India's growth crisis undercuts its influence
A weakening Indian economy threatens the US-India strategic partnership as well as India's rise as a major power.


US President Barack Obama (L) shakes hands with India's Prime Minister Manmohan Singh as they arrive for a working dinner at the Nuclear Security Summit at the Convention and Exhibition Center (COEX) in Seoul March 26, 2012.

Article Highlights

  • Some hiccups in the US-India bilateral relations can be traced to poor economic decisions by both countries.

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  • India already lags most of East Asia in terms of both income and human development; it can scarcely afford to slip behind further.

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  • @dhume: Fulfilling the strategic potential of the U.S.-India relationship needs fostering an entrepreneurial Indian economy linked to America

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As Manmohan Singh meets Barack Obama Friday on what is likely his last visit to America as India's prime minister, U.S.-India relations stand at a proverbial crossroads. Not so long ago, many in Washington viewed the 2008 civil nuclear deal as marking the advent of a dynamic partnership with the potential to transform Asia and the world. Today, ties between the world's oldest and largest democracies are just as often characterized as listless or oversold. Arguably, the mood in Congress over Indian policies that hurt U.S. companies has never been darker.

Some of the hiccups in bilateral relations can be traced to poor economic decisions by both countries. In America, overzealous advocates of immigration reform in the Senate have targeted India's flagship information technology industry by proposing restrictions on firms that employ a high proportion of foreigners on skilled worker visas. U.S. policy also makes liquid natural gas exports to India needlessly complex by requiring exports to countries with which the U.S. hasn't signed a free trade agreement to be individually approved.

Nonetheless, for the most part India has only itself to blame for rising skepticism about it in corporate suites and congressional offices alike. India's harebrained decision last year to impose retroactive taxes, its patchy protection for intellectual property, and an attempt to mandate local content requirements for technology purchases all signal backsliding toward statism and protectionism. New Delhi's self-inflicted economic wounds—caused by a combination of policy paralysis, populist spending and stifling red tape—have only made things worse. HSBC expects India's gross domestic product to grow only 4% this year, compared to 10% six years ago. Needless to say, India's lagging growth makes the logic of a big U.S. bet on it look a lot less compelling.

In the long term, fulfilling the strategic potential of the U.S.-India relationship requires fostering an entrepreneurial Indian economy linked to America by ideas, capital, people and technology. In order to achieve this, India needs to repudiate anti-market measures that have soured investors, and renew its commitment to the incomplete task of economic reform.

India ought to prioritize negotiating a high-quality bilateral investment treaty with the U.S. It also needs to improve protection for intellectual property rights, conditions for manufacturing, and the predictability of its taxation policy. Commencing nuclear commerce, an unfulfilled promise of the nuclear deal, will go a long way toward restoring trust in India among skeptical Washington policy makers.

Not that everything in the relationship is gloomy. Many Americans continue to root for India's success. Republicans and Democrats alike generally agree that the goal of a strong India—as a symbol of democratic capitalism, an implicit counterweight to Chinese hegemony, an ally in the long war against radical Islam, and an engine of global growth—remains worth supporting. The United States also views stronger ties with India as an essential part of its "rebalance" toward Asia. Washington and New Delhi talk to each other more often, about more things, and at higher levels than ever before—on everything from Afghanistan and counterterrorism to vocational education and clean cookstoves. Total defense trade, virtually non-existent a decade ago, has crossed $10 billion.

Nonetheless, a strategic partnership built on weak economic foundations will likely flounder. With $92.3 billion in two-way trade last year, India is only America's 13th largest trading partner, falling between the Netherlands and Venezuela. Business ties, which ought to be the lifeblood of a U.S.-India partnership, have instead become a source of friction. In June, more than 170 members of Congress wrote to President Obama to express concern about India's failure to protect intellectual property adequately and its attempts (since partially suspended) to implement local content requirements in technology purchases.

Meanwhile India's sharp slowdown—at a level of per capita income that still lags both China and Indonesia—raises questions about whether it will live up to forecasts that have underpinned its rise to prominence in Washington. Last year, for instance,the National Intelligence Council estimated that "by 2030 India will be the largest driver of middle class growth on earth and will surpass China in economic dynamism." The prediction hinges on sustained high growth.

No foreign country can gift India's political class the wherewithal to tackle long overdue reforms in labor, land, infrastructure, and taxes, and give up a dangerous addiction to doling out subsidies and handouts. Nonetheless, President Obama ought to be frank with Mr. Singh about the strategic implications of India's shoddy economic performance. Simply put, it's foolish to pretend that an India growing at 4% can have the same influence as one growing at 10%.

Time is not on India's side. After nearly a decade of stuttering reforms, both foreign and domestic investors are looking at the country with greater skepticism than at any time since the onset of liberalization in 1991. India already lags most of East Asia in terms of both income and human development; it can scarcely afford to slip behind further. If growth continues to stall, it will jeopardize both the U.S.-India strategic partnership and India's rise as a global power. If Mr. Obama is frank, this is the message he'll deliver to his visitor today.

Mr. Dhume is a resident fellow at the American Enterprise Institute and a columnist for Follow him on Twitter @dhume

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