'Reviving US investment'

Modi has a packed schedule during his visit to the US starting on Friday, September 26. The Hindu nationalist, who swept to power after a landslide election win in May, is scheduled to give more than dozens of speeches, attend meetings with top CEO's, address the UN General Assembly and an Indian-American community reception at Madison Square Garden and have a private dinner with US President Barack Obama in Washington.

The Indian PM's visit provides an opportunity to improve bilateral ties which have seen some irritants over the past years, including the revocation of Modi's visa after the 2002 Gujarat riots where some 1000 people - many of them Muslims - were killed, and, more recently, the spat over the arrest of an Indian diplomat in the US and India's refusal to sign a global trade deal.

While US goods and private services trade with India totaled 93 billion USD in 2012, according to Office of the US Trade Representative data, many analysts argue there is potential for much more given that US foreign direct investment (FDI) flows into the South Asian nation have slowed down in recent years. Modi's five-day visit will be watched closely not only in the US, but also in China and Japan which recently held high level talks of their own with India where they signed multibillion dollar investment deals.

Milan Vaishnav, expert in political economy at the Carnegie Endowment for International Peace, says in a DW interview that more than anything, PM Modi - who was elected on promises to revive India's flagging economy - will seek to convey the message to an American audience that, once again, India is "open for business." Given India's massive domestic needs, he adds, the country requires significant FDI inflows to meet its developmental requirements.

DW: What major economic issues will Modi focus on during his US visit?

Milan Vaishnav: Modi's number one objective during his visit is to attract US private investment to India. His itinerary, in both New York and Washington, contains several engagements with leading CEOs of US companies, Indian-American business leaders, and members of the US-India Business Council.

More than anything, Modi seeks to convey the message to an American audience that, once again, India is "open for business." This message is crucial as Modi's electoral mandate is fundamentally premised on getting India's economy back on track. Given the country's massive domestic needs, especially in the realm of infrastructure, India requires significant FDI inflows to meet its developmental requirements.

What type of economic ties does the Modi government seek with the US?

First and foremost, Modi seeks to galvanize the US private sector. India is emerging from a two-year economic slump in which the country's annual Gross Domestic Product (GDP) growth rate remained below five percent per year - the worst performance in a quarter-century. The slowdown shook investors' confidence in India's growth model as it was fueled by severe governance failures, large-scale corruption scandals, and numerous self-inflicted policy missteps - on tax and foreign investment, in particular.

Beyond the US private sector, Modi is keen to cultivate ties with the US government in sectors such as energy, higher education, and defense where the US has technical expertise and technology that can help bolster economic growth in India.

For instance, Modi has spoken about the need to revive India's defense manufacturing sector, an area where co-production and co-development of new technologies and equipment with America is an attractive - if not complicated - possibility. In the area of higher education, Modi realizes that India stands to benefit if US expertise and innovation can be brought to bear to help train India's future labor force.

What role can the US play in the Indian economy given the increase in interest of Japanese and Chinese companies in the South Asian country?

At the risk of simplifying matters, Modi wants two major inputs from foreign partners when it comes to reviving India's economic fortunes: capital and technology.

Unlike the governments of China and Japan, the United States government does have not access to large pools of capital it can tap into to invest directly in Indian infrastructure.

The US government simply does not have the instruments, beyond the limited ability to provide risk insurance or loan guarantees to US companies through institutions such as the Export-Import Bank (Ex-Im) or Overseas Private Investment Corporation (OPIC), to match what the Japanese or Chinese are doing.

Whatever investment that does eventually flow from the United States will largely come from the private sector. And that, at the end of the day, will flow (or not) to India on the basis of the business climate and the availability of attractive investment opportunities.

Where the United States can perhaps play more of a role is in the realm of technology, in areas such as green technology, defense, higher education, or on "smart cities" - another of Modi's top domestic priorities. In these areas, the US does have some advantages that others might not possess.

What does US industry expect from India's recently elected government?

US businesses essentially expect three things: First, US companies expect that the Modi government will provide a strong, stable macroeconomic framework in which it invests in growth, addresses persistently high inflation, and reduces its twin fiscal and current account deficits.

Second, the US business community is counting on the new government to improve India's investment climate, whose reputation was badly tarnished by recent protectionist measures, policy blunders - such as the retrospective taxation of cross-border mergers and acquisitions - and endemic bureaucratic red tape.

Finally, US businesses want the new government to alter India's legal and regulatory framework so that it is more attractive to foreign capital. This includes lifting caps on FDI investment in critical sectors, reducing barriers to trade in goods and services, and offering US firms greater assurance on the sanctity of intellectual property rights.

Given the skepticism among US businesses to increase investment, what other measures should the Modi government undertake?

There really is no silver bullet here. The government has to move on all three fronts - macro stability, investment climate, and legal/regulatory framework - to help boost foreign investment. There are numerous discrete actions that the government could undertake in each of these areas. For instance, it could further remove barriers to FDI in sectors such as insurance and defense.

It could take stronger steps to bury the issue of retrospective taxation. It could amend legal and regulatory provisions that give US firms pause when it comes to patents and intellectual property protection. It could push for tax changes, such as revising the Direct Tax Code or implementing a Goods and Services Tax, both of which the private sector has been clamoring for.

The reform agenda is not only about downsizing the government's footprint, however; in many areas, the rule of law comes to mind, the public sector in India is actually quite weak and chronically short-staffed. One important component of a welcoming investment climate is a judicial system that can adjudicate disputes or enforce contracts in a timely manner. With a shortage of judges but burgeoning caseloads, India fares poorly in this regard.

How did India's veto of the WTO's Trade Facilitation Agreement (TFA) affect US perception of India as a global trade partner?

India's recent veto of the TFA was extremely damaging for perceptions of India's desire to bring about a more open, inclusive global trading regime. There is much sympathy with India's concerns over how the new rules might affect the country's agricultural and food security imperative, but at the same time there is tremendous disquiet over the way in which India acted to scuttle the TFA.

This move is particularly damaging because it comes on the heels of a series of measures, mainly carried out by the previous United Progressive Alliance (UPA) government, which were deemed to be protectionist in nature.

What are the biggest obstacles for increased economic ties between the two countries?

Barriers to trade and investment in India are a significant concern. Having said that, if Washington and New Delhi can broker a compromise on the TFA working bilaterally, and then bring that to the WTO, it could be a huge breakthrough. This is something both sides are working on in the run-up to the Modi visit.

In addition, one should not forget that India too has concerns about the US that also complicate economic relations. For instance, India is concerned about pending legislation in Congress that would impose restrictions on H1-B visas for many employees of leading Indian IT firms. They are also concerned about the high costs of obtaining US visas.

Another thorny issue regards India's desire to secure a Social Security 'totalization' agreement, whereby expatriates residing in either country are not required to contribute to social security schemes of the host country.

What is your outlook for the US-Indian economic ties in the coming months?

The outlook depends in great measure on how successfully the Modi government fulfills its mandate to restore India's economic dynamism. In many ways, the trajectory of US-Indian economic ties follows India's GDP growth rate. When growth is buoyant, many of the irritants in the relationship do not necessarily disappear, but they move to the periphery. During an economic downturn, such as the one India is now hopefully emerging out of, these irritants move front and center.

Assuming India continues to enjoy an economic recovery, I would watch out for two things. First, to what extent can Modi build on his unique political mandate to implement the sorts of pro-market reforms many foreign investors in the United States and elsewhere have been seeking? In his first 100 days, Modi has pursued a broad array of governance fixes meant to improve administrative efficiency, but he has proceeded cautiously on broader pro-market reforms.

These administrative alterations will make India a more attractive place for investment in the short run, but deeper policy reform will be required to fundamentally change the equation in the medium to long run. Furthermore, even on the administrative front, changes have to be institutionalized within the bureaucracy so that they can be sustained beyond the tenure of any one prime minister.

The second thing to watch out for is the degree of personal chemistry Modi and Obama are able to strike up. Personal relationships definitely matter - and have mattered - in charting a way forward for the bilateral partnership. Both sides recognize this, which is why much of the emphasis in the lead-up to Modi's visit to Washington has been on the theatrics of the visit, even more than the substance in many respects.

Milan Vaishnav is an associate in the South Asia Program at the Washington-based Carnegie Endowment for International Peace. His primary research focus is the political economy of India, and he examines issues such as corruption and governance, state capacity, distributive politics, and electoral behavior. You can follow him on Twitter @MilanV.