Narendra Modi's Emergence as Prime Minister - What it Means for India-US Relations :

- By Krishna Monie, Former Economic Advisor to the US Consulate, India

The Indian electorate has made its choice giving the Bharatiya (BJP), with as its Prime Ministerial candidate, a clear majority (282 seats in a Parliament of 543 members). Modi is a strong leader. His emergence has provoked both optimism and apprehensions about the direction in which he will lead India. This article is an opinion piece of what Modi’s emergence means for India-US political and economic relations and how it could affect the diamond, gem and jewellery industry.

India-U.S. Political / Economic Relations in the Past

The political and economic relations between India and the U.S. has been waxing and waning like the phases of the moon. The relations moved from tepid to tense during the periods when Prime Minister Jawaharlal Nehru and Mrs. Indira Gandhi were at the helm of affairs. It improved somewhat during the period of Prime Minister Rajiv Gandhi in late 1984. In July 1991, Dr. Manmohan Singh, as the Finance Minister in Narasimha Rao’s Cabinet, started some dramatic economic reforms, when the Indian economy was at the brink of a global payments crisis. The effects of these reforms on trade and investment relations with the United States were profound. USA became a major investing country in India in terms of Foreign Direct Investment approvals, actual inflows, and portfolio investment. India’s investments in USA and in other Western countries began picking up. USA became India’s largest trading partner. Soon after, when of the BJP-led NDA government came to power, in 1998, the bilateral relations took a dip because of India’s nuclear weapons testing at Pokhran. However, as India progressed boldly forward despite America’s limited economic sanctions, the then US President Bill Clinton and Prime Minister Vajpayee took steps to rebuild bilateral relations. Since 2000, the two countries have been making efforts to strengthen institutional structure of India-US bilateral economic relations through the “India-US Economic Dialogue” deepening the Indo-American partnership through regular dialogue and engagement. The economic and political relations between the two countries blossomed further in the 21st century under President George W. Bush and Dr. Manmohan Singh, culminating in the US-India Civil Nuclear Agreement.

In Manmohan Singh’s second term as Prime Minister since 2011, the Indo-US relationship saw some strain. This coincided with a sharp reduction in India’s GDP growth rate and a similar “patchy economic record” in the U.S. The Obama administration’s approach to India on several issues such as: The U.S. immigration policy and the limited H1B visas; Opposition to American companies outsourcing to India; The more recent diplomatic row over Devyani Khobragade, India’s Deputy Consul General in New York, are some factors leading to the deterioration in relations.

Additionally, the lack of deliverance over the Nuclear Agreement from both sides, and the “policy paralysis” in India that resulted in India’s economy slowing down (highlighting corruption and tax issues that caused resentment among both foreign and Indian investors), also played a part in causing strained relations.

India’s trade and investment relationship with the United States has vacillated with the gyrating bilateral political relations. Nevertheless, overall trade and investment between the two countries has grown.

1 www.gematlas.com The US is one of India’s largest trading partners. In 2011, the US exported $21.50 billion worth of goods to India, and imported $36.15 billion worth of Indian goods. Major items imported from India include information technology services, textiles, machinery, gems and diamonds, chemicals, iron and steel products, coffee, tea, and other edible food products. Major American goods imported by India include aircraft, fertilisers, computer hardware, scrap metal, and medical equipment.

The United States is also India’s largest investment partner, with a direct investment of $9 billion (accounting for 9 percent of total foreign investment). Americans have made notable foreign investments in the country’s power generation, telecommunications, ports, roads, petroleum exploration and processing, and mining industries.

The Prospects Under Narendra Modi’s Leadership

Narendra Modi’s rise has been watched closely by India’s friends abroad, especially in the U.S. There remain apprehensions of how he will handle relations with the U.S. because of the denial of the U.S. visa to him. In 2005, Narendra Modi, was denied a “diplomatic visa” under 214(b) of the U.S. Immigration and Nationality Act and his existing tourist/business visa was revoked under Section 212 (a)(2)(g) of the Act. Under the latter, foreign government officials are considered ineligible for a visa if the State Department views them as “responsible for, or directly carried out, at any time, particularly severe violations of religious freedom.” The U.S. visa was denied because of allegations against Modi for not acting to stop the Hindu- Muslim riots in 2002. Persistent counter-lobbying by groups such as the Coalition Against Genocide, the Indian American Muslim Council and the Congress-backed U.S. Commission on International Religious Freedom ensured that the U.S. administration would not revoke its earlier order. But now that Modi is Prime Minister of India, the U.S. administration has begun to repair the damage.

As protocol demands, U.S. President Barack Obama called Modi, as Indian Prime Minister Elect, to express his hope that his win would help “fulfil the extraordinary promise of the US-India strategic partnership”. Significantly, Obama invited Modi to visit Washington at “a mutually agreeable time to further strengthen our bilateral relationship,” said a U.S. government spokesperson. This could occur as quickly as the UN General Assembly in New York in September, if Modi visits Washington. The visit is likely to be an extraordinary event with Modi – a teetotaller, who has shunned the sophisticated salons of India’s power elite – suddenly pushed on to the world stage, and into a gruelling round of diplomatic engagements. Ashutosh Varshney, Professor at Brown University in the US, noted: “The public boilerplate, as it so often does, hides a difficult and often acrimonious relationship.”

Whatever the apprehension about Modi that the U.S. may have, all are agreed that he is a decisive leader. That such an individual will head India now raises new hope that U.S.-Indian relations may be rejuvenated. Trade is still significant. Last month, Nisha Biswal, the top US diplomat for South Asia, said that the US wants bilateral trade of $500bn a year, up from about $100bn currently. There are tensions in the bilateral relationship but utterances of BJP’s top leadership in particular that of Modi is indicative of optimism that bygones will be bygones. Sudhanshu Trivedi, national spokesperson for Modi’s BJP, said there had also been “many apprehensions” about the Hindu nationalist BJP before it last took power in 1998. But the 1998-2004 BJP government of Prime Minister Vajpayee proved that the BJP leadership is very pragmatic and realises the importance of healthy relations with not only its neighbours but also with the U.S, and the Western world.

2 www.gematlas.com Top Democratic leader and India Caucus Co-Chair Congressman, Joe Crowley, said that the US looks forward to working with the new Indian government. “I am sure there would be better days ahead (in India-US relationship). There will be potholes. I think the White House understands that India is on the rise and that’s why it deserves a seat at the UN Security Council,” the New York lawmaker said, as he welcomed the initiative of then Prime Minister-designate Modi to invite leaders of the South Asian countries to attend his swearing in ceremony. From an international perspective, the New Yorker magazine of May 16 reported: “Modi’s ascension to the Prime Minister’s office raises two questions. Will India adopt a more strident and bellicose foreign policy than it did under Manmohan Singh, an Oxbridge-educated economist, and his Congress party? And will the new government succeed in rebooting India’s “economic miracle,” which has sputtered in recent years?”

The US-India Political Action Committee, the voice of over 3.2 million Indian-Americans and which works on issues that concern the community, has expressed great optimism that Modi will rejuvenate India-US relations and take it to greater heights. On May 22, USINPAC had a meeting in Washington, D.C. to greet Modi’s victory in getting a massive mandate for change towards “better times”. BJP President sent the following message for the occasion: “Thank you for your good will towards India. The people of India and our karyakartas have handed not only a victory, but also a heavy responsibility to our party and Shri Narendrabhai Modi as the Prime Minister of India. We look forward to fulfilling the mandate given to us by the people of India … The BJP is looking forward to strengthen bilateral relations with the United States and we will take the large Indian-American community on board in this endeavour. … I congratulate USINPAC for its active role … and all friends of India who are working to promote mutual understanding and strong relations between both the countries.” If Modi’s incoming administration can fire up India’s economic engine — by rolling back antiquated restrictions on business, cracking down on corruption, and creating a more open playing-field for investment and job-creation — India’s return to dynamism will have far-reaching international implications. Modi will want greater American trade and investment to catalyse an economic takeoff. The best way to restore momentum to bilateral ties is to get India growing again, making it a more attractive partner to the world’s superpower and returning India to the centre of Washington’s crowded foreign policy agenda.

The general belief the world has is that Modi is a decisive leader and that every country would have to deal with India as an equal partner. A muscular India that punches its full weight in the world is also more likely to have the confidence to engage America as a partner, rather than retreating into the old shibboleths of non-alignment and third-world politics. These values may have been appropriate when India was poor and weak, but hold little water now that it is an emerging giant. Vajpayee’s opening to America gave India a set of strategic options that were once unimaginable. Daniel Twining, a senior fellow for Asia at the German Marshall Fund of the United States and a former member of the State Department’s policy planning staff observed in a recent article in the Guardian, “For all the happy talk of ‘natural allies’, he made a hard-nosed judgment that their common economic and security interests were best served by closer collaboration between the world’s largest democracies. The same logic holds true today..” Modi’s commitment to pro- market economic policies and defence modernisation is likely to yield new opportunities for US businesses and lift the relationship to a new level of engagement. US strategic interests will be advanced by likely new defence co-operation and trade that boosts US arms sales and creates avenues for joint military co- ordination. Modi is the sort of leader who can help put US-India ties back on track and boost co-operation.

3 www.gematlas.com Better Times for India’s Diamond, Gem & Jewellery Industry

A positive mood has emanated from India’s diamond industry, albeit as trading remains fairly cautious. Sentiment has been bolstered by the victory of the BJP, and Modi in particular. The industry has high hopes that he will bolster domestic jewellery demand and help revive local diamond trading. India’s diamond industry had a challenging time recently largely because of unfavourable government policies. Despite its massive diamond manufacturing capacity, India’s trade became increasingly insular under the previous government. Foreign companies found it difficult to operate in the country and Mumbai’s importance as a diamond trading hub was diminished. Locals navigated through slowing economic growth, reduced domestic demand, a dramatic rupee depreciation, higher import duties on gold (and diamonds) and limitations on foreign exchange holdings.

Sentiments driven by Modi’s victory perked up Indian stock markets which have soared since the election results were announced on May 16. The rupee has strengthened to 11-month highs below 59 to the dollar. Significantly, foreign investors have a renewed interest in India and have poured more than $16 billion into Indian stocks and bonds in the past six months in anticipation of the Modi victory, according to a Reuters report. The hope is that Modi will do on a national level what he achieved in Gujarat, as he helped the state emerge as one of the fastest growing regions in the country. In particular, the diamond industry is encouraged by its experiences in dealing with Modi. Previous lobbying points that went unheard by the government include the possible introduction of a duty-free quota for polished diamond imports amounting to 15 percent of a company’s previous year exports.

Greater attention is likely on easing gold import restrictions, and trade sources are hopeful of a lowering of the import duty on gold, which rose from 4 percent to 10 percent in a very short time. The previous regime desperately sought to control its Current Account Deficit by curbing gold consumption. Meanwhile, rupee- based gold prices hit record highs as the currency plummeted. As a result, costs for jewellers increased and gold demand continues to slump. India’s gold jewellery demand fell 28 percent year on year to $6.05 billion in the first quarter of 2014, according to the World Gold Council. Demand by volume dropped 9 percent to 145.6 tons. Foremost on the diamond industry’s current agenda is to boost trading activity to complement its dominance in manufacturing. Having endured a tough economic and political landscape in the past few years, the diamond industry has high expectations from India’s new leadership.

Figures from Gem & Jewellery Export Promotion Council (GJEPC) show that in dollar terms, gold jewellery exports rose 14.69 per cent to $604.42 million. Cut and polished diamond exports also rose 8 per cent to $1,634.25 million in April 2014. However, total exports including exports of gold medallions and coins, coloured gemstones, silver jewellery, pearls, synthetic stones and rough diamonds, declined 6.8 per cent to 16.03 per cent in dollar terms to $2,483.33 million. “The improvement is heartening and I believe the worst is now behind us, for the industry. It also reflects the improvement in the supply of gold,’’ said Vipul Shah, Chairman, GJEPC. India does not produce any gold and a huge current account deficit (CAD) in early 2013 led the government to impose restrictions of gold imports in July 2013 as it felt that was one reason for the high CAD. Subsequently, India faced a gold shortage following a 10 per cent import duty on gold and the “80:20 scheme” which made it mandatory for all gold importers to export a fifth of the value of the imported gold. Things are a lot better now. The CAD is under control, the US economy is doing better, so demand from the major market for India’s gold exports is better.

The industry is looking forward to very promising times, under Narendra Modi’s governance.

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