Atlantic Council SOUTH ASIA CENTER ISSUE BRIEF Unlocking US-India Trade Potential MUKESH AGHI AND SEPTEMBER 2018 BHARATH GOPALASWAMY INTRODUCTION Over the last decade, trade between the United States and India has grown exponentially to over $126 billion and two-way investment to ap- proximately $40 billion. This crucial strategic relationship is also being shaped by broader forces, namely India’s growing centrality as a bastion of stability in the Indo-Pacific region as well as the close and growing col- laboration on defense technology between the United States and India. In his October 2017 address on growing US-India cooperation at the Center for Strategic and International Studies (CSIS), Secretary Rex Tillerson routinely mentioned the phrase “free trade” alongside “rule of law,” both of which are hugely significant in the context of the resur- gence of the Quadrilateral Security Dialogue—the set of nations (Japan, The South Asia Center works to Australia, the United States and India) which are committed to the lib- overcome entrenched rivalries eral international economic order and a shared commitment to mari- and foster collaboration in one of time security in the Indo-Pacific basin. the world’s most volatile, dynam- ic, and strategically significant It is naturally in the United States’ geostrategic interest to help India regions. actualize as a regional power in the Indian Ocean region so that it may contribute toward efforts to provide security for the regional commons, ISSUE BRIEF Unlocking US-India Trade Potential and to guarantee enhanced trade stability to the re- occurred within the last five years, but certain chal- gion in addition to serving as an important counterbal- lenges continue to pose a threat to the actualization of ance to other regional powers which do not hold the success in the sectors mentioned as part of the confer- same level of respect for the rule of law and interna- ence themes. tional norms that India, and its Western partners may. Given the US-India synergy in defense and security To address the many complex challenges and opportu- concerns, it is not a surprise that the growth in defense nities confronting greater US—India trade, the Atlantic trade has been a resounding success. However, suc- Council’s South Asia Center and the US Consulate cess in defense convergence must be accompanied by General Chennai, with support from the Takshashila similar progress in other areas within the bilateral re- Institution, the Federation of Karnataka Chambers lationship. Without such equivalent progress, the lon- of Commerce and Industry (FKCCI), and the Indo- gevity and resilience of the US-India relationship could American Chamber of Commerce (IACC), launched be placed at risk. the “Unlocking US-India Trade Potential” conference, November 6–8, 2017. This report follows the broad con- Defense Cooperation: There has been huge growth tours of the conversation that unfolded at the confer- in the US-India defense trade, this growth preced- ence, and the recommendations offered by the experts ing President Obama’s tenure. As the defense part- to elevate the bilateral trade relationship to new heights. nership has grown from $200 million USD in 2000 to over $15 billion USD in 2016, it is necessary for CONFERENCE OBJECTIVES the increasingly convergent Indo-Pacific partners to move past these barriers to unlock the potential of To explore the economic partnership between the defense trade to sustain and exceed this momen- United States and India. The conference brought tum over the next decade. The mutual desire for this together representatives from the international busi- is evidenced by the extent to which US giants like ness and trade sectors in the United States and India, Boeing, General Atomics, Raytheon, and Lockheed to enable direct interactions among global economic Martin are vying for Indian defense contracts. The stakeholders, thought leaders, and policy makers conference laid the foundations for new, lasting re- aimed at curating sound economic policies to bolster lationships between private firms and government bilateral trade. contractors in the United States and India that work on issues related to the bilateral defense relation- To integrate US-Indian economic partnerships ship, as well as the objective of securing regional on a regional, national, and international level. stability. India’s regional outlook is still constrained The following themes were addressed during the by its traditional posture of nonalignment causing two-day conference: Expanding US-India Defense the country to not exercise its full potential in main- Cooperation, Ease of Doing Business in India and Trade taining regional stability. Current sanctions policies Facilitation, Expanding US-India Energy Cooperation, of the United States could potentially affect defense I.T. and Services, Advancements in Infrastructure, trade with India, given the extent to which American Connectivity, Smart Cities and Special Economic giants like Boeing, General Atomics, and Lockheed Zones, and IPR in Media and Entertainment. By iden- Martin in the United States are expected to impact tifying factors that may impede increased trade and local American economies through their manufac- developing potential solutions to overcome these turing plants. challenges, the conference helped the two countries identify solutions that will bring about major improve- The experience of leading American defense firms ments to the trade relationship. in India is hindered by India’s difficult business cli- mate. Many foreign companies have a hard time go- MAJOR DEVELOPMENTS & CHALLENGES ing through the Indian bureaucracy, which they cite as the number one bottleneck to their operations in The US-India trade relationship has blossomed over India. Additionally, the Indian defense industry is com- the last decade. Throughout the course of the con- posed of ten to fifteen companies, comprising mainly ference, participants discussed the following principal small to mid-tier players, that attract governmental breakthroughs in the bilateral relationship that have attention and support. Another hindrance is the lack 2 ATLANTIC COUNCIL ISSUE BRIEF Unlocking US-India Trade Potential of transparency surrounding logistics in India in ad- to enormous entrepreneurial activity, there are se- dition to the constant lack of predictability in trade rious physical bottlenecks which impede progress and investment regulations in the country. The fact namely the bad infrastructural connectivity that pre- that India’s new insolvency regulations have been ac- vents people from getting to their work on time thus tive for over one year without “disclosure norms or giving way to serious inefficiencies. These bottle- mandatory transparency regulations” is a major bot- necks are not confined to one city but are present in tleneck to enhanced bilateral trade cooperation with Indian cities of all tiers. This would affect the supply the United States. The proliferation of corporate bad chains which compose the grander US-India trade loans that have happened in India, under a shroud of framework. This is an issue which affects every ma- opaqueness, is disquieting for Indian investors and jor Indian city. On the World Bank’s Logistics score, corporate professionals alike, as well as for foreign India scores poorly on Infrastructure with a score of investors. In 2017, Indian banks’ sour loans reached 3.34, punching below many of its developing world $145.56 billion demonstrating a real problem in the peers, including China and South Africa. According transparency of India’s financial sector. India’s pro- to a joint study by the World Economic Forum and tection and enforcement of the intellectual property the Confederation of Indian Industry, “the top ma- rights (IPR) at stake in these transactions is a further jor constraints in infrastructure development over major risk factor in its economic relations with the the next three years are thought to be corruption, United States. As it stands, India is presently on a US political and regulatory risk, access to financing and watch list priority for failing to protect US companies’ macroeconomic instability.”1 intellectual property rights, through lax rules against trade secret theft and poor patent protection. In the Additionally, an Economic Survey put out in 2018 eyes of the US government, India is home to several by the Indian government heralded that India will “Notorious Markets” and has extremely weak en- have a “$526 billion infrastructure investment gap forcement of its copyright laws contributing to wide- by 2040,” if present trends are to be continued as spread digital piracy. they currently exist.2 In the context of India’s enor- mous rural to urban migration, which is expected to Indian Infrastructure: Connectivity, Smart Cities be “roughly half of the total population by 2031, and and Special Economic Zones: Prime Minister the expected scorching pace of growth,” it is cru- Narendra Modi’s stated objective to build one hun- cial that India finds a way to improve its infrastruc- dred smart cities across the country by 2030 was a tural logistics. This would see improvements across significant step in addressing India’s urban bottle- India’s logistical landscape. Presently, as discussed necks. Given the enormous significance of digital by conference participants, there is “high cost and connectivity to India’s domestic growth, regional delay” as a result of shoddy domestic transporta- and global stature and ability to facilitate greater tion in India and inappropriate telecommunication quality of life for its citizens, the Indian government’s infrastructure allowing for most costly imports. If digitization of many logistics services is a key step these issues, two of many within the sphere of in- forward. The conference convened experts from the frastructure, could be addressed under the Indian public and private sectors in both countries to eval- government’s initiative to boost digital connectivity, uate how India’s infrastructure, traditionally a major it would become much easier to export to India from bottleneck to the country’s economic and commer- the United States.