Column: Not as big as US-China, but important

In 2006, most of the comments about China in the international financial sector domain were about its potential. The Shanghai stock market, too, was just taking off and few notable scrips were traded in the market. There was, however, one US entity that was deeply interested in the China story, cultivating it for a long time. The company was Goldman Sachs and the person leading the charge was its CEO Hank Paulson.

One of the first things Paulson told his new chief executive, President Bush when he was appointed the treasury secretary of the US, was that he was going to set up a permanent forum for economic and financial sector dialogue with China. Top leaders from the two countries would visit or simply pick up the phone to explain positions to each other on every economic and financial matter.

The validity of the approach was made clear in less than a year when the global financial crisis broke in the summer of 2007. It culminated in September 2008, when Europe just ran away from every sort of US corporate paper, but China remained invested. As Paulson writes in his book On the Brink, ?The SED?s success is one of the achievements I am most proud of.? He has reasons to be. Paulson writes that through a wave of food and product safety scares, the platform kept anti-protectionism off US-China relations. He does not call it a payback but says that when the financial crisis erupted?and he repeatedly cites examples to buttress the point?Chinese officials helped maintain ?confidence in our system.?

The lesson has not been lost on the US leadership. The value of the ?hotline?, as the US financial markets imploded, was stark. This is one of the perspectives for viewing the India-US Financial and Economic Partnership signed on by finance minister Pranab Mukherjee and the US treasury secretary Timothy Geithner on Tuesday. Of course, it would be facile to expect the US-India platform to operate on the same scale.

The Indian economy is a quarter of the size of the Chinese economy and the foreign exchange RBI holds in US treasury bills is also a quarter of the Chinese investments. The US is India?s second largest trading partner, but we do not figure in the list of the top 20 trading partners of the US. Indian companies and financial institutions have very little investment in, say, US commercial paper. So, there is a huge difference in terms of the size of the framework. But India is getting there. A $1.2-trillion economy is a market that US-based companies are keen to tap. The presence of US companies in India has sharply grown since 2000. This is the more proximate reason for the new engagement.

US investment in India has had a chequered history. Since the 1970s, in every decade there has been at least one major stand-off between the Indian state and US companies. While India dabbled with socialism in the 1970s, the then Indian government asked Coca-Cola and IBM to leave. It made little difference that one was a consumer product and the other high-end technology.

While there was a very good case to prosecute Union Carbide for the Bhopal gas tragedy in 1984, the government asked the company to leave India, which made matters murky. The 1990s will, of course, be remembered for the Enron-Dabhol case. In the new century, there have been no such major cases but niggles remain. Sure, in the conduct of the cases against Enron and Union Carbide, the Indian government was absolutely within its rights, but in both cases it earned very little as compensation. Instead, as the cases dragged in international tribunals, they earned Indian government hassles and concurrent negative press in the international media. Yet in all these cases no Indian agency expropriated the property of the companies unlike several emerging economies. But the perceived baggage of India?s socialist mindset and the often brusque attitude shown by some of the US-based companies made it a fertile ground for biases to persist on both sides.

As late as 2006, the India-US CEO Forum set up by UPA-1 also flagged corporate dispute resolution as one of the four key areas where India should speed up the pace. India and the US obviously want to put that phase behind them. The partnership will open up an institutional framework to solve such episodes, among other things. This means more responsibility for the US, too. For instance, if the US wants to retain the confidence of the Indian consumers and that of New Delhi, it cannot now brush aside concerns on corporate malfeasance. But it will have an established blueprint on which to drive upon. There will be a two-tier structure to the partnership. It will have a Cabinet level dialogue, at least once a year. This will be fed by working groups and sub-Cabinet level meetings throughout the year.

Of course, the wish-list from the two sides will be huge. India wants the investment window to be opened far wider than it is now, while the US government will reflect the desire of its financial sector to make more inroads into the developing Indian financial sector through a higher equity share in several sectors. This is something that China has not offered the US so far.

subhomoy.bhattacharjee@expressindia.com