Blog Post

AEIdeas

President Obama heads to India next week, a worthwhile visit for several reasons. Perhaps surprisingly, the best reasons do not include the US-India economic relationship, which is not especially important and will not be especially important for years to come. This is because India’s economy faces a very long development road and its first priorities should be internal change.

Can India be a sizable American economic partner – yes. Vital, even. This is at least a decade away, though. In 2014, trade with India accounted for less than 2% of total US trade. Volume fell short of $70 billion. In contrast, US trade volume with Korea was more than $40 billion higher and that with Mexico more than $400 billion higher.

Plainly, just the huge Indian population is not enough. American exports to 1.2 billion Indians last year were less than $22 billion, less than $20 per person. The primary reason is lack of buying power — net household assets averaged only about $25,000 in India in mid-2012, where the equivalent number for the US was more than 20 times larger.

The top households in both countries account for a good deal of wealth, but this only clarifies that the vast bulk of India’s people are much too poor to buy from the US. It will take many years of strong income growth to make ordinary Indians good customers for America-made goods and services.

The president’s host, Prime Minister Narendra Modi, intends to launch an extended period of strong growth. He can do this chiefly by granting full individual land rights to the poor, liberalizing the labor market to encourage hiring, and truly unifying the national economy by breaking down tax and other kinds of barriers between Indian states.

These are purely internal actions; US involvement is minor. American business priorities – better market access and protection of intellectual property – are entirely reasonable but also comparative luxuries. Until it is recognized that land ownership rights are the best weapon against rural poverty, for example, pharmaceutical firms cannot expect to see patent rights protected.

President Obama will no doubt listen carefully to Prime Minister Modi’s economic plans, as their success or failure will change the lives of hundreds of millions of people. But when it comes to the bilateral relationship, economics should take a back seat while India addresses its primary tasks.

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