An Agenda for Secretary Geithner’s Visit to India

In the early days of the Obama administration, many in India had felt that unlike President Bush, who vigorously fought for the U.S.-India nuclear cooperation deal and successfully saw it through, President Obama was keener to promote U.S. cooperation with China rather than India. The visit of India’s Prime Minister Manmohan Singh as the first state guest of President Obama was partially aimed at countering this impression. Yet, this sense of uneasiness on the part of the Indians still remains since the visit did not produce any concrete results.

Against this background, Treasury Secretary Timothy Geithner’s forthcoming visit to India to meet his counterpart Indian Finance Minister Pranab Mukherjee offers a unique opportunity to transform U.S.-India relations. Recent developments in the U.S.-China relationship including the effective exit of Google from the Chinese market and threats of a retaliatory action by the U.S. Congress on the exchange rate issue should calm down Indian fears that the Obama administration is keener on China than India. Symmetrically, from the U.S. perspective, the current Indian leadership is well inclined towards continuing to build U.S.-India relations.

Therefore, the real question concerning Secretary Geithner’s visit to India is how it can help advance U.S.-India economic ties. At the basic level, it must be recognized that economic ties between countries are largely a matter of private businesses and entrepreneurs exploiting profit opportunities in each other’s markets. As such, it would be wrong to expect that the visit by itself would produce direct and immediately observable economic gains for either country.

However, this being said, there remain important areas in which the proposed partnership dialogue between the United States Treasury and Finance Ministry in India could advance economic ties between the two nations. The official agenda agreed between the two sides proposes to focus on macroeconomic, financial sector and infrastructure issues. Within these three areas, the subject with the greatest potential is infrastructure. India is on the cusp of launching a massive build up of its infrastructure including power, railways, roads, ports, airports, telecommunications and urban housing and transport. The current estimates are that India will need to invest $1 trillion on infrastructure over the next ten years.

Yet, India remains inadequately prepared for this gigantic task, especially in terms of financing. Given a debt-to-GDP ratio of nearly 80 percent and a high existing fiscal deficit that must be brought down, it is unlikely that the Indian government can increase public investment in infrastructure beyond the current level of 5 percent of the GDP. This leaves an annual financing gap of almost $50 billion per year over the next several years. Thus, private resources including those from abroad will have to be mobilized and the United States could play a major role in filling this gap.

At present, while infrastructure companies from Italy, Germany, Spain, Singapore and Malaysia have a visible presence in the Indian market, U.S. infrastructure companies have remained relatively disengaged. Therefore, the visit by Secretary Geithner could focus on forging necessary agreements with his Indian counterpart to bring the U.S. companies prominently to India’s infrastructure market. The visit could also help bridge the information gap that seems to exist among the U.S. infrastructure companies with respect to the Indian market.

A second important potential area of cooperation between the U.S. and India is higher education. The Foreign Universities Bill, which the Indian Cabinet recently approved to be tabled in the Parliament, will finally end a regulation that currently forbids foreign universities from awarding degrees in India. India produces a large number of extremely talented students while the United States has a large number of world-class universities. Once the barrier to the entry of foreign universities is removed, the two countries stand to mutually benefit big from cooperation in this area. As many as 70,000 Indian graduate students currently study in the U.S. and could be hired as faculty members on Indian campuses of the U.S. universities.

The third major area of possible U.S.-India cooperation is financial sector development. In particular, while the equity market has been coming along very well in India, long-term debt market in instruments such as corporate bonds and municipal bonds is almost non-existent. This has indeed been a major barrier to raising private infrastructure finance. A large part of the action to develop the debt market has to come from the Indian government. For example, regulation on insurance and pension funds that encourages them to heavily invest in government securities needs to be gradually liberalized. But the experience and expertise of U.S. financial sector firms can be exploited as a part of cooperation between the two nations. Symmetrically, India has perhaps shown greater prudence in regulating its banks and financial institutions, which helped it largely escape the recent global financial crisis. There may be lessons for the United States to learn from India in this area.

Fourth, trade, which can be included as a part of macroeconomic agenda of the Treasury-Finance Ministry partnership dialogue, could be a very important area of cooperation. The Doha negotiations have remained stalled and their revival and conclusion remain in the interest of both India and the United States. U.S. Trade Representative Ron Kirk has been lukewarm to resuming talks, but perhaps the Geithner-Mukherjee dialogue could help break the ice. Thee may also be scope for liberalization in agriculture by India outside of the Doha negotiations. But this will require a quid pro quo from the United States in areas such as temporary worker visas for which the latter may not be ready.

Finally, Federal Reserve Vice Chairman Donald Kohn who will accompany Secretary Geithner has said that rebalancing the global economy will also be a part of the discussions in New Delhi. In the Indian context, the precise rebalancing issue is not clear.  Unlike China, with rare exceptions, the current account of India has been in deficit in most years. As such, there is little scope for the appreciation of the rupee to accommodate larger volume of imports and smaller volumes of exports. On the other hand, the statement is meant to hint at asking India to join hands with the United States in pushing China to revalue its exchange rate, Mr. Kohn will need to tread carefully. India perhaps has its own worries about managing the bilateral relations with China.

As Secretary Geithner embarks upon the visit, Indians will be keenly looking for concrete evidence of a desire to strengthen the partnership between the two countries on the part of the Obama administration. Rather than insisting on balancing every single concession offered, as the United States frequently does, Secretary Geithner should exhibit greater flexibility and generosity. In the end, the success of the largest and most diverse and complex democracy of the world holds many rewards for the United States in the long run even if its concessions are not immediately reciprocated.