Dean C. Garfield photo
India at an Economic Crossroads: Retreat or Advance?

Yet another partisan budget showdown and potential government shutdown eclipsed a recent significant event in Washington that has the potential to drive innovation, economic growth, and job creation in the United States -- namely, last week’s visit of Indian Prime Minister Manmohan Singh provided an opportunity to return our historic bilateral relationship to a firmer footing with significant positive economic benefits for both countries.

The U.S.-India economic relationship is one of the most strategically important and yet least understood bilateral partnerships on our nation’s trade agenda. Our two countries compete and collaborate, creating innovations and opportunities felt throughout the world. Just in the last decade, goods exports from the United States to India increased by roughly 700 percent, and U.S. services exports to India doubled in the last four years. Thanks to the quality of skilled American and Indian talent, almost every global information and communications technology (ICT) product development chain, supply chain, and support chain is fueled in some manner by both countries.

This astounding growth in U.S.-India trade is rooted in shared economic principles, starting with the path-breaking economic reforms that India set in motion in 1991. Through these and additional reforms, as well as the growth of the global ICT sector, the bonds between our two countries have become more dynamic as India’s innovative and entrepreneurial minds started to take hold of that country’s destiny.

Unfortunately, like our domestic budget battles, the relationship has become increasingly turbulent and unpredictable. During the last two years, the Government of India (GOI) has pursued policies that would be a retreat from the economic principles that gave rise to the growth of new industries, companies, and opportunities across the subcontinent. India has, for example, put forward policies that would allow market access for a number of ICT products that are only manufactured or tested in India. This would have the effect of foreclosing India from the innovation supply chain that has made its software and services industries world leaders, not to mention restricting our industry’s ability to sell into that market.

To be sure, there are some glimmers of hope that India may be pivoting back to the incentive-based economic policy playbook that has already lifted tens of millions out of poverty and attracted billions in foreign investment. The signs of progress include the GOI’s tentative assurance that its manufacturing promotion policies may not include mandates on the private sector requiring locally manufactured electronics products.

The GOI also this week decided to delay for three months burdensome testing requirements for imported electronics goods that risked denying Indian consumers and businesses access to world-leading technologies. Lastly, India has made initial steps to make its tax code more transparent and predictable, including new transfer pricing and profit sharing rules for global companies that operate in India.

These are important steps, but, for this bilateral relationship to flourish, more needs to be done. For starters, even these suggestions of progress resemble the one-step forward, one-step backward nature of policy making in India. While the delayed implementation of the testing requirements is welcome, the requirements themselves remain deeply flawed to the point of being unworkable. In addition, efforts to achieve tax code transparency could easily be undermined by unworkable conditions and arbitrary enforcement.

Moreover, many Indian industries remain subject to foreign investment barriers, and U.S.-based companies in these sectors continue to struggle to gain access to India’s markets. India also needs to engage in efforts to expand the Information Technology Agreement, which would enable it to more easily import innovative technologies that are essential to building advanced manufacturing capabilities.

In a dynamic global economy, among the greatest threats to an open, entrepreneurial ecosystem are policies attempting to restrict the flow of global commerce. Last Friday’s meeting between Prime Minister Singh and President Obama represented an opportunity to reaffirm a shared bilateral commitment to that ecosystem.

India and the United States have the innovative spirit and entrepreneurial drive needed to foster the flow of global commerce and investment, which is why both countries should be committed to tearing down boundaries to the development, production, and trade of goods and services. I hope the follow through resulting from last week’s meeting will yield concrete results. We could sure use the jobs and do without the drama that too often casts a pall over this strategically vital economic and trade relationship.

Public Policy Tags: Trade & Investment, Forced Localization