In three decades since India opened its economy, China has remained a greater draw for foreign investors. India has lagged behind China, in GDP growth and in elevating its citizens out of poverty. Beijing has bested New Delhi in developing infrastructure, manufacturing capacity, and financial incentives, on its way to becoming a factory floor of the world.
COVID-19 is one of the forces reshaping the corporate world’s relationship with China, and the United States-India relationship could be the major beneficiary. But India must act quickly to seize the opening and fully embrace long-needed economic and structural reforms.
Multinationals, already wary of China’s mounting costs, are accelerating plans to locate new supply lines due to heightened political and strategic risks. In Washington, the U.S. Congress is currently pursuing legislation to incentivize American companies to decouple from China, due to growing fear the United States has become overly dependent on Beijing for strategic products such as medicines, rare earth metals, and computer chips. Reshoring to the United States will be a campaign theme. Other countries, particularly Southeast Asian nations, are also pursuing these global companies, trying to attract their supply chains.
In this U.S. election year, President Donald Trump isn’t only casting China as a rival, but as an emerging enemy who fueled the global pandemic and is practicing a predatory foreign policy, particularly toward Hong Kong. The presumptive Democratic presidential nominee, Joe Biden, is also getting tough and proposing a paradigm shift in the China relationship.
In this rapidly evolving environment, a number of American companies are already planning to make India part of their Plan B. On the positive side of the ledger, they cite the country’s large market and its growing middle class; India’s educated and English-speaking workforce; its comparatively lower operating costs, and its democratic system.
Apple Inc., one of the largest manufacturers in China, is reported to be planning to invest several billion dollars to expand its current manufacturing in India and become the country’s largest exporter.
Indian Prime Minister Narendra Modi and leaders of Indian states have been aggressively rolling out the red carpet to multinationals and U.S. companies in a bid to woo them away from China. “India, with the right blend of the physical and the virtual, can emerge as the global nerve center of complex, modern multinational supply chains in the post COVID-19 world,” the prime minister wrote in April.
While India’s federal government recently lowered corporate tax rates, the state leaders have outlined steps to upgrade infrastructure and to amend land and labor laws that have seriously impaired foreign investment in the past. Some have also offered financial incentives to attract capital-intensive projects that China has traditionally dominated.
In another welcoming sign to foreign investors, New Delhi and Indian states are attempting to harmonize their policies to bolster commerce. Historically, central and local governments have worked at cross-purposes, locking outside investment in a maze of taxes, licenses, and labor laws.
Industrialized states such as Maharashtra, Tamil Nadu and Karnataka have been drawing up new investment-outreach plans since the pandemic hit. And several poorer rural states have also been seeking to woo foreign investment. Northern Uttar Pradesh seeks to partner with American firms to create a commercial corridor focused on producing weapons and other defense equipment.
No sector holds more promise, at least in the short term, than pharmaceuticals. Indian companies already produce 40 percent of the generic drugs used in the United States. And American drug makers are now turning to the subcontinent to try and speed up the production of a vaccine for COVID-19.
Gilead Sciences Inc. of California announced partnerships in recent weeks with six Indian firms to register, manufacture and sell its experimental treatment drug, Remdesivir, internationally.
However, the factors on the negative side of the ledger are significant. India’s economy is expected to sharply contract this year due to the COVID-19 shutdown, before returning to growth next year. India’s international reputation as a bureaucratic nightmare, for example covertly changing tax policy from budget to budget, is discouraging.
Furthermore, differing political perspectives between Washington and New Delhi on sensitive national security issues, including dealings with Iran and Russia, could ensnare Indian firms in U.S. sanctions legislation.
India and the United States also failed last winter to finalize a landmark trade agreement that Trump and Modi had personally championed to solidify ties between the world’s two largest democracies. This failure in progress illustrates the rising political populism and protectionism in both countries and exposes the potential limits to economic integration.
Still, tectonic plates are shifting around the globe. America and India have deepened their partnership over the years with a civilian nuclear agreement, historic intelligence sharing and defense cooperation, and vibrant people-to-people ties. Moreover, if the two sides can manage to create a new bilateral trade structure, cutting tariffs and circumventing respective bureaucracies, this model could be a harbinger for the post-pandemic order. Economic commerce should ultimately benefit both countries, not become one-sided as trade is tilted toward Beijing.
As added enticement, Indian companies could be encouraged to invest in the United States and stimulate job growth for Americans. The trend is encouraging, as firms such as Tata Group, Infosys, and Wipro have recently injected $18 billion annually into the United States and created more than 100,000 jobs. The U.S. recovery from economic coma will require new blue-collar and service jobs to address the unemployment rate.
The United States and India have achieved one historic break-through after another in their strategic relationship over the past two decades. It’s past time to construct a mutually beneficial trade relationship that’s a “win-win” for both democracies, and one that helps build their middle classes.
Tim Roemer is a former U.S. ambassador to India. The views expressed are the author's own.
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