Still bickering after all these years

The Economist, UK
http://www.economist.com
March 17, 2005

India and America: Happy ending?

DELHI: LIKE a novel where it is obvious from the outset that the two protagonists are meant for each other, but take hundreds of pages to get together, India and America should form a natural partnership yet are usually at odds. As Condoleezza Rice, America's new secretary of state, started a tour of Asia in the Indian capital this week, the two countries were closer than ever to achieving their happy ending. Democracy's superpower and its most populous nation are enjoying a honeymoon. But old bugbears remain, and some new ones have cropped up.

The biggest snag remains America's alliance with Pakistan, whose co-operation is essential for the campaign against al-Qaeda, but which India regards as a big exporter of terrorists on to its soil. India is still smarting from the snub it felt last March, when Ms Rice's predecessor, Colin Powell, proceeded to Pakistan after a friendly visit to India. In Islamabad, he announced that Pakistan was to be one of America's “major non-NATO allies”—an important detail he had omitted to mention in Delhi.

One year on, the peace process between India and Pakistan has made some progress. So, in theory, India should be less touchy about America's ties with Pakistan. But India remains opposed to America's possible delivery to Pakistan of F-16 fighter planes. K. Subrahmanyam, a leading Indian strategist, argues that in India “nobody will lose sleep” about the military implications. But he says it has symbolic importance, revealing American-Pakistani co-operation, and because F-16s could potentially carry Pakistan's nuclear arms.

The peace process with Pakistan has itself thrown up a new bone of contention: a proposed pipeline bringing gas from Iran to India across Pakistan. An important part of India's strategy to secure future energy supplies, the pipeline would also give both India and Pakistan a big economic stake in peace. But Ms Rice repeated America's misgivings about the benefits it would bring Iran. Given America's hold on Pakistan, that probably scuppers the project.

India is pleased with the progress made under the so-called “New Steps in Strategic Partnership” with America, giving it access to higher-technology imports with possible military uses. The relationship could be transformed—and India's military and energy worries dissipated—by two further conceivable transfers of technology: of a large number of F-16s to India itself; and of nuclear reactors. America currently refuses to sell India reactors. That a similar ban on China has been lifted rankles in India, as does Ms Rice's waffling over another issue where India is demanding parity with China: permanent membership of the United Nations Security Council.

The two countries could, however, boast about their co-operation over Nepal, where both have urged King Gyanendra to restore the liberties he took away in a coup on February 1st. Even here, however, there are differences. America seems more prepared than India to give the king a chance to win the war against the Maoists without the bother of party politics. After India announced a freeze in military help to Nepal, Pakistan offered to plug the gap. There, too, America might make a difference.

For many Indians, however, these are nuances that do not undermine the secular trend of improving relations. Just as George Bush has been reaffirming America's championing of free democracies around the world, India's prime minister, Manmohan Singh, has been redefining India's role in the world. Last month he made a speech positioning India no longer as a leader of the third world, nor of cold-war non-alignment, but as “proud to identify with those who defend the values of liberal democracy and secularism across the world”. America, says Mr Subrahmanyam, faced with a challenge to its supremacy from a rising China, has no choice but to “bet on India”. In the long run, say India's strategists, America needs India more than India needs it. Modesty has never played much part in Indian diplomacy.

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Background:

India gained independence in 1947 after two centuries of British colonial rule. Partition at the same time created the state of Pakistan, with which India has fought three wars, two over the disputed territory of Kashmir. Until a spate of economic reforms in the early 1990s, economic policy focused on a drive for self-sufficiency with a minimum of foreign participation. Reforms have since proceeded slowly. The large (and inefficient) public sector co-exists with a sizeable and diversified private sector. Agriculture is almost entirely in private hands.

Political structure: India has maintained a democratic framework since independence. The centralisation of decision-making, particularly in the 1970s, has led to the growth of regional parties, and coalition government is now the norm. Despite poor literacy rates and widespread corruption, a high level of political awareness has ensured that democratic norms are, on the whole, respected. The prime minister is the head of government, requiring the support of a majority in the national parliament. The president is the head of state and, although limited in executive power, can influence the formation of governments at both the state and the national level when no party has received an outright majority. The judiciary is formally independent, and is becoming increasingly assertive.

Policy issues

The government is committed to stimulating the agricultural sector, but balancing this with the need to reduce the fiscal deficit will be difficult. Simplifying the tax structure to reduce tax evasion and lowering real interest rates are two means by which the government may try to lower the fiscal deficit. It will be politically difficult for the government to continue with the disinvestment process, although sales of small stakes in public enterprises will proceed. Reducing government subsidies will continue. Further liberalisation will increase the role of domestic and foreign private-sector companies, but political opposition will remain an obstacle to wholesale changes in policy.

Taxation

The top rate of personal income tax is 30%, and the corporation tax rate is 35% for Indian companies and 40% for foreign companies. However, these rates do not include a 2% additional tax to improve education. All firms pay a 10% tax on distributed profits. Customs duties have been sharply lowered but remain high by international standards.

Foreign trade

India’s trade deficit rose to an estimated US$17.5bn in 2003 in balance-of-payments terms, from US$12bn in 2002. Although exports performed strongly in 2003, rising by 12% to US$56.7bn, imports soared by 18% to US$74.2bn owing to higher oil prices and demand for industrial inputs and consumer goods. In fiscal year 2003/04 (April-March) the US was again India’s top trading partner. However, the US share of trade slipped to 11.6%, from 13.4% the previous year.