But can Prime Minister Modi capitalise on the changing winds and let foreign firms help build his “Make in India” economy? For years, bothWashington and New Delhi seemed utterly devoid of ambition about where to take U.S.-India trade and investment relations. Now that all may be about to change…
To quote the Beatles, the ice is slowly melting between India and the United States after trade relations had been in a deep freeze for several years. President Barack Obama will travel to India in January to participate in the Indian Republic Day celebration in New Delhi as the chief guest. This visit will mark the first time a U.S. president will have the honor of attending India’s Republic Day. While there he is expected to talk trade and anti-terrorism with his host Prime Minister Narendra Modi. In part as preparation for that official visit, U.S. Trade Representative Michael Froman was in India on November 24-25, where co-chaired the U.S.-India Trade Policy Forum with India’s Minister of Commerce and Industry Nirmala Sitharaman.
In the past, this trade forum has often been rescheduled or postponed because Washington and New Delhi disagreed over where to take U.S.-Indian commercial relations. Americans were bitter that the 2008 U.S.-India Civil Nuclear Agreement had failed to produce business for American nuclear energy equipment suppliers. The Indian Government was seen as the main stumbling block to successful completion of the Doha Round of multilateral trade negotiations. And, contrary to American hopes, New Delhi had failed to open its market to greater foreign investment in retail and financial services. The Indians, for their part, were genuinely uncertain how rapidly they wanted to open their market to foreign competition. And they were frustrated that the office of the United States Trade Representative (USTR), claiming it was a congressional prerogative, refused to even talk about granting more visas to highly skilled Indian workers.
For years, both Washington and New Delhi seemed utterly devoid of ambition about where to take U.S.-India trade and investment relations. Now that all may be about to change. The Modi Government has recently liberalised some foreign investment restrictions as part of its “Make in India” campaign to transform the country into a global manufacturing hub. And the Obama administration has agreed that the Indian food security program, which a Pew Research Center survey earlier this year found had the support of 80 per cent of the Indian population, will not be challenged through a World Trade Organization (WTO) dispute settlement while a permanent solution regarding this issue is hammered out. This agreement to disagree will allow implementation of the recent WTO trade facilitation deal, which eases customs barriers around the world for all countries, but which India was blocking until its food security program was protected.
The Indian Government’s willingness to be more cooperative and the desire of the Obama administration to re-engage with New Delhi reflects new evidence that the Indian public is more supportive of trade and foreign investment than previous Governments in New Delhi had acknowledged. This is particularly the case with regard to the heretofore thorny issue of foreign investment, long a domestic political hot potato. And all this suggests this new U.S.-India readiness to take a fresh look at how to bolster bilateral trade and foreign investment could actually bear fruit.
About three-quarters (76 per cent) of Indians think trade and growing international business ties are good for their country, according to a recentPew Research Center survey. Such broad support for globalization is the kind of popular backing all politicians yearn for but often fail to achieve. Nevertheless, Indian enthusiasm for trade is relative. Backing exceeds that in Japan (69 per cent) and the United States (68 per cent), but trails that in China (89 per cent). And Indians, much like many people around the world, especially in advanced economies, have greater faith in trade as a principle than they do in practice.
Only about half (49 per cent) of Indians voice the view that trade creates jobs. This is roughly comparable to opinion in other emerging markets. Indians seem to have greater faith in the employment opportunities afforded by trade than the views held by Americans (20 per cent) or the Japanese (15 per cent). Compare that to Vietnam (78 per cent), China (67 per cent), and Indonesia (63 per cent). Across developing countries, a median of 66 per cent believe that international commerce generates employment.
The same holds true for Indian views on the impact of trade on wages. Roughly one-in-two (49 per cent) Indians say that trade boosts wages. This is a far more positive sentiment than that found in Japan (10 per cent) or the United States (17 per cent). But the Vietnamese (72 per cent) and the Chinese (61 per cent) are more likely than the Indians to see a link between trade and bigger paychecks. Most important, the Indian public’s views on foreign investment challenge the country’s reputation for hostility toward foreigners building factories in India or buying Indian companies. Previous Indian Governments have used alleged public antipathy toward such investment to justify blocking foreign direct investment (FDI) in the retail sector and for capping foreign investment in certain industries and financial services.
The Modi Government has announced plans to open up the defense and insurance sectors to more foreign investment. Such moves seem to reflect a public appetite for greater foreign involvement in the Indian economy. Like most people around the world, Indians have little objection to “greenfield” foreign investment, such as when international firms build factories in their country. About two-thirds of Indians (68 per cent) say such investment is good for the nation. And more than half of Indians (56 per cent) also back foreign companies buying Indian firms, a practice that is often far more controversial in other countries.
In both cases, Indian support for FDI significantly exceeds that in China, where only 51 per cent of the public supports greenfield investment and just 39 per cent favor foreign-led mergers and acquisitions. Such sentiment suggests that as foreign firms look to expand their operations in Asia they may encounter far less wariness in India than in China. Since New Delhi has long trailed Beijing in the global competition for foreign investment, this should prove a boon for the Modi Government’s ambitions.
The Indian public’s views on trade and foreign investment are more positive than past Indian Governments have claimed and more positive than foreigners often assume. Young Indians, men, and better educated people are particularly supportive. These represent a constituency in India for an opening up of the economy, a move that the Modi Government claims it wants to make.
The Froman visit and President Obama’s trip to India in January will test whether the Modi Government has the political will to exploit Indians’ support for foreign investment and trade to the country’s advantage or whether it simply talks a better game than its predecessor.