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3 November 2010, Gateway House

India-U.S.: Natural coupling?

Gateway House at four different horizontals of Indo-US relations to try to answer the question of what it means to be a “natural ally” and how it is different from having a “strategic partnership”?

Former Director of Research

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As President Obama’s trip to Mumbai nears, the usual chatter on Indo-U.S. partnership is picking up speed and volume. The foreign in both countries are trying to counter the generally low expectations from the visit as compared to that of President Bush’s visit in 2006 by characterizing India and the U.S. as “natural allies”, the relationship as a “strategic partnership”, India as an “indispensable” country and the relationship as potentially the most important in the 21st century.

We looked at four different horizontals of Indo-U.S. relations to try to answer the question of what it means to be a “natural ally” and how it is different from having a “strategic partnership”?  The horizontals that we examined are:

  • Government – Geo political, Defense
  • Trade – Goods and services
  • Business – Investments, Corporations, SMEs
  • Citizens – Employment, Students, Tourists, Expat Community

Examining them in detail yielded three interesting observations:

  • Partnership becomes weaker as we move down the four horizontals.
  • Partnership is nearing equality in absolute terms but not in proportion or significance for United States (e.g. Trade).
  • Partnership is skewed when it comes to certain interactions (e.g. students).

In order to move from “strategic” to “natural” we need:

  • To partner more at the lower horizontals such as business and citizen
  • To shift focus from just War Time cooperation (military, anti-terrorism) to Peace time cooperation (business, employment) and involves the business and citizens in both countries directly
  • To establish “Equality of Stake” for partnership to be “sustainable”. India-U.S. is nearing equality in absolute numbers but India remains a very tiny part of U.S. trade, investment, business and employment market whereas U.S. remains a significant part of the Indian economy.

Government – Geopolitical, Defense and Climate Change

It is clear that the United States government understands the geopolitical significance of India. Whether it is as a balance to a rising China or to stabilize the Af-Pak region or to promote the ideals of democracy or boost trade for creating jobs at home.  India with its entrepreneurial skills, its enormous market, its escalating demand for arms and its well established democratic institutions is looking more and more like America’s best bet in a rapidly changing Asia scenario.

The two governments have made significant strides in pushing for a strategic partnership. Inviting our Prime Minister to be President Obama’s “first” State guest, visiting India in his first term, making his stay in India the “longest” of any previous President (and not visiting Pakistan in the same tour), are all both symbolic but important gestures by the United States. The progress of Indo-U.S. Strategic Dialogue is a good indication that the leadership of both countries is looking beyond tactical military and anti-terrorism cooperation to more long term aspects of partnership such as Defense, Democracy promotion, Science & Technology exchanges, Education and Agriculture. At the 34th anniversary of the U.S. India Business Council, Secretary of State Hillary Clinton said the two countries entering into a “third era” of Indo – U.S. relations.

The United States has emerged as one of the India’s major defense partners. Despite all the restrictions it continues to place on defense sales to India, the volume and value is growing exponentially.  Until 2010, the cumulative total of defense purchase was about $10 billion but now deals worth $15 Billion worth are under discussion and some will be signed in the upcoming trip. Although, India and the U.S. exercise together frequently and this Trade is expected to grow but Defense is a good example where the partnership is a one way flow.

Trade – Goods and services

Trade in goods and services is roughly in balance in absolute terms but skewed when it comes to proportions. Trade in goods in 2009-10 was U.S. $35 Billion with India exports worth $19 Billion matched by $16 Billion in imports from the U.S. illustrating an overall balance in trade. While this trade is growing at 20-30% annually, U.S. exports to India are growing to India is growing faster than any other country. There is equality in numbers, but U.S. accounts for 8% of India’s trade standing as the 2nd or 3rd third highest trade partner whereas India accounts for a mere 1.5% of U.S. trade standing as 12 largest trade partner. Similarly, U.S. Exports of services to India was $10 Billion and Indian service exports to the U.S. $12 Billion in 2008-09. While majority of India service exports are directed at the U.S. the U.S. export of IT, Consulting and Financial services of an equal amount are only 5% of total trade worldwide.

Business –Investments, Corporations, SMEs

The cumulative total of U.S. investment in India is 11.5 Billion and Indian investment in the U.S. is 5 billion. However, in the last couple of years investments are becoming balanced both ways even in absolute terms. In 2008, U.S. invested 2.6 Billion in India whereas India invested 1.7 Billion in the U.S.. However, the U.S. remains one of India’s top investors as the 3rd largest after Mauritius and Singapore (both of which are larger for well known, not so good reasons) accounting for over 8% of total investment. India on the other hand, accounts for just half percent all foreign investment in U.S.. Interestingly, over 70% of Indian investment is made by few selective major conglomerates such as TCS, JSW, Reliance, ESSAR, etc. While U.S. companies invest mostly in IT and Manufacturing, Indian companies invest in Minerals, Metals, IT and Financial Services.

The India-U.S. CEOs forum has been a good strategic corporate forum for conveying the interest of business to the highest levels. However, it remains an ivory tower view of the potential of the business partnership between the two countries because SMEs are neither represented on it nor are they views taken into consideration.

A good example of equality in partnership is the functioning of companies in either country. Total Revenue generated by U.S. companies in India was 7.6 Billion and Indian companies in U.S. was $5 Billion in 2009. More interestingly, 90 companies made Greenfield investments in the U.S. and another 240 made acquisitions amounting to 5.5 Billion and 21 Billion respectively between 2004-2009. These investments probably helped to save companies that may have otherwise gone under during the recession.

The SME partnership between the two countries remains nonexistent. With the new framework signed by Commerce departments of both governments for SME cooperation, this area is expected to grow exponentially. There is a dearth of funds and process expertise for Indian companies that the U.S. SME sector could provide. On the other hand, the U.S. SME sector can benefit from the market size and scale of the growing Indian middle class.

Citizens – Employment, Students, Tourists, Expats

Though American companies remain among the largest employers in India, according to various new reports, Indian investments account for having created somewhere between 65,000 to a 100,000 new jobs in the United States. However, the Indian Brand Equity Foundation puts the number of jobs saved and created by Indian companies much higher to around 314,000. All indicators have begun to play significant role in the U.S. employment market and this relationship is increasingly becoming more equitable.

The flow of students and professionals between the two countries remains completely one way. There are less than 1000 American students in India while Indian students in the U.S. have crossed the 100,000 mark accounting for 15% of all foreign students and have become the largest foreign contingent in American universities. Most of th
e American students that come to India are Indian Americans holding U.S. nationality. Since the number of scholarships has dried up, it is the wealthiest section of the Indian society that is getting the opportunity to study in USA. However, recently, The Fulbright Program has been revamped to be called Fulbright-Nehru Program, encouraging more American students to come to India. In 2008-09, 70 American students came to India and 90 Indian students went to the U.S.. While the 70 students make up 10% of all students coming to India, the 90 students constitute for less than 1% of all students going to U.S.. However, steps such as the kicking off the Obama-Manmohan Singh Knowledge Initiative with a total funding of USD 10 million for increasing university linkages and junior faculty development exchanges between U.S. and Indian universities is a good start towards a more equitable partnership in the Education sector.

In addition, two developments are going to have a positive effect of more American students wishing to study in India. The Foreign Universities Bill will open doors for American universities to establish institutions in India. This will provide American students with strong academic environment which is becoming of interest from the business angle. Programs such as The South Asia Initiative at Harvard, which in its first 4 years has sent nearly 300 faculty members and students to India and South Asia, conducted high profile seminars and conferences, supported new websites, and conducted other research activities, are being emulated by other American universities.

The 2.7 millions Indian Americans community in the U.S. are generally believed to be the highest income-per-capita of any immigrant community. This is because they are highly educated and the IT sector has given birth to many entrepreneurs. In addition, there continues to be an outflow of Indian professionals to the U.S. taking up close to 10% of H1B visas every year. The number and proportion of U.S. professionals coming to India is growing but remains dismal in comparison.

Indians tourists on the other hand are at par in contributing to the tourism inflow. Many more Indians learn about America but since mostly Indian Americans come to India, it doesn’t increase the level of education and sensitization towards Indian culture.

Moving from Strategic to a Natural Coupling

Though there is buzz about President Obama’s visit, there is very little that is being said on anything substantial that is going to come out of this visit to deepen this relationship. Issues that will be discussed are Market Access and IPR and from the Indian side, removal of barriers to trade in Hi Tech (dual use items), restrictions on movement of professionals (H1B visas) and possibly outstanding differences in the Doha round.

Partnership at the business and citizen level ensures that it engages and benefits the citizens of both countries directly. Only then will the partnership be “deep” and “natural”. The individual stake in the bilateral relationship must also be significant for both sides. Generally, speaking we should be among the Top 10 trading or exchange partner in any venture, to be growing into natural allies.

What we would like to see is for the government to go beyond the “strategic” geopolitical government-to-government relationship to a more “natural” relationship at the lower horizontals where the citizens of both countries are engaged and impacted directly. For instance, partnerships in the SME and Agriculture sectors would be a good start to that end. A Free Trade Agreement in Services, especially allowing free movement of professionals, will be a great move forward facilitating exchange of business and ideas at the grass roots level.

By starting his visit in Mumbai, accompanied by Commerce and Agriculture secretary but not secretaries of State or Defense, bringing a 250 member business delegation including SMEs who are at the cutting edge of technology, President Obama is making it clear that his focus will be primarily economic. Increasing trade to increase exports to India, attracting Indian investment to create in the U.S. and promoting Defense sales to sustain American jobs are the announced objectives. The spin off strategic link that defense sales generate, are a bonus not the principle motive at this of near 10% unemployment in the U.S.. One has to ask this question, whether these exchanges are happening in a setting of shared pluralistic democratic values is only happenstance or can be turned into an enduring advantage for both countries where the lower horizontals that include citizens of both countries can be engaged and benefitted directly.

Akshay Mathur is Head of Research, Gateway House

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