Can Obama fuel life into Indo-US economic ties?

Updated: Nov 01, 2010, 00:55 AM IST

Anil Kumar Satapathy

It was one of the most widely discussed events not only in the United States, but also in India, when Barack Obama went on to become the first black President of the world’s greatest democracy.

It was not only his race, but his views on outsourcing that attracted a lot of attention here.

Over a year later, the US President is visiting India on a high profile tour. Preceding this is his rhetoric to make a law on discouraging outsourcing especially to countries like India.

There has been an undeniable rise in the protectionist tide arising out of the US. First it was the `Buy America` provisions in the American Recovery and Reinvestment Act of 2009 that restricted the import of iron and steel. Then came the Border Security Bill that allowed massive increase in the fees on categories of H-1B and L1 visas. And recently, the Ohio state government banned off-shoring IT projects.

In light of these developments, there is a heightened interest of businesses on both sides of the Atlantic over Obama’s maiden India visit. The presence of around 200 CEOs in the US contingent and Obama’s stay in Mumbai is an indicator of the business and economic importance of this visit and the bilateral ties on the whole.

It is therefore pertinent to take a look at the business aspect of India-US trade relations.

The United States is one of the India’s largest trading partners. Suresh Kumar, Assistant Secretary and Director-General of US and Foreign Commercial Service, said, Indo-US trade is worth USD 37 billion, including USD 16 billion worth exports from US to India.

In the first seven months of this year, US exports to India touched USD 11 billion, up by 20 percent, while Indian exports to the US crossed USD 17 billion, up 40 percent.

India’s export basket includes Information Technology services, textiles, machinery, gems and diamonds, chemicals, iron and steel products, coffee, tea, and other edible food products. Major American items imported by India include aircraft, fertilizers, computer hardware, scrap metal and medical equipment.

Major issues:

- India and the US had inked an agreement in October 2008, covering the lucrative nuclear field. Later, India’s Parliament gave its assent. However, the entry of US firms into India`s promising nuclear power market is still uncertain, owing to issues on compensation liability of private operators.

US firms, such as General Electric and Westinghouse Electric, a subsidiary of Japan`s Toshiba Corp, stand to make up to USD 10 billion through already-earmarked projects.

-Washington is also eying the lucrative defence sector. India is all set to open its purse for some big ticket defence purchases. According to research firm KPMG, India is set to spend about USD 112 billion on defence procurement by the year 2016. This includes a whopping USD 11 billion deal for 126 fighter aircraft that six companies are competing for, including US firms Boeing and Lockheed Martin Corp.

- Gaining access to India’s untapped retail sector is another major agenda on Obama’s platter. India’s USD 450 billion retail industry is currently off-limits for foreign multi-brand retail firms.

The retail sector is largely closed to foreign firms, with 51 percent foreign direct investment allowed only in single-brand retail. Multi-brand retail is restricted to cash-and-carry or wholesale outlets, restricting the entry of retailers such as the US giant Wal-Mart.

Wal-Mart has time and again expressed its desire to open hundreds of retail outlets as soon as the rules are liberalised. A welcome relief for it is that the Indian Prime Minister’s Office and the Planning Commission have given the green signal to their proposal.

- FDI in India`s banking sector is currently limited at 49 percent in private banks, and 20 percent in public lenders. However, current rules restrict foreign investors to only 10 percent of voting rights, regardless of investment level. US and other foreign firms are unlikely to increase their investment unless the cap on voting power is lifted.

- Insurance industry reform, to allow foreign investors to take a bigger stake in Indian firms, has been on the anvil for some time and has the attention of US firms like AIG.

-Meanwhile, India Inc (mainly the IT sector) will be happy to hear some assurances if not get sops from Obama on outsourcing and visa rules. It is also hoping for a breakthrough in export sanctions on dual-use technologies with both military and civil applications.

Obama, in his short trip to India, is largely staying in India’s financial capital – Mumbai – sending a clear signal that he means business. No doubt, domestic compulsions would prevent him from promising any significant announcements on outsourcing or agriculture, but the question is how long can the US afford to overlook a market of 1.2 billion people?