U.S. Department of the Treasury

(Archived Content)

Good morning. It’s a pleasure to beheretoday to celebrate India’s first fifty years and look ahead to the next fifty.

Half a century ago this Thursday, in thespeech honored at this conference, Prime Minister Nehru asked whether the new India wasbrave enough and wise enough to...accept the challenge of the future. Sincethen, India has built and sustained a vibrant democracy in the most diverse society in theworld - a country of 17 major languages, 22,000 dialects, four major religions ....and 300ways of cooking potato. It has all but defeated starvation, in a nation whose populationhas grown by more than that of the entire US in the last 20 years alone. It has increasedreal per capita incomes by 125 per cent over the years 1950-1992 - after 130 years inwhich they rose only 12 per cent.

And yet, as the people in this room knowbetter than most, in all these achievements India has not come close to fulfilling itspotential:

Real income growth of 125 per cent putthe years of colonial rule to shame - but Taiwanese real incomes rose 1,160 per cent in the same time.

India’s pool of trained scientistsand engineers is second only to our own - but nearly one half of Indians, and two-thirds of Indian women, cannot read.

Indian expatriates are among theworld’s most successful immigrants - but in India itself 470 million people still scrape by on less than $1 a day.

The challenge for India’s secondfiftyyears is to free its economy and its people to live up to the potential we see already inGujarat and Bangalore, and in the thriving Indian communities of Southern California andthe English Midlands. In short, is to become, not just the world largest democracy, butthe fastest growing.

Whether India succeeds in this mammothtaskis of greater importance to the US than perhaps many in this country realize. In so manyvital respects - our commitment to democracy and free speech, our creativity, even ourknack for making popular movies - we see in India but a larger version of ourselves.These, our status as India’s most important trade and investment partner, and ourstrong security interest in a stable and prosperous South Asia give us a huge stake inIndia achieving the rapid and sustained development it deserves. (As we approach the newmillennium, the future shape and direction of the global economy could rest on theoutcome.)

Twenty-five years from now, we could bereading very different media portraits of India at 75 than we have seen during her 50th.With 25 years of 9 per cent average growth behind it, India would be firmly on the way tobecoming one of the world’s new economic superpowers. Per capita income would beabout 450 per cent higher than today. The Hindu rate of growth would be apoint of pride - not frustration.

Behind the raw data would be talk of thewayIndia’s creative energies were unleashed by the reform period which began in theearly 1990s. Vanity Fair would be declaring Bombay, not London, the world’scoolest city, and devoting entire issues to India’s trendsetting fashion andjewelry designers and cutting-edge software companies. Elsewhere in Asia there would begripes about the Bollywoodization of the domestic movie industry, and theflood of Indian soaps filling the domestic TV screens.

Best of all, Time or Newsweek would pointout, has been the dramatic reduction in absolute poverty, from 48 per cent of thepopulation to 24 per cent in the first decade of the century alone - an absoluteimprovement rivaled only by the first decade of China’s economic reforms. With that,they would write, India has come of age. And the world has been shown that rapid,market-led, growth was entirely consistent with the freest and noisiest of democracies,and with growth in the living standards of the entire population.

India is closer to this golden picture thanit was five or six years ago. The reforms of the 1990s have brought a change in attitude -across the political spectrum. You may remember, not so long ago, the time when IndiraGandhi’s communications minister stood up in parliament to respond to questionsbemoaning the frequent phone breakdowns. He said that telephones were a luxury, not aright. He added that any Indian who wasn’t satisfied with his phone service couldreturn it - there was an eight-year waiting list of people who’d be happy to take it.

That is not the mood today. The reformswhichbegan in 1991 have increased the growth rate to around 6 per cent a year, compared to 3.5per cent or so of the 1960s and 1970s. And India has begun to walk back from its long,self-imposed exile from the global economy. In the first 30 years after independence,manufacturing exports grew only 0.1 per cent a year. In the 1990s they’ve grown by 7per cent a year. Trade now accounts for about 27 per cent of GDP, up from 8 per centtwenty-five years ago.

The micro-effects of this shift in attitudecan be seen in different states and industries: in Sundram Fasteners, the tiny Madras autocomponent manufacturer which is now the main global supplier and producer of GeneralMotors radiator caps; in Bangalore, and other fast-growing Indian software centers, whichbetween them make more software for US computer companies than in any other country in theworld; in Gujarat, now home to one of the world’s largest diamond-cutting centers.

And yet, for all the benefits of thesechanges - and all the political difficulties of achieving them - the job is only halfdone.

When he was teaching at Oxford theeconomistThomas Balogh used to explain economic reform problems to his students with the help of aproverb from his home town in Hungary: when you have put a waistcoat onincorrectly, it said, you have to undo all the buttons to put it onagain. India, you might say, has a number of buttons left to undo. That is the badnews; a fresh reform push is needed, across a broad front. The good news is that, as withthe misshapen waistcoat, the combined benefits of doing so will be far greater than thesum of individual reform parts.

In many respects, India in 1997 resemblesthereforming countries of Eastern and Central Europe. Huge and distorting governmentsubsidies to industry and agriculture, a vast bureaucracy, regulations overing every kindof economic activity..... And this - I should say - is like the formerly Communisteconomies before they started to reform.

The recent government paper on subsidiescalculated that, all told, state subsidies in India came to 15 per cent of GDP in 1994-5 -rather more than the average in the Visegrad countries of Eastern Europe in 1990 androughly the same as Russia at the start of the 1990s. As the paper pointed out, thesecarry two tremendous costs.

First, they foil any attempt to achievelasting control of government borrowing and a more sustainable relationship between centerand state budgets. This endangers macroeconomic stability and undermines financial sectordevelopment. And it saps resources from urgent public sector priorities such as health andeducation.

Second, the subsidies inflict hugedistortions on the micro-economy, thwarting efforts to improve productivity and attractmore private investment in infrastructure.

Consider the cascade of benefits of reducingprice distortions in power sector. This would reduce state deficits by an estimated 2 percent of GDP. It would also encourage much more efficient use of energy, restoringfinancial health to state power generators. This, in turn, would give them greater abilityto attract private sector investors by lowering the perceived risks; one of the reasonsthat Enron went to such pains in obtaining its controversial guarantees was its fear ofthe solvency of the state electricity board. And that - that would start easeenergy bottlenecks in an economy in which inadequate power generation is the largestsingle drag on productivity.

Last year’s report from the ExpertGroupon Infrastructure chaired by Dr Rakesh Mohan gave a sobering reminder of theinfrastructure mountain India will have to climb to grow fast. It reckoned the countrywill need $115-130 billion in new investment in this area over the next five years alone,rising to $215bn in the subsequent five.

Further easing the path for foreign investorsin this area would plug some part of the gap. But as the Report recognized, the vast bulkof the funds will have to be raised domestically. That means, not merely furtheradjustment of central and state budgets, but deeper regulatory and pricing reforms toraise the scope for private investment. Even in key sectors such as power generation,investors still need 42 official authorizations from central and state governments beforethey can start work.

Finally, India will not come close to meetingits heaving infrastructure needs without free and efficient financial markets. The bankingand capital market reforms of recent years have taken India closer to this objective. Butas Minister Chidambaram has clearly recognized, liberalizing the state-dominated insuranceand pension fund industries - both domestically and internationally - is a crucial nextstep.

The withdrawal from parliament onWednesdayof legislation aimed at beginning this process can only be considered a serious setback -not merely to the government’s continued liberalization efforts, but for the broaderaim of a strong global market in international services. We have been in close andconstructive dialogue on this topic with the Indian government for some time, particularlywith regard to the ongoing negotiations for a global financial services agreement nowtaking place within the World Trade Organization.

A failure in those talks would be bad newsfor the world - and bad news for India. Gaining access to the high quality expertise andefficiency of international service providers could play a vital role in giving India -and other investment-hungry emerging economies - a strong financial sector to make suretheir precious domestic savings get channelled to where they are needed most. We will berooting for Mr Chidambaram and his colleagues as they try to proceed with these reforms inthe coming weeks and months.

It is not merely in the service sector thatIndia stands to gain from closer integration. For all the progress we’ve seen inrecent years, the World Bank estimates that even by 2020 India will account for less than4 per cent of world exports - better than the meager 0.7 per cent of 1992, but only alittle above where it was in 1950. Equally, India still attracted barely 6 per cent of theFDI China received last year.

Since 1991 India’s import-weightedtariff has fallen by more than three-quarters, and this year’s budget lowered thepeak tariff still further. The government is committed to keeping tariffs falling, to theaverage level of the Association of South-east Asian Nations by the turn of the century.But even then, the International Monetary Fund has estimated that India would still besignificantly less open than China. Small scale industries, in particular, and Indianconsumers stand to gain enormously from the speedy removal of the remaining 2700-plusquantative controls on consumer and other goods.

The Indian government has beenunderstandablycautious of moving faster toward full capital account convertibility - though of course,only when this is achieved will India truly have put the years of insularity behind it. Asyou know, a recent non-partisan study submitted to the Reserve Bank of India suggested thegoal of achieving full convertibility by the end of the century. On past experience,having a firm date would help concentrate minds on achieving the fiscal adjustment,banking sector and trade reforms which will be needed to make the lifting of capitalcontrols a success.

Greater investment in India’s humancapital base will be just as vital. The Indian economist, Amartya Sen, recently pointedout that for every student China sends to university, India sends six - but China’sbasic literacy levels were far higher than India’s are now, even before the countrybegan its economic reforms. Infant mortality in China is nearly two-thirds lower, and lifeexpectancy some ten years longer than in India.

Growth in East Asia was underpinned bybroad-based health and education programs which allowed all to contribute to - and gainfrom - those countries’ rapid development. We do not need the example of centers ofexcellence such as Bangalore to show us that the same could be true of India. And yet,India presently spends only about $14 per person, per year on health and educationinvestment - rather less than it spends on energy subsidies - compared to per capitaspending of $160 in South Korea.

Women do particularly badly out of bothhealth and education programs, even though around the world we have learnt that investingin women pays for itself many times over in reduced fertility rates, improved health andhigher productivity and wages. In India today there are only 929 women for every 1,000 men- one of the lowest ratios in the world.

India does not need to look as far away asChina or South Korea to see the benefits of reversing these biases, and dedicating morestate and central government resources to improving health and education. Kerala boastsnear universal literacy, a lower fertility rate than China - and western style lifeexpectancy for men and women alike. The challenge if to nurture more Keralas - and fewerRajasthans, whose 20 per cent female literacy rate is among the lowest in the world.

You could say that the ratio of geo-politicalimportance to political attention is never higher than with regard to India. But just asIndia has been changing in the 1990s, so have we in the Clinton Administration worked tostrengthen our ties with the emerging Indian market and further the process of reform.

Our highest priority in our relations withIndia is the same as it is in every emerging economy: namely to smooth the way for the USand Indian private sectors to work together in ways which help both our economies. The USis India’s single most important trade partner - responsible for around one tenth ofall foreign goods sold in India last year and for buying 17 per cent of its exports. Andtrade in both directions growing by around 90 per cent in dollar terms since 1991.

But we could do so much more. Indiabought amere 0.5 per cent of our total exports - little more than one quarter as much as China.Indian goods make up less than one quarter of a per cent of US imports - a rather lowershare than the Philippines, a country with barely 1/14th the population of India.

We in the Clinton Administration have hadtowork hard to convince people here that we need to work in partnership with the emergingeconomies of the developing world and grasp the opportunities which closer integrationoffers. It will perhaps take even more courage and commitment for India’s leaders tothrow off the last vestiges of mistrust of markets, and of the global marketplace, andachieve the rapid growth we all know India is capable of. But we should remember yourfirst Prime Minister’s words of fifty years ago: those dreams are for India,but they are also for the world, for all the nations and peoples are too closely knittogether today for any one of them to imagine that it can live apart.