(Archived Content)
js-3013
U.S. Treasury Secretary John Snow Delhi, India Hosted by FICCI, AmCham, USIBC Opportunities for Indo-U.S. Economic Ties
Thank you. It is a great pleasure to be with you today. I would like tothank my hosts, Mr Kanwar from the Federation of Indian Chambersof Commerce and Industry, Mr. Singh of the American Chamber ofCommerce, and of course, Torkel Patterson. I also want to thank my very good friend, Minister Chidambaram, and the Prime Minister, for hosting my delegation this week.
Before I begin my remarks I first want to offer my deepest condolences forthe losses India has faced in the tragic attacks that occurred here mostrecently on October 29th. The U.S. condemns the triple terrorist attacksperpetrated on innocent civilians and we stand with India in efforts tofight against terrorism. The news of bombings in Jordan also serves as areminder that our constant vigilance against terrorism is needed.
I also want to express my condolences for the loss of your former president,Kocheril Raman Narayanan His long and distinguished service to the people ofIndia is truly remarkable.
This is an important time for relations between our two nations. Our strongIndo-U.S. relationship continues to gain significance in many aspects and atno time in our history have our relations been stronger and deeper than theyare today. As countries with strong democratic traditions – India is theworld’s largest democracy, while the United States is the world’s oldest –we share a common vision of the importance of democratic institutions and the inherent wisdom of our citizens. We share respect for a free and openpress and respect for the rule of law. Our political and securitycooperation is growing, as reflected in the agreements reached with PrimeMinister Singh and President Bush in July that ranged from cooperation inagriculture technology and aviation to the civil nuclear sector. Moreover,I am proud to say that over 2 million people of Indian heritage call the United States their home, likely more than in any other country outside ofIndia, and hundreds of thousands of young Indians come to study in the U.S.
Our bilateral economic engagement has also expanded significantly in thelast decade to the benefit of both India and the United States. BothAmerica and India rely on private enterprise to generate economic growth.America is India’s largest trading partner. I was told a remarkable factthis week in meetings with Indian investors that about 80% of private equity
funds in India come from the United States.
Foreign direct investment has been growing in India. But it’s important torecognize that the potential here has only been glimpsed. Looking ahead15-20 years, the U.S-Indian economic relationship should become a key pillar
of strength for both our countries and for the global economy.
I have had the opportunity to meet with India’s leaders, both here thisweek, and in our bilateral meetings in Washington and elsewhere, and it’sclear to me that there is a firm commitment to pushing forward on economicreforms to improve the standards of living for Indian citizens. India istruly fortunate to have such talented economic officials to lead thiseconomy. I have come here to work with India’s economic officials and toencourage continued progress. I am here to listen, to learn more aboutIndia’s goals and strategies for achieving success, and how we can help each
other. And I want to highlight America’s great interest in seeing Indiasucceed. India’s success is important for India, but it is also important forAmerica.
I look forward to reporting back to President Bush with ideas on how tofurther strengthen our relationship in advance of his visit next year.
Since 1991, India has made great strides in shaking off the legacy of astate-dominated economic system, and this has translated into steady, stronggrowth rates. India’s economic leadership, from successive governments, hasmoved ahead with policies to liberalize and modernize the Indian economy,and this has shown real results. It’s no secret that good policies tend tolead to good results. India has been able to put in place a stablemacroeconomic environment, with inflation under control. Foreign exchangereserves have grown significantly and India has pursued an enlightenedpolicy allowing flexibility of its currency. And while further developmentand liberalization of India’s financial services sector would be helpful,the central bank has put in place good supervisory policies so that Indianbanks do not face the same systemic risks we see in other emerging marketeconomies.
India’s privatization policies are helping to lead to efficient markets thatprovide better goods and services to consumers at the best price. I waspleased to see the announcement this week to liberalize thetelecommunications sector. Progress in the retail sector could also bringbenefits.
Real progress has also been made in India’s equity markets. Earlier thisweek I visited the National Stock Exchange and the National Commodities andDerivatives Exchange. I was greatly impressed by the talent and technicalcapacity of these very important markets. They will add immeasurable valueto the Indian economy and play a significant role in directing capital toits best uses. It is this combination of dynamism and efficiency that helpto create growth and prosperity.
India’s natural advantages make it poised to take a leading role in theglobal economy. In fact, India has the potential to be an economicpowerhouse. India’s population will continue to provide new sources oflabor, well after European, Japanese, and even Chinese labor resources beginto wane. Indians are properly focused on future job creation for this laborpool, and the investments that India is making now in primary education willpay dividends in the years to come, as more people can participate in theknowledge economy. And, India’s widespread English-language skills give ita key edge in the global marketplace. Finally, I would point to India’sdemocratic tradition as providing important political legitimacy andstability.
The achievements in India are significant, but there is so much more toaccomplish. I have heard the sentiment that so much progress has been madethat now it is time to slow the pace of reforms in India. The pace ofreforms will be decided by India’s economic leaders and the demands of theglobal economy, but I think it’s important to recognise that there are costs
to going too slow. With huge segments of the population unemployed,underemployed and living in poverty, more rapid growth is an imperative.Furthermore, when reforms are rapid in some sectors of the economy butslower in others, not only are there lost opportunity costs, but risks candevelop that can threaten an economy. Reforms in all sectors mustcatch-up to keep pace and prevent distortions.
I believe India could and should play a major and productive role on theinternational economic stage. India should be at the forefront of largeemerging markets, demonstrating how such economies can contribute to globalgrowth and reap significant benefits. In this context, India now has aunique opportunity to become a leader in the effort to open world markets by
taking a proactive negotiating position in the Doha round in favor ofliberalized agriculture, manufacturing and services sectors. The World Bank
has estimated that India would be one of the largest beneficiaries from asuccessful Doha round, but these gains will not be forthcoming if the Doharound fails due to unambitious offers.
To support additional foreign trade, India also faces challenges at home.As the government has recognized, weak infrastructure is a major constrainton trade and growth in India. In a recent survey of worldwide corporateleaders by McKinsey, about 60% of Indian executives cited infrastructure asa significant constraint on growth, compared to less than a quarter ofexecutives worldwide. To meet the government’s goal of raising averageannual GDP growth from 6.5% to 8%, the IMF estimated that an additional 4%of GDP in annual infrastructure investment will be required. The publicsector alone will not be able to finance such investments, so activatingprivate resources is essential.
I think there is a real opportunity here to help India meet its goals. Thefinancial sector could play a much more important role in supporting growthin India, especially in infrastructure. The same McKinsey survey noted thatabout half of Indian executives cite the lack of access to capital as asignificant hindrance on growth. And, I expect the percentage would behigher for small and rural enterprises. Indeed, only about half of smallbusinesses in India have active bank credit lines, compared with 75% ofsmall businesses in Brazil. The relatively high price of capital in Indiais part of the reason that India’s services sector, which requires lesscapital, has grown more quickly than manufacturing. It is striking thatIndia’s service sector is about 55% of GDP while industry is only 23%. InChina, industry is a whopping 53% of GDP, compared with services of 33%.While there is no preferred ratio, these figures point to distortions inboth the Indian and Chinese economies.
A focus of my visit this week has been to underscore the role that financialsector reform can play in helping this nation achieve its goals in buildinginfrastructure. India’s pool of domestic savings has been rising in recentyears and will likely continue to do so. The key will be to use marketmechanisms to channel such savings into financial institutions that canon-lend them efficiently to productive uses. Currently, bank depositsrepresent only about 60% of GDP, compared with levels in Japan and Chinathat are 2-3 times higher.
Even after deposits flow into the financial system, they are often not putto the most productive use. Government borrowing is having the effect ofcrowding out lending that could be made to the private sector. Of theirdeposit base, Indian banks have put over 40% into government bonds. Further
progress in meeting the fiscal responsibility law would help to reducecrowding out, and reining in state level deficits is necessary to furtherfree up resources for the private sector.
In my view, additional liberalization of the Indian financial sector wouldalso go a long way towards addressing India’s pressing needs. In the bankingsector, for example, allowing for more engagement by foreign banks would addcapital to the banking system, spread credit availability, bring inadditional managerial expertise and technology, and result in more capitalbeing channeled to more productive investments. Some may argue that Indianbanks are not prepared for global competition. But India’s banks have madesubstantial improvements in their risk management abilities, and many of thebanks are eager to expand abroad to prove their competitiveness.In a similar vein, liberalization of Indian markets in insurance, pensions,and fund management would lead to the development of new sources of capital,
provide new services for consumers, and deepen India’s domestic capitalmarkets. India’s insurance industry is an example of the positive effectsof competition. Liberalization has led to impressive growth in insurancemarkets. In 2004, Indian insurance companies mobilized over $21 billion,nearly three times as much as in 1999. This kind of capital mobilizationprovides crucial resources for investment in infrastructure, businesses,long-term bonds, and municipal projects. I welcomed the move yesterday toallow more foreign investment in asset recovery companies.
Many of these policies would be self-reinforcing. A stronger financialsector, combined with steps like the liberalization of the retail sector andmore effective use of technology in the agricultural sector, wouldjump-start a surge in investments in India throughout the agriculture andfood processing sectors that would add jobs and increase productivity.
Part of strengthening the financial sector involves protecting it from abusefrom criminals and potential terrorists. India has taken a significant stepforward this year with the enactment of the Prevention of Money LaunderingAct. To meet international standards, India will need to aggressivelyimplement its provisions and address some deficiencies that hamper itseffectiveness. In addition, proper regulations need to be developed forinformal financial systems such as hawala as risks for illicit financialfacilitation in this sector remain high.
India also faces challenges in improving its investment climate. The WorldBank’s recent study on Doing Business around the globe puts India at 116out of 155 countries. This is 25 slots below China and just belowIndonesia and Philippines. One problem is international trade. It takesthree times as many official signatures to export a good from India than ittakes to export one from China. As McKinsey argued several years ago, Indiacould raise its growth rate by nearly 5 percent per year by removing productand labor market distortions and reducing government ownership ofenterprises.
Conclusion
I have benefited from discussing these issues during my visit with manyIndians from the official sector, private sector and NGOs. India’s leadersare well aware of the economic challenges ahead and the policies that itwill take to increase sources of credit, finance infrastructure, andintegrate with the world economy, all of which are essential to supportgrowth, reduce poverty, and improve the lives of the Indian public.
I would like to end this speech by quoting one of my gracious hosts, PrimeMinister Singh. Just three months ago, he told an Indian audience that wemust seize this moment and grab this opportunity. We need to have theresolve to make our country prosperous. We must have the self confidence torealize that we are second to none, that Indians are as good as the best.With that spirit, India has a great future ahead of it, and we are ready tobe partners in your endeavors.