Bloomberg News

India Looms Larger as U.S. Shifts Attention to Asia

June 13, 2012

U.S. Defence Secretary Leon Panetta

Leon Panetta, U.S. defence secretary. Photographer: Brendan Smialowski/Bloomberg

India’s growing economy, rising strategic influence and potential as a democratic counterbalance to China are making the South Asian nation a vital element of U.S. commercial and military strategy.

The latest evidence of India’s importance to the U.S. came last week in New Delhi, when Defense Secretary Leon Panetta invited a larger role for India in Afghanistan after the NATO- led coalition withdraws its combat forces in 2014. Secretary of State Hillary Clinton visited India last month, and Treasury Secretary Timothy F. Geithner is scheduled to go there June 27-28 for the third annual meeting of the U.S.-India Economic and Financial Partnership.

The two nations are expanding ties as the U.S. puts a higher priority on Asia and as U.S. relations with Pakistan -- India’s neighbor and rival -- grow increasingly strained. Today, Clinton is hosting a dialogue in Washington between the U.S. and India, which was the only country named as a long-term partner in a strategic outlook released by the Pentagon in January.

“We are forging a new and more mature phase in our critical bilateral relationship, one defined by near-constant consultation aimed at advancing the interests and values we share and working through the inevitable differences,” Clinton said today at the State Department, flanked by Indian Minister for External Affairs S.M. Krishna.

Trade Grows

Underlying the U.S. pursuit of a closer bond with India is a burgeoning economic relationship. Bilateral trade jumped fivefold during the last decade, fueled by India’s purchases of U.S. weapons and collaboration on clean energy, counter- terrorism, cybersecurity and monsoon forecasting. India’s growing middle class also has become an attractive market for U.S. exports.

“We have an enormous stake in India’s emergence as a global power,” Michael Froman, deputy U.S. national security adviser for international economic affairs, said yesterday at an event organized by the U.S.-India Business Council. President Barack Obama “views India as one of his top foreign policy priorities and one of the most important bilateral relationships.”

Mending Ties

After decades of mutual suspicion during the Cold War, which prompted a U.S. “tilt” toward India’s arch rival Pakistan 40 years ago, U.S. President Ronald Reagan began to mend ties with India in the 1980s, allowing sales of advanced U.S. computers and high technology equipment.

A high-water mark in the relationship came in 2005, when President George W. Bush and India’s Prime Minister Manmohan Singh signed a civil-nuclear cooperation agreement that allowed India -- which isn’t a signatory to the Nuclear Non- Proliferation Treaty and has nuclear weapons -- to obtain atomic fuel for its nuclear energy plants.

As part of today’s strategic dialogue, the third of such annual talks between the countries, Clinton met with Krishna, her counterpart. The Indian delegation includes four other cabinet-rank ministers and several other top officials.

Two days before the foreign minister’s visit, India was granted a renewable, 180-day exemption from new U.S. financial sanctions in exchange for demonstrating that it’s reducing its dependence on crude oil imports from Iran.

Bilateral Trade

U.S.-India bilateral trade in goods and services is expected to reach $100 billion this year, U.S. Ambassador to India Nancy Powell said yesterday in Washington. That’s up from $18 billion in 2001.

Indian purchases include Chicago-based Boeing Co.’s (BA:US) 787 Dreamliner aircraft and its C-17 military transport plane, as well as Bethesda, Maryland-based Lockheed Martin Corp.’s (LMT:US) C-130J military cargo aircraft.

Two-way investment flows also have grown. Indian companies have a presence in 43 U.S. states in different parts of the economy and have created 280,000 jobs in America, Nirupama Rao, the Indian Ambassador to the U.S., said yesterday.

The relationship’s strength is “not confined to or driven only by our governments,” she said, saying that Indian students contribute $3 billion in annual tuition to U.S. universities.

Powell said India is the world’s largest recipient of U.S. work visas, getting 65 percent of all U.S. visas issued to high- skilled workers.

‘Expectations Gap’

Still, landmark accords such as the energy cooperation agreement have created high expectations on both sides that all bilateral engagements should lead to measurable outcomes or “deliverables,” said Richard Armitage, former U.S. deputy secretary of state under George W. Bush.

“Both sides have judged ourselves on these deliverables and patted ourselves on the back” for agreements such as the nuclear deal, Armitage, president of Armitage International, an Arlington, Virginia-based consulting firm, said in an interview.

A strategic relationship with India has “huge potential, but it will be a whole lot of hard work to accomplish it,” said Teresita Schaffer, a South Asia specialist at the Brookings Institution in Washington who served as a U.S. diplomat in India and was ambassador to Sri Lanka.

“There’s been an expectations gap” in part “because there have been unrealistic expectations on both sides,” Schaffer said in an interview yesterday.

Liability Protection

U.S. business leaders have been frustrated by Prime Minister Singh’s failure to advance proposed policy changes. U.S. companies continue to face obstacles in selling atomic fuel and technology to India because Singh’s government hasn’t passed legislation to shield suppliers of nuclear reactors from liability in the event of an accident.

Liability protection is key to General Electric Co. (GE:US), based in Fairfield, Connecticut, and Cranberry Township, Pennsylvania- based Westinghouse Electric Co., which are interested in supplying India’s nuclear power projects.

Westinghouse, a unit of Toshiba Corp. (6502), today announced an agreement with the government-owned Nuclear Power Company of India Ltd. to work on preliminary licensing and site development for a power plant in the Indian state of Gujarat.

U.S. companies are concerned that India’s “investment environment has deteriorated or that domestic political challenges are slowing the pace of reform,” Froman said. This is “worrisome” because the business community is a critical component of the U.S.-India relationship, he said.

Wal-Mart Help

Other Singh initiatives, such as plans to open up the country’s $1.7-trillion economy to foreign insurers and retailers, including New York-based American International Group Inc. (AIG:US) and Wal-Mart Stores Inc. (WMT:US), based in Bentonville, Arkansas, have been shelved because of protests from opposition parties and members of his own coalition.

Megastores such as Wal-Mart could help India, where malnutrition remains an issue, achieve food security and improve the food-to-market supply chain, said Timothy Roemer, Obama’s first ambassador to India. Roemer said that almost 30 percent of India’s crops rot in fields because of a lack of transportation to markets.

Indian officials, for their part, are irritated by export control laws restricting transfer of U.S. military technology. Responding to those concerns, Panetta announced in New Delhi an effort “to streamline our bureaucratic processes and make our defense trade more simple, responsive, and effective.”

“To the degree we reform our export control legislation the opportunities for India to buy U.S. goods will increase,” said Ashley Tellis, an India specialist at the Carnegie Endowment for International Peace in Washington.

‘Fertile Opportunity’

China’s slowing growth and the financial crisis in Europe “create a fertile opportunity for the U.S. and India to build our middle classes,” Roemer said. The U.S. manufacturing sector needs India’s market potential, he said.

A larger goal for both sides is to negotiate a bilateral investment treaty that can become the foundation for a free- trade agreement, Roemer, who’s now a senior director at APCO Worldwide Inc., a Washington-based public-affairs firm, said in an interview.

India isn’t keen to become a counterweight to China simply to help long-term U.S. goals, Armitage said. “India doesn’t want to be a pawn in someone else’s play, because they’ve their own difficulties with China having to do with territory and water disputes,” he said.

Autonomous Policy

India’s drive to maintain an autonomous foreign policy, which hearkens back to the country’s role as a founder of the Non-Aligned Movement during the Cold War, may frustrate U.S. policy makers looking to the South Asian nation to do more militarily in the Asia-Pacific region.

Just because the U.S. wants India to play a greater role in Afghanistan and in the broader Asia-Pacific doesn’t mean India will do so, said C. Raja Mohan, the head of strategic studies at the Observer Research Foundation, a New Delhi-based policy research group.

The U.S. push for India to increase its presence in Afghanistan comes after three years of warning the country to limit its profile there because of objections from Pakistan, Raja Mohan said in a phone interview.

India already has pledged $2 billion in aid to Afghanistan and has helped build the new Afghan parliament. The two countries last October signed an agreement that allows Indian training of Afghan troops.

Asked about U.S. calls for India to play a larger role in Asia’s security, Krishna said in an interview last night: “If we are playing a larger role, it’s because we see it’s in our interests, it’s not at the behest of anyone else.”

To contact the reporters on this story: Gopal Ratnam in Washington at gratnam1@bloomberg.net; Indira A.R. Lakshmanan in Washington at ilakshmanan@bloomberg.net

To contact the editor responsible for this story: John Walcott at jwalcott9@bloomberg.net


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