The Debate

With AIIB, US Shot Itself in the Foot on Indian Infrastructure

The United States’ reaction to China’s AIIB will be a setback for its cooperation with India. It’s not too late to fix this.

With AIIB, US Shot Itself in the Foot on Indian Infrastructure
Credit: Flickr/ narendramodiofficial

During his first year in office, Prime Minister Narendra Modi has articulated his vision of Indian economic development to almost anyone who would listen – perhaps most notably to presidents Barack Obama and Xi Jinping.  “Make in India,” electricity in every village, modern sanitation, and rising standards in health, education, and individual prosperity are all part of the Indian future according to Modi. With Obama’s visit to New Delhi earlier this year, U.S. support for this vision is now the cornerstone of U.S.-Indian relations. However, when Modi visits Xi next month, they will discuss India’s benefits from China’s new Asian Infrastructure Investment Bank (AIIB) and what India may receive from the $62 billion China has just announced for its “new Silk Road” infrastructure initiative.

Under these circumstances, the U.S. Congress has blocked the effectiveness of the most vital institutions for U.S engagement with India on infrastructure development. The Obama Administration has compounded the error through a futile effort to hamstring China’s attempts to provide a source of additional infrastructure financing through the AIIB. The U.S. effort has been rejected by India and 55 other nations, including some of America’s closest allies. Surely, this constitutes a self-inflicted wound—a shot in the foot.

Modi’s vision of exponential economic growth simply will not occur unless India can fix its infrastructure problem—the Achilles heel of the Indian growth story. The most pressing need is for energy infrastructure to rectify the rolling power cuts that have become endemic. Not far behind is transportation, where India wastes vast amounts of productivity through delays in moving people and goods to, from, and around the country. The Asian Development Bank estimates that Asia will need to invest about $800 billion a year on infrastructure through 2020. The previous Indian government estimated India’s share of that needed investment at about $200 billion a year.

Modi fully recognizes India’s massive infrastructure challenge. In this year’s budget, he increased Indian central government and state-owned enterprises infrastructure investment to about $40 billion and set up a National Investment and Infrastructure Fund for another $3.3 billion. While there will be some contributions from the Indian states, the gap in infrastructure funding will have to come from other financing sources. Private funds can be leveraged by public funds through public-private partnerships. However, Indian public sources at present levels will not be sufficient to obtain the needed private funds. In short, India needs outside help to fill its gap in infrastructure financing.

Working with India on infrastructure financing presents an excellent opportunity for strengthening and deepening relations with the world’s fastest growing economy. U.S involvement in Indian infrastructure financing has often been through multilateral institutions such as the World Bank. India is one of the World Bank’s leading borrowers and hosts the largest operations of the Bank outside Washington. In recent testimony before the Congress, Treasury Secretary Jack Lew declared that the International Monetary Fund and World Bank were critical to national security and long term prosperity.

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However, there is a problem with the World Bank being an effective element of U.S. engagement with developing economies like India. For India, the World Bank is lumped together with the IMF as one among the handful of post-World War II institutions that have become highly unfair to India (now the third largest economy in the world on a purchasing power basis) in management structure and control. As an example, consider that U.S. votes on the IMF executive board outnumber those of India by about 9 to 1 and at the World Bank by about 6 to 1, and the President of the World Bank is always an American citizen. The Obama Administration and members of the G-20 recognized this problem in 2010 and this recognition led to agreement among all members of the IMF and World Bank to a series of reforms. However, the Congress of the United States has blocked the reforms for fear of dilution of American authority, and they remain unimplemented.

On a bilateral basis, the story is much the same. The ExIm Bank has been critical to U.S. efforts to support Indian infrastructure development. Over $2 billion worth of renewable energy infrastructure financing has already been provided to India through the ExIm Bank and significant amounts are being provided for pipelines and other infrastructure. It has promoted U.S. sales and investments abroad under 13 presidents, both Republican and Democrat. Going forward, the ExIm Bank should be a major instrument for engaging with India on infrastructure. However, the same Congress that has blocked the usefulness of World Bank reform is now refusing to renew authorization of ExIm on ideological, anti-governmental grounds. ExIm, which costs the U.S. taxpayer nothing, may go out of business this summer.

It is little wonder then that India was among the very first countries that China sought out to join its Asian Infrastructure Investment Bank. India is the second largest country in terms of population and the second largest economy in Asia. It is also a nation concerned about the failure of World Bank reform and the bank’s human rights and environmental lending requirements (particularly in regard to coal-fired power plants). For these reasons, India was a virtual sine qua non for the success of  the Chinese AIIB initiative. Soon after Modi assumed office in May 2014, the Chinese foreign minister pitched the AIIB to India and, in October 2014, India signed an MOU indicating its intention to participate in the institution as a founding member. Although some in the Indian administration have qualms about India being too close to a China that still claims an entire Indian state, jointly manufactures fighter jets with Pakistan, and has just promised Pakistan $45 billion in infrastructure financing, India continues to be announced by China as a founder of the AIIB. China hopes through AIIB, the new BRICS bank, and its “new Silk Road” land and maritime development schemes to draw India into the Shanghai Cooperation Organization and, by extension, win its acquiescence to Chinese strategic ambitions.

What now is to be done in order for the United States to heal this self-inflicted wound and regain the initiative? World Bank President Jim Yong Kim, an American, has already expressed the Bank’s willingness to work with AIIB on multilateral lending. The U.S. should endorse Kim’s position. Further obvious steps would be for the United States to go through with the IMF/World Bank reforms and to reauthorize the ExIm Bank. However, political reality in the U.S. House of Representatives presently makes approval of the reforms unlikely, although reauthorization of the ExIm Bank is somewhat more plausible.  Approval of the Trans Pacific Partnership trade agreement and then serious discussions with India about accession become more important than ever. In addition, the U.S. needs to move forward immediately with India bilaterally on Modi’s “Make in India” initiative, particularly with regard to defense production, and other infrastructure related items agreed to by Obama and Modi. Among these are implementation of the U.S.-India civil nuclear agreement and Modi’s “smart cities” program. The U.S. government should be willing to work more closely with U.S. private sector funding sources on these projects.

On a multi-national basis, the United States has a great opportunity to cooperate further with Japan and India on the subject of infrastructure. Prime Ministers Modi and Shinzo Abe are great friends, and Modi has repeatedly expressed great admiration for Japan. The United States has strong and growing strategic relationships with both Japan and India. Much has been done on this trilateral relationship already, and Japan is heavily involved in Indian infrastructure. Now would be a good time for India, the United States, and Japan to further elevate their cooperation on infrastructure finance even beyond that now occurring through the Asian Development Bank (Abe’s visit to Washington during the week of April 27 offers an immediate opportunity to discuss this matter). Other democracies in the area should welcome the opportunity to support such an effort.

If the United States is to best serve its own interests, it should heal the harm it has done itself and make even greater common cause on infrastructure with India and other Asian democracies.

Ray Vickery is Global Fellow, Woodrow Wilson International Center for Scholars; Senior Advisor, Albright Stonebridge Group; Of Counsel, Hogan Lovells; and former Assistant Secretary of Commerce, Trade Development. Michael Kugelman is Senior Associate for South Asia at the Woodrow Wilson International Center for Scholars.