Column: Why work with Modi? It’s the economy, stupid

REUTERS - (Anja Manuel served in the State Department from 2005 to 2007, working on policy for Pakistan, Afghanistan and India. The opinions expressed here are her own.)

Prime Minister Narendra Modi arrives before his meeting with U.S. President Barack Obama in the Oval Office of the White House in Washington September 30, 2014. REUTERS/Larry Downing

Great powers sneak up on you.

While Washington has been preoccupied with a burning Middle East, Russia behaving badly and, to a lesser extent, the rise of China, U.S. relations with India have slipped down the diplomatic priority list. In coming decades, however, enormous, unwieldy India will likely be the United States’ most important continental partner in Asia.

On Sunday, 19,000 spectators were enthralled at a rock-star-like rally for India’s new prime minister, Narendra Modi, in Madison Square Garden in New York. Additional screens were set up in Times Square. The Rolling Stones and U2 do not command a similar reception. Responding to chants of “Modi, Modi, Modi,” the prime minister promised to “form the India of [his fans’] dreams.”

Modi, a Hindu nationalist who successfully brought economic growth to his home state of Gujarat, was elected by a landslide in May. His first state visit to the United States this week signified to Indians around the world that their country is back, front and center, on the world stage. After a frustrating few years of economic slowdown and gridlock in Delhi, they can be proud to be Indian again. Their hopes are now pinned on their new prime minister and his team.

Let’s hope that India is back on the U.S. priority list as well.

Why does India matter? First, it is enormous and growing. Just 16 years from now, many experts believe, India will likely have inched past China to become the world’s most populous country, with 1.5 billion people. By 2030, China will likely be the world’s largest economy by purchasing-power parity, with the United States second and India third.

Yet the size of India’s middle class is expected to surpass that of both the United States and China, due to its fast-growing population. In 2030, India alone will account for 23 percent of middle-class spending globally (nearly $13 trillion a year!). U.S. companies will be courting Indian customers. If our two governments can remove trade and investment barriers, we will be selling that new, huge middle class everything from computers to cars to legal services and much more.

China will lead Asia’s rising energy demand this decade, but India - again due to its fast-growing population - will surpass it in the years before 2030. Though China is now the world’s largest emitter of carbon, the United States and India are close behind in this depressing league table. By some calculations, India could by 2030 surpass China as the world’s largest polluter.

In the past few years, the U.S.-India relationship has drifted, pushed off the top of the agenda by other urgent priorities in Washington and by the Delhi’s hidebound inability to push through key reforms, such as improving infrastructure, rationalizing its tax system and making it easier for foreigners to invest. Modi’s visit is an important opportunity to give relations a jump-start.

Supporters of BJP attend a rally being addressed by Hindu nationalist Narendra Modi at GuwahatiOn Washington’s long list of diplomatic agenda items with India, the most important for the Obama administration to get right is the bilateral economic relationship. Modi was elected with a mandate to revive the struggling Indian economy. If President Barack Obama can help him achieve that goal, he will build a strong and grateful partner - and create a long-term check on Beijing overstepping its power in the region.

Annual trade between the United States and India has skyrocketed, from $19 billion in 2000 to $97 billion today. But it is still tiny compared to U.S.-Chinese bilateral trade, now nearly $600 billion.

The United States and India have repeatedly squabbled over trade. In 2008, the international trade negotiations in Doha collapsed because the two countries could not agree on the rules governing agriculture trade. They have each brought cases against the other in the World Trade Organization.

Partly as a result, India is not a part of the Trans-Pacific Partnership, the trade deal that Washington has been promoting aggressively. Obama called the pact “a model not only for the Asia Pacific, but for future trade agreements.” These trade differences threaten to undermine progress in the two countries’ economic relationship.

The two sides can reverse course by setting a firm deadline to complete a bilateral investment treaty in 2015. Negotiations have been languishing for years. This relatively small step on the trade agenda would give U.S. investors renewed confidence in India.

Modi is already asking U.S. business to make substantial investments - and bring sophisticated U.S. technology to bear - to build up India’s infrastructure and other key sectors.

To convince the American private sector to invest capital, technology and best business practices in India, Modi must complete several over-due reforms: First, he must work to simplify India’s legendarily complex bureaucratic procedures. His government is trying to do this, but it is too soon to see major results.

Second, he must clarify - and liberalize - restrictions on foreign investment in such key economic sectors as retail and construction, as has already been done for insurance and defense. Third, he must ensure that the tax system is fair and that contracts that have already been signed are not called into question.

If Modi can successfully tackle these internal issues, and the two countries can normalize their trade relationship, important advances can be made. Lured by a booming middle class, the U.S. private sector would likely invest and trade more - and so help India meet its ambitious domestic growth targets. American business, in turn, would champion India’s cause in Washington, leading to a stronger political partnership.

A thriving India - in partnership with the United States - would also be more able to confront the serious challenges posed by a rising China, instability in Afghanistan and Pakistan, global warming and a host of other transnational issues.