance if it is to succeed. Or else it will continue to be an “almost” superpower forever. While China is right about there.

    It is a shame because you would have wanted India, as the democracy between the two, to be the more successful one.

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