By Frank Jack Daniel and David Brunnstrom
NEW DELHI/WASHINGTON (Reuters) - India ordered the United States on Wednesday to close down an embassy club for expatriate Americans in New Delhi, escalating a diplomatic row between the two nations that has brought faultlines in their ties out in the open.
Furious at the arrest, handcuffing and strip search of its deputy consul in New York last month, India initially reacted by curtailing privileges offered to U.S. diplomats. The officer, Devyani Khobragade, was accused by prosecutors of underpaying her nanny and lying on a visa application,
Still festering nearly a month on, the row has started to affect the wider relationship between the world's two largest democracies, with one high-level visit by a senior U.S. official already postponed and a visit scheduled for next week by U.S. Energy Secretary Ernest Moniz looking doubtful.
Both sides have said the relationship is important and will not be allowed to deteriorate - Washington needs New Delhi on its side as U.S. troops pull out of Afghanistan and it engages with China. Millions of Indians have made the United States their home and bilateral trade is worth about $100 billion a year.
But the row over Khobragade, which should not have been more than an easily resolved irritant, is just not going away and has plunged the two countries into a crisis described by Indian media as the worst since New Delhi tested a nuclear device in 1998.
"I'm a little worried it may spin out of control," said Lalit Mansingh, a former Indian ambassador to the United States who has also served as India's top diplomat and is now retired.
India stepped up the pressure on Wednesday ahead of a January 13 court appearance where Khobragade could be indicted, ordering the U.S. embassy in Delhi to stop receiving non-diplomats at an embassy club popular with expatriate Americans for its swimming pool, restaurant and bar.
Americans working in the Indian capital have been frequenting the club for decades.
The embassy said it had no comment to make on the move.
Despite an overall improvement in ties since the end of the Cold War, the dispute has brought into the open the lingering wariness between the two countries. Over the past year, there has been increasing friction over trade, intellectual property rights and visas for Indian IT workers.
There is also a legacy of mistrust between the both sides, with some Indian officials whose professional life began when India was a close partner of the Soviet Union still not convinced Washington is a reliable ally.
Despite close security and economic cooperation now, many officials recall U.S. support of Pakistan, India's old enemy, and some quietly believe the United States sees a strong India as a threat.
"For 50 years we were led to believe that the United States was an adversary. For the last 10 years we have been experimenting with a strategic partnership. It is not a done deal." said Mansingh.
Among some U.S. diplomats there is a perception that while India insists on respect and friendship from Washington, it fails to deliver either in support on issues such as Iran or Afghanistan, or by giving enough commercial access to U.S. businesses.
To defuse the spat, India wants the U.S. State Department to approve Khobragade's transfer to its U.N. mission in New York, a move it believes would give her immunity from prosecution.
If that doesn't happen before the U.S. government commences a preliminary hearing or files an indictment, India could unleash more retaliation measures, a government source with knowledge of the affair told Reuters.
U.S. officials hope for a resolution to the Khobragade row through some sort of plea-bargaining process. State Department spokeswoman Marie Harf has said Indian officials were in touch with the U.S. Justice Department.
If the row persists, the next casualty could be the trip by Moniz, due in Delhi later this month for a round of talks to promote trade and investment in the energy sector, the government source in New Delhi said. The talks usually include discussions of civil nuclear trade between Indian and the United States.
For now, the trip has not been cancelled. However, the U.S. Assistant Secretary of State for South Asia, Nisha Desai Biswal, has postponed her first visit to India, which was due on January 6, to avoid it becoming embroiled in the dispute.
Harf said Biswal would visit India as soon as possible, but no date had yet been set.
India is also preparing to take steps against the American Embassy School, which it suspects may be employing some staff in violation of tax and visa requirements, the government source said.
Along with the embassy club, the highly respected school is the heart of Delhi life for the families of many expatriate employees of U.S. corporations in India.
"Has an era of steadily improving ties between the two countries come to an end?" asked Indian Human Resource Minister Shashi Tharoor in a column published this week.
"Indian-American relations had been strengthening owing to both sides' shared commitment to democracy, common concerns about China, and increasing trade and investment," wrote Tharoor, a former senior U.N. official who unsuccessfully contested for the Secretary-General's post in 2007.
"The Khobragade affair suggests, however, that all this is not enough: sustaining a strategic partnership requires, above all, mutual respect."
As the two countries drew closer over the past decade, the United States had high hopes India would emerge as a counterbalance to a rising China and a new engine for the U.S. economy.
However, there is a widespread sense the relationship has drifted since India's 2009 nuclear deal with the Bush administration marked a sharp improvement.
Anti-Indian feeling has grown among the U.S. corporate lobby. 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.
Now, with general elections due in India in four months, and mid-term elections in the United States in November, the fear is that the current row will make it harder for both sides to stick their necks out and make progress on thorny issues such as liability for nuclear equipment suppliers.
"There is such a long laundry list of concerns on the American side that seem to be ignored or slow rolled in India,' said Persis Khambatta at the Center for Strategic and International Studies, a think tank. "The risk is that this incident will dig up a lot of frustration that had built up."
(Additional reporting by Aruna Viswanatha and Valerie Volcovici in Washington and Joseph Ax in New York and Sruthi Gottipati in New Delhi; Editing by Raju Gopalakrishnan)