23 September 2014

A foreign economic policy

Americans believe that India can achieve rapid economic growth through innovation if it opens up its economy to foreign technologies.Americans believe that India can achieve rapid economic growth through innovation if it opens up its economy to foreign technologies.

Written by Husain Haqqani | Posted: September 23, 2014 
For decades, pundits have described India and China as rivals for leadership in Asia. Chinese President Xi Jinping’s recent visit to India suggests that economic cooperation, rather than strategic competition, could be the main driver for the two Asian giants. If Prime Minister Narendra Modi’s forthcoming meeting with US President Barack Obama also gives due weight to economic considerations, India could be on the verge of significantly redefining its global role.
It is good that Modi pays attention to economics, unlike the entrenched establishment in Pakistan, which clings to military strategies even when the cost is the country’s impoverishment. India and the United States could still emerge as strategic partners, but with shared economic interests rather than just shared concerns about the balance of power. And Sino-Indian rivalry could be postponed to a day when both countries have modernised their economies.

India has yet to realise its full potential as a leading global economy. The rapid economic growth that India has witnessed since the mid-1990s was ushered in by much-needed reforms. After being criticised by economists for its low rate of growth, India finally earned a place among the world’s leading emerging markets. Further reform could lead it to greater success among the BRICS, that is, Brazil, Russia, India, China and South Africa, and beyond.

Americans believe that India can achieve rapid economic growth through innovation if it opens up its economy to foreign technologies. As Modi and Obama meet, Indian policymakers must recognise that economic factors are as important to Washington as they are to Beijing. For American FDI, India must strengthen its intellectual property right regulations and protect foreign investors who are exporting new technologies to India. Greater protection for foreign technologies will not only encourage growth and innovation, but also bring in vital FDI.

New Delhi cannot afford to persist with its dated modes of thought on pharmaceuticals or the defence industry either. Spending on healthcare is only about 1 per cent of the GDP in India, making the country one of the lowest spenders in the world. A number of issues plague India’s healthcare sector, ranging from a lack of infrastructure and financing to a dearth of health workers across the country. Hatred of Western pharmaceutical corporations cannot be the core of India’s healthcare strategy.

While India has emerged as a hub for IT outsourcing, it has lagged behind in exporting value-added manufactured goods. It has been unable to increase its share of technology-intensive products. With wages rising and productivity falling in China, India has a great opportunity to attract American FDI in its manufacturing sector. Such investment could go a long way in kickstarting India’s economy.

The country will require over $500 billion just for funding its infrastructure needs in the next five years. This fact makes capital market reforms a critical component of the agenda. Lack of liquidity and transparency as well as an excessive government footprint in capital markets are a few of the problems plaguing this sector. Any positive commitment from Modi in this area would be music to American ears and might help attract dollars for infrastructure.
With India seeking to modernise its armed forces and diversify its arms acquisitions, opportunities for stronger US-India defence ties will arise. The speed with which the two countries collaborate will largely depend on how reforms are introduced in India’s defence sector. Both sides speak of the opportunities for defence cooperation. But success in this arena will require streamlining the licensing processes as well as improving foreign and private participation.

As the economy grows, India’s energy needs continue to expand as well. The energy sector has been dominated by monopolies and the state, resulting in a lack of market-based mechanisms in the sector. This has led to governance issues, inefficiencies and a lack of strong competition from private companies. Americans would like to see market-based reforms in the energy sector.
The first set of reforms, implemented in the early 1990s, marked India’s arrival on the global economic map and made the country a key destination for international investors and companies. It has made significant progress in the last two decades and is now counted among the world’s leading emerging markets.

Economic growth led to a rise in India’s global standing and has radically improved the country’s socio-economic indicators. It has also raised the expectations of people within and outside the Indian economy. The burgeoning middle classes expect more growth from the economy and are keen to see even more improvement in the country. So do the major powers courting India.
The success of Modi’s initiatives with both China and the US depend on his ability to put economics at the centre of India’s new foreign policy. India has a remarkable knack for exploring new ideas and then settling for old ones. For peace and stability in Asia, and in order to create a model for its neighbours, one can only hope that India under Modi will have the economic emphasis that the prime minister’s predecessor failed to sustain.

The writer is director for South and Central Asia at the Hudson Institute, and was Pakistan’s ambassador to the United States from 2008-11. He is the author of ‘Magnificent Delusions: Pakistan, the United States and an Epic History of Misunderstanding’
- See more at: http://indianexpress.com/article/opinion/columns/a-foreign-economic-policy/99/#sthash.Iq4dQn2q.dpuf

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