Shadows on Indo-US Ties

EXTERNAL affairs minister Jaswant Singh has visited the United States of America, held an unscheduled meeting with President George W Bush, and returned home exuding confidence about the future of Indo-US relations.

In fact, the outlook for Indo-US ties has turned markedly sour in the last few months. The reasons have nothing to do with diplomacy and everything to do with economics.

First, demand for Indian software professionals in the US has suddenly collapsed. Second, the Enron fiasco will discourage future US investment in Indian infrastructure.

Third, the growing chance of a global recession may induce foreign portfolio investors to pull out of all emerging markets, including India.

The new Indian ambassador in Washington, Lalit Mansingh, said on taking charge that Indo-US ties were stronger than ever today. True, but this improvement has been based mainly on closer business relations, and above all on the prospect of India becoming a major technology partner of US. Alas, this is now in jeopardy.

At the political level, India and Pakistan hardly matter to US policymakers, whose knowledge of the region is skin-deep. Gary Ackerman of the India Caucus once joked that most members of Congress believed that Indiapakistan was a single word.

Jesse Helms, head of the Senate Foreign Relations Committee, once repeatedly referred to Benazir Bhutto as prime minister of India.

The nuclear explosions of 1998 brought India onto the US political radar screen. After initial US outrage and imposition of sanctions, the two countries have more or less restored normal relations.

Some minor sanctions remain, and non-proliferation remains a US concern. But the Strobe Talbot-Jaswant Singh talks have repaired the diplomatic rupture, as proved by the visits of President Clinton to India and Prime Minister Vajpayee to the US.

However, the virtual end of sanctions does not mean the creation of important common ground at the political level. With the nuclear issue receding to the background, the US is once again losing political interest in India.

There remains significant interest in India as an economic partner, but that is precisely where recent news has been very bad.

Till recently, the US had an insatiable appetite for Indian software professionals. It expanded H1-B visas for visiting professionals from 65,000 per year to 100,000 per year and then to 195,000 per year for three years starting 2001. Indian professionals seemed set to storm many US citadels of brainpower.

But the whole technology sector in the US has collapsed in the last few months. Stock market prices have crashed, and orders for both hardware and software have suddenly dried up.

So, far from needing fresh Indian professionals, existing Indian visa-holders are being fired in Silicon valley and returning home. Long-term software prospects are still good, though last year’s euphoria will not return.

US foreign direct investment has also suffered a blow with the Maharashtra government reneging on its deal with the Dabhol Power Corporation.

This is by far the biggest foreign investment in India, worth $2.8 billion. Maharashtra complains that the power supplied by Dabhol is much too expensive to be affordable. But foreign investors expect any country respecting the rule of law to honour contracts, taking the rough with the smooth.

After all, India does not bail out foreign investors who have lost piles of money, so those who strike gold expect to keep their windfall.

The Dabhol deal has already been renegotiated once. Asking for a second renegotiation shows clearly that Indian politicians do not believe in the sanctity of contract.

Some years ago, when a Chinese mayor cancelled a licence for McDonalds, there was much talk of how India had an advantage over China in the rule of law. Dabhol shows that India is as bad as China.

Bankrupt governments have reneged on power deals in countries like Indonesia and Pakistan. This is one reason why Dabhol is viewed by most foreign investors as an exception.

However, changing rules midstream is equally evident in telecom. Cellular operators are up in arms against the government’s proposal to allow basic telephone companies to provide limited mobile services too.

AT&T, which runs a cellular company in collaboration with the Birla and Tata groups, is likely to pull out of India altogether if limited mobility becomes official policy. Here again, the damage to India’s image may be limited.

Cellular companies were saved from bankruptcy when the rules were changed to let them migrate from licence fees to revenue sharing. So they cannot expect too much sympathy when hit by a second set of changes that are disadvantageous. Still, India’s attraction for FDI, never strong, will become even weaker.

US companies which once dreamed of selling goods to an Indian middle class of 250 million have burned their fingers. Investors in infrastructure have burned their fingers too.

Finally, foreign portfolio investors have mostly suffered losses since entering after 1993. The Bombay Sensex today is two-thirds of its peak-1992 level.

Indian software once seemed a fabulous prospect for FIIs, but stock market prices have crashed by up to 95 per cent. FIIs have been net investors despite the crash. But if a global recession now occurs, they could start pulling out.

So, the prospects for Indo-US relations have dimmed. And, unlike the nuclear stand-off, this time diplomacy cannot repair the damage.

What do you think?