U.S. & India: From estranged democracies to natural allies

Center for Strategic and International Studies (CSIS), Washington DC

My remarks made at Center for Strategic and International Studies (CSIS), Washington DC on 14 May 2018

As some of you know, I returned to India about 15 months ago after decades in the US. In fact I went directly to India from this town. Here, in my role as Assistant Secretary of Commerce for Global Markets, I had a view of US economic engagement around the world. I saw clearly that India, the ASEAN and Sub Saharan Africa had the highest upside and focused my time on those areas and on sectors that were pertinent to them. The most important sector was infrastructure comprising power, transportation and urbanization.

My fifteen months in India have confirmed the assumptions I held while in Commerce. India is opportunity-rich. I have not seen such demand, such attractive markets, since my dot-com days in Silicon Valley.

Consumer demand is rising. Infrastructure spend is increasing.

The focus on Ease of Doing Business is welcome. The new Insolvency and Bankruptcy Code is a very significant reform. GST is underway creating a common market in India for the first time.

There is energy around entrepreneurship. There are 5000 tech startups, making India the second most attractive entrepreneurship area after Silicon Valley. Many state governments are promoting entrepreneurship, encouraging young people to become job creators rather than job seekers.

The India opportunity cannot be ignored. India has 1.25 billion citizens—one-sixth of the world’s population. It has a middle class of a quarter-billion people. Every month, five million new subscribers sign up for mobile phones. Its economy is now the world’s third-largest, in terms of purchasing power parity. In nominal dollar terms, it is the size of the economy of the UK, an advanced industrial economy. The case for greater trade and investment between the US and India as two of the largest economies in the world is strong. For too long, the countries were divided by opposing economic models and misgivings, until ten years ago, of nuclear proliferation issues and other areas that generated mistrust.

That era of division is over.

The U.S. – India bilateral relationship is on a positive trend. Bilateral trade grew by over 10 percent in 2017 to reach USD 126 billion, making India America’s ninth largest trading partner.

But that’s not good enough. India accounts for far too little of America’s trade. China’s trade with the U.S. is six times larger than India’s. Another example is South Korea – whose bilateral trade relationship with the U.S. is two times bigger by volume than that between India and the U.S., while its GDP is 40 percent smaller than India’s.

India ought to be America’s fourth largest trading partner.

India, for its own growth, needs to increase the proportion of trade as a component of its GDP. The country cannot grow at the rates it needs to achieve without growing trade. And the US has to become a significant part of that growth.

The U.S. – India trade relationship has not over the years kept pace with the strategic relationship. The Obama Administration sought to move economics and commerce to the center of the relationship; accordingly, the two-principal Strategic & Commercial Dialogue was set up, with the Secretaries of State and Commerce sitting side by side. Two such dialogues were held, supported by numerous work streams. Alongside, the Trade Policy Forum stimulated constructive discussions on issues that normally were the subject of contentious argument.

Looking forward, what needs to happen? First, what should the governments do?

As one of the largest future markets for US products and services, it is in the manifest interest of the United States to see India grow and prosper. It is in the interest of the United States that India creates jobs as that rising economy will buy more from the US, resulting in more jobs here. This is why Make in India is not at variance with America First.

Both countries are not command economies so it takes a nuanced approach to find areas of collaboration that can catalyze growth. There are a number of elements to focus on.

One, is to get India into the global supply chains of US companies. This will promote job creation in India, greater competitiveness and job creation in the US, and a healthy interdependence and alignment of interests.

A place to start is in defense manufacturing which should be spurred by increases in India’s procurement of defense equipment and systems from the US. Intelligently executed, by incorporating India into global value chains, India can develop competitive and job-creating manufacturing; this can be a win-win for India and for US companies. India will need to adopt policies that enable such integration – including basic trade facilitation processes, refraining from imposing tariffs and dramatically improving logistics.

A second area, and probably as important than the first, is of creating helpful mechanisms for US companies to increase their participation in India’s infrastructure build-out. Good infrastructure in turn will help boost trade. The US Trade Development Agency has facilitated progress in aviation, power and urbanization with thoughtful programs that build Indian capacity in these areas. We need to see more such efforts.

A third area is to encourage the harmonization of standards which in turn helps integrate supply chains. Both countries have different approaches to standards resulting in duplication at best or, worse, in unproductive mismatches. An intentional and sustained approach is needed in this area.

A fourth area, where there have been some examples of recent progress is in increasing energy linkages and being a source of hydrocarbons for India.

A fifth area is to step up collaboration in innovation and entrepreneurship. We should find ways to tap India’s talent base to advance joint research and development – from pre-commercial research in universities to product development in companies and start-up ventures. We have to make the ecosystems for innovation more compatible – spanning the free flow of investments and services, the visa regime and even direct air connectivity between US metros and Indian cities.

The US companies are indeed paying attention. FDI into India is at an all-time high. Last week’s announcement of the Walmart Flipkart deal is the latest example of a major bet on the growth of the Indian consumer market. Infrastructure, defense and energy will be other key sectors.

Opinions in this piece are purely personal and do not reflect the views of KPMG in India