Monday, November 10, 2008

Barack Obama and India

I was indeed impressed by Barack Obama’s oratory skills when he gave the keynote address during my commencement ceremony a few years ago. He has surely used it to his advantage towards the road to the presidency of the United States. The important question for us is determine the repercussions of his presidency for India.

Before that, however, we need to understand why the US matters to India.

The first and foremost reason is international trade. The importance of international trade for a country’s economy needs no explanation and the US is one of the few countries with which India has a positive trade balance. For the 2006-2007 financial year, India’s overall trade balance was a negative 2687 billion rupees, while the trade balance with the US was a positive 322 billion rupees. The trade balance did reduce quite a bit for the 2007-2008 financial year, but that was mainly due to increase in aircraft purchases by the airlines in India. Also, the US accounts for about 10% of India’s total foreign trade when measured in rupees.

Another important reason is Foreign Direct Investment in India. The US currently has the third highest FDI in India. FDIs provide the much needed foreign exchange that not only provides reserves for unexpected situations, but also keeps the imports unaffected by the change in the value of the rupee.

And, of course, we have the IT and BPO sector in India that does not reflect in either the GDP or FDI statistics. These exports for the financial year 2007-2008 have been $40.4 billion out of which the US has a 61% share. This sector is estimated to provide employment to about 1.5 million people.

One of the most important reasons why a change in the US presidency matters to India is the political situation in the Indian subcontinent and the US interests in Afghanistan. Every year India pays heavily (not just money) because of terrorism and unrest that is instigated by outside forces. The big issue here is not the defense spending (which is around 2% of our GDP – the US is about 4.9% of its GDP for comparison), but the impact terrorism has on the life of the people and the economy. (Remember how terrorism in Kashmir collapsed the booming tourism industry in the late 1980s).

Now, that we understand that the policies of the US government do matter to India, let’s look at some of Barack Obama’s expected policies.

One of the big differences between Barack Obama and John McCain was the fact that Obama propagated a bottoms-up approach to steer the US economy, while McCain supported the top-down approach. India generally benefits from a top-down approach in the US, where businesses are given incentives, which increases foreign trade. In addition, the fact that the general population is not directly provided money (or say tax breaks), they look for cheaper products, which supports imports from China and India and abets outsourcing. The top-down approach directly benefits the businesses and then trickles down to the population while a bottoms-up approach directly benefits the people and then reaches the businesses.

Apart from that, I don’t foresee a big change in US policies towards international trade with India including the Indo-US nuclear deal.

Regarding the war on terror, Obama seems to be geared towards ending the war in Iraq while continuing the hunt for terrorists in the Afghanistan-Pakistan region. In such a scenario, the US is more likely to need support of the Pakistani government, which may result in both financial and military incentives to Pakistan. Secondly, the US may try to mediate between India and Pakistan over Kashmir for a resolution so that Pakistan could focus on the western border. India prefers a bilateral improvement in its relationship with Pakistan. A continued US interest in the region may also make the extremists more determined to spread their philosophy making them more active in the region. This may increase activities like serial blasts and formation of new terror groups in India.


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