THE UNITED STATES should approach its reinvigorated relationship with India as more of a long-term economic relationship than a geopolitical chess move against China.
U.S. relations with independent India have never been quite what one would have hoped. To the dismay of the United States, Nehru-led independent India became a key leader of the non-aligned nations' movement, which sought a middle ground between the United States and the then-Soviet Union. The United States became an ardent supporter of Pakistan, with whom India fought wars in 1947, 1965 1971 and 1999. One might have thought that India's defeat in its 1962 war with China could have pushed India closer to the United States. Instead, India signed a 20-year treaty of friendship with the Soviet Union in 1971 due to its fear of China. As further insurance, India began development of nuclear weapons in 1974 and conducted five underground tests in 1998 (after other powers ceased). Economically, Indian government policies were highly suspicious of foreign investment, reflecting the country's colonial past. Faced with unending regulation, U.S. and other foreign investors put their money elsewhere.
For the last 25 years, India has had the second-fastest-growing economy, behind China, in the world. Serving first as the governor of the Reserve Bank of India in the early 1980s and finance minister in the 1990s, Prime Minister Manmohan Singh often is called the architect of India's economic reform and opening to the world. Since becoming prime minister in 2004, Singh has eliminated the capital gains tax, reduced corporate tax rates, and sought to increase India's economic growth rate between 7 percent and 8 percent. To do so, agricultural growth must continue, despite India's ruinous monsoons and poor infrastructure. Foreign direct investment (FDI) has averaged only $5 billion to $6 billion a year, as compared to the $60 billion in FDI that pours into China annually. India hopes to increase FDI to $10 billion this year.
As an FDI destination, India offers many advantages that China does not. Like America, India embraces democracy. Approximately 20 percent of Indians speak English as a native language. Key Indian service industries have grown at more than 9 percent year after year due to increases in productivity and the incorporation of new technology. The Mumbai-Sensex Index gained 42 percent for 2005. Stock exchanges and the securities business in India is considered well managed and above board, quite to the contrary of the Shanghai and Shenzhen exchanges in China. The Indian banking industry shares a similar reputation. Conversely, China's beleaguered banking sector is the victim of a high percentage of loans that it will never be able to fully recover and that were made on the basis of political concerns and connections. India has a functioning, codified judicial system; China does not. Although one-third of India's 1 billion people live in poverty, it boasts a middle class of 250-300 million and is experiencing a tsunami of consumerism, second only to China's. One-half of all Indians are under 25 years of age; China is an aging society. If India had not experienced the growth that it has, Bush likely would not have visited earlier this year.
Based on Dan Fineman's "Growth Model" in the April 15, 2004, edition of the Far Eastern Economic Review, India has created its own model of economic development that is distinctly different from the East Asian model. Unlike the East Asian model, the Indian model is not based on a central government developed and monitored industrial policy, which dishes out preferential tax breaks, politically directs lending and ponies up subsidies. The East Asian model creates growth, but stock market profits lag behind gross domestic product.
|