American Business Must Stop Distracting India

The stunning potential of India as an economic partner for the U.S. seems to be getting further away rather than closer. India's own policies are the core problem and have been widely and properly criticized. But the U.S. is not helping. In particular, the American business community has adopted short-sighted positions.

First, blame where blame is due. A national election in India is now six months away. In 2010, this might have seemed to be a major event, a rising power deciding on its course. But India has since headed back in the direction of global obscurity. Up to the minute news on the Indian economy remains discouraging. October wholesale inflation was back over 10 percent while September industrial production grew only 2 percent. 

The problems seem overwhelming. Over 800 million rural citizens do not own their land, the state does. This impoverishes and angers ordinary people, so that they oppose domestic infrastructure and foreign investments alike. The government's response is not to permit land ownership, but to create a new, complicated system that maintains the state role and continues to inhibit development.

Technology services are the leading sector for the economy. It is no surprise that the rules governing employment in services are loose and flexible. The rules governing manufacturing are completely different - firms with more than 100 employees often must have government permission to fire anyone. India is in the process of seeing a huge increase in the number of workers. Small manufacturing firms, which should be the engine for growth in this environment, will not hire because it will bring them under the government's purview.

India is not even India. That is: it is a collection of state markets, not a unified national market. There are multiple reasons for this but the most obvious one is states still impose entirely different taxes and usually do not credit tax payments made in other states. Moving goods from one state to another typically involves double taxation and vastly different rules to try to follow.

Enter U.S. business. Around the globe, American companies quite naturally demand more market access. In the case of India, the question is: access to what? Until India lowers the barriers between its own states, it is highly unlikely it will truly lower barriers to multinationals. When the central government does grant additional access at the national level, as it did last week in banking, it does so with conditions that make the concession unpalatable. Then the states pile more restrictions on top of that.

The U.S. complains, accurately, about the extensiveness and complexity of India's external trade barriers. Meanwhile, India's regulatory system for its own companies and individuals is burdensome to the point of absurdity, with licensing requirements for the most minute of actions. The country is ranked by the World Bank an ugly 179th of 189 countries in the ease of setting up a business. It is highly unlikely that foreign goods and services will receive better treatment than domestic.

Another loud American complaint is disregard of intellectual property, for example patents on drugs. It is certainly true that Indian companies and courts act in self-interested ways that undermine the U.S. comparative advantage in innovation. But the Indian government does not even grant the poorest of its people the basic right to own their land. It can hardly be a surprise that Delhi and the court system reject comparatively obscure legal protections for giant multinationals.

It may very well be that the development of India will continue to be stunted. If successful development is to occur, it can only come from fundamental and difficult internal reform. The comparatively peripheral demands being made by American business therefore contribute very little to the creation of the dynamic, prosperous market U.S companies want.

Instead of seeking short-term gains, American firms should encourage sustained liberalization. They should lobby for tax reform that unifies the market and benefits all, not for specific advantages for their firms, no matter how well justified. They should work with local companies to advance domestic deregulation, which is a far more important problem than India's trade barriers. To the extent possible, they should seek out those Indian states which grant more land rights to individuals.

American businesses cannot transform India into successful economy. But they can help India and ultimately help themselves by changing their approach.