(Fixes quote in paragraphs 5-6)
By By Doug Palmer
WASHINGTON, July 11 (Reuters) - U.S. Trade Representative Michael Froman urged India on Thursday to reverse course on policies that he said discriminated against American companies and were fraying relations between the world's two largest democracies.
"Let me stress that as a friend of India and one of the caretakers of our economic relationship, I am concerned about the investment and innovation environment in India," Froman said in a speech to the U.S.-India Business Council.
Froman said the United States appreciated the Indian government's decision this week to put on hold a policy that would have required private Indian companies to purchase domestically manufactured goods.
He said, however, that Washington remains concerned about a number of other policies that India has adopted as part of its efforts to promote its manufacturing sector.
"There has been great concern about localization measures that are meant to stimulate domestic manufacturing and achieve other important domestic-policy objectives, including preferences for solar developers who use domestically manufactured solar equipment," Froman said.
"Similarly, in the area of intellectual property rights, there has been substantial concern raised about recent actions to impose special rules for the patenting of medicines that otherwise meet the internationally accepted criteria."
Experience has shown that both countries benefit most when they are open to each other's trade and investment, he said.
Speaking to the same group, Indian Finance Minister P. Chidambaram said the United States and India should not let "a few cases of business rivalry" stand in the way of good relations and asked for patience as India struggles to create jobs for its young and growing population.
He acknowledged "angst" in the U.S. business community but said the problems had been exacerbated by the global economic slowdown, which had increased competition for jobs.
Back home, Chidambaram is grappling with India's slowest economic growth in a decade. The country's current account deficit has ballooned to a record level, putting pressure on the Indian rupee, which hit a record low this week.
India has paid a price for its earlier period of rapid growth "in terms of a high fiscal deficit, high inflation and now a high current account deficit. But these are not problems that we can not overcome," Chidambaram said.
SENATE IMMIGRATION BILL A CONCERN
Chidambaram expressed concerns about provisions in immigration legislation passed by the U.S. Senate that would make it harder for India's information technology workers to get temporary visas to work in the United States.
"In no dictionary is immigration defined as including temporary relocation of knowledge workers. ... Yet the immigration bill has a clause that seems to erect non-tariff barriers on temporary relocation of knowledge workers," Chidambaram said.
"We must find a way to disentangle that," he said.
Both spoke to the business group before Friday's meeting of the U.S.-India CEO Forum, an annual event that brings together government officials and corporate chief executives from the two countries to discuss ways to expand trade and investment.
The meeting takes place at a rocky time in U.S.-India economic relations, with many U.S. lawmakers and business groups complaining about Indian government policies they say discriminate against foreign firms and undermine valuable U.S. intellectual property, particularly for pharmaceuticals.
Economic concerns are expected to remain high on the agenda when U.S. Vice President Joe Biden travels to New Delhi later this month and Indian Prime Minister Manmohan Singh visits Washington in September.
In the latest Indian fiscal year, which ended in March, foreign direct investment fell 21 percent to $36.9 billion, according to Indian government statistics.
Chidambaram has proposed relaxing rules on foreign direct investment in defense, telecoms, pharmaceuticals and retail to help revive the Indian economy, but is facing strong opposition from other parts of the Indian government.
Ron Somers, president of the U.S.-India Business Council, likened the bilateral relationship to a plane losing altitude and asked a panel of former U.S. ambassadors to India how the countries could pull it up "out of the treetops."
They offered various solutions including launching talks on a bilateral investment treaty or possibly a free trade pact.
Several were markedly pessimistic, including Robert Blackwill, who was U.S. ambassador to India from 2001 to 2003. He said he believed the two countries would be in "a damage limitation mode ... for the next couple of years."
Froman said he and Indian Commerce Minister Anand Sharma agreed earlier on Thursday to begin preparing for a ministerial-level U.S.-Indian Trade Policy Forum meeting to further discuss concerns. (Editing by Peter Cooney and Mohammad Zargham)