US-India relations: A test case for the Sullivan Doctrine

Indian Prime Minister Narendra Modi’s state visit to the U.S. last week provided a venue for the two countries to deepen their relationship during a time of heightening tensions with Russia and China. This is occurring as economic ties have increased in the past decade as India has opened its economy and U.S. businesses have made sizable direct investments there.

India has overtaken China as the world’s most populous country and has one of the world’s youngest populations. India’s economic growth recently surpassed China’s, and India is now the world’s fifth-largest economy and may become third-largest by the end of the decade.

Underlying these developments is a new sense of dynamism that has made former skeptics of India turn optimistic. Indeed, billionaire investor Ray Dalio concurs with Modi that “India’s time has come.”

Journalist Fareed Zakaria cites three revolutions that are transforming India. The first is a government initiative called Aadhaar, which gives every Indian a 12-digit ID number that is verifiable and that enables a protected bank account to be established in minutes.

The second is the revolution pioneered by business tycoon Mukesh Ambani that offers very cheap phones and data packages through his telecom service provider Jio. Today one-half of India’s populace have access to the internet. 

The third is an infrastructure buildout in which government spending has increased five-fold since 2014 and is resulting in improvements in roads, airports, trains and other projects.

So, how might the U.S. increase ties with India?

To begin, it is important to appreciate how far India has come since it attained independence in 1947. India’s politicians pursued import substitution policies then because they did not want to be subservient to foreigners.

The policies included setting high tariff barriers to discourage imports while requiring manufacturers to obtain import licenses to conserve on scarce foreign exchange. In the process, India’s economy averaged just 3.5 percent average annual growth in the first three decades post-independence.

In the 1990s, the Indian economy began to open up to trade and foreign investment amid the collapse of the Soviet Union and its own internal problems. The trade liberalization included reducing tariff rates dramatically, eliminating licensing controls and allowing the exchange rate to float. Although India initially lacked the means to ramp up exports quickly, the tech revolution coupled with the liberalization of the economy has produced visible results.

The most noteworthy changes occurred in the past decade as the Modi government tackled some pressing problems. Among the main catalysts for change are that India has become a hub for global software development, and it is now prominent in technology, pharmaceuticals and steel, among other industries.  

According to The Wall Street Journal, Modi’s vision for India rests on six giant conglomerates that have the ability to raise vast amounts of capital and navigate India’s entrenched bureaucracy.

Recognizing these accomplishments, the U.S. Council of Foreign Relations sees improved trade relations as the best way to strengthen ties. While the U.S. is India’s largest trading partner, with bilateral trade surpassing $190 billion last year, significant barriers to trade exist on both sides.

One challenge is that the two countries do not agree on some key international economic issues. For example, India’s minister for power and renewable energy, Raj Kumar Singh, has criticized the Biden administration’s climate initiative, the Inflation Reduction Act, on grounds that it disadvantages developing countries that are unable to subsidize their own transition to green energy. India has also opted out of the Indo-Pacific Economic Framework’s trade pillar, which is the Biden administration’s signature trade initiative.

Nonetheless, the council sees several ways for the U.S. to improve trade relations. They include lifting tariffs on steel and aluminum that were imposed on national security grounds during the Trump presidency, as well as renewing the Generalized System of Preferences status for India that was removed then.

But the council also maintains that the relationship needs to be reciprocal and that the U.S. should press Modi to adhere to democratic principles amid signs of backsliding. In this regard, it views the outcome of Modi’s visit as a litmus test for a “values-based U.S. trade policy.”

India also poses a test for how National Security Adviser Jake Sullivan’s vision of international trade might be implemented. In an April speech at the Brookings Institution, Sullivan argued that the “Washington consensus” that favored free trade and globalization should be replaced with a new consensus that “invests in the sources of our own economic and technological strength.”

For Financial Times journalist Edward Luce, however, Sullivan’s vision represents a loss of faith in economic multilateralism. He observes: “The old consensus was a positive sum game; if one country gets richer others did too. The new one is zero sum; one country’s growth comes at the expense of another’s.”

My take is that the rejection of free trade in favor of industrial policies dismisses the achievements from the mid-1980s through 2007 when globalization served as a launch pad for developing economies to emerge from poverty via export-led growth and increased foreign investment.  

President Biden’s overture to Modi hopefully will mark a new phase in deepening and broadening U.S.-India relations. While India has a long-standing non-aligned status, Russia’s overtures to China should encourage India to move closer to the U.S. when U.S. multinationals seek to diversify their supply chains away from China. As The Wall Street Journal notes, big deals for jet engines and chips during Modi’s visit are a promising start.  

For the ties to be enduring, however, the mutual political and economic interests of the two countries must continue to expand as India becomes more prominent globally.

Nicholas Sargen, Ph.D., is an economic consultant for Fort Washington Investment Advisors and is affiliated with the University of Virginia’s Darden School of Business. He has authored three books, including “Global Shocks: An Investment Guide for Turbulent Markets.”