U.S. President Barack Obama missed out on a date with the Taj Mahal, a universal symbol of love, during his visit to India last week. (He rushed off to attend the Saudi king’s funeral.) But the atmosphere in Delhi may have made up for it. “It’s a love fest in India,” reported Quartz, the New York-headquartered business news brand of Atlantic Media. The Economic Times noted: “Namobama bonhomie in full bloom.” (Namo is the sobriquet for Narendra Modi.)

Normally, the visit of a high-powered foreign dignitary is the occasion for a lot of announcements about partnerships and projects. This trip was no exception, with pronouncements on nuclear power, defense cooperation, clean energy and climate change. But while such statements are often forgotten soon after the departing dignitary’s flight has taken off, this time there was evidence that the Obama visit had pushed the government to quick action on various fronts.

A day after Obama left for Riyadh, the government announced that it would not file an appeal against a Bombay High Court ruling in the Vodafone case. This relates to a Rs. 3,200 crore (some $500 million) demand by the tax authorities on transfer pricing of shares issued to Vodafone’s parent company. The taxmen had previously alleged that Vodafone had undervalued its shares.

Just to be clear, this is not the $2.1 billion capital gains tax claim the authorities had made against Vodafone. That case, in which the laws were changed with retrospective effect after the country’s Supreme Court had decided in favor of Vodafone, is now in international arbitration.

The transfer pricing issue, though slightly smaller in financial terms, is equally significant since it seemed to be taking the same route as the other case. In his speech at the U.S. India Business Council (USIBC), Obama noted: “We need to be fostering a business environment that is more transparent and more consistent and more predictable.” Many who heard it thought he was referring to instances such as the Vodafone case.

The response was quick. After a Union Cabinet meeting, telecom minister Ravi Shankar Prasad told newsmen: “The Cabinet has decided not to appeal in the Supreme Court.” What’s more, this applies not just to Vodafone, but to other affected companies, including IBM, Nokia and Shell.

“India today stands between communism on one side and terrorism on the other.” –Jagmohan Raju

“We want to convey a clear message to investors that this is a government where decisions will be fair, transparent and within the four corners of law,” Prasad said. “We are trying to correct a legacy issue. Where the income-tax liability is clear and unambiguous, it shall be charged. Where it is overstretched without legal authority, the government will be fair. That is the indication. It shows our fairness.”

“Stability and predictability in tax matters are important for long-term investors such as Vodafone,” a Vodafone spokesman told Knowledge at Wharton. “We welcome the Indian government’s decision not to appeal the Bombay High Court ruling.” A day later, the Central Board of Direct Taxes issued instructions to its officers not to pursue Vodafone-type cases any longer.

A New Impetus

New life seems to have coursed through other pieces of the economic reform process following the Obama visit. In his budget for 2014-2015 presented last July, finance minister Arun Jaitley had proposed to raise $9.5 billion through public sector disinvestment. Until December nothing happened. Then the government tested the waters with a small, $275-million offer for sale of the shares of Steel Authority. It found enough takers. With time running out — the fiscal year ends in March and the money is needed to balance the budget — the government took the plunge. The first big-ticket item — Coal India’s $3.7 billion issue — was launched on January 30. It was oversubscribed the very first day, with domestic financial institutions lending a helping hand. Two more large issues — Oil & Natural Gas $3 billion and NHPC (formerly National Hydro Power) $500 million — should roll through.

The markets are going strong. The Bombay Stock Exchange Sensitive Index (Sensex) has been recording daily highs and advancing toward 30,000. When Obama had been in India last in November 2010, the Sensex hit a new record of 21,000. According to Bloomberg, “Indian stocks advanced to a record for the fifth day as Prime Minister Narendra Modi and President Barack Obama pledged greater cooperation in defense and economic ties amid sustained capital inflows.”

In another move, the government has cleared the decks for spectrum auction. This was a controversial issue under the earlier regime. The online auction will take place on February 25 and the government expects to raise $10 billion.

The government has also approved a $1.6 billion rights issue from HDFC Bank. Indian banks are eager to increase in size. The State Bank of India is planning to merge with several of its subsidiaries and eyeing a rights/public issue of $2.5 billion. Like China, India needs larger banks to support its companies on the global stage.

More than Chemistry

All this is being depicted as a Modi miracle with Obama in a strong supporting role. But is that really the case? Jitendra V. Singh, dean and professor of business at Hong Kong University of Science and Technology and an emeritus professor of management at Wharton, notes that the environment has had a role to play. “There is much breathless discussion all around about the great personal chemistry between Prime Minister Modi and President Obama,” he says. “While there may indeed be a good relationship between them, we must not forget the broader context and settle for an overly individual-centered narrative As the saying goes, in relations between nation states, there are no permanent friends, no permanent enemies, only permanent interests.

“The broader context of the India-U.S. relationship is that, increasingly, the interests of the two countries have become aligned, whether on account of the end of the Cold War, or the fight against terrorism, or the balanced development of Asia,” Singh continues. “It is on this bedrock that we must overlay the role of the personal relationship between Obama and Modi. While clearly a positive, without the contextual changes, the personal relationship would not take us very far.”

“It takes two hands to clap and similarly, it takes two sides to build a relationship,” adds Devesh Kapur, director of the Center for the Advanced Study of India and professor of political science at the University of Pennsylvania. “Both were willing to look ahead rather than be weighed down by the past. But underlying the pragmatism are the large structural changes taking place in Asia, especially the rise of China and the attendant geopolitical uncertainties.”

“Perhaps, as never before, interests on both sides are aligned, even if they are not identical.” –Jitendra V. Singh

There appear to be in influential U.S. political circles some “concerns about the increasingly powerful role of China. The U.S. interest seems to be in a more balanced Asia, and India is the only country large enough to provide any counterbalance,” Singh says. “Japan is large in economic terms, but its economy has slowed down in recent decades. Pakistan is now much better understood by the U.S. establishment and a perhaps pivotal event was the discovery of Osama Bin Laden on Pakistani soil not so long ago.”

Adds S. Raghunath, professor of corporate strategy and policy at the Indian Institute of Management, Bangalore: “Obama is revisiting his Asia strategy and India as a preferred place to invest and partner global initiatives.” He notes that “India is critical to the U.S., first because it is the only true democracy in the subcontinent and thus secures political stability in South Asia and second, because India can sustain economic growth relevant to U.S. trade, commerce and industry.”Manish Sabharwal, chairman of staffing firm TeamLease, says, “India is a counterfoil to China.”

“It is more than China now,” notes Jagmohan Raju, Wharton professor of marketing. “India today stands between communism on one side and terrorism on the other.” For the U.S., India is an obvious ally to contain both.

China was, of course, never mentioned — at least in official communications — during the Obama-Modi summit. The Chinese official media had no such inhibitions. “High-sounding remarks and deals are often showcased during high-level visits between the U.S. and India, but when the trips end, actions often lag behind,” China’s state-run Global Times said.

Gains and Breakthroughs

It is true, of course, that the summit produced a laundry list of proposals and good intentions. The joint statement issued during the visit has some 60 clauses ranging from science and technology and defense to clean energy and climate change. Intellectual property rights got a passing mention and nuclear security was tucked away in point 50.

Nevertheless, it was the announcement that Modi and Obama had broken the deadlock on a long-idle civilian nuclear pact that stole the show, with the media projecting it as a ‘breakthrough’. “I think from a symbolic perspective the nuclear agreement is important,” says Raju. “It has economic as well as symbolic value. Today, oil is cheap; tomorrow it won’t be. India needs nuclear power.” Adds Singh: “The most salient initiative seems to be the breakthrough in nuclear cooperation. This has been a long time coming and, of course, energy security is an important issue for India.”

But what is the ‘breakthrough’ about? The sticking point until now, following the original agreement in 2008, was the liability in case of an accident. India wants equipment supplier liability rather than operator liability; this was unacceptable to U.S. companies, which have not built a single nuclear power plant in India. There can be many solutions to this problem, notes Raju. He believes a private insurance fund will be created with multiple parties contributing to it. “If you want just the coverage of risk, there are many ways to do it,” he says. “It doesn’t have to be through the stroke of the pen of a president or a prime minister.”

“Regarding nuclear power, it is too early to see any noticeable movement,” adds Ajay Singha, executive director of the American Chamber of Commerce in India. “The U.S. side has cleared all hurdles for transfer of technology. But the liability clause issues remain.”

Beyond symbolism, are there any concrete economic gains? “My own sense of the visit is that it was fundamentally important from a defense and diplomacy standpoint rather than bilateral trade and investment,” says Ravi Venkatesan, author of Conquering the Chaos: Win In India, Win Everywhere and former chairman of Microsoft India.

In his speech to U.S.-India Business Council, Obama said: “We do about $100 billion a year in trade with India. But we do about $560 billion a year with China. That gives you some sense of the potential.”

One component of increased trade is the Modi government Make in India initiative. It’s early days yet, but some of the agreements with U.S. companies will have domestic manufacturing components. “All major U.S. defense companies doing business in India will have to get involved in manufacturing here,” says Singha. “At least a part of their products being supplied in India will have to be manufactured in India.”

Make in India has had its critics abroad. Some see it as a return to the days when huge import duties and other restrictions kept the goods of the world at bay. Raju does not see that as an outcome. “Make in India does not mean anti-export and that the markets will be closed,” he says. “Make in India means make for the world and also make for India.”

“If U.S. firms wait until all their misgivings about India are settled, they will be waiting for a very long time.” –Devesh Kapur

Obama announced an additional $4 billion to support Made-in-America exports to India ($1 billion), loans to small and medium businesses in India ($1 billion) and investments in renewable energy in India ($2 billion). But PepsiCo alone is investing $5.5 billion in India and Coca-Cola another $5 billion. “The larger amounts of investment capital will come from the private sector,” says Singh. “However, the government’s promises will enable easier investments by the private sector. I believe we are still in the early part of the story; in cricket terms — a game India and Indians are crazy about — this is the start of the first innings. There is more to come.”

“We are looking forward to moving ahead on defense cooperation between the Indian and the U.S. private sector,” adds Singha. The other priority areas for U.S. private sector participation are energy (particularly clean energy) and smart cities.

Will U.S. Firms Bite?

Some of the reforms before the Obama trip were done through ordinances. They are not yet law, and Modi will have problems getting them passed by the Rajya Sabha (the upper house of Parliament where the ruling party does not command a majority). Will U.S. companies bite? “U.S. companies will monitor these developments carefully,” says Singh. “They may hedge their bets and wait before making large, irrevocable, commitments.” According to Kapur, the ordinances are a signal of intent. “We should wait and see if the budget will be another (signal of intent),” he says. “But if U.S. firms wait until all their misgivings about India are settled, they will be waiting for a very long time. And others will fill the gap.”

“Companies are far more concerned with regulatory certainty than they are about regulations per se,” adds Anant K. Sundaram, visiting professor of business administration at Dartmouth’s Tuck School of Business. “Indeed, this is one of the reasons that investment spending in the U.S. slowed considerably in the past few years, though we were coming out of a recession and might thus have expected a substantial investment uptick: Business investment froze because of all the regulatory uncertainty emanating from Washington, D.C. What regulatory uncertainty creates is opportunity for the judicial system to fill the void; things get tied up endlessly in court.Policy pronouncements and ordinances are great. But regulatory certainty is far better.”

Still, U.S. companies are already preparing their game plans. “The potential for the India-U.S. relationship is very positive, and an opportunity that must not be missed by India,” says Singh. “India has crucial developmental needs, such as in upgrading its infrastructure, in which U.S. companies can play a central role. Indian financial markets already attract significant U.S. capital and this is likely to increase in the future, even as interest rates remain low in the U.S. and there is plenty of liquidity looking for higher rates of return.”

The goodwill that has been generated by the summit “will definitely help in working through some of the differences on the trade front as well,” adds Venkatesan. “The big gainers will be U.S. and Indian defense firms like Boeing or Mahindra and Larsen & Toubro. It is less clear if all the roadblocks have been removed for nuclear deals so that GE and Bharat Forge can benefit.”

Sundaram is skeptical. “Obama is in the last two years of his presidency, with a Republican Congress,” he says. “The only real power he can exercise now is negative power — the power of the veto. Granted, U.S. presidents have traditionally had a little more leeway in foreign policy. But even that has changed quite a bit. Increasingly, Congress has its hands all over the U.S. foreign policy, again being able to exercise considerable negative power — the power of funding.”

Venkatesan is more optimistic about a major improvement in bilateral trade and investment. “But I expect it will be more gradual than we might wish,” he notes. “The world has been disappointed multiple times by India and will wait to see clear evidence that this government can indeed deliver tangible improvements to the ease of doing business and relief from tax harassment. On the other hand, India and the U.S. are oases in an otherwise barren economic landscape. With Western firms facing severe headwinds in China, India is a market that few can afford to ignore. I expect much more investment and many more deals starting in the second half of this year.”

After pointing out all the negatives, Singh is optimistic. “I believe it is just possible that when the history of our times is written, this may be remembered as a watershed moment in India-U.S. relations,” he says. “Perhaps, as never before, interests on both sides are aligned, even if they are not identical. The changing geopolitical landscape has brought the countries closer together. While the work was started under President Bill Clinton, with President George W. Bush taking some important — even dramatic — steps such as the nuclear deal, these initiatives are now starting to bear fruit. There may yet emerge some new challenges, but the U.S.-India partnership has very positive potential for the future.”

Adds Raju: “If the next six months are like the past six months, I will be very happy.”