The Impact of Indian Economic Liberalization on U.S.-India Relations

Abstract

The Impact of Indian Economic Liberalization on U.S.-India Relations Thomas A. Timberg (bio) In the fall of 1990, India experienced a foreign exchange crisis that triggered a change in the direction of economic policy in the country. The crisis, precipitated by the Gulf War, was in many respects a delayed reaction to shifts in capital flows from the Middle East to India. Tangibly, these pressures were reflected in the constraints that they imposed on fuel supplies, the ensuing rise in fuel prices, and the drop in earnings and remittances from the Gulf as foreign workers were sent home. In the wake of the crisis, India began to lift industrial and trade controls and open the country to foreign investment. This policy shift was a culmination of gradual developments, both in the thinking of the policymaking elite and in the nature of the world economy. Under the new economic regime, India’s actual and potential roles in the world economy have changed significantly, affecting both its commercial and political relationships with the United States. The change in the direction of economic policy has sparked a debate in India about the impact of economic growth, which, since the crisis, has been maintained at 6 to 7 percent per year. In general, the World Bank’s annual reports, as well as official statements of the Government of India, indicate that the results of liberalization have been an acceleration in investment and [End Page 123] growth, with relatively little, if any, negative effect on the poor or the environment. 1 Critics allege that growth levels have not dramatically deviated from the trend, that they are unsustainable, and that the impact on the poor has been negative. 2 Still other critics believe that the loss of national sovereignty required by India’s entry into the new world trading order is both contrary to national dignity and ultimately not consistent with India’s economic progress. The number of critics is quite large and ranges from the left to the nationalist right. 3 This article, however, is concerned primarily with the impact of liberalization on India’s relations with the United States. The increased presence of U.S. investors within the Indian economy has significantly altered relations with the United States, though the ultimate direction of these changes is not entirely clear. Before the 1990 crisis, trade levels between the two countries were small, as was the volume of U.S. capital invested in India. Today both these figures are growing, although increases in capital investment have outpaced changes in trade levels. The increase in investment in India comes primarily from two sources: direct investment by American multinational corporations and portfolio investment by mutual and pension funds. United States residents of Indian origin have contributed funds to both sources and their influence has been essential to the gradual liberalization of India’s policies. The Facts Since the 1990 crisis, more than $8 billion of foreign investment is estimated to have flowed into India, of which a modal 15 to 16 percent has been from the United States (the figure was only 9 percent in 1995–96). 4 India has opened considerably to foreign trade and investment and sought to harmonize Indian norms with international ones. Both developments reflect India’s desire to expand its participation in the new international trading order. U.S. exports to India rose from approximately $2 billion in 1991 to $3.3 billion in 1995, while U.S. imports from India rose from $3.1 billion to $5.7 billion. The stock of U.S. direct investment in India also rose, from $372 million in 1990 to $818 million in 1994; this growth is likely to accelerate. Since India’s liberalization, then, exports and imports have each risen by more than 50 percent and direct investment has more than doubled. The [End Page 124] fact that the effect on the proportion of trade accounted for by each country has been small reflects the general buoyancy of all international trade in this period. The rupee is now convertible for trading purposes and the government has committed itself to a time-bound freeing of the capital account. (In a report published by India...