The Importance of India

The Importance of India, by Duncan Currie
Bush deserves credit for boosting relations with New Delhi
The Weekly Standard, Jan 15, 2009

BILL EMMOTT, a former editor of the Economist magazine, has written that George W. Bush's "bold initiative" to strengthen U.S. relations with India "may eventually be judged by historians as a move of great strategic importance and imagination." It "may turn out to be the most significant foreign policy achievement of the Bush administration," says historian Sugata Bose, an India expert at Harvard. Bilateral ties had improved toward the end of the Clinton administration, thanks largely to the efforts of Strobe Talbott, then serving as deputy secretary of state, and Jaswant Singh, then serving as Indian foreign minister. But "the big jump in relations came under President Bush," says Columbia economist Arvind Panagariya, author of the 2008 book India: The Emerging Giant.

By far the most controversial element of Bush's India policy was the U.S.-India civilian nuclear cooperation agreement, which Congress approved this past fall. It was announced in 2005 but then delayed for years by opposition from Democrats in Washington, left-wing parties in New Delhi, and an Indian nuclear establishment that was skeptical of U.S. intentions. "The determination of the White House was very important," says Panagariya, who believes the Bush administration played a "crucial" role in convincing the Indian government to fight for the deal.

Critics of the nuclear pact "really exaggerated the risks to the non-proliferation regime," says Stephen Cohen, an India expert at the Brookings Institution. As part of the accord, India has accepted new international safeguards on its nuclear program. In turn, the United States has lifted a longstanding ban on U.S.-India civilian nuclear trade. Cohen predicts that the deal will help New Delhi pursue a more sensible arms control policy.

Beyond the nuclear pact, the United States and India have also upgraded their broader strategic cooperation. After the 2004 Asian tsunami, they launched a joint relief mission with Japan and Australia. In June 2005, they signed a new defense framework which enhanced bilateral military ties and stated that "the United States and India agree on the vital importance of political and economic freedom, democratic institutions, the rule of law, security, and opportunity around the world. The leaders of our two countries are building a U.S.-India strategic partnership in pursuit of these principles and interests." In September 2007, India hosted and participated in multilateral naval exercises that included ships from the United States, Japan, Australia, and Singapore.

To appreciate where U.S.-India relations are today, recall how frosty they were during much of the latter half of the 20th century. The first prime minister of independent India, Jawaharlal Nehru, who served from 1947 to 1964, was an avowed socialist and champion of the Non-Aligned Movement. Throughout the Cold War, Indian scholar Ramachandra Guha writes in his 2007 book, India After Gandhi, the United States "tilted markedly toward" Pakistan while India "tilted somewhat toward" the Soviet Union. (During the 1971 India-Pakistan war, Richard Nixon groused to Henry Kissinger that "the Indians are no goddamn good.") It was not until the late 1990s, notes Guha, "that the United States moved toward a position of equidistance between India and Pakistan."

Today, the U.S.-India partnership seems to make perfect strategic sense: Both countries are English-speaking democracies; both are wary of a rising China; both are fighting against Islamic terrorism; and both have an interest in promoting bilateral economic cooperation. India wants to secure a permanent seat on the United Nations Security Council, and it needs America's support. Economic links between the two countries are now "so strong that they stabilize the overall relationship," says Cohen.

Then there is the cultural dimension of the relationship. Panagariya points out that most people in India have a relative, friend, or neighbor who is a member of the Indian diaspora. "They see so many Indians being successful in the U.S.," he says. India is a youthful country, and its younger generation has no serious connection to the anti-Americanism of the Cold War era. In a 2008 Pew Global Attitudes Project survey, 66 percent of Indians expressed a favorable view of the United States.

To be sure, the U.S. and Indian governments will not always be in harmony. Bose says that India probably took a more "strident" position than necessary in the Doha round of global trade talks, which collapsed in late July after a fierce debate over agricultural policy. He adds that Indian officials are worried about Barack Obama's commitment to free trade, given his repeated criticism of "companies that ship jobs overseas." American officials, meanwhile, are concerned about India's relatively warm relations with Iran. But Panagariya says the Iran issue will not prove a major hindrance to U.S.-India collaboration. After all, India is very friendly with Israel. "You don't hear a peep out of the Israelis about India's Iran policy," says Cohen.

As for Pakistan, it has always bedeviled U.S.-India relations. Now the war in Afghanistan is complicating things even more. In the aftermath of the recent terrorist attacks in Mumbai, "India and the United States are likely to come closer," says Bose, provided the Americans use their leverage with Pakistan and pressure Islamabad to reform its army, clean up its intelligence services, and clamp down on militant groups. Despite all the saber-rattling, Bose expects that New Delhi will stay focused on its international ambitions and act prudently.

"India wants to play a role on the global stage," he says. Right now, however, with a national election due by May, the South Asian giant is experiencing severe economic turmoil. The worldwide downturn has taken a harsh toll on India and disrupted its lengthy run of 9 percent annual GDP growth. World Bank economist Sadiq Ahmed reckons that the Indian growth rate will dip below 7 percent in the 2008-2009 fiscal year and below 6 percent in the 2009-2010 fiscal year. "Job losses are going to be enormous due to the global slowdown," Indian commerce ministry spokesman Rajiv Jain recently told Bloomberg News. Meanwhile, the Indian financial industry has been rocked by news of a massive fraud scandal at outsourcing giant Satyam.

Painful as they are, India's economic troubles should not be overblown. "It's not a disaster scenario by any means," says Ahmed, who thinks that Indian policymakers have thus far done "a very good job" in responding to the slump. He notes that inflation has fallen sharply, interest rates have returned to normal levels, and the domestic liquidity situation has stabilized. India is benefiting from its high savings rate. "We are not expecting a prolonged downturn," says Ahmed.

Whatever its current woes, India has remarkable potential. Its middle class is still dwarfed by that of China, but it will balloon over the next few decades. A May 2007 McKinsey Global Institute study estimated that between 2005 and 2025, average real household disposable income in India will nearly triple, the Indian middle class will swell from roughly 50 million people to around 583 million, and the country's consumer market will grow from the 12th largest in the world to the fifth largest.

Goldman Sachs reckons that India could have a larger economy than the United States by 2050. As Goldman economists Jim O'Neill and Tushar Poddar observed in a June 2008 paper, the United Nations has projected that India's population will increase by around 310 million between 2000 and 2020. "India will in effect create the equivalent of another U.S.," wrote O'Neill and Poddar, "and for those of working age between 2000 and 2020, India will create the equivalent of the combined working population of France, Germany, Italy, and the U.K. We estimate another 140 million people will migrate to Indian cities by 2020."

India's long-term progress is stunning. The 2007 McKinsey study pointed out that, "in effect, there are 431 million fewer poor people in India today than there would have been if poverty had remained at its 1985 rate." There is no question that "India's economic reforms, and the increased growth that has resulted, have been the most successful anti-poverty program in the country's history."

Long a bastion of socialism, India flirted with economic liberalization during the 1980s, under the leadership of Rajiv Gandhi, who served as prime minister from 1984 to 1989 (and was assassinated in 1991). But the reform process didn't begin for real until 1991, when India was facing an economic crisis. As Robyn Meredith of Forbes magazine writes in her 2007 book, The Elephant and the Dragon, some 110 million Indians "had been thrown into poverty in just the preceding two years," and "330 million people, or two of every five Indians, lived below the poverty line." Inflation had surged to 17 percent, and the country "was flat broke."

In response, the Indian finance minister, Manmohan Singh, embraced a bold agenda of deregulation, privatization, tariff reductions, and tax cuts. Singh devalued the rupee, removed obstacles to foreign investment, and expanded trade. "Early steps were also taken to open telecommunications and domestic civil aviation to the private sector," writes Panagariya. "These measures yielded the handsome growth rate of 7.1 percent between 1993-94 and 1996-97, and also placed the economy on a long-term growth trajectory of 6 percent."

The reform process stalled in the late 1990s but regained momentum during the third term of Prime Minister Atal Bihari Vajpayee, which began in 1999. As Panagariya writes, "the Vajpayee government systematically moved to open the economy to foreign and domestic competition and to build the country's infrastructure." Singh's Congress Party took power in 2004 as the leading coalition member of the United Progressive Alliance, and Singh became prime minister. Economic reformers had high hopes for the government, especially given Singh's record as finance minister, but they have been disappointed, as the reform process has stagnated.

Moving forward, further economic reforms will be critical. The United Nations Population Fund says that India will eclipse China as the world's most populous country by 2050. Will India's population explosion produce a "demographic dividend," or a demographic disaster? "That's the million-dollar question," says Bose. Indeed, a rising population does not guarantee that India will fulfill its potential. It will need to create millions of new jobs and also ensure that its workers are properly equipped to do those jobs. In their recent paper, O'Neill and Poddar outlined ten steps that India must take "to achieve its 2050 potential." These include strengthening its education system, containing inflation, liberalizing its financial markets, boosting trade with its neighbors, and improving its infrastructure.

India's biggest weaknesses are education and infrastructure. As Emmott writes in his 2008 book, Rivals, "The country's large, young population will not be an economic advantage unless it can be educated to the standards required by manufacturers and service companies." The current Indian education system "is grossly inadequate for that task, and putting that right will be costly." Consider these numbers: "Only 28 percent of India's schools had electricity in 2005; only half had more than two teachers or two classrooms." India has a significantly lower literacy rate than countries such as China, Vietnam, and Malaysia, Emmott notes.

As for the infrastructure problem, it remains a huge drag on Indian economic growth. According to the World Bank, more than half of India's state highways are in "poor condition." In its latest survey of global competitiveness, the World Economic Forum found that Indian business executives consider "inadequate supply of infrastructure" to be "the most problematic factor for doing business" in their country. The next four "most problematic factors" were (in order) "inefficient government bureaucracy," "corruption," "restrictive labor regulations," and "tax regulations."

Though India has come a long way since the 1991 crisis, its business sector remains heavily shackled. The latest World Bank report on "the ease of doing business" around the world ranks India a lowly 122nd out of 181 economies. By comparison, China ranks 83rd. Meanwhile, the most recent Index of Economic Freedom, compiled by the Heritage Foundation and the Wall Street Journal, ranks India 123rd out of 179 economies, barely ahead of Rwanda.

"Indians joke that India is like a drunk walking home: it takes one step forward, then two steps sideways, but eventually makes it home," writes Meredith. "Indian reforms, hampered especially by local politics, tend to lurch ahead, then jolt to a stop, only to hurl forward again." Besides local politics, Indian reforms have also been hampered by persistent social tensions, ethnic conflicts, and domestic security threats. As Meredith observes, "The advances of the glittering New India mask stubborn problems, such as high child-mortality rates, violence against women, caste-based discrimination, and religious strife."

The 2008 Mumbai massacre offered a grisly reminder that India has long been plagued by Islamic terrorism. (In December 2001, jihadists attacked the Indian parliament building.) It has also spent several decades battling Maoist rebels known as "Naxalites." Then there is the longstanding dispute over Kashmir and plenty of other spats with India's nuclear-armed neighbor, Pakistan. Tensions with Islamabad have been high in the aftermath of the Mumbai attacks. Though many Indians wish they could just disregard Pakistan, that is not a viable option. "When you have a neighbor whose house is falling down, you simply can't ignore it," says Cohen.

Barack Obama will inherit a dangerous situation in Pakistan, but he will also inherit a U.S.-India partnership that is stronger than ever. Over the coming decades, as global power continues shifting to Asia, the importance of that partnership will only increase. Embracing India may indeed prove to be a significant part of President Bush's legacy. As Bose puts it, Bush elevated the relationship "to a completely new level."

Duncan Currie is managing editor of The American.