Why Indian States Are Important for U.S.-India Ties

Given current disagreements over a response to Russia’s invasion of Ukraine, the outcome of next week’s 2+2 talks between India and the United States are likely to reveal a lot about whether there are limits to the growing bilateral cooperation the two countries have seen over the past few years. Yet some clues to the direction of the relationship were already revealed by India’s five recent state elections.

With 28 states and eight union territories, 22 official languages, and 54 recognized state-based political parties, it can be daunting for Americans to follow Indian state-level politics. Yet it is worth tracking closely. The role of the states and their political and policy trajectories are critical not only for India’s governance, but also for the growth and sustenance of U.S.-India ties.

The recent state elections made clear that Prime Minister Narendra Modi’s ruling Bharatiya Janata Party (BJP) is very likely to be the primary interlocutor for some time to come. The races’ outcomes continued the decline of the country’s Indian National Congress. Perhaps even more significantly, the recent races and Indian state-level governments generally will also help promote and implement policies that may impact the U.S.-India bilateral relationship in both the nearer and longer terms.

Much official U.S.-India cooperation takes place at the level of the Indian states. Four U.S. consulates and a special office at the embassy in New Delhi support U.S.-India interactions on a broad range of issues, many of which are best handled through engagement with state governments and the center. This includes promoting bilateral trade and investment; Covid-19 response, HIV/AIDS, diabetes, and other health concerns; law enforcement cooperation; and advancing India’s economic development. State governments and civil society create much of the enabling environment for this important work at both policy and operational levels; having the U.S. government work directly with them ensures a successful relationship.

The states are also the fulcrum for robust subnational government and people-to-people ties with the United States. When I was in Hyderabad serving as U.S. Consul General, the three states in the consulate’s area of operation were home to 130,000 U.S. citizens, many of them children born in the United States to Indian parents. There are numerous contacts and programs between the states and U.S. state counterparts as well.

Indian states’ most significant impact on the bilateral relationship is in the commercial realm, especially due to the large intake of foreign direct investment (FDI) that comes from the United States into India. Similar to their U.S. counterparts, India’s state governments have significant power to shape their own policies as well as implement national government policies and programs in areas such as agriculture, education, energy generation, land use, and healthcare, all of which may influence U.S. companies’ investment decisions. Per the recently released Indian state election results, 18 of 30 Indian states and territories (Puducherry and New Delhi are the lone union territories where elections are held) are BJP-led or BJP-coalition-led; most of the rest are led by state or regional parties. Many investors are attracted to India by the vigorous outreach and favorable investment policies initiated by individual states, rather than policies initiated by the central government.

Some of the policy levers that have played a greater role in attracting FDI into the states are single-window clearances, automated permits, dedicated country desks, and easy access to nodal investment agencies. While incentives make it easier to conduct business, they are unlikely to be the main determinants of the destination for FDI. A state’s ability to effect socioeconomic reforms is vital to its investment attractiveness. States with poor governance or political instability may not attract private investments. However, proactive public policy, the capacity to innovate, and favorable intergovernmental linkages are crucial to the industrial development of the states and are also common features of FDI hotspots.

In contrast, policies and policy changes made by state governments can raise questions about their openness to foreign investment. In 2019, the then-newly elected government in Andhra Pradesh set about to review and cancel state contracts signed (but not yet implemented) by the departing government. While the stated reasons for the review were arguably credible, the businesses involved claimed the process was not transparent, and in at least two cases, the decision to cancel was suspended by the state’s high court. Both the national and Maharashtra High Court similarly stopped the new government in Maharashtra from canceling contracts entered that the previous state government entered into. In all these cases, it is important to note that the process stopped not because the states had no right to review, cancel, or change such contracts, but because the courts found they did not provide sufficient evidence that these changes were warranted.

The outcomes of Indian state elections may also impact the trajectory of U.S.-India ties by resetting national policies as part of national parties’ efforts to woo regional voters. Many analysts view the BJP’s victory in four of the five recent state elections as boding well for Prime Minister Modi’s prospects in the upcoming 2024 national elections. But even if this proves to be the case, there are signs that a reelected BJP government will not necessarily continue to implement policies that will allow the United States to deepen cooperation in all areas of interest. While many analysts had predicted the issue of job creation would be of primary concern to Uttar Pradesh voters, the BJP’s appeal to nationalism seems to have carried the party to victory. This, together with the central government’s walking back of agriculture reforms to appease rural voters, may not bode well for future economic reforms that India needs in order to further spur trade and investment with the United States and other partners. The Hindu-centric rhetoric used during the campaign – especially in Uttar Pradesh – may also raise bipartisan concerns by members of the U.S. Congress and other Americans about the shared democratic values that both sides regularly cite as a cornerstone of U.S. bilateral partnerships. This is even more the case given concerns over the current divergent U.S. and Indian responses to Russia’s invasion of Ukraine.

As is the case with U.S. state elections, these races may also portend the rise of up-and-coming national leaders who could end up determining India’s policy priorities and outlook toward the United States, both within the ruling party (Yogi Adityanath, the Uttar Pradesh chief minister who led the BJP to victory in his state) and the opposition (Delhi chief minister Arvind Kejriwal, whose Aam Aadmi Party won a resounding victory against the Congress Party in Punjab). Unlike the United States, there are also a myriad of small regional parties, most confined to individual Indian states, that may wield influence at the national level by forming coalitions with the ruling or opposition parties in India’s legislature and by their votes for India’s president, who is selected by the Indian Parliament’s upper house.

The U.S.-India partnership will likely continue to grow. Many of the countries’ strategic interests will remain aligned for the foreseeable future, including concerns over Chinese aggression, the need for pandemic preparedness, and a desire to create more diversified and resilient regional manufacturing supply chains. Because Indian states will continue to play a key role in how much of the bilateral agenda plays out, state elections and governance warrant close attention by U.S. policymakers and other Americans who have a stake in U.S.-India ties.

Katherine B. Hadda is an adjunct fellow (non-resident) to the Wadhwani Chair in U.S.-India Policy Studies at the Center for Strategic and International Studies in Washington, D.C.

Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

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