The U.S.

-India Relationship

Eswar Prasad and Karim Foda

Global Economy and Development at Brookings
November 4, 2010

Eswar Prasad and Karim Foda highlight the strategic and economic aspects of the U.S.-
India relationship in the context of President Obama's upcoming visit to India. They argue
that Obama's visit provides an opportunity for the U.S. to build trust and convince Indian
leaders that the U.S. has a genuine interest in promoting a more cooperative approach on
issues where the two sides agree and in dealing with some irritants in their relationship.

President Obama’s visit to the world’s largest democracy comes at a time when prospects
for the world economy are becoming increasingly reliant on leading emerging markets like
India, and when India’s economic and political clout in global affairs is growing. Flows of
goods, services and people have strengthened the economic interdependence between the
two countries, although this is still an order of magnitude smaller than the U.S.-China
interdependence.

There are natural alliances between the two countries on a range of economic and political
issues, but the relationship still needs some careful nurturing. This visit by President
Obama provides an opportunity to build trust and convince Indian leaders that the U.S. has
a genuine interest in promoting a more cooperative approach on issues where the two
sides agree and dealing with some irritants in the relationship. The nature of the strategic
relationship between the U.S. and India could play an important role in shaping a number of
international policy debates, especially as the U.S. sees India as a counterweight to China.

Here are some highlights of the strategic and economic aspects of the bilateral relationship:

 Economic ties between the two countries are growing. Trade in services and skilled
migration are the key components of these growing linkages. Trade between the two
countries is roughly balanced, reducing the potential for conflict on currency and
trade issues. Indian officials are now very concerned about loose monetary policy in
the U.S., which is fueling surges in capital flows into India and creating concerns
about an unsustainable boom in equity markets.

 Indian citizens are by far the largest skilled migrant group in the U.S., accounting for
over one-third of U.S. H-1B visas issued in recent years. Even as the U.S. benefits
enormously from this import of skills, tensions are rising about high-end service

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 sector employment that is moving from the U.S. to India. This could become a potent
issue if employment growth remains weak in the U.S.

 President Obama needs to reassure India that the U.S. is not just a fair-weather
friend. India has major concerns about security on its borders with Pakistan and
China. Indian leaders are not convinced that, in the event of rising tensions on either
of these borders, the U.S. will throw in its lot with India.

 India has so far taken a relatively passive role in international policy debates where
the U.S. would like it to be more assertive—for instance, in the currency wars. Here
again, India is hesitant to lead the charge on behalf of other emerging markets as it
feels somewhat isolated and is nervous about being left out in the cold, including by
the U.S., if it takes an aggressive position against China.

 Most of the conflicts between India and the U.S. are in fact played out on the
international stage rather than on specific bilateral issues. The U.S. sees India as
blocking progress on the trade liberalization and climate change agendas. This is
one area where constructive cooperation and give-and-take between the two
economies could have global implications.

Key Elements of the Bilateral Economic Relationship

Trade

U.S.-India trade has expanded in recent years but took a hit during the crisis and has only
recently begun to rebound. Trade in goods and services between the countries has been
quite balanced, with India running a surplus of around $7 billion (See Figures 1 and 2,
below).

The share of total Indian exports going to the U.S. has declined steadily from around 20
percent at the beginning of the decade to about 11 percent over the last two years. The
increase in India’s exports to China, especially minerals such as iron ore, accounts for part
of this shift. Less than 2 percent of U.S. exports go to India. Services trade between the two
economies has been growing rapidly—the share of total U.S. services imports that come
from India has risen from less than 1 percent in 2000 to 3.4 percent in 2009.

Migration

Indian citizens are by far the largest skilled migrant group in the U.S. In 2009, the number
of H-1B visas awarded to Indian citizens totaled 123,002, or 36 percent of all H-1B visas
awarded that year, up from a share of about 25 percent in 2005 (See Figures 3 and 4,
below). The bias toward Indians in the allocation of H1B visas to the U.S. is no coincidence
– it reflects the complementary relationship between skilled Indian immigrants and
advanced, high growth sectors in the U.S., most notably information technology services.
Travel and Tourism

In addition to the flow of migrant workers and services, tourism is another area that is
helping to foster rising linkages between the U.S. and India. American tourist expenditures
(both business and leisure) in India amounted to about $2.5 billion in 2009, accounting for
roughly 20 percent of U.S. services imports from India in 2009. Indian tourist expenditures
in the U.S. have increased to $3 billion, or 30 percent of services exports to India. These
numbers are another testament to the small and growing but relatively balanced nature of
the U.S. and Indian economic relationship.

The State of the Indian Economy

India has bounced back sharply from a mild growth slowdown during the global financial
crisis. GDP growth was 6 percent in 2009 and could hit 10 percent in 2010 (See Figure 5
and Table 1, below), led by robust industrial production growth. The big concern is inflation,
which is now running in double digits (See Figure 6, below).

Food price inflation triggered the inflationary surge, which has now become more broad-
based. India has been receiving large amounts of capital inflows in the last few months,
leading to concerns about a bubble building up in the equity market and increasing
appreciation pressures on the currency, which could hurt the manufacturing sector and
exports. Indeed, industrial production growth has shown some signs of slowing down in the
last couple of months (See Figure 7, below).

The Bombay Stock Exchange has been running hot in recent weeks, with the main stock
index (SENSEX) reaching levels comparable to its pre-crisis peak. Surges in capital inflows
have fueled the equity market boom and led to sharp appreciation pressures on the
currency (See Figures 8 and 9, below). A rising currency could of course help contain
inflationary pressures but at the cost of hurting exports, which are crucial for job growth.
India has recently raised interest rates to try and tamp down inflation but this could induce
more capital inflows. The government has indicated that it is seriously considering capital
controls to try and block some of the inflows and mitigate the complications they create for
domestic macroeconomic management.

India has good short-term growth prospects if it can manage to keep inflation from getting
out of hand. But there are many longer-term challenges—public finances that are in dire
need of repair, inadequate physical infrastructure, weak public governance (corruption),
restrictive labor laws and a relatively under-developed financial system. Moreover, for India
to reap the demographic dividend of a relatively young workforce, the education system
has to be overhauled in short order to increase skill levels among the workforce. These
challenges will have to be dealt with forcefully for India to meet its own version of the G-20
goal of robust, balanced and sustainable growth, with the benefits of that growth shared by
the entire population rather than a select few.
Table 1: U.S., India, China GDP Growth and Inflation
2008 2009 2010 2015 2008 2009 2010
GDP Growth
US 0.0 -2.6 2.6 2.6
India 6.4 5.7 9.7 8.1
China 9.6 9.1 10.5 9.5

Inflation Inflation (end of

(avg) period)
US 3.8 -0.3 1.4 1.9 US 0.7 1.9 0.5
India 8.3 10.9 13.2 4.0 India 9.7 15.0 8.6
China 5.9 -0.7 3.5 2.0 China 2.5 0.7 3.5
Source: IMF World Economic Outlook, October 2010
Note: GDP in constant prices

Table 2: U.S., India, China National Income, 2009

2009
United States India China
Nominal GDP (Trillions USD)
Market Exchange
Rates 14,119 1,237 4,985
PPP-adjusted 14,119 3,615 9,047

Nominal Per Capita GDP (USD)

Market Exchange
Rates 45,934 1,032 3,735
PPP-adjusted 45,934 3,015 6,778

Population (Millions) 307 1,199 1,335

source: IMF World Economic Outlook, October 2010
Figure 1
20
Indian Trade Balances (Annual)

0
2003 2004 2005 2006 2007 2008 2009 2010
-20

-40
Billions USD

-60

-80

Total
-100
Balance with U.S.
Balance with China
-120

-140

Source: IMF; Ministry of Commerce and Industry

Note: 2010 is 12 month balance as of May 2010

Figure 2
U.S. Trade Balances (Annual)
0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

-50

-100
Billions USD

-150

-200 Balance w ith India

Balance w ith China

-250

-300

Source: Bureau of Economic Analysis

Figure 3

H1B Visa Admissions by Country of Citizenship, 2009

India, 36.3%
Rest of World,
44.9%

Canada, 6.5%
China, 3.8%
UK, 4.3%
Mexico, 4.2%

Source: 2009 Yearbook of Immigration Statistics, Office of Immigration Statistics, Homeland Security

Figure 4
180,000
Indians admitted under H1B Visas 157,613 154,726
160,000

140,000
125,717 123,002
120,000
102,382
100,000

80,000

60,000

40,000

20,000

0
2005 2006 2007 2008 2009

Source: 2005 - 2009 Yearbooks of Immigration Statistics, Office of Immigration Statistics, Homeland Security
Figure 5
16
GDP Growth 2000-2010
14

12
10
8

6
4
2
0

-2 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

-4 India United States China

Source: IMF World Economic Outlook, October 2010

Note: GDP in constant prices

Figure 6
25%
India: Inflation Rates, Jan 00 - Oct 10
20%

15%
Consumer Prices
Food Prices
10%

5%

0%
2000M01
2000M07

2001M01
2001M07

2002M01
2002M07

2003M01
2003M07
2004M01
2004M07
2005M01
2005M07

2006M01
2006M07

2007M01
2007M07
2008M01

2008M07

2009M01
2009M07
2010M01

2010M07

Source: World Bank, Global Economic Monitor; CEIC; Ministry of Commerce and Industry
Note: Inflation based on 12 month growth rates
Figure 7
18%
Industrial Production Index, year over year growth, Jan 00 - August 10
16%

14%

12%

10%
Growth

8%

6%

4%

2%

0%
01

10

07

04

01

10

07

04

01

10

07

04

01

10

07
M

M
00

00

01

02

03

03

04

05

06

06

07

08

09

09

10
20

20

20

20

20

20

20

20

20

20

20

20

20

20

20
Source: World Bank, Global Economic Monitor
Note: based on 3 month moving averages

Figure 8
25000
Bombay Stock Exchange Jan 3 - November 3, 2010

20000

15000

10000 Equity Prices

5000

0
1/3/2000 6/22/2001 12/12/2002 6/2/2004 11/16/2005 5/10/2007 10/27/2008 5/5/2010

Source: Yahoo! Finance

 rupees per foreign currency
Ja
n-
0

30
35
40
45
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60
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Ju 0 75
Figure 9

l-0
Ja 0
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Ju 1
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