Despite Default Risk, India Builds Economic Ties with U.S.

October 14, 2013 Posted by India Briefing Reading Time: 2 minutes

Oct. 14 – India’s Finance Minister P. Chidambaram and the U.S. Secretary of Treasury Jack Lew met this week during the fourth-annual India-U.S. Economic and Financial Partnership meeting to discuss policy reforms designed to increase bilateral economic growth between the two nations.

During the talks, both delegations stressed the need to redouble their efforts on finalizing a bilateral investment treaty (BIT) between India and the United States. The BIT, which was first proposed in 2008, has faced strong headwinds due to legal preconditions proposed by India that would favor Indian companies in the case of an international trade dispute.

Leaders from both countries have refocused their resources on the strained relationship following a slow economic recovery in the U.S. and economic worries in India over their large current account deficit.

According to an Indian press release issued after the meeting, “[Chidambaram and Lew] agreed that sound macroeconomic policies, structural reforms and strong prudential frameworks will help boost economic growth.”

Several high-level government officials, including the United States’ Federal Reserve Board Chairman Ben Bernanke and the Reserve Bank of India’s Governor Raghuram Rajan, attended the meetings held in Washington.

Despite efforts to move forward as economic partners, the relationship between India and the United States was further stressed following concerns over a possible default by the U.S. due to governmental impasse on raising the nation’s debt ceiling.

Prior to Chidambaram’s visit to the United States this week, India, which holds an estimated US$59 billion in U.S. issued debt, began calculating the financial costs to its economy were the U.S. to default on its debt.

As a sign of good faith, India’s Reserve Bank Governor announced publicly that India does not believe the U.S. will default and reaffirmed India’s plan to continue holding dollar denominated debt issued by the United States.

“We do not worry about that issue. We are not selling our U.S. assets. We are holding on to them,” said RBI Governor Rajan last week. “I have to say, [if there is a] default, [it] will be a technical default because repayments can be prioritized. Unless there is a sudden stop and markets stop taking new U.S. debt meant to refinance the old debt, there is no chance that the U.S. will default,” he further commented.

Bilateral trade between the United States and India reached US$82.9 billion in 2012 and has increased steadily since a slight decline in 2009.

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