Financial Daily from THE HINDU group of publications
Thursday, Jun 01, 2006
Industry & Economy - Economy
India-US economic relations on a high
The US President, Mr George W. Bush, the Prime Minister, Dr Manmohan Singh, the dynamics of a changing relationships.
The visits of the leaders of two emerging economic powers India and China to the US within a year and the American President, Mr George Bush, coming to India in March have opened up the many dimensions to the relationships between and among these countries. Significantly, the US is the determinant for the economic health of both India and China.
The US is the biggest destination for Chinese and Indian products, accounting for a third of former's and a fifth of latter's exports every year. For a predominantly export economy, the US plays a crucial role in the Chinese economy. For India, the US is a key source of foreign direct investment.
Yet, the US administration appeared more receptive to the Prime Minster, Dr Manmohan Singh, than to the Chinese President, Mr Hu Jintao. Mr Hu failed to get that level of protocol which Dr Manmohan Singh received. Mr Hu's visit was not accorded a state visit status, which involves a formal dinner; he was given only a lunch.
The US expected more from China. Mr Bush wanted Mr Hu to make some formal announcement that would pacify the Americans over the mounting trade deficit; at $202 billion, the trade deficit with China has become a major cause for worry for the jobless in the US.
India, a strategic partner
In contrast, the US gave India what was called a strategic partner country status. The US faces a trade deficit with India also, but its impact is low due to the low trade value between the two countries. India accounts for less than one per cent of the US' imports compared to China's 14 per cent.
India too attracted ire, as American companies shifted jobs to India. But this was neutralised with Mr Bush terming outsourcing an effective and competitive means for American companies to foray into the global market. More important, Mr Bush cleared the nuclear deal, even though India is not a signatory to the nuclear Non-Proliferation Treaty.
This wooing of India is seen by many observers as the US' move to counter a rising China in Asia. Many see a turning point in the aftermath of the US invasion of Afghanistan. China went slow in extending military support to Pakistan. Tension on the Indo-Pak border eased. And China decided to strengthen economic relation with India; indeed it has emerged India's second largest trade partner. To contain the China factor, the US had to come closer to India.
The Chinese President, Mr Hu Jintao.
Though American investments in China are ten times that in India, recent trends show a drop. During 2002 to 2005, US investment in China dropped by over 43 per cent. In contrast, the US investment in India zoomed 68 per cent. Assuming that the recent mega deal between Chevron of the US and Reliance Industries in petroleum and gas goes through this single joint venture is worth $1.74 billion US investments in India will be nearer to that in China. In 2005, the US investments in China totalled $3.06 billion compared to $0.47 billion in India.
Two-third of the US investment in China is in manufacturing sectors. In 2004, transport and electrical equipment accounted for 44.6 per cent of the US investments in China. Ironically, these investments boomeranged on the US. Foreign firms in China, including American ones, became exporters to the US, leading to a yawning trade deficit and raising fears of unemployment in the US.
In contrast, the bulk of the US investment in India flowed into computer software and related areas, followed by consultancy/service sectors.
Also, the US investors did not face problems in India over protection of intellectual propriety rights (IPR), as they did in China. India has a product patent regime in place, and its regulations are WTO compatible.
The other advantage that India has over China include a better quality human resource, especially at the managerial levels; with some 600 programmes, India turns out more than 5,000 mangers every year. China has only 95 management programmes. India also has a larger working-age population. China's working population is expected to peak at 1 billion and then shrink, by mid-century. But India is expected to have 1.6 billion people, 220 million more workers than China.
According to A.T. Kearney, India heralds a big potential for investment in retail market. The potential in China has saturated with more than 40 MNCs already in retail business.
According to Ernst and Young, venture capital firms are likely to increase investment in India as companies such as Microsoft, Intel and Cisco systems are spend more on R&D. Given the bounce-back of American interest in India, it would not be over-optimistic to foresee a paradigm shift in the US investments in India. With China figuring as the hot topic of debate in board rooms of several US MNCs, India's policymakers should strike to take the edge.
(The author is Adviser, JETRO, New Delhi. The views are personal.)
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