U.S.-Indian Business Relations Strained by Political Gridlock and Flip-flopping
By Sofia Liska
Jun. 15 – Business relations between India and the rest of the world are not going well, particularly with companies from the United States that are trying to invest in the Indian economy. S.M. Krishna, India’s external affairs minister, attempted to emphasize on Tuesday that India is in fact committed to making economic reforms despite the government’s recent decisions that are worrying foreign investors.
“In an era of global interdependence, not everything is within the powers of national governments. But we are confident we will restore investor confidence and regain momentum and growth,” Krishna said before a meeting with U.S. Secretary of State Hillary Clinton on Wednesday.
Ongoing political and regulatory discord has frightened foreign investments away, hurting India’s economic growth, significantly weakening the rupee’s value, and increasing the account deficit.
When India’s industrial output growth grew stale in April largely because of political gridlocks, Standard & Poor warned that the country would be demoted to junk status. Despite arguments that the economic stalemate in which India has found itself in is not solely due to political inaction, but also the economic crisis in Europe and other exterior factors, Standard & Poor still wants to downgrade the country to junk status.
Michael Froman, White House international affairs adviser, said U.S. companies have become “concerned about the economic relationship, fearing that the investment environment has deteriorated, that domestic political challenges are slowing the pace of reforms.”
According to Froman, a further commitment by India to create economic reforms aimed at opening the market is “the best way to assure our bilateral relationship continues to deepen and broaden and the best way to ensure that India’s place as an emerging power remains secure.”
The lack of commitment sensed by Froman and global business groups stems from India’s new policies regarding the technology industry that would unjustly discriminate against foreign firms. Additionally, India has been warned that its new tax provisions will induce companies overseas to reconsider their investment plans. New Delhi’s recent change of heart, deciding to keep its markets closed to large multi-brand retailers such Wal-Mart, has also frightened investors.
The “disturbing flip flops and increasing signs of an absence of predictable investment and business climate … are hampering India’s progress and scaring away foreign investment,” Ajay Banga, new chairman of the U.S.-India Business Council and CEO of MasterCard Worldwide, said in a speech.
However, Krishna seems confident about the Indian economy’s ability to overcome these obstacles and concerns, emphasizing that an “open and growing market” in the United States is a high priority for India.
Krishna asked that the Obama Administration allow India to import natural gas from the United States, giving reason to believe that the country does seek to further intertwine its business relations.
Therefore, despite the trials currently endured by the two nations, hope looms on the horizon. Ron Somers, president of the U.S.-India Business Council, said he looks forward to ongoing two-way discussions on a Bilateral Investment Treaty (BIT), which will hopefully reach a conclusion by the end of the year and inspire confidence and security in business investors from both nations.
Once the BIT is reached, business groups hope the two governments will sign a free trade agreement.
The Peterson Institute for International Economics will research the possible benefits of a free trade agreement and should be done by the start of 2013, at which point the next U.S. administration will decide whether or not to embrace the initiative.
Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States.
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