Indian Prime Minister Narendra Modi on 8 September met US President Joe Biden ahead of the G20 Summit. The meeting came less than three months after Modi was given a red carpet welcome during his first state visit to the US in late June. Beyond the glitzy headlines and the photo-ops, these meetings have underlined the momentum and future direction of the India-US strategic ties and the potential opportunities created for businesses.
Biden’s meeting with Modi – which the White House said was marked by “undeniable warmth and confidence” – was the most recent in a series of high-level engagement between the two countries. In a joint statement, the leaders reaffirmed the close ties between their countries and acknowledged the progress underway in implementing the achievements of Modi’s historic state visit to the US. Mutual concerns over China’s growing influence have driven the qualitative and quantitative improvement in bilateral ties in recent years. There is a bipartisan consensus in the US that India represents an effective regional bulwark to China. India too has shed its earlier reluctance to deepen security engagement with the US amid its growing strategic rivalry with China.
The relationship is not free of constraints. New Delhi, in its pursuit of an independent foreign policy, is unwilling to follow Washington’s lead on Russia, sign up for a formal military alliance or support economic sanctions against China. Nevertheless, the strategic rationale and the economic potential of the bilateral relationship will compel India and the US to work around these differences. A stronger India-US partnership over the course of the decade is very much on the cards.
Trading partners
Closer economic engagement will remain the bedrock of this strategic partnership. While India will remain hesitant to fully embrace a security alliance with the US, political constraints for the promotion of economic co-operation will be less.
In FY2023, the US overtook China as India’s largest trading partner, with bilateral exchanges in goods and services exceeding USD 191bn. A broader free trade agreement remains unlikely given Washington’s growing reluctance for signing up for large FTAs – even with its close partners – or reinstate trade concessions under its Generalised System of Preferences. Even in its absence, bilateral trade is expected to continuing growing over the next few years, though may miss the ambitious targets of USD 500-600bn by 2030.
Digital trade also has significant potential for growth given India’s new data privacy laws, enacted in August 2023, that continue to allow cross-border transfer of data. In the earlier drafts of the new law, India was aiming to impose hard data localisation norms. The turnaround in India’s stance on the issue was partially driven by pressure from its strategic partners (including the US), which considered the proposed measures to be a significant barrier for bilateral digital trade.
Gunning for more
Defence ties between the two countries have been expanding over the last several years, most evidenced by India’s participation in the Quadrilateral Security Dialogue (the Quad), a strategic security dialogue between the US, India, Japan, and Australia. US-India defence trade will likewise receive a boost as India seeks to modernise its armed forces and reduce dependence on Russian weaponry. There has been a marked increase in India’s imports of US military hardware in recent years. However, Modi’s June visit to the US is likely to trigger a significant transition towards co-development of military equipment, opening opportunities for companies in both countries.
The crowning achievement of Modi’s state visit was the agreement between a US multinational company and an Indian state-owned enterprise to manufacture jet engines in India for combat aircraft. This marks the first time Washington has agreed to share a substantial amount of sensitive military technology with a non-ally, reflecting its willingness to deepen strategic ties with India despite concerns regarding the latter’s reliability as a long-term security partner. The agreement also fulfils a long-standing Indian request for military technology transfer.
The agreement will push New Delhi in the coming years to attract more US defence companies to India for joint manufacturing of other military hardware. Deals for the co-production of armoured vehicles and artillery guns are already under discussion. Similarly, the launch of the Defence Acceleration Ecosystem in June is also likely to cement collaboration among private companies in both countries for developing advanced military technologies.
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Shoring up with friends
Joint defence manufacturing centred in India also aligns closely with the new US friendshoring strategy. In February, during an official visit to New Delhi, US Treasury Secretary Janet Yellen labelled India as an important cog of this strategy, which seeks to diversify supply chains away from China. India’s relatively untapped market potential, cheap labour and large consumer base offer an attractive alternative destination. India is also keen to market itself as a global manufacturing and export hub. Given the political stability enjoyed by the ruling Bharatiya Janata Party and its strong chances of returning to power in 2024, there is likely to be significant policy continuity towards foreign investments, particularly from the US, for the rest of this decade.
The technology sector stands to benefit significantly from the US’ friendshoring strategy. On 30 January, the two countries announced the US-India initiative on Critical and Emerging Technologies, which aims to expand bilateral cooperation on advanced technology, particularly in the semiconductor and 5G and 6G wireless infrastructure sectors. Several US technology and semiconductor companies announced new investments in India ahead of Modi’s visit to the US.
Furthermore, Washington has identified pharmaceuticals, clean energy and critical minerals as priority avenues in India within this strategy to reduce China’s influence over the supply chains in these sectors. US and Indian leaders agreed to strengthen pharmaceutical supply chains, research ties and pandemic readiness collaboration, which will likely enhance opportunities for US pharmaceutical companies in India. In addition, the two countries will prioritise the energy transition and have already announced initiatives to boost clean energy production and research. Washington also invited India to join the Mineral Security Partnership, a multilateral initiative to secure critical mineral supply chains among US partners and enhance public and private investment in the sector. This will likely encourage collaborations between US and Indian mining interests. Furthermore, Biden and Modi in an 8 September joint statement reaffirmed their commitment to collaboration on 5G and 6G technology, resilient semiconductor supply chains, and joint research in advanced technology.
The idea of friendshoring is likely to gain further prominence in bilateral ties over the next two to three years. However, despite strong political will and concerted attempts on both sides, India cannot replace China overnight as the world’s premier manufacturing hub. China’s experienced workforce, vast infrastructure and export-oriented policies will continue to give it a competitive advantage. Moreover, India is likely to also fare unfavourably in comparison with some South-east Asian countries, which are perceived to have a better business environment. In recent years, India has taken steps to improve its infrastructure and logistics, better integrate with the global supply chains and ease its regulatory and tax environment. The pace of such changes has been slow and while greater improvements are likely over the course of the decade, for now these changes remain very much a work in progress.
Given such challenges, traditional concerns among American companies of India being a difficult place to do business will persist. However, to capitalise on the opportunities provided by India, American businesses looking to enter the Indian market will need to undertake a careful assessment of the regulatory landscape for relevant sectors. This should also include an analysis of the business environment across different states, as each region presents its own regulatory maze and operational challenges. Such a comparative study will enable companies to determine the region within India best placed for their investments. Finally, companies must undertake a careful pre-assessment of all integrity risks and political connections specific to prospective partners as this could undermine their operations in the country.