Tensions between India and the US on bilateral commercial issues had started simmering long before the arrest of Indian diplomat Devyani Khobragade in New York earlier this month.
Both sides have been at loggerheads on almost all aspects of business since the visit of US President Barack Obama in November 2010.
Even so, it appears this row will adversely impact the strategic business relationship, as the Indian government plans to go slow on some pending economic issues.
A slew of measures in economic cooperation require the government’s nod for US firms to do business here smoothly.
Some of the significant ones are the revised preferential market access policy, increasing the foreign direct investment cap in the insurance sector to 49 per cent and issues related to intellectual property rights, especially in the pharmaceutical sector.
It is now unlikely that any movement on these proposals will take place, sources told Business Standard.
“India had been way too generous with the US.
While some of the decisions like increasing the FDI cap in insurance is implausible at a time when the government is facing crucial elections next year, on other major policy measures like releasing a revised PMA policy that directly benefits the American firms or the IPR issues, nothing will move now before the elections.
The Devyani issue has killed even the very last effort both sides would have made to resolve some of the issues,” a highly placed official told Business Standard.
The combined annual trade in goods and services had crossed $100 billion for two years.
In the first quarter of the present financial year, two-way trade in goods and services rose 18 per cent over the same period last year, according to data from the ministry of commerce and industry.
The US is the fifth largest source of FDI inflow into India, accounting for 5.75 per cent of total inflow in the past decade.
This is mostly in the areas of mining, manufacturing, information technology and depository services.
“The US is basically fed up with this government.
“Business and commercial ties were, in any case, going through a very rough patch, with so many policy inconsistencies, outbreak of so many scandals. . . the undercurrents were always there.
“The Devyani issue has only led to a flare-up that was waiting to happen,” said a top executive in a leading American fast moving consumer goods company, on condition of anonymity.
The US had been vehemently complaining about what it calls ‘localisation’ measures, under which India told American firms to transfer technology to domestic companies or produce locally to gain access to the markets here.
"The recent diplomatic incident underscores how vitally important it is for the United States and India not to take the relationship for granted.
“Even now, despite current policy challenges on both sides, businesses are only increasing their investments in the respective countries, underscoring their faith in the US-India commercial relationship.
“Therefore, during these troubled times, it is incumbent on business to keep the overall relationship on track.
“We leave it to our governments to sort out this diplomatic challenge via the proper channels," said Ron Somers, president, US-India Business Council. According to the American Chamber of Commerce in India (Amcham), there is ‘an increased and noticeable lack of coordination between various ministries of the Government of India on economic matters and decision making.’
India is ‘no longer an easy place to do business in the experience of existing MNCs (multinational corporations) in the country’ and the country has ‘emerged as a challenging and unpredictable business environment in the last few years’, Amcham has said in a report.
The government, meanwhile, is watching the developments in the US immigration Bill, which has the potential to very adversely impact some of the marquee Indian firms operating there, especially in information technology.
Likely to be among those badly hit are Tata Consultancy Services, Infosys and Wipro. India had been also pushing the US to renew the Generalised System of Preferences for export to that country, which expired in July.
Under this scheme, exports from small and medium sectors are allowed dutyfree import into American markets.
India has also raised strong concerns over the US attempting to restrict movement of Indian professionals, with minister of external affairs Salman Khurshid and minister of commerce and industry Anand Sharma even threatening to take ths to the World Trade Organization’s dispute settlement body.
Inadequate intellectual property rights protection has been a long-standing issue between India and the US. American companies have also complained over the ‘deteriorating climate for innovation in India’, said an American diplomat.
The USIBC recently held a meeting with finance minister P Chidambaram and vowed to increase the two-way trade to $500 billion annually by 2020, even as it highlighted some issues troubling American companies, such as taxation and IP.
The US government has been also critical of the stance India has taken on pharmaceutical companies.
The voices against Indian IPR laws seemed to have gone louder after the Bayer-Onyx and Novartis cases.
The US even accused India of violating global trading rules under the WTO.
Recently, India was mentioned in the ‘Priority Watch List’ of the US Trade Representative’s Special 301 Report.
This was strongly raised by India during the India-US Trade Policy Forum and India-US CEOs Forum.
India and US are also entangled in a range of WTO disputes concerning solar panels, steel import duties, poultry import and hike in professional visa fees.