Premium Conversations | The India-US economic relationship with Mukesh Aghi

President and CEO, USISPF, Mukesh Aghi on the current bilateral partnership, the challenges faced by US businesses, and the reformist steps and policy gaps in India.

As the president and chief executive officer of the United States-India Strategic Partnership Forum (USISPF), Mukesh Aghi is among the most significant players in shaping the economic relationship between India and the US.

I would like to see trade reach $500 billion. That is important because it creates jobs on both sides. (HT Photo)

He spoke to Hindustan Times in his office in Washington DC on the current moment in the bilateral partnership, the opportunities and challenges faced by US businesses, and both the reformist steps and policy gaps back in India.

You speak extensively to both the Government of India (GOI) and American industry. What is the one positive thing, and one major grievance, that you hear from both sides vis-a-vis the economic partnership?

I think the one positive thing which we hear from the US side is the slice of opportunity that India offers to US companies to partner in the growth story of India towards a $5 trillion or $10 trillion economy. That story continues. If I hear grievances, it has more to do with level-playing field; it has to do with a certain lack of transparency, and probably improved consultative process. Those are the themes that keep coming up. But overall, the sentiment on India is still very positive. You have to understand this from a global perspective because US companies were so dependent on China, especially in manufacturing. And in every boardroom, they are now talking about what is your China plus one strategy; how do you de-risk being in one country for all of your global manufacturing?

For its part, GOI is very keen to attract US companies and US capital. If it wants India to be a $5 trillion economy, it needs substantial amount of investment and technology coming into the country to fulfil the vision of the Prime Minister (PM).

Let me jump straight into the China dimension here. The House of Representatives recently passed the America Competes Act, and the Senate had passed a version of it last year. The legislation stems from the political mood to counter China. How much of this mood both in political and business circles has translated into real investment vis a vis India?

When you look at US FDI, it is up in India by 29%. This is till the last quarter because this quarter isn’t over yet. The sentiment is still very strong because as time goes by, what we are seeing is more of a negative sentiment towards further investment into China. But you have to understand that you have Vietnam, Cambodia, Thailand, even Bangladesh which is competing for the dollar. So India has to compete. It can’t take for granted that these companies will come.

In terms of the competition with these other Asian countries, how would you rate India? Is it being able to wean away American investment? We hear about Vietnam taking away a fair share.

So when you look at it from the tax perspective, especially for new manufacturing plants, India is as competitive with anybody else with a rate of 15%. When you look at cost of labour, it is competitive. Where it becomes more challenging for the US companies is labour productivity and supply chains, where you are able to move goods smoothly in a global supply chain across borders. That’s where the cost is 20% on the total cost of goods, while in China, it comes to about 8% of the goods. We need to bridge that gap to make it much more competitive.

And is that to do with the fact that India is not as enmeshed in global and regional trading networks?

I think that is happening. The challenge is the bureaucratic hurdles on customs. We need to simplify that. Where goods come in as capital goods to add features and then go into other supply chains, we need to streamline that process. What happens is that organisations end up paying duties which shouldn’t be there; these goods come in for an additional component to be added before they become finalised goods or go to a third country to become finalised goods.

The America Competes Act has a huge component in terms of support in boosting semi-conductor manufacturing, and investment in scientific research and innovation in newer technologies. Are these the next big areas of India-US collaboration?

Under the Quad umbrella, India and the US are collaborating on secure supply chains, vaccines, semi-conductors, artificial intelligence (AI), 5G. So we see substantial effort being put in by both governments under Quad to leverage that.

One of the recent success stories in India are start-ups. The PM referred to it in his speech in Parliament this week. What is attracting US capital to Indian start-ups?

Returns. Today, India has 60,000 start-ups. India is producing three unicorns a month. And a lot of that is US capital. US companies see opportunities and they are chasing those opportunities and I think the momentum will continue because of the tremendous abundance of cheap capital in the US. It has to look for returns and Indian start-ups are providing that return.

With the Fed about to increase interest rates, will that cheap capital diminish, and therefore affect flows to India?

It does have an impact but I don’t think it has an impact that will slow down these investments because the returns are multi-fold, rather than a 10% or 20% return. So I think that momentum will continue. We are seeing a lot of capital in start-ups moving into health care, defence, e-commerce, AI, supply chains. Wherever you see inefficiencies, you are seeing start-ups moving in with solutions and platforms and that’s where capital is moving in.

We have seen some recent progress on the trade front. Do you think the US and India should just reconcile themselves to the fact that there will be incremental progress on trade rather than chasing a mega trade deal which has proved elusive?

We have to think differently here. Each of the last ten trade deals that the US has done, in the last 20 years, has brought deficit to the US. And this was because the US stepped up and opened up the markets. The sentiment among liberal democrats, progressive democrats is not to do a trade deal. Unions say we have to protect jobs here, they don’t want jobs going out. So it will be difficult under the Joe Biden administration to get a straight Free Trade Agreement (FTA) deal.

My recommendation is that we should look at it from the Quad security umbrella, and from a sector-wise perspective, rather than boiling the ocean on trade deals. For example, you can start on health care. India provides 40% generic drugs to the US. How can you basically align that to secure supply chains for the US, because 70% of the API (Active Pharmaceutical Ingredient) comes from China? India needs affordability and scalability, and can provide that to the US market too. Remember 16% of the GDP in the US goes to health care, as compared to Europe, which is at 8% and India which is at 2%. You can also explore it on the defence side because both countries are looking at Quad from an Indo-Pacific perspective. You have to look at trade deals not from a pure FTA perspective anymore.

You mentioned defence. There is a strong push for indigenisation in defence production back in India; in the recent budget too, there was an increase in the share of capital outlay reserved for domestic production. Is the US defence-industrial complex willing to come to India and produce or is it worried about this undermining the emerging defence relationship?

I don’t think it will jeopardise the relationship. I strongly believe that the localisation of defence, to be successful, has to have substantial US partnership – from a capital investment perspective, research and development (R&D) perspective, and to bring in proven technologies itself. We have seen since Independence that local defence industry has not been as successful as it should be. And that’s because it was closed. When you open, you can see companies such as Boeing and Lockheed doing joint ventures. For example, Sikorski cabin that the president of the United States used was made in Hyderabad. You look at the wings of some of the jet fighters, and they are made in India itself. So we have seen a lot of progress in joint ventures, and when they do joint ventures, they are able to participate in local procurement also.

Will the imposition of sanctions under CAATSA (Countering America’s Adversaries through the Sanctions Act) undermine this element of the relationship? Or do you see a waiver happening?

The imposition of CAATSA defies common sense. You have a sovereign nation trying to defend itself by procuring missiles which are from Russia, but they are pointed towards China. At the same time, you can’t have a domestic law being imposed on a sovereign nation. All indications are that it makes sense for India to get a waiver. Russians would love it and the Chinese would it if CAATSA is imposed on India because they want to see a chasm coming into the India-US relationship.

Does the crisis in Ukraine make common sense difficult to operationalise?

You have to understand that India doesn’t have a dog in this fight – this issue between Ukraine, Europe, US and Russia. India has said it is a multipolar world going forward, and that it will have strategic autonomy. What India did at the UN was the right thing – to abstain. China would try its best to leverage Ukraine again to put some gap between India and the US. It serves their interests. Russia will do the same thing. But I think there is enough wisdom here, enough maturity here in America. You saw the statement by the State Department spokesperson Ned Price that the relationship with India stands on its merits.

Let me turn back to the economy. You mentioned the protectionist mood here; there is a similar mood in India in terms of focus on self-reliance. Does the relationship become complicated because of the inward economic turn on both ends?

This is a global phenomenon. Nationalism is rising. India also has a unique problem. You have a large number of unemployed young people; you have 12 million people entering the workforce on an annual basis. We saw that when applications opened up for a limited number of railway jobs, there were millions of applicants and when things went awry, they burnt the trains. The threat of social disorder hangs on the government all the time if you don’t create jobs. The question you have to ask is whether by opening up, do you create more jobs?

My own thinking is that every economically successful country has opened up borders from a trade perspective; they were export-oriented. If it is going to export more on the manufacturing and services side, then it has to open up its borders to make its industry more competitive because the moment you close the border, then the edge and pressure on the companies to compete globally fades away.

There was a recent US Independent Trade Commission Report that said that censorship in India had affected American businesses. Is that your sense when you speak to your corporate members?

No. I will tell you why. US companies are out there to get market share, to get better returns on their investment. They want to be a part of the fabric of society. We saw how, during the Covid-19 crisis, they stepped up and contributed substantially. I saw the report. It is not reflective. There will be aberrations. In the US too, you have the Republicans calling the liberal media fake news, or entities engaging in censorship like Twitter banning the former president of the US. You can’t say that India has gone to the other end, while the US has not. We are in a new era of individual media and we are trying to deal with it. Sometimes, we are successful and sometimes, we are not.

On the digital side, let me focus on three specific issues – the first is big tech regulation. India is seeking to make social media companies accountable, as is the US here. But Indian actions seem to provoke concern here.

Let me just say that the challenge India is facing is the challenge most economies are facing. How do you manage data? How do you manage privacy? How do you make sure that access to data is the right of the individual and does not get commercialised without their permission? So far, large tech companies have taken individual data, and marketed it and made money off that. They are able to look at your behavior and sell that and make money. There is nothing wrong with that, but in the web 3.0 environment, an individual has a right to his own data. Then from a national security perspective, the government and its security agencies would like to get access to data right away to deal with threats. If that data is not local, then it becomes complicated to find access to that. It is not just India. Almost every country is trying to manage it. You have to understand that technology always leads and policy becomes a laggard, and that’s what is happening.

Is the push for data localisation back in India becoming a major concern here?

There is a concern. It is a complex issue. We have given feedback to the joint parliamentary committee, in consultation with our member companies. You also have other interests, from security agencies and local e-commerce companies. But data is not one-way. India’s biggest export is IT (information technology) services, BPO (business process outsourcing) services. In fact, more data flows from the US into India than from India into the US. We have to make sure that as we move into that direction, we don’t give ammunition to the other side to block the data coming into India also. I think we need to bring this fact more to the limelight, that data is two-way, Balkanised data loses value, and cross border data increases the value.

So if I understand you right, you are suggesting that a degree of localisation for law-enforcement purposes and to protect individual privacy is fine, but blanket data localisation which may cripple businesses is a concern.

Yes, exactly. I agree with that.

The third related issue is e-commerce rules.

We have to understand that e-commerce has made the customer the king in India now. There is competition. But at the same time, you also have to protect the small kirana stores. You don’t want them on the streets with no jobs. So large companies have to find a balance. They have to incorporate them into the ecosystem.

A big debate in Indian politics and political economy right now is the nature of Indian capitalism. The opposition believes that there is crony capitalism, with a set of select corporates benefiting, while the government insists it has actually brought in a wider set of structural economic reforms to level the playing field for all actors. From the outside, what do you think?

First, you have to compliment the PM and the government. They have taken a structural reform process forward in a way that I have not seen in a long long time. In the last budget, they talked about removing 25000 compliances, changing 1400 antique laws. The effort is to take the shackles off government bureaucracy and policies which inhibit competitiveness of companies and make sure they can operate.

In every country, when there are reforms, you have to understand that crony capital plays a pivotal role. They say it is my country and we are the first among equals. Foreign companies can’t contribute to campaigns and local companies can. They have that advantage and they leverage that. It happens in the US, and it happens in India. All that US companies are saying is create a level-playing field, bring more transparency in decision-making, and have a little more of a consultative process – and we will compete in terms of technology, goods, prices and services.

Final question. In 2030, what are the three things that you would like to see in the India-US economic relationship that’s not present today?

First, I would like to see trade reach $500 billion. That is important because it creates jobs on both sides.

Second, I want to see Quad becoming a more effective and efficient from a security perspective. The reason I say that because India needs 20-25 years of economic growth without interruption of war or threat from any of its neighbours. That will improve quality of life of citizens.

And third, I would like to see India becoming not just a regional but global leader. And when I say leader, I mean it in the sense of proactively leveraging vaccine health care diplomacy, leveraging tech in terms of 6G and 7G by that time or in terms of AI, and bring a sense of improvement in quality of lives in Africa and Asia and other geographies. This is where I would like India, and the India-US relationship move forward.