Reimagining US-India business in the “new geopolitical normal”

July 25, 2020 9:14 AM

Even though India’s investment climate is favorable yet certain contentious issues relating to H1B Visas needs to be worked out, just like the pending tariff issues which will be resolved amidst the impending Preferential Trade Deal.

India is inviting FDI in agriculture sector in lieu of historic reforms undertaken in it.India is inviting FDI in agriculture sector in lieu of historic reforms undertaken in it.

By Rajesh Mehta, Somya Mathur and Badri Narayanan Gopalakrishnan

On the occasion of 45th Anniversary of U.S. India Business Council (USIBC), PM Modi in India’s Ideas Summit, re-iterated that India moves forward on the clarion call of an Atma-Nirbhar Bharat, while exhorting the partnership of U.S. business counterparts to invest in India. He urged on calibrating the growth model resilient to external shocks by enhancing domestic capacities, rather than just being focused on efficiencies and optimization. By “economic resilience to external shocks”, PM Modi does not only refer to the ensuing pandemic crisis, but also to the geo-political tensions brewing in the Indian Ocean Region and economic cornering of China, which calls for further strengthening of the U.S. India ties.

India recently conducted Malabar Joint Naval Exercises with the USS Nimitz off the Andaman coast. This is to showcase the Military might of the QUAD nations to counter China’s besiege plans in the Southern Asia. Ban on Huawei in many countries on cyber espionage charges, is an opportunity for India to pitch in with many democratic countries to the development of 5G technology. Countries like Japan are relocating their supply chains from China, making India a choice for many democracies as the next economic hub.

The highest FDI inflows in our recent history was in the year 2006-07 with total FDI inflows to US$22,826 Million. Besides the Mauritius route, the U.S. topped the highest FDI equity investor list in 2006-07 with US$ 856 Million from U.S. The massive surge in FDI investments by FII in 2006-07 was due to the Federal Reserve’s rate cut in September 2006 which had prompted the RBI to propose further liberalization in norms of foreign investment by Indian companies, residents and mutual funds.

Due to escalating U.S. China tensions, it’s an opportune time for India to open the doors for foreign investments. An investment friendly business climate with a number of reforms taken place in the last six years, have ensured competitiveness, transparency, expanded digitization and led to more policy stability. India has improved by 23 places to 63rd position, in the Ease of Doing Business Index of its 2020 report, though consistent efforts must be made on its further improvement. Rick Rossow, Wadhwani Chair in U.S. India Policy Studies, CSIS says, “At the national level, India has done solid work to increase the nation’s attractiveness as a destination for foreign investment. Recent trade protectionist moves will harm India’s ability to integrate with global supply chains, but the domestic market is huge. Now, more of the onus to improve India’s business environment falls to the states. Basic issues like land clearances, access to quality electric power and water, business permits—are almost entirely state-level issues. There is little transparency as to states’ reforms, and even less accountability. That’s where the next phase of reforms are crucial.” As per Ministry of Commerce, Maharashtra (30%) tops the list of states which attract the highest FDI, followed by Karnataka (18%), Delhi (17%), Gujarat (11%), Jharkhand (8%), Haryana (3%) and Telangana (3%).

Since the last three financial years, U.S. is 5th largest FDI investor in India while the top investors in India being Mauritius, which is a tax haven, Singapore, Netherlands and Japan.

The top sectors of investments have been the technology driven services sector, IT and Telecommunication, since the last two decades. India is inviting FDI in agriculture sector in lieu of historic reforms undertaken in it and a number of opportunities lying to invest in agriculture inputs and machinery, agriculture supply chain, food processing, fisheries and organic produce. The faster growing health sector opened new vistas of opportunities for foreign players in the area of medical-technology, tele-medicine and diagnostics. India is growing to be a digital economy, with growth in disruptive technologies like Internet of Things, robotics, industrial and office automation, Block chain and big data analytics, which are being adopted extensively across industries. It provides opportunities for investments by foreign players in new technologies driven sectors. Dr. Sean Randolph, Senior Director of the Bay Area Council Economic Institute says, “Continued economic reform in India and accelerating digitization are attracting Silicon Valley’s attention, with large scale investments recently announced by Google, Facebook, Apple, and venture capital firms such as Silver Lake and Sequoia Capital. The unprecedented scale of the bets being placed by Silicon Valley on India’s success point to the growing opportunity to expand trade and investment and to more closely align our economies.”

Growing air traffic in India lays a huge potential market for aviation companies to invest here. The FDI cap on investment in defense has been increased to 74 percent to encourage production of domestic defense equipment. A huge scope is in insurance sector in India to cover health, agriculture, business and life. Hence it raised the FDI cap for investment in insurance to 49% and 100% FDI is permitted for investment in insurance intermediaries. Infrastructure and Energy sectors are also open for foreign investment.

Even though India’s investment climate is favorable yet certain contentious issues relating to H1B Visas needs to be worked out, just like the pending tariff issues which will be resolved amidst the impending Preferential Trade Deal. This mini deal may mature into a long term free trade agreement between India and U.S. Ms. Nisha Biswal, President, USIBC commented, “This year’s Ideas Summit shows how far US-India relations have come in a short time. The most senior officials from both countries—including Prime Minister Modi emphasized on how we’ve developed a trusted partnership. Critically, on the US-side, we saw this was also a bipartisan consensus. The next and most pressing step is to get a trade deal done, so we can use it as a spring board for so much more. There’s no time to lose as we look to forge even broader cooperation in areas like 5G and restore Indians’ access to jobs in the US where their hard work has helped take both countries’ economies to new heights.”

(Rajesh Mehta is a Leading International Consultant & Policy Professional. Somya Mathur is Senior Economist, Infinite Sum Modelling Inc., Seattle, U.S. and with Indian School of Political Economy, Pune, India. Badri Narayanan Gopalakrishnan is founder director, Infinite Sum Modelling, and affiliate faculty member at University of Washington Seattle. Views expressed are personal.)

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