From Geo-Politics to Geo-Economics: Indo-US Experience


- P.R. Rajeswari, Researcher, IDSA


In recent years, a certain kind of study of international politics has been in vogue. A stereotype study of foreign affairs purely confined to the realm of inter-state relations is gradually receding into the background. A strong need for fostering an economic outlook on foreign affairs has come into vogue. International affairs are being viewed in terms of their international economic implications.

The year 1989 will remain a turning point in the pages of history. So much happened in the world in so short a time with such great unpredictability. The collapse of the Soviet Union, the disappearance of the Warsaw Pact, and the end of the Cold War are milestones in the historic year. Now, not only an era has come to an end, but also a new thinking has emerged.

The end of the Cold War has made fundamental changes in the pattern and content of international relations. The death and disintegration of the USSR has also resulted in an absence of ideology-dominated politics on the international scene. Today, actions of countries are interpreted from an economic point of view. Although power and security constitute the nucleii of the foreign policy of every state, the emphasis on the economic aspect of their relationship has assumed new dimensions.

Indo-US relations after the Cold War have had a shift in their focus--from political factors to economic interests. Economic aspects have become influencing forces in the making of foreign policies of nations. This new trend is expected to continue in the 21st century. The age of military superpowers is changing and we are slowly passing into a new age of economic superpowers.1 Military power can no doubt be a powerful source of influence in international relations, but economic power can prove to be a stronger source of influence in the world affairs. We already see the emergence of economic power blocs. Europe with its European Economic Community (EEC), the US, Mexico and Canada with a North American Free Trade Agreement (NAFTA), the formation of the Asia-Pacific Economic Cooperation (APEC), the South Asian countries with the South Asian Association for Regional Cooperation (SAARC) are examples of such regional trade groupings.

One should not simply ignore the fact that the formation of APEC was the result of the anticipated collapse of the Soviet Union and its disappearance in the Asia-Pacific region or it was because Japan was emerging as an economically powerful country. In order to tighten its grip in the Asia-Pacific region, the US had, right from the beginning, encouraged the formation of APEC and took an active role.

Now, after 40 years of arms race and Cold War, the major power blocs have been reducing political confrontations and moving towards trade-cum-commercial groupings. A Japanese politician, Shintaro Ishihara, has predicted that the "twenty-first century will be a century of economic warfare."2 In this warfare, the US may not be the only superpower and the whole concept of power based on military might is undergoing a change. Today, economic tools of policy have become more available whereas the military instruments of policy have become more costly and risky. Other experts in international relations feel that the basis of international relations has shifted from geo-politics to geo-ecomomics.

The emergence of a global economy with growth of world trade and spread of foreign investments in the international markets coupled with the production of innovative electronics and the revolution in communication technology show that there has been a clear shift in the study of international affairs from politics to economics. In this changing context, a new and energetic Indo-US relationship based primarily on economic interests can be envisaged for the 21st century.

"Dialogue of the Deaf"3

India and the United States have many common values which they cherish in their societal experience, viz. love of freedom, respect for individual worth, a strong sense of justice, commitment to the rule of law, individual liberty, freedom of the Press, etc. At the people-to-people level also, there exists an abundance of goodwill for one another. Despite this strong foundation, it would be incorrect to overestimate the strength of these bonds that the two countries possess regarding each other. The world's largest and oldest democracies have had many ups and downs in their relationship owing mainly to the "third country factors"--like Pakistan and the Soviet Union. This swing in the relationship has clearly been visible in the past, more particularly during the Cold War years.

Despite all third country interruptions, the US-India economic relationship had been stable to some extent. The US had been India's largest trading partner, and the American aid to India's development was large in size and remained uninterrupted. So was the private investment and industrial collaborations. Cultural relations were always at high levels. The Fulbright exchange programme is an important component in this sphere. Tourism is another. India always had the largest number of tourists coming from the US.

Pakistan Factor in Indo-US Relations

Pakistan has always played a crucial role in Indo-US relations. In the earlier years, Pakistan was not identified as a country that could be important in the promotion of major interests of the US which had no desire to win the favour of Pakistan at the cost of its friendship with India.4 But things took a down turn during the period of John Foster Dulles as the Secretary of State. At this time, India even considered the US financial assistance to Pakistan as an unfriendly act.5

The whole situation further worsened with the initiation of the formal military assistance programme to Pakistan in 1954. This became a crucial and changing factor in US-India relations and this military build-up of Pakistan by the US created security problems for India. India looked at the US with astonishment and perhaps anger for arming their prime enemy.

US-Pakistan relations had been based entirely on strategic interests. Pakistan had gained some importance from its geo-strategic positions in its proximity to major powers like the erstwhile Soviet Union and China. The security relationship between the US and Pakistan had been characterised by its partial nature, its asymmetry, and its non-congruence.6

First of all, the US-Pakistan relations are partial. For each state, there are other interests more important than its overlapping interests. In the case of the US, the Soviet Union remained more important than Pakistan itself. And for Pakistan, India remained and still remains the chief security threat and this threat overshadows its relations with the US and other major powers. Thus, the overall US-Pakistan relationship is forever subjected to buffeting by other relationships and events. In 1971, the US used Pakistan only to achieve a rapprochement with China for which Pakistan was used as a middleman. The situation is not very different now after two and a half decades, at the end of the Cold War. Former chief of Pakistan's Inter-Services Intelligence (ISI) Hamid Gul has accused the United States of trying to use Pakistan again for its vested interest by resuming the economic and military assistance. He said, "What new strategic designs of the Americans do we fit into now? This is definitely a ploy to appease the Pakistan army."7

He went further to say that in the wake of Soviet withdrawal from Afghanistan and its subsequent break up, the Americans down played the importance of Pakistan. Now the US wants to isolate Iran, contain China and exploit the Central Asian markets, so Pakistan is back again in the US scheme.8

General Gul was reacting to the report that the US Senate has approved an amendment to the Foreign Operations Appropriations Bill resuming military and economic aid to Islamabad. The only positive aspect that the General noted in the US Senate's decision was that it will restore some balance in Pakistan's relations with India.

Secondly, the relationship between the two states is asymmetrical, in the sense that the relationship has been, and may remain, more important to Pakistan than to the US. There does not exist any consistent mutual helping attitude for each other, and the US involvement with Pakistan may be intermittent, and it can withdraw with little loss, but not Pakistan. Its very survival is continuously at stake, whereas the United States would only be inconvenienced.

Thirdly, the interests of the two states are non-congruential. For Pakistan, the US represents an important source of weapons and political support useful in a whole range of diplomatic and military fronts. For the US, it was Pakistan's position as a counter to the Soviet Union which made it important. Today, with the death and dissolution of the Soviet Union, the strategic importance of Pakistan has been nullifield. But again, another Cold War is on the scene and Pakistan gains some significance in American foreign relations.

Economic Links

The economic relations between the two countries since Indian independence have been strong despite all differences. The economic links between the two countries have to be examined from three perspectives--the US developmental assistance to India, trade relations between the two countries, and the US direct investments in this country. All three have their long-term significance in India's economic growth as well as India's relations in that regard.

During the decade after our independence, the two countries made a fantastic record in food aid. Also the way in which the PL 480 funds were ultimately liquidated in the early Seventies were instances of their economic assistance to India. The US aid to India's development had helped all sectors including agriculture, industry, health and population control, environment, technology, education and the like.

Indo-US trade relations are exceptional, in which the US has become India's largest trading partner, while India's share in US trade is very small. Indo-US trade dates back to the early 19th century when India began to export spices, cashew nuts, and jute to the United States.9 After independence, Indo-American trade has diversified into a wider range of commodities and grown into enormous volume, making the US the largest trading partner of India.

The Indo-American economic relationship is to be seen from the direct investment angle also. The entry of US companies into India is very significant and this started after our independence. In 1949, when the Government of India spelled out its foreign policy on foreign collaboration, it recognised the significant role the foreign companies had to play in building this country. Since 1949, there has been a steady rise in the American private investment programmes, rising from Rs. 11.2 crore in 1949 to Rs. 422 crore in 1968.10 While this has been the picture in 1968, this trend has continued more vigorously in the 1990s. In the words of Ambassador Gunther Dean, "...the dynamism of Indo-US commercial cooperation demonstrates what can be achieved when we fuse the creative energy and vision of our two peoples in mutually beneficial endeavours."11 He observed that nearly 75 per cent of Indo-US collaborations have been established after 1980, with the tempo markedly increasing during the 1990s. Indo-US collaborative ventures are now active in almost all states and union territories, with the greatest concentration in Maharashtra (more than 300). More than half the collaborations are involved in high technology products--with the largest groups comprising electrical equipment, electronics, industrial machinery and chemicals. Some projects are directly linked to development goals. An example is the establishment of a serum institute at a cost of $3 million--the first measles vaccination institute in India.

US-India Relations in the 1990s

George Washington, the founding father of the United States of America had laid down a foundation principle for the American foreign policy. He said, "The great rule of conduct for us, in regard to foreign nations, is in extending our commercial relations."12 Almost two centuries later, President Bill Clinton echoed the same principle. He declared, "In this new era, our first foreign priority and domestic priority are one and the same: reviving our economy...I will elevate economics in foreign policy, create an Economic Security Council...and change the State Department's culture so that economics is no longer a poor cousin to old school diplomacy."13 Economic factors will dominate the political relations between nations of the world in the 21st century. The US-India relations will also be guided by this.

Today's bilateral relationship is mainly based an economic interests. India's Economic Reform Programme is a point of great attention to the whole world and the US in particular. With the liberalisation policies of the Government of India, the interest of the American business community to invest in India has enormously increased. President Clinton has said that it is the economic reform of India that has become the engine of growth in the bilateral relationship. India's economic programme has unleashed the expanding trade and investment ties of the US.14

Ambassador Frank G. Wisner opined that the trade and economic ties that are growing between the two countries provide the basis for a new era of engagement.15 The US is India's largest investor, with proposals from American companies accounting for nearly half of all investment approvals issued by the Government of India in 1993. India has received massive infusion of private capital through both direct investment in joint ventures and portfolio investment in stock markets.

The approvals of direct foreign investment proposals have risen from $73 million in 1990 to $1,318 million (Rs. 3,888 crore) in 1992 to $2,381 million in 1993. Actual flow of foreign investment in India exceeded $3 billion in 1993-94 since August 1991 and by mid 1994-95, the accumulated foreign investment stands at $5.9 billion out of which actual inflow of foreign direct investment stands at $1.2 billion. Foreign Institutional Investors (FIIs) have invested US $2.2 billion and inflow through Euro Issues and Global Depository Receipt came to US $2.5 billion.16

Indo-US collaborations have shown a dramatic rise since 1991. The number of Indo-US collaborations approved has risen from 177 in 1991 to nearly 300 in 1993. In 1993, US investment worth US $1,103.56 million accounting for 40 per cent of the total was approved. The US is not only a major source of foreign direct investment but also an important source of technology for India.

In the past, a total of 2,168 technical collaborations and 1,892 financial collaborations have been approved. Out of these, the US accounts for 442 technical collaboration approvals and 389 financial collaboration approvals. Hence, in terms of number of collaboration approvals also, the US occupies a leading position accounting for over 20 per cent collaboration approvals.

Also, the US is India's largest trading partner, buying 20 per cent of the merchandise India exports, according to Robin Raphael.17 During Prime Minister Rao's visit to the United States in May 1994, the late Commerce Secretary Ronald H. Brown said that the previous years' 44 per cent increase in American exports to India and the 20 per cent in Indian exports to the United States were both a result of Rao's economic reform programme. With the ongoing reform package, the Clinton Administration has designated India as one of the ten Big Emerging Markets (BEMs) that will account for nearly three-fourths of the growth in world trade in the next two decades and have extraordinary influence on global affairs in the post-Cold War era.18

The 1996 "National Trade Estimate Report on Foreign Trade Barriers" (NTE) lists a wide range of trade barriers which restrict US exports as well as those of other nations. US trade representative, Mickey Kantor, emphasised that last year, the US experienced the "largest dollar volume increase in exports in history."

According to the report, India was the United States' 30th largest export market in 1995 and US imports from India totalled $5.7 billion last year or about 8 per cent more than in 1994. The stock of US direct investment in India was $818 million in 1994, 33.9 per cent higher than in 1993 and much of these investments were largely concentrated in banking, manufacturing and wholesaling.19

The report acknowledged that as part of India's economic reform process, there has been a more open and transparent trade regime.

Under a purely bilateral set-up, economic relations between India and the United States have been remarkable, evolving a fruitful partnership in the last five decades. This is despite the fact that India's share in the US foreign trade is disproportionately small compared to its size and population. And the US economic actions are of much greater consequence to India than the reverse. From the viewpoint of India's balance of payments and external earnings, the US market is crucial. But much more important is the US interest to invest in India. There has been a great improvement in this direction. The new policy of liberalisation is a point of great attraction to the US. One basic reality about India is that India, with all its frailties, is a large continental economy with a great deal of opportunities within the country itself. Now America has acknowledged India as a BEM. The US Under Secretary of Commerce for International Trade, Jeffrey E. Garten has said that as the economic reforms gather momentum, India may be in a position to provide significant commercial opportunities for the US firms throughout the 1990s.20 Although Japan and Western Europe are likely to remain the biggest markets for the US, Garten suggests that the BEMs hold far more promise for large incremental gains in exports. He estimates that nearly three-fourths of the growth in world trade in the next two decades is likely to take place in the developing world, much of it in the BEMs. By the year 2010, according to Garten, the share of the BEMs in world imports is likely to exceed that of Japan and the European Union combined.21

Garten further feels that America must change its policies towards India. The Carnegie Report underlines economic reforms as the field with the greatest potential in the Indo-US equation.22 It advises the US to follow a more liberal policy towards India and supports the Special Drawing Rights of India. The same view about the BEMs has been expressed by John F. Cogan Jr., President of one of the oldest mutual funds in the US. He stresses that there is certainly much to get excited about China, but India may be a very large yet hidden jewel among the emerging equity markets.23 India, out of 21 emerging markets along with Indonesia, Pakistan and Malaysia, is projected to have the second highest Gross Domestic Product (GDP) growth of 7 per cent in the next five years, only next to Hong Kong with 8 per cent. Similarly, in respect of expected earnings per share growth rates for 1993, India ranks second among 21 markets with 33.3 per cent.

Since the beginning of the decade, the trade between the two countries has been gaining strong momentum. In the past three years since 1990-91, the overall trade with the US has risen by 20 per cent. The exports during the same period had a phenomenal spurt of 50 per cent. The imports during the same period have risen by 7.1 per cent. The trade balance of India which stood at negative US $253 billion, has now risen to US $1.2 billion, which is greater than its export levels of 1980-81. The bilateral trade between India and the US, on the whole, has expanded considerably in the last five-six years, rising from $4 billion in 1994.

In the sphere of foreign trade after India has opened herself:

1. there is a great decline in trade deficit, both in terms of dollars and rupees;

2. imports have increased in rupee terms, while in dollar terms, they have increased much more;

3. exports have increased by 28 per cent in rupee terms, but declined by 5 per cent in dollar terms.

The composition of India's exports over the years has undergone a change: crude oil which was the second largest item in 1985 has been virtually phased out. In spite of this, India's exports to the US have been rising mainly on account of significant increases in exports of gems and jewellery, readymade garments, carpets, yarns, handicrafts, drugs and pharmaceuticals, electronic goods and transport items.

Over the past decade, the US share in India's exports has hovered around 18 per cent, and for imports at nearly 11 per cent. On the other hand, India accounts for a miniscule portion of the US' exports and imports at nearly 0.6 per cent.

Thus, today's evolving bilateral relationship between India and the US is mainly based on economic interests. The US has become India's largest trading partner and the largest source of investment. India's economic reform programme has been well apreciated and responded to by the US. Ambassador Wisner's remark at the Senate Foreign Relations Committee highlighted the economic sphere as having the most dramatic potential in future Indo-US relations. The progress of India's liberalised economy is literally breathtaking and is building a fundamentally new dimension for Indian and American interaction.24

Here one must analyse as to why India has assumed so much importance in the global market. First of all, India is viewed as one of the "hottest and hugest emerging markets" in the world today.25 The important advantages of India are:

* One of the largest economies in the world; sixth largest in terms of Purchasing Power Parity.

* A large and rapidly growing consumer market with upto 300 million people who constitute the market for branded consumer goods—estimated to be growing at 8 per cent annum; demand for consumer products growing at over 12 per cent per annum.

* One of the largest manufacturing sectors of the world, spanning almost all areas of manufacturing activities.

* One of the largest pools of scientists, engineers, technicians and managers in the world.

* Long history of market economy infrastructure, along with sophisticated financial sector.

* Vibrant capital market with over 6,500 listed companies and market capitalisation of US $140 billion.

* Policy environment that provides freedom of entry, investment, location choice of technology, production import and export.

* A long history of stable parliamentary democracy.

Political observers and captains of industry have been interested by the government's ability to stay focussed on economic reforms despite various turmoils (the Ayodhya incident, the Hindu-Muslim riots, the Bombay blasts, etc.). Paul Griesse of the US-India Joint Business Council points out that US investments in India topped $1 billion (Rs. 3,400 crore) in 1993, more than double the previous year's tally.26

Economist Jagdish Bhagwati observes that the combination of democracy with market reforms gives India a prospect that will outweigh the temporary advantages that economic reforms have given to totalitarian China. The Indian giant is awakening later than the Chinese giant, but it will step onto firmer ground.27

However, the US-India economic relationship has not always been a smooth one. There have been many irritants in the past like imposition of certain types of control of Super 301, etc. But when two nations get into a mutual relationship, everything need not be smooth between them. President Bill Clinton explained: "When two nations are friends, it doesn't mean that they agree on everything or that they should. But in the context of their friendly relationship, they are then able to discuss differences, problems, or issues between them."28 During the confirmation hearing, the then Ambassador designate Frank G. Wisner touched on the same theme saying, "We cannot let our differences define our relationship."29 So, by all accounts, economic links will form one of the strongest pillars of the relationship.

Despite all these utterances and assurances that India is one of the big emerging markets, it would be unwise if India does not prepare herself for tougher battles. When India enters the world economy, one question that should be kept in mind is whether there will be coalition or competition of interests between India and the US.

However, the unipolar situation has changed, and "America's ability to shape the rest of the world has actually decreased. America will be the greatest and most powerful nation, but a nation with peers, the primus inter pares but nonetheless a nation like others." And India too is a dominant power, at least in the making, which cannot be neglected and the US views India as a continental power like Europe.30

Even though John Foster Dulles was an established anti-Indian, his comment that the US' relations with India and Pakistan were different and that the relations with India were "intellectual" whereas with Pakistan, it came from the heart seems to have gained more relevance today, because only a relationship based on intellect can be stable, whereas a relationship based on emotions and sentiments is like passing clouds which may come and go.31

With the foregoing, we can safely project that there is going to be a strong, mature "partnership in peace and progress" between the United States and India in the 21st century. Such a relationship will encompass all fields including economic, political and cultural interests of both the countries. Hence, the 21st century may witness spectacular developments that may cement their relations on stronger grounds than has been the case in the past.



1. P.C. Alexander, Recent Trends in International Relations, Emerging Trends in International Relations, (Bangalore: Ecumenical Christian Centre (ECC), 1992).

2. Fred Bergsten, "The World Economy After the Cold War," Foreign Affairs, Summer 1990.

3. The above caption used by Selig Harrison, a specialist on Indo-US relations, has some interesting facets to indicate the experience of the two countries vis-a-vis each other.

4. The New York Times, October 9, 1949.

5. Stephen P. Cohen, & Richard L. Park, India: Emergent Power? (New York: 1978).

6. Stephen P. Cohen, US Pakistan Security Relations, US-Pakistan Forum: Relations with the Major Powers, (Vanguard Books, 1987).

7. Times of India, July 19, 1997.

8. Ibid.

9. T. Ramalingam Pillai, "MNCs: Catalysts of Development," The American Reporter, vol. XXII, no. 16, August 6, 1972.

10. Ibid.

11. John Gunther Dean, Ambassador of the US to India in his foreword in Indo-US Cooperation in Business & Industry 1996.

12. Quoted from Span, May 1994.

13. Ibid.

14. Ibid.

15. Remarks by Frank G. Wisner at the Confederation of Indian Industry, New Delhi, August 8, 1994.

16. US & India: Forging a New Balance (Published by Indo-US Joint Business Council, New Delhi).

17. Speech by Robin Raphel, Assistant Secretary of State at American Centre, New Delhi, March 25, 1994.

18. Speech by Ronald H. Brown, US Commerce Secretary at Bangalore, January 18, 1995.

19. Times of India, April 3, 1996.

20. Raja Mohan, "US Sees India an Emerging Market," The Hindu, January 26, 1995.

21. Ibid.

22. Rahul Mittra, "Indo-US Relations and the Carnegie Report," Mainstream, May 8, 1993.

23. Ludwina Joseph, "A Mission to the Indian Market Place," Business World, November 2-15, 1994.

24. Span, June 1994.

25. Carla Anderson Hills, "India: Land of Opportunity," Seminar, 422, October 1994.

26. Speech by Jeffrey E. Garten in New Delhi, March 22, 1994.

27. Jagdish Bhagwati, "India's Economic Strides," The American Enterprise, March-April 1994.

28. n. 24.

29. Ibid.

30. Book Review of Henry Kissinger's Diplomacy by A.S. Abraham in Indian Express, December 4, 1994.

31. Reproduced by J.N. Dixit in the review article of Estranged Democracies, Span, May 1994.