Business Standard

Evan A Feigenbaum: Can India, US up the investment game?

Expanded trade and investment can both diversify and solidify a partnership to which both governments are deeply committed

Related News

Nirupama Rao, India’s new ambassador to Washington, says that is open for business, and the good news is that many in the agree with her. Bilateral trade has grown rapidly, more than doubling from 2004 to around $60 billion in goods and services trade in 2009. The investment story is positive too. In 2008, in India was $16.1 billion, a 10.8 per cent increase over 2007, while Indian in the US totalled $4.5 billion, a 60.4 per cent increase from 2007.

As a US official in the Bush administration, I embraced these trends. Expanded trade and investment can both diversify and solidify a partnership to which both governments are deeply committed. That means bilateral initiatives to unlock an investment treaty, free up trade, grant visas, streamline the investment process, and remove regulatory barriers. Such initiatives can matter greatly to the trajectory of trade.

But last month, I left Washington after ten years and moved to the American heartland. Moving from Washington to Chicago, I’m struck by how a change of scene can yield a change of context.

Yes, macro policies matter. But living in a business city, not an “official” one, you get a different perspective on just how much of an advantage India could derive from structural reforms.

Chicago likes India a lot — and, by the way, the sentiment is mutual. An India business forum last month attracted the new mayor, Rahm Emanuel, along with commerce and industry minister and a few dozen companies.

But the Midwest is an agribusiness centre. And so there are limits to the scope and scale of how far investment can go in the absence of change to India’s supply chain processes and infrastructure.

Government economists and bureaucrats increasingly believe that the sharp and sustained rise in India’s food price inflation since 2008 is a consequence of structural increases in income and consumption brought by rapid growth. Investment should rise to the extent that debate reopens in India about more liberal policies for FDI in all segments of the food supply chain.

Examples include investment-friendly reforms to boost crop yields, heighten competition in the procurement of food from farmers, better develop the food processing industry, encourage investment in warehousing and cold storage chains, liberalise trade in agricultural products, and support the growth of modern retail.

But several other issues, well known and much debated in India, matter to American business too:

Growth: Will growth be fast enough amid the current domestic slowdown to sustain the requisite levels of demand in India’s internal market?

Demand: India’s economic expansion has been driven fundamentally by internal consumption. But will India’s internal market be big and affluent enough to make it a sufficiently attractive investment destination?

The question is especially relevant because domestic demand trends are shifting elsewhere in Asia. Take China: Chinese planners are setting into place measures aimed at promoting internal migration and urbanisation, continuous income hikes, and virtuous investment cycles to spur higher-value added manufacturing. The political barriers are high, but China is likely to achieve a consumption windfall.

In Southeast Asia, too, consumption is already robust in the big economies and growing among exporters and frontier markets.Manufacturers like Vietnam are pushing up from the bottom, leading others like Thailand to increasingly aim at higher value-added manufacturing that could spur consumption. In Indonesia, consumption already accounts for as much as 70 per cent of GDP.

One question for India will be whether it lags in public goods provision, or on other reforms that could expand consumption in its domestic market.

Manufacturing: Will India win as Asia’s geography of manufacturing changes? India is well-positioned to play a larger role in investors' thinking about Asian supply chains. And as I have argued in this column before, the national manufacturing policy could yield new manufacturing zones with industrial parks, warehousing, and opportunities in special economic zones. An India with a 25 per cent share of manufacturing in GDP would be a vastly different investment proposition from one in which it lags at around 16 per cent.

Nor does India need only to compete at the bottom of the value chain. It could aim to compete in machinery or auto parts through the adoption of new policies at the state level. But Indian manufacturing and labour reforms have lagged behind other investment destinations in Asia. And such policies could falter on land acquisition.

Infrastructure: Roads, rail, ports, and airports steal headlines. But pricing reforms are especially relevant for the trajectory of US investment. Power tariffs in India are much higher than in China and reforms to tax infrastructure have stalled.

Sectoral issues: Traditions of political contestation bind Indians and Americans together. But from the standpoint of US investors, contestation has compromised the final version of at least some Indian reforms. Multi-brand retail is an example of a reform that ultimately may not lead to serious investment. The same is true of insurance and the nuclear industry.

Last, political risk: India is attractive to US investors because its democratic institutions enjoy a high degree of political legitimacy. But how will investors navigate players they cannot easily negotiate with — for instance, non-governmental organisations? Service delivery and administrative reforms set investment destinations apart.

Viewing things now from a business city, not a national capital, such steps appear very much in India’s self-interest, not as a “deliverable” in an official relationship with Washington.

The author is adjunct senior fellow for Asia at the Council on Foreign Relations, Washington, DC

Read more on:   
|
|
|
|
|
|

Read More

Capital flow conundrums

Recent two-way movements have highlighted the complexity of managing the capital account

Advertisements

Most Popular Columns

Rahul Jacob

Rahul Jacob: How Mr Modi has outplayed the media
Rahul Jacob

From a ruling party's perspective, the BJP is in a sweet spot; editorial independence and analytical coverage of governance is rapidly declining

Abheek Barua

Abheek Barua: The right questions
Abheek Barua

A response to the 28 economists defending the employment guarantee scheme

Sreenivasan Jain

Sreenivasan Jain: Is Swachh Bharat repeating mistakes of the past?
Sreenivasan Jain

India's proposed toilet revolution is all set to repeat mistakes of the past

Advertisement

Columnists

T N Ninan

T N Ninan: The audacity of hope?
T N Ninan

First, the country has only 2.6 Gw of solar capacity installed as of now, and the plan has been to take it up to 20 Gw by 2020 (revised later to ...

T C A Srinivasa-Raghavan

T C A Srinivasa-Raghavan: The two phases of JLN
T C A Srinivasa-Raghavan

Historians ought to examine the pre-1947 Nehru independently of the post-1947 one

Sunanda K Datta-Ray

Sunanda K Datta-Ray: Black money and black holes
Sunanda K Datta-Ray

Instead of chasing chimeras or politically motivated witch-hunts, we need to focus on the phenomenon of black money. The point is not how it is ...

Back to Top