Taking US-India Economic Ties to the Next Orbit

Image Source: U.S. Secretary of Defense, Flickr

Published September 9, 2024

Background

Over the last two decades, India and the United States have strengthened their strategic partnership by focusing on defence and national security. However, trade disagreements have strained economic ties between the two nations. Resolving these disputes is essential for enhancing the bilateral partnership. In our endeavour to strengthen this partnership, Hudson Institute and the Takshashila Institution organised a series of roundtable discussions in November and December 2021, at which leading scholars and policy practitioners from India and the US focused on opportunities for collaboration in the post-pandemic era. The final outcome of these roundtables, a policy brief, was widely circulated among policymakers. 

New Delhi and Washington have made concerted efforts to strengthen economic ties over the past two years. One such notable measure is the initiative on Critical and Emerging Technology (iCET). Despite these advancements, further economic collaboration carries the potential to boost bilateral trade to $500 billion by 2030. To understand the leverage points that can advance this collaboration, Hudson Institute and the Takshashila Institution organised a second series of roundtable discussions in March and April 2024 to promulgate ideas that can shape the future direction of India-US relations.

The ideas below reflect the broad consensus of these roundtables.

(Please note: The following is a sneak peek from the upcoming Takshashila-Hudson Report, which will be released soon.)

Executive Summary

This executive summary outlines the key recommendations for policymakers that emerged from deliberations at the Takshashila-Hudson roundtable series “Taking the India-US Economic Ties to the Next Orbit.” Its recommendations are divided into four proposed areas for collaboration between India and the United States: trade and investment, ideas and human capital, technology, and methods and mechanisms.

A. Trade and Investment: Policy Recommendations

1. Reduce PLIs, Tariffs, and Import Duties

Reducing PLIs would mitigate the inefficient allocation of government resources and help industries with natural competitive advantages thrive. Eliminating these incentives would help foster a competitive business environment that attracts foreign investors and cultivate industries that would be more competitive, both domestically and abroad. Reducing or eliminating tariffs and import duties would make it easier for companies to manufacture in India, especially in high-tech sectors that require significant resources. Reducing tariffs across the board would also help provide a predictable business environment for investors.

2. Create a Single Window for Exports

A single window for exports would help large companies as well as small firms. Many small firms that want to list their products on Walmart, Amazon, and other global platforms could get clearances quickly. This would diversify India’s business landscape and help small businesses gain market share.

3. Experiment with Innovative Policy Measures

Using its most successful states as labs for ambitious policies, such as land and labour reforms, would limit risk while optimising policy effectiveness. Experimenting with federalism would provide insights and evidence to planners in New Delhi, and could attract international investment and accelerate broad regulatory improvements.

4. Make Regulatory Systems More Predictable and Transparent

Enhancing the predictability and transparency of regulatory systems would reduce uncertainty for foreign investors and foster a more attractive business environment. Clear-cut and consistent regulations would streamline business operations and compliance, increasing efficiency and reducing costs. India should also reduce import restrictions and focus on having consistent tax and tariff regimes. As major players, both public and private, seek to de-risk supply chains, eliminating outsized risks from India's regulatory climate would strengthen US-India trade relations.

India needs to address the perception that the playing field is tilted in favour of a select few domestic companies with privileged access to the government. Such perceptions negatively impact the investment decisions of both foreign and domestic companies.

5. Leverage State Capacity

India’s state capacity has gradually increased over the last several years. India should leverage this capacity to implement and enforce policies that benefit domestic and foreign businesses. New Delhi can utilise existing administrative systems for effective business governance, including the enforcement of intellectual property rights. India should not use its increased state capacity for coercive actions that create a chilling effect on business and investment.

6. Focus on Open Trade Rather Than Industrial Policy

De-emphasizing industrial policy that artificially supports certain industries, and instead focusing on open trade, would allow resources to flow to competitive sectors. This would promote efficiency and innovation and help businesses compete in a fair market environment. Open trade would attract foreign investment by creating a more predictable and welcoming business climate. India should also cultivate efficiency in its permitting and clearance process. By utilising its size and undoing the red tape it has strung up around its market, India can grow its economy.

7. Build Heavy Infrastructure, Including Freight Rails and Deep-Water Ports

India should focus on its infrastructure to compete for global market space with China. Although pillars of Indian industry—like Maharashtra, Karnataka, Gujarat, and Delhi—continue to grow, the wealth of globalisation should be more equally spread across the country. Constructing production-ready factories, increasing transport options to move goods and people, and building ports to facilitate exports across India are key to developing a resilient economy.

8. Facilitate State-Level Relationships

States in India should highlight their areas of expertise, emphasising what they can offer to investors and how effectively they can address challenges as they arise. Focusing on specifics is crucial for India to spread its wealth and broaden its skill base.

9. Focus on Co-development With International Partners

India cannot afford to become isolated in a globalised world. Access to foreign markets and the ability to become a net exporter is imperative for the success of the Indian market. Focusing on co-development with India’s international partners would increase economic prosperity, improve access to opportunities in labour and business, and stabilise international relationships.

B. Ideas and Human Capital: Policy Recommendations

1. Make India’s Cities More Attractive to Investors

India is often too difficult for foreign businesses to navigate. Fixing this starts at the local and state level. States and urban local bodies (ULBs) should simplify the regulatory and permitting framework for foreign investors and increase funding for the critical infrastructure upon which key industries rely. Subnational governments can make the investment process easier, and should actively seek partnerships with major international corporations to create low-regulation laboratories of investment and innovation.

2. Leverage Cooperation Among Subnational Governments

The federal nature of the US and Indian governments presents underexplored opportunities for collaboration. Rather than seeking to micromanage economic and cultural cooperation on a national level, both Washington and New Delhi would do well to facilitate more state- and city-level connections. State-level governments are particularly important, as they often have direct power to build infrastructure, issue permits, and fast-track project reviews. State-to-state agreements can also simplify cultural and intellectual exchange.

3. Facilitate Partnerships Among American and Indian Universities 

Indians have already demonstrated a tremendous appetite for an American university education: over a quarter-million Indians are studying in the US during the 2023–24 school year. While bringing the American university system to India is more challenging than sending Indians to American universities, the opportunity for cooperation is real. Study abroad programs could deepen ties and help put India on the radar of American administrators. More academic and research cooperation is also an important step, with the opening of satellite campuses in India a potential goal that would require concessions from both sides.

4. Strengthen Indian Institutions of Higher Education

Higher education institutions are proliferating rapidly in India, and government intervention can help them grow. Scam universities and low-quality degrees increasingly plague the Indian market, taking advantage of a population hungry for education. Here the state can be a constructive actor. A more transparent and visible system of accreditation would increase trust in the system and stop Indians from being defrauded. 

Yet New Delhi needs to take care to avoid even the appearance of ideological interference. American universities have a high level of academic independence, and if their Indian counterparts want to attract international partners they have to mirror this norm. Grants and other forms of state support should not be contingent on ideological conformity.

Beyond ideological involvement, other forms of micromanagement can also be deeply damaging. In an era when institutions of higher learning are growing rapidly, the Indian bureaucracy should allow the free market to function, ignoring the impulse to centrally plan and pressure universities to fill niches according to civil service diktats. In the long term, encouraging innovation and demand-driven growth would build a more robust and sustainable university system than one driven by micromanagement.

5. Create a More Open Environment for Research and Collaboration

New Delhi should work to foster a more open environment for research and collaboration. The government should publicly celebrate the role of Indian scientists and academics in international projects, highlighting them as exemplars. Beyond this, the state can also ensure the financial viability of research projects by easing regulations that complicate international grant proposals and directing research and development funding to collaborative projects.

6. Streamline Visa Processes

The two countries’ respective visa regimes are a damaging barrier to growth. In the US, politically toxic debates over immigration have made visa reform challenging, but politicians should work to demonstrate the value of liberalising the visa regime for Indian academics and thought leaders without being seen as soft on immigration. Indians and Indian-Americans have already played outsized roles as key drivers of US growth, particularly in tech, and they have more to contribute. It should be easier for Indians to get short-term visas to the US. This change would maximise the potential for corporate and academic cooperation while ensuring that Indian-born talent still makes its way home.

The Indian visa regime is equally self-sabotaging. Americans with much to contribute to the Indian economy are needlessly kept away, due to an opaque bureaucracy and senseless institutional inertia. There will never be enough American specialists in India to deprive Indian nationals of professional opportunities. As such, New Delhi should do more to recruit high-skilled American workers. 

7. Foster Corporate Cooperation

A more open bilateral visa regime would bring a myriad of benefits, demystifying India for American business leaders. Indian government and civil society leaders should cultivate a web of bilateral personal ties across corporate sectors, such as by organising summits and conferences to bring the best and brightest of both countries together.

8. Attract Global Talent

India should also work to attract and retain talent from abroad and reverse the outflow of high-skilled individuals to other countries. An important part of this effort will be making Indians comfortable with having non-Indian CEOs. Many of the largest companies in the US are led by foreign nationals; in an era of multinational corporations, this norm needs to be introduced to India. The Indian government should fundamentally alter its approach to the workforce: rather than thinking of individuals as potential liabilities or easily replaceable commodities, India has to see human capital as an asset of national importance. A whole-of-government change in perspective is needed to retain and attract talent.

C. Technology: Policy Recommendations

1. Ensure Policy Coherence

Policymakers in New Delhi need to reconcile their desire to encourage domestic manufacturing with their goal of creating a genuinely competitive market. Additionally, India should enhance its bureaucratic capacity and make taxation and enforcement more predictable. Firms cannot comply with vague rules and regulations.

2. Reconsider ITA3 and Resolve Trade Disagreements

By re-engaging in ITA3 negotiations, India could gain access to new markets and attract more foreign investment in its tech sector. Its 2023 resolution of outstanding WTO disputes was a good start. Both Washington and New Delhi should aim to reduce tariffs, regulatory impediments, and unenforced violations of intellectual property laws.

3. Focus on Emerging Technologies

The US and India have recognized the benefits and dual-use potential of emerging technologies, including AI. Both governments should facilitate cooperation in research and development for emerging tech and update regulatory frameworks to reflect the changing economic landscape.

4. Formulate a Coherent Approach to US-China Tech Competition

Since the Trump administration drew greater attention to China’s threat to the rules-based international order, American national security priorities have shifted. This shift has been met with a mixed reception in the private sector, for which China remains a vital business partner. By establishing a coherent and clear approach to US-China tech competition, Washington and New Delhi can help the private sector invest and trade in ways that are aligned with each nation’s national security interests.

5. Encourage Exports and Acquisitions

Currently, the regulatory climate in India makes acquisition and manufacturing difficult for foreign nations. Strategic deregulation can make India competitive with Vietnam and Mexico as export-based economies.

6. Increase Support for Biotech

Biotech is an emerging yet underexploited field that carries significant opportunities for American industries looking to detach from China. Incentives like advanced purchase agreements and the strong enforcement of intellectual property laws would drive growth in this industry.

7. Streamline Visa Processes

Washington and New Delhi should reduce barriers to the effective maximisation of human capital. Long and complex visa acquisition processes are a barrier for tech, research, and finance professionals, and hinder collaboration and talent exchange. Both nations should make it easier for an ambitious worker to get a visa.

D. Methods and Mechanisms: Policy Recommendations

1. Focus on Mutual Interests

Trusted partners and allies can disagree without derailing their relationship. Washington and New Delhi should view the ability to weather criticism as a sign of an enduring partnership. The shared objective of curbing China’s influence has given the US and India an unprecedented overlap of interests. To sustain their relationship, both nations should strive to identify and strengthen areas of agreement, especially outside the realm of state security. Regular dialogues and joint initiatives involving trade bodies and private industry can help consolidate convergences.

2. Manage Differences Discreetly Through Established Frameworks

Although India and the US share strategic objectives, the two nations have a long history of divergence as well. India’s longstanding ties with Russia, for one, do not sit well with American policymakers. Leaders from both nations can preserve the bilateral relationship by minimising public disputes and managing controversial incidents behind closed doors. This can help prevent disagreements from becoming partisan issues or escalating and causing long-term damage to the bilateral relationship. Pre-existing bilateral frameworks and strategic dialogues can provide a mechanism to address disputes and find mutually beneficial solutions.

3. Increase Bureaucratic Bandwidth

India should expand the bandwidth of its Ministry of External Affairs, which is small compared to the US State Department. As a result, India’s diplomats cannot do as much as they could with more institutional support. Improving the capacity of India’s key institutions would strengthen its diplomatic ties with multiple nations.

4. Offer Political Support for Collaboration in Energy

Government backing is crucial for advancing joint ventures in critical minerals, natural gas, oil, and thorium. As energy, minerals, and source materials for electronic components become increasingly fraught areas of competition, tactical collaboration will help both Washington and New Delhi. Political support for cooperation, including in the private sector, is critical for strengthening currently limited supply chains. 

5. Integrate Trade Discussions Into Strategic Dialogues

Incorporating trade discussions into strategic dialogues on defence and diplomacy would make the US-India relationship a more well-rounded partnership. It would also help align trade policies with strategic objectives, provide another mechanism to resolve trade disputes, and open new avenues for economic collaboration. As trade interests between the two nations are often at odds, the continued prioritisation of strategic cooperation can ensure the persistence of the relationship despite trade disagreements.

6. Make Academic Collaboration Easier

Increasing the frequency of academic exchanges would lead to better-informed policies and deeper bilateral cooperation. Such exchanges promote goodwill and create lasting ties between citizens of both countries. They also help share best practices, foster innovation, and enhance mutual understanding. India should cultivate a more open academic environment to attract talented international scholars by eliminating bureaucratic hurdles; a more open academic environment enhances India’s global reputation as a hub for education and research. New Delhi should also ease visa restrictions for academics, students, and researchers to deepen the exchange of intellectual and human capital.

7. Maximise India’s Access to US Markets

India should work to gain greater access to US markets by reducing trade barriers, leveraging bilateral agreements, ensuring the protection of intellectual property, and deregulating its domestic economy. As the China Plus One framework emerges, India’s inconsistent and arbitrary regulatory enforcement routinely limits its ability to be a viable “plus one” partner for private industry. Ensuring policymaking coherence while leveraging bilateral agreements would broaden India’s access to US markets.

8. Align Technological Norms, Standards, and Regulations

Establishing common standards would make Washington more comfortable transferring dual-use and benign high-value systems to India. Moreover, a shared set of norms on technology and intellectual property enforcement would cultivate private-sector confidence in Indian markets, research, and manufacturing.

9. Expand Educational Exchange Programs Beyond the STEM Fields

Academic ties between India and the US are strong: in the 2022–23 academic year, nearly 269,000 Indian students attended American universities. However, most of the two nations’ academic partnerships are in the STEM fields. Expanding educational exchange programs beyond the STEM disciplines could expand opportunities in each nation.

10. Improve Cooperation at the United Nations and in Other Multilateral Forums

Although India and the US share many strategic objectives, the nations have a long history of disagreements in multilateral forums, including the UN and WTO. Improving cooperation in these venues could help Washington and New Delhi present a united global front and enhance their ability to reinforce a rules-based global order.

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