The Economic Fallout of Obama Visit

(Published in The Tribune, January 27, 2015)

The presidential visit of Barak Obama to India for the 66th Republic Day was laden with ‘symbolism’ which can be decoded as ‘US is now ready to acknowledge India’s rising economic power’. India is after all the third biggest economy in the world and is poised to grow at 7 to 8 per cent according to the IMF.

His coming to India has given the American business community a signal that India is going to be important for American business. Other reasons for Obama’s visit could be that he is keen to tap India’s economic potential specially when China’s growth is slowing down and EU is facing a deflationary spiral that could turn into a full-fledged recession. India as an important member of the BRICS is also close to both Russia and China, two countries that the western powers are wary of. India with its huge population of 1.2 billion of mostly young people, is a future powerhouse of the world, ready to supply labour to countries needing it. It will not only be software engineers who would be going to the West but with ageing Europeans and Americans, a lot of care givers from India would be needed in their health sector in the future.

Secondly, though there were many issues to be sorted out during this Presidential visit, Obama went for generalities saying he would like to take India US economic relations to new heights. Trade with US was at $63.7 billion in 2013 though now it is nearly $100 billion. India and the US want to see this bilateral trade rise to $500 billion. India had a trade surplus with US at $20.9 million in 2013. India and China already have bilateral trade of $65 billion. India accounts for only 2 percent of US imports and 1 per cent of its exports.

There was much talk of Foreign Direct Investment (FDI) and the controversial issues relating to the ‘ease of doing business’ in India. Prime Minister Modi promised he would greatly improve the ‘ease of doing business’, important not just for Americans but for other countries as well. India’s ranking is 142ndin the important World Bank index of ‘ease of doing business’ and India is known to have various impediments to FDI starting from lack of speedy clearances due to bureaucratic hassles, old labour laws and difficulties in land acquisition. The Land acquisition law has been amended by an Ordinance by NDA government but this will not be accepted easily. Reluctance to opening up the Multibrand Retail sector is also regarded as a hindrance to FDI inflows.

USA’s FDI to India from April 2000 to September 2014 was $13.16 billion constituting nearly 6 per cent of the total FDI into India making US the sixth largest source of FDI into India. On the other hand 65 large Indian companies have been investing in the US and have invested $17 billion so far. Indian companies have created 81,000 jobs in the US.

The Bilateral Investment Treaty was talked about during the visit but since it requires a lot of technical background work, it did not materialize. The US Export Import Bank would finance a billion dollars to support ‘Made in America’ exports to India over the next two years. US trade missions will be here this year with specific focus on infrastructure development in rail, roads, ports and airports.

Obama has promised that US Overseas Private Investment Corporation will lend $1 billion to small and medium enterprises in rural areas in India. On the whole he promised $4 billion in investments and loans. Through clean nuclear energy he has promised to raise overall productivity and through technology, help India have clean drinking water and air– a promise worth following up. Another important promise from Obama is about digitalizing rural bank accounts to make Modi’s dream of financial inclusion come true.

The problems with India Inc. today however are mainly related to domestic policies which are constraining growth and domestic investment and FDI could help a lot. The impact of slow investment has been that the last quarter (Q3) results of companies show very slow profit growth.

Even IT companies have not shown a rapid profit growth. The IT companies’ combined annual net profit growth stood at 6.3 per cent down from 15.4 per cent in the previous quarter and 32.7 per cent in the corresponding quarter, last year. Analysts attribute this to the continued economic slowdown in Eurozone and Japan even though US has been increasing its demand.

Manufacturing growth in India has picked up from a negative growth to 6.3 per cent in April to September 2014. Prime Minister Modi’s pet theme of ‘Make in India’ may materialize with the Nuclear Deal being sealed and American companies coming to India to make nuclear reactors even though there would be competition from ‘Made in America’ goods. Making domestic defence equipment has been the aim of the NDA government and it has eased FDI norms considerably in the defence sector.

The main problem however could be the quality of labour force. Around 90 per cent of India’s labour force is employed in the unorganized sector which is without any kind of safety net. Unless the labour force is given social protection, guaranteeing wage earners and their families healthcare, housing and education, labour productivity cannot rise.

Most importantly, there has to be training in skills to enable unorganized sector workers to join the organized sector with higher wages and better conditions of work to ‘Make in India’ dream come true.

Meanwhile the stock market has been on the roll before and after Obama’s visit because of the news that India will surpass China’s growth by 2015 and the recent announcement of quantitative easing by European Central Bank—all of which has led to a huge inflow of FIIs to Emerging markets. The inflows have raised India’s reserves to $322 billion recently. The rupee has become stronger which could dampen exports in the future. What India needs badly is more FDI with its technology and capital. Hopefully it would come as a positive outcome of Obama visit.

 

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