U.S.' Paulson aims to deepen India economic ties

U.S. Treasury Secretary Henry Paulson seen in Washington in this June 20, 2007 file photo. Paulson left Friday for a four-day trip to India to push for more market reforms and closer economic ties amid strains caused by controversy in India over a civilian nuclear deal.

WASHINGTON (Reuters) - U.S. Treasury Secretary Henry Paulson left Friday for a four-day trip to India to push for more market reforms and closer economic ties amid strains caused by controversy in India over a civilian nuclear deal.

Paulson, eager to highlight India's progress in fostering robust growth, a flexible currency exchange rate and muted inflation, will meet Finance Minister Palaniappan Chidambaram, and the heads of India's central bank as well as its main securities regulator during his visit.

He also will meet West Bengal Chief Minister Buddhadeb Bhattacharjee, a reformist Communist Party of India (Marxist) leader who has been wooing industrial and technology investments to the impoverished, agrarian eastern state.

Analysts in Washington predicted Paulson's welcome will be warm, perhaps more so than if he was visiting China.

"We don't have any big problems with India from an economic point of view. We just want them to keep growing and continue on the path of reforms," said Barry Bosworth, an economist and South Asia expert at The Brookings Institution in Washington.

CONTRAST WITH CHINA

Bosworth said India's relatively free-floating exchange rate should be held up "as an encouraging example" to China, which has a tightly controlled yuan exchange rate that is increasingly a source of trade tension with the United States and other industrialized western economies.

Paulson has concentrated heavily in the past year on pressing Beijing to allow the yuan to rise more quickly to reflect China's strong economic fundamentals and for reforms to encourage more domestic consumption and reduce reliance on exports. He has faced stiff resistance on the currency front, but has launched regular dialogue with Beijing.

In a speech this week, Paulson lauded India's ability to achieve growth without generating large imbalances but said it risked "backsliding" on reforms to open up its economy.

On Thursday, India's securities regulator moved to curb flows of anonymous foreign investment funds into Indian shares, a move that Chidambaram has said could help stem the rupee's rapid appreciation.

Paulson told Reuters this week he doesn't intend to "lecture" Indian officials about capital controls, but wants to make known his belief such controls would deter investment and lose their effectiveness over time.

Chidambaram also may have some advice for Paulson regarding lessons from the U.S. subprime mortgage crisis. He told Reuters last week on the sidelines of the International Monetary Fund semi-annual meeting that U.S. regulators "have fallen behind" new and complex financial market instruments at the heart of the crisis.

NUCLEAR RISKS

Paulson and other U.S. officials have acknowledged that economic ties to India are likely to continue to deepen even if India's communist opposition parties are successful in a bid to thwart the controversial deal to provide India with U.S. civilian nuclear technology.

The major economic risk from a failure, apart from lost opportunities for some U.S. power infrastructure companies, is that the opposition will weaken the political power of Prime Minister Manmohan Singh, a strong advocate for economic and financial reforms.

Defeating the nuclear deal might embolden leftist parties into opposing other economic reforms. "That would definitely slow things down," said Karl Indefurth, a top U.S. State Department official in the region under former President Bill Clinton.

But, Indefurth added, since democracy is one of India's strengths, high-level engagement from officials like Paulson could help "bring the skeptics along."

"We're going to have disagreements with India, we so need a strong economic relationship to serve as the ballast for this relationship overall, he said. "The U.S.-Indian relationship is on much sounder footing because we share democratic practices and values."