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India-U.S. ties lose shine over economic differences

By Frank Jack Daniel

NEW DELHI (Reuters) - When India's Prime Minister Manmohan Singh last visited the White House in 2009 he was feted at President Barack Obama's first state dinner, a star-studded affair that reflected the excitement about blooming ties between the two big democracies.

Back then, optimists in Washington saw India as a counterbalance to a rising China and a new engine for the U.S. economy. In a dinner toast, Obama talked of his "duty" to bring the two countries closer.

That duty has only been partly fulfilled. As the two leaders prepare to meet again at the White House on Friday for a working bilateral meeting, Obama is under pressure from lobby groups and lawmakers seething at what they see as India's protectionism and lax enforcement of intellectual property rights.

India's $60 billion trade with the United States is widely seen as less than it could be and is just an eighth of U.S. trade with China. Even India's national security adviser accepts there is a perception the relationship is drifting off course.

"It arises from the macro-economic situation. U.S. friends mention concerns about economic reforms and specific policy issues in India. These concerns are not unique to the U.S. They are, first and foremost, of concern to Indians," National Security Adviser Shivshankar Menon said on Friday.

India has still not shaken off memories of foreign domination through trade and it is increasingly hard for the government, ahead of elections next year, to push ahead with economic reforms and deals seen as favoring U.S. companies.

In turn, Indian IT firms which operate in the United States are angered by restrictions on travel visas for skilled workers.

In June, fourteen U.S. business groups took the unusual step of forming a coalition specifically to pressure Obama over India's perceived protectionist measures, piracy and patent laws.

Indian sourcing rules for retail, IT, medicine and clean energy technology are contentious and U.S. companies gripe about "unfair" imports from India of everything from shrimp to steel pipes. In June, more than 170 U.S. lawmakers signed a letter to Obama about Indian policies they said threatened U.S. jobs.

Even U.S. Vice-President Joe Biden grumbled about India's reluctance to open up to U.S. companies, or align with the United States on the world stage, during a visit to Mumbai in July.

Traditionally, India has been reluctant to get too close to any one big power and Singh is heading to Russia and China over the next two months on trips his staff have described as "economic diplomacy".

FULL SPECTRUM

To be sure, India and U.S. ties are closer now than they have ever been, thanks in part to a 2008 civil-nuclear pact forged by Singh and then President George W. Bush that ended India's isolation after nuclear weapons tests and cleared the way for closer defense ties.

Menon last week described a "full spectrum" relationship of defense, economic and commercial ties with the United States, a far cry from the wariness during the Cold War when India had warm ties with the Soviet Union.

The United States still sees India as a counterbalance to China and in a sign of the level of trust, revelations in the Indian media about spying by the U.S. National Security Agency on Indian institutions, including its embassy in Washington have not led to a spike in tension, at least in public.

From almost zero in 2008, India is now buying billions of dollars of defense equipment from U.S. suppliers, including a $640 million deal to buy six C-130J Super Hercules from Lockheed Martin that might be signed during Singh's visit.

The Indian cabinet on Wednesday approved a preliminary contract with Toshiba's U.S. nuclear unit Westinghouse relating to a major nuclear power plant project - the first such deal under the 2008 agreement and likely to be signed in Washington.

But the fact that it took five years to reach even a preliminary deal to work on reactors, because of worries about Indian liability laws for nuclear suppliers, underscores the problems U.S. companies face doing business in India.

"The Americans want to know what Singh and Sonia are ready to do to get the Indian economy back on track, and the Indians want to know what the Americans intend to do in Afghanistan and Pakistan after 2014," said Bruce Riedel, who advised four U.S. presidents on South Asian affairs, referring to Sonia Gandhi, the president of Singh's ruling Congress party.

India fears that the withdrawal of U.S. and other Western forces from Afghanistan next year will expose it to more Islamist violence, including attacks by Pakistan-based groups.

(Additional reporting by Roberta Rampton in Washington; Editing by Robert Birsel)

(This story was refiled to fix month of lawmakers' letter to Obama, inserts dropped name)

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