October 13, 2012

Indo-US Relations: Economic Respite?

Sudesh Rani
Research Associate, NMF 

Amid domestic political opposition by various states and political parties, the Indian government issued a notification clearing the way for the implementation of economic reforms. New Delhi  announced massive set of  reforms viz. 100 percent Foreign Direct Investment (FDI) in  single-brand sector (earlier it was 51 per cent), 51 per cent FDI in multi-brand retail (prohibited so far), 49 per cent in aviation and 74 per cent in broadcast sector (except the TV news channels and FM Radio). 

The move is not surprising as the proposal regarding the reforms was approved by the cabinet in November 2011. But the implementation of the proposals had been deferred because of lack of a broader consensus among the various states. Some states and union territories extended their support in written and asked for its implementation, while other states expressed their reservations on the proposed reforms.

Following the announcement, there has been widespread criticism amongst various political parties. They argue that through this step the government is trying to divert the people's attention from corruption issues faced by the government. According to them, the small industry sector will be adversely affected by these reforms. However, the government justified these reforms in terms of capital infusion and employment opportunities. These economic reforms are being seen as a second wave of reforms after 1991, when reforms were introduced to save India from the severe balance of payment crisis. India integrated its economy with the world economy by adopting the policy of liberalisation. 

However, despite the opposition, this move will strengthen the bilateral relations of India with other countries as the foreign companies would get a chance to invest more in many sectors. The US media and corporations have hailed the Indian reforms as the biggest positive development in the last decade. US-India Business Council (USIBC) President Ron Somers said that these big bang reforms send a crystal clear signal that India is open for business. 

Infact, the leadership in the US had been pushing India for economic reforms for a long time. Earlier, US President Barak Obama had expressed concerns over deteriorating investment climate and stated that India has delayed decisions on FDI proposals in many sectors. However, corporate minister Veerappa Moily had countered such statements by stating that the US President was not properly informed about the country's strong economic fundamentals.  
Thereafter, US Secretary of State Hillary Clinton during her Indian visit in May this year expressed her expectations from India regarding economic reforms. This visit was significant because she visited China just before arriving in India. During this visit she met with her Indian counterparts and the Chief Minister of West Bengal. There were media reports that during her meeting with Indian officials, Secretary Clinton discussed the investment issue that indicated the US desire of the economic reforms as its business corporation can get benefits from the large Indian market. So, one of the motives of Hillary Clinton's visit to India was to push India for further reforms particularly in the multi-brand retail sector. 

While in 1991 Indian policy of liberalisation was one of the major factors that led to the gradual improvement in Indo-US relations, India's hesitance of late was now being deemed by analysts in both the countries as an area of discord in Indo-US economic relations. The recent reforms in India can be deemed as bonhomie in the Indo-US relations. Despite this, US investors may be hesitant on the absence of Bilateral Investment Treaty (BIT) between India and the US. According to this treaty, the government commits to protect investment in their territory by other countries (82 of them currently).  At the instance of lack of security assurance the US investors will find themselves in a disadvantageous condition as compared to other foreign competitors. 

There is no doubt that it these reforms will make way for better Indo-US relations and especially in the economic realm. But signing the Bilateral Investment Treaty is a must if both the nations want to gain full advantage from each other's markets. At the same time, the Indian decision to put on hold its complaint against the US over the visa fee hike in the World Trade Organisation (WTO) is also a welcome move from New Delhi as it will strengthen the bilateral relations further.   

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