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Ride into an Affluent Future

Booming knowledge economy, expanding trade and limitless investment options provide India and the US a never before opportunity

By Rohit Saran 

If you are looking for a parable of missed opportunities and wasted potential, pick up a chapter from the history of Indo-US economic relations. Be it trade, be it investment, be it science and technology, in sector after sector the story of under-achievement is distressingly uniform.

Indian exports to the US ($7 billion last year) are an insignificant 0.68 per cent of total exports to the US. In fact, never in the past 30 years has India's share in US' export or imports been more than 1 per cent. India also gets less than 1 per cent of the total foreign direct investment by the US. "There is more US investment going into Shanghai city than the whole of India, and bilateral trade between the two countries is less than that between the city of Toronto and the US," points out Joydeep Mukherji, associate director with credit rating agency Standard & Poor's.

Even in the areas outside traditional trade and investment actual Indo-US cooperation is a fraction of its potential. The two countries have the world's largest entertainment industry. Yet the entertainment trade between them is so minuscule, it is not even recorded. India boasts of the world's largest pool of scientific manpower, while the US has the world's best research facilities. But the two countries have never been jointly engaged in any frontline scientific research.

The reasons for such underperformance are obvious and known. "The faultlines mostly lie within India," says Charan Wadhwa, professor at the Delhi-based Centre for Policy Research. "True, the Indian economy today is far more open and much less restrictive than it was a decade ago, but on the global landscape, it is still one of the least open and most controlled economies." Says Nirupam Bajpai, coordinator of India Programme at the Harvard-based Centre of International Development: "Indian reformers must realise that they are chasing moving targets. That means India should do better than others, not just better than its past."

Yet there hasn't been a time better than now to turn potentialities of the Indo-US economic relations into realities. A dipstick survey of experts reveals that India could treble its trade with the US (from the existing $12 billion to $35 billion) and raise the inflow of investment by an equal measure (from $2.5 billion to $10 billion) in 5-10 years. "It is not magical to think that India can treble trade and investment with the US in the next 10 years. The growth opportunities are exponential," asserts Amit Mitra, secretary-general of FICCI and secretary of the Indo-US Joint Business Council. India today charts out the basis for such optimism, and evaluates how much of that optimism can President Clinton's visit fulfil.

A BEGINNING HAS BEEN MADE
Though disappointing in pace and content, the economic reforms of the '90s have not been of no avail. The slashing of custom duties, delicensing of imports and a more open investment regime have triggered some impressive growth rates. In eight years since 1990-91, India's exports to the US have zoomed by 175 per cent. In 1993 -- just two years into the reforms -- US companies had invested more in India than they had in four decades before that. All the eight fast-track power projects identified by the government in 1992 were with US investments. But the best showcase of the growing Indo-US economic ties are infotech exports which have skyrocketed from $250 million in 1991 to $5.5 billion in 1999.

Amidst the low levels of absolute trade and investments, such growth rates hold out the hope for a fast-track Indo-US economic relations in the future. "The future is built on potential, not present, achievements. These growth rates prove that the long-known potentialities of Indo-US ties can now be realised," rationalises B. Bhattacharyya, dean (research) at the Delhi-based Indian Institute of Foreign Trade (IIFT).

Luckily for India the onset of reforms has coincided with two other favourable changes. The end of the Cold War is yielding peace dividends. "Post-Cold War, economics has returned to the forefront of international relations," says Chintamani Mahapatra, associate professor at the Centre for American Studies in Delhi's Jawaharlal Nehru University. To the extent that political interests guide economic relations, India has been a sure -- even though slow -- beneficiary of the unipolar world. The '90s has also been the decade of unprecedented economic boom in the US. At its current growth rate of 5 per cent a year, the US economy will generate an additional income of $400 billion this year. That approximately is the size of the Indian economy.

Such large-scale wealth creation has not only generated funds for investment abroad, it has increased the economic dominance of the US so much that globalisation has become tantamount to Americanisation. This, many believe, will be the biggest propeller to prospective Indo-US economic ties. Reason: the goodwill for the US in India today is more than ever before. The US is the dream destination of most Indians and its culture is reaching every nook and corner of the country with the advent of Satellite television. Says Mitra: "Economically, politically and socially India is at the doorstep of a major boost in economic cooperation with the US."

KNOWLEDGE PARTNERSHIP IS THE KEY
The emergence of the knowledge economy -- an umbrella term for infotech, pharmaceutical, biotechnology and basic research -- offers India a chance to leapfrog the bilateral economic ties straight into information age. In doing so it could make up for the missed opportunities of partnership in the industrial age. The early signs are encouraging. From negligible amounts in 1991 the value of infotech exports to the US are now worth half the value of total exports of traditional merchandise. By 2008, infotech exports to the US are projected to touch $30 billion, surpassing the value of merchandise exports. The other sectors of the knowledge economy too hold promising prospects for cooperation (see box).

Right now the US economy seems set to guzzle up all the infotech exports that India can generate. By 1998 Internet-based businesses alone had generated $300 billion in revenue and 1.2 million jobs in the US. The job and wealth creation is spilling over to India. Many US companies have located their back office operations in different parts of India catering to jobs like data transcription and transmission for hospitals in the US, telemarketing for US firms and answering of customer calls. Already Chennai, Bangalore and Hyderabad have come to form a "Silicon Triangle" on the lines of Silicon Valley in California.

There is one fundamental reason why the infotech boom is not likely to be short lived. It is an economy that is least controlled by the governments and where companies form their own "virtual countries". "The future of Indo-US economic relations are increasingly moving out of the purview of the two governments and into the hands of 'wealth creators' and 'imagineers'," comments Poonam Barua, regional director (India), the Conference Board of New York. In India though, the Government has one clear task at hand: creation of a world- class telecommunication network without which much of the existing growth in infotech exports will hit a bottleneck. What's required is not just more investment, but also some sensible policies like breaking of the public monopoly on international telephone calls. Emphasises Mukherji: "The demise of long-distance telephone monopolies would do more to boost relations, both cultural and economic, than any other immediate step."

The surge in US knowledge economy has had another benefit for India. The spawning of Indian info-entrepreneurs in the US. The NASSCOM, India's software industry association, estimates that 38 per cent of all Internet and e-commerce start-ups in Silicon Valley are owned by Indians. As these non-resident Indians grow in power and stature they will create a political constituency for Indian interest in the US.

TRADITIONAL TRADE TOO CAN GROW EXPONENTIALLY
Unlike the knowledge-based services exports, the fate of traditional exports is dependent on the efficiency of the Indian manufacturing industry. That means merchandise exports can grow exponentially only if some bold reforms are undertaken. That such exports can grow faster is well established. A recent IIFT study shows that between 1993-94 and 1997-98 India added 1,600 new high-value items to its export basket to the US. These new products, mainly plastic, machinery and TV recorders, comprise an impressive 7.3 per cent of India's total export to the US in 1997-98. Two policy reforms can multiply the traditional exports many times over. Both reforms are general, not specific to the US.

The first is the removal of product reservation for small-scale industries (SSI). Virtually every product in which China dominates the US market (e.g. toys, slippers, readymade garments) is reserved for the SSI in India. That means low quality and high-cost products which are often uncompetitive abroad. Laments Bajpai: "Sector by sector, the SSI reservation is eating into India's competitiveness in merchandise exports."

The second is the larger issue of improving competitiveness through improved infrastructure and modern labour laws. These are not the things that can be delivered overnight all over the country. But there is a way out. Explains Wadhwa: "Granted the whole country cannot switch to efficient infrastructure and flexible labour laws quickly. But there is a proven way of delivering both in a microcosm called an export processing zone." The readiness of India's traditional exports will be tested in 2005 when the US abolishes its quota for textile imports.

The US too must desist from unilateral trade sanctions against India's imports if the bilateral trade potential is to be realised optimally. Often, the US threatens to impose measures like Super 301 and Special 301 which ban import of a particular product on the grounds of dumping (selling products below the cost price). Added to these threats is the US domestic pressure to link labour and environment issues with trade. Says Bhattacharyya: "As the biggest beneficiary of globalisation, the US shouldn't resort to unilateral trade sanctions. Such actions harm globalisation and hurt the long-term interests of the US."

IT'S TIME TO GO BEYOND BILATERAL ISSUES
The relationship between two countries matures when they deliberate and decide global issues. Such a moment has come in the Indo-US economic relationship. This isn't the view of some incorrigible Indophile, but the advice of experts like Richard Haass, vice-president, Brookings Institute Washington DC and Jeffrey Sachs, professor of economics at Harvard University. Suggests Haass, who visited India a fortnight before Clinton's visit: "India and the US should work jointly to redefine the rules of IMF intervention and World Bank lending." Sachs would like India to have a definitive voice in the appointment of the IMF and the World Bank chiefs.

Such clout with the US cannot be had on the basis of trade and investment alone. India needs a strong lobby in the US. "One features of the global village is that domestic and foreign policies in the US are completely inter-linked," says Mahapatra. That means domestic lobbies have more sway over the US foreign policy than diplomats and thinkers. For India such a lobby would consist of three groupings: Growing and wealthy Indian vote bank in the US (there are a million Indian immigrants in the US); increasing presence of Indian businesses in the US; and the India caucus. The India caucus has 126 Congressmen. It did, along with Indian businesses, have a role in the dilution of post-Pokhran sanctions. But the Indian lobby is nowhere as strong as those of the Jews or the Greeks.

The visit of President Clinton is an opportunity to make the US Administration aware of India's -- and Indians' -- enhanced economic clout, both real and potential. That would end what Haass calls a "benign neglect" of India in the US. Surely, a more India-focused Clinton Administration may itself not tangibly lift Indo-US economic relations. But doing that is more India's job than the US's. In that sense, Clinton's visit is nothing more -- and nothing less -- than a big reminder than the destiny of the vast Indo-US economic ties is in India's hands.

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