Infrastructure

India and the US must grab this chance to reset their relations

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Prime Minister Narendra Modi and US President Joe Biden had their first phone call this week. They re-affirmed a commitment to a rules-based international order, a theme which is likely to become a mainstay of the Biden administration. However, the new President inherits unprecedented uncertainty, fuelled by a global economic crisis, and an assertive China. India shares these concerns. This seems an opportune moment to strengthen US-India bilateral ties, to define resilient globalization and a stable regional order. But, both countries must face some hard facts together at the outset.

Economic crises create winners and losers. For instance, major developing markets bounced back quicker than their developed counterparts after the Global Financial Crisis of 2008-09. Relatively low exposure to financial markets helped accelerate their recovery. Sadly, revival from the latest crisis exhibits a troubling inversion. Several large developing countries like India are witnessing some of their sharpest growth contractions in recorded history. This attenuates already low state capacity to deal with the fallout of covid. It doesn’t help that China bucked the trend and continued to grow.

Another implication of a multi-speed recovery is that support for globalization will wane in developing nations, as large and vulnerable segments of their population suffer a disproportionate impact. Workers in their 20s account for 80% of India’s total job losses so far this fiscal year, and women 52%, according to Centre for Monitoring Indian Economy data. Reduced support for globalization as a result of inequitable development can translate to confusion in policy objectives. Young aspirational Indians may no longer hyphenate globalization with progress if they don’t gain from it. This threatens to encourage a politics of unreserved protectionism.

The Biden administration would do well to remedy America’s tactical approach to economic ties with India, to ensure that their developmental trajectories don’t permanently diverge. A sensible approach requires the US to better align its geopolitical and economic interests with India’s. The recently declassified ‘Strategic Framework for the Indo-Pacific’ pays mere lip service to economic collaboration to counter regional hegemony. It suggests that the US should “work with India towards domestic economic reform” and on “regional connectivity”. Such formulaic statements are bereft of meaning in today’s context, while far greater ambition is required to encourage a renewed Indian commitment to globalization.

The US must provide firm economic commitments to recast the Obama-era policy of a ‘Pivot to Asia’. It should actualize public-private partnerships with India to build technology infrastructure, like the Soviet Union did in areas like energy and metals. It should also nudge large financial institutions, public and private, to diversify their geographical spread and invest here. US pension funds have much lower overseas allocations compared to European ones, and negligible exposure to Indian markets. A focus on enhanced flows of technology and capital can help create jobs for the young, boost domestic productivity and bolster India’s economic resilience. The US can also provide technical assistance to build regulatory and supervisory capacity to manage such investments.

India, on its part, must realize that an unconstrained partnership on technology is a lever for long-term growth and a regional rebalance. It tends to confine related policy considerations to the periphery of national strategy, where they fall prey to protectionism. This is most visible in the case of digital markets. For instance, India hasn’t signed the Osaka Declaration on the Digital Economy, crafted by Japan in 2019, to provide a safe harbour to the exchange of data within G20 nations. Last year, India imposed a tax on digital services, which a US investigation has claimed as discriminatory against its firms. India is also contemplating a data governance framework that could dilute intellectual property rights, striking at the heart of the US model of private enterprise. There are other issues that also merit a harmonized approach, such as e-commerce and investment protection.

To its credit, India made incremental efforts to integrate geostrategy with economics last year. It established a division in its foreign ministry to look at “new and emerging strategic technologies” within its foreign ministry. It also shed an ambiguous stance on global supply chain risks and issued a national security directive to identify trusted vendors for telecom. To develop technology industries, it should set up a whole-of-government mechanism to avoid fragmentation of policy objectives, just as the office of the US Trade Representative works closely with over a dozen agencies to craft America’s global posture. It also relies heavily on international trade principles to negotiate favourable terms for its companies. India requires an analogous approach to break free from the constraints of its legacy institutional design.

The US-India bilateral relationship can shape a peaceful and prosperous Asian Century, if there is to be one. The question is whether the new American administration and a decisive Indian leadership can imagine and design rules for a convergent economic future.

Vivan Sharan is partner at Koan Advisory Group

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