April 23, 2008
HP-940

Under Secretary David H. McCormick
Remarks to the Confederation of Indian Industry
& the American Chamber of Commerce

Chennai, India – Thank you for your kind introduction. It is a pleasure for me to be here with you today. CII and the American Chambers of Commerce around the world have long been strong and reliable partners with the U.S. Treasury Department as we work toward our shared goals of economic growth, prosperity, and stability.

This is a remarkable time in India's history. Over the past 15 years, India has emerged as a strong and confident player in the global economy, an important trading partner, a major consumer of global commodities, goods, and services, and an attractive destination for global investment capital. Average growth of nearly 7 percent over the past decade has allowed India to raise its GDP per capita by over 50 percent since 2000, creating a large and growing middle class in the process. Trade between the United States and India has continued to expand, reaching over $50 billion last year, and the United States is India's largest trading partner. Cultural ties are also strong, with nearly three million Americans of Indian descent and 80,000 Indian students in the United States. The U.S. Consulate right here in Chennai issues more visas for skilled workers than any other U.S. diplomatic post in the world.

Throughout this period of remarkable growth, we have also witnessed a deepening U.S.-India partnership. We cooperate on everything from increasing trade and investment, to educational exchanges, to research and development, and of course power generation, most notably with the civil nuclear agreement.

We have also learned together that the success of India's economic policy and the acceleration in growth presents its own challenges. These challenges include ensuring India's physical infrastructure grows by enough to support the country's expanding economy and ensuring that India's newfound growth and prosperity is shared by all. And, as India's presence in global markets expands, it is also increasingly called upon to address global challenges. India can only be a major player in the global community if it demonstrates much-needed leadership on common challenges and opportunities such as climate change, energy security, non-proliferation, global trade, and investment.

The deepening U.S.-India partnership is the byproduct of a range of dialogues and growing friendships inside and outside government. The relationship between the Treasury Department and our Indian counterparts, for example, is particularly strong. Each Treasury Secretary since the early-1990s (when India launched its first wave of economic reform) has visited India at least once during his tenure. These regular contacts have led to concrete initiatives on a number of financial and economic issues.

The U.S.-India High Technology Cooperation Group, initiated in 2002, stimulates high-technology commerce between our two countries, promoting investment in the technology sector that has been one of the primary drivers of India's remarkable economic emergence. The U.S.-India CEO Forum, launched in 2005, is aimed at incorporating the advice and experience of our private sectors into the U.S.-India Economic Dialogue. And the U.S.-India Financial and Economic Forum, a cornerstone of Treasury's economic engagement with India, brings together Treasury, the Ministry of Finance, and financial regulators on both sides to address key issues in our respective financial markets, not only improving skills and capabilities, but also ensuring systemic stability and integrity.

The bottom line is that we have accomplished much together in the past several years. Yet, there is much more we can and should do in the future. Today, I will discuss five important global challenges and opportunities: infrastructure investment, financial sector liberalization, bilateral investment, clean technology, and multilateral trade. These areas of interest are particularly promising for the US. and India to stand together as global leaders and make meaningful progress, and should provide the basis for a common agenda going forward.

Providing the physical infrastructure – roads, ports and airports, power generation, water supply and sewage, and communications links – India needs to support accelerated growth is a critical challenge. Official estimates suggest that India requires upwards of $500 billion in infrastructure investment over the next five years. Policymakers are counting on a significant portion of this investment to come from the private sector, and the U.S. Treasury Department has been actively involved in promoting greater private sector investment in India. Secretary Paulson participated in last October's CEO Forum conference on infrastructure finance, which was held in Mumbai, and we plan to organize a "U.S.-to-India" road show to introduce U.S. investors and project developers to the opportunities this sector offers.

But increasing private infrastructure investment is not simply a matter of arranging introductions. Our engagement also highlights specific issues that inhibit domestic and foreign private investment. These concerns include regulatory environments, dispute settlement and investor protection, financial sector development, and capital account issues.

Legal and judicial reform are an important part of improving the investment environment in both of our countries. As potential investors know, resolving commercial disputes in India can be a long and difficult process. With more than 20 million cases currently in the Indian legal system, it can take a company 25 years to obtain a verdict. Concrete steps to strengthen its arbitration law and reform its judiciary to render dispute resolution more effective would help India attract the investment dollars that will otherwise flow to other emerging markets.

Mobilizing foreign investment is only one part of the equation for addressing India's infrastructure challenges and demands of its robust growth. Financial sector liberalization and capital markets reform will effectively be the linchpin for sustaining India's growth trajectory and mobilizing the huge amount of capital needed to meet the country's development needs. The World Bank estimates that financial sector liberalization adds an additional two percentage points to a country's growth. Liberalization frees up capital in the financial sector that can be used to fund development projects and the borrowing needs of India's consumers and firms. Coupled with comprehensive reforms, accelerated liberalization will enable India's capital markets to efficiently mobilize and allocate financial resources.

For example, the development of a corporate bond market would deepen capital markets, provide a source of stable long term domestic financing, and enable a vibrant institutional investor base – all of which are essential for corporate and infrastructure financing.

Enabling an efficient and competitive financial system is also critical as economies depend more on competitive service sectors, productivity growth, technology, and human capital. Competition drives growth and dynamic innovation, but requires removing barriers to entry and creating a "level playing field" for all institutions. Allowing greater participation of international financial services firms will accelerate the development and competitiveness of India's capital markets. We already see how U.S. and foreign financial firms are working with India to meet its goals for greater financial inclusion for the estimated 600 million people without access to finance. They are driving innovation in financial products by rolling out biometric ATMs in rural areas and offering affordable mobile banking.

In parallel, it is essential for any economy to create an enabling regulatory framework based on international standards and best practices. A strong regulatory framework will help to ensure capital enters India in a transparent and productive way. The Treasury Department and U.S. regulators are working with our partners in the Finance Ministry, the Securities and Exchange Board of India (SEBI) and the Reserve Bank of India (RBI), including through regular technical dialogue and assistance, to share "best practices" and lessons learned. Underpinning this collaboration is our shared belief that India will benefit from an effective and transparent regulatory regime that reflects international best practices in regulation and supervision for banks, insurance companies, and other financial services firms.

A bilateral investment treaty (BIT) between the United States and India would provide an enormous opportunity for both countries. By ensuring legal protection for investors, BITs are great incentives for two-way investment. This is particularly true of infrastructure industries, which require large investments in immobile capital.

India is a party to at least 45 BITs based on a European model that protects existing investors. In February 2008, the U.S. government began exploratory discussions with our Indian counterparts about the U.S. model, which goes further than the European model by allowing investors to establish businesses in all sectors except where specifically prohibited. While BIT negotiations are always difficult, we appreciate India's enthusiasm for moving forward promptly. I am hopeful we can make greater progress by the end of the year.

In any large and rapidly growing economy, many of the economic choices we have been discussing have environmental consequences. India's rapid economic growth and expanding middle class have placed additional demands on an already strained power sector, and India must more than double its current generation capacity in the next decade. For finance ministries, the question becomes: how do rapidly-industrializing economies finance the deployment of clean technology needed to power their economies in environmentally-sustainable ways?

In India, coal-based power already represents half of the total generation capacity. America's goal, both through bilateral and multilateral efforts, is to help India expand the share of renewables in its power generation mix as the country's overall generation capacity grows. Tamil Nadu traditionally has been an energy-rich state, and has the potential to lead the way in terms of development and wide adoption of alternative energy projects.

The Civil Nuclear Agreement pledged by President Bush and Prime Minister Singh in July 2005 is an important step in this direction. Equally important is the multilateral Clean Technology Fund (CTF) that the U.S., along with our partners in the U.K. and Japan, announced in February. The World Bank, which will administer the CTF, estimates that transitioning to low carbon technologies could cost developing countries $30 billion per year. The CTF is intended to minimize this cost by financing the development of local markets for clean technology and by financing the cost difference between clean and dirty technologies. As a measure of how important the United States believes the CTF to be, the President's budget requests $2 billion over the next three years for the fund.

Finally, India is one of the fastest growing economies in Asia, but nearly 700 million Indians still live on less than $2 per day. The challenge is to extend India's economic gains to the broader population. As India's rural poor become integrated into the global market, the priority is to ensure they too see the benefits inherent in global trade and commerce.

The U.S. regards Doha as an opportunity to attack the scourge of poverty by opening trade flows between all nations in agricultural goods, industrial products, and services. We remain fully committed to an ambitious and comprehensive outcome to the Doha Development Round by the end of the year.

Trade has a compelling record of advancing economic development. The World Bank has estimated that, in the 1990s, per capita real income grew three times faster for developing countries that significantly lowered trade barriers than for other developing countries that lowered barriers less. The World Bank also estimates that eliminating trade barriers in goods could boost incomes in developing countries by at least $142 billion a year, greatly exceeding the total of G-7 foreign economic assistance of $80 billion last year. And, the World Bank finds that the income gains from trade are enjoyed by people at all income levels, and could lift 65 million people out of poverty by 2015.

We are at a critical juncture in the Doha Round. This spring, we need to see progress on services and agreement on modalities for agriculture and non-agriculture market access if an agreement is to be completed by year's end. To achieve results, a Doha deal must include substantial reduction of applied agriculture and manufacturing tariffs and new liberalization of services.

Financial services, where the Treasury Department has the lead in negotiations, exemplifies a sector where liberalization and improved foreign access can extensively benefit development. This is particularly true for India. Given the potential of open financial sectors to leverage growth and development, it is essential to keep these efforts at the center of the Doha Development Agenda.

The U.S. will provide the necessary leadership, but we can't do it alone. Key advanced developing countries – such as India – are major beneficiaries of the international trading system and must take a leadership role to move the Doha negotiations forward.

This agenda may seem daunting, but these five key issues – promoting infrastructure investment, financial sector liberalization, supporting a bilateral investment framework, investing in clean technology, and supporting multilateral trade – are significant opportunities. They will enable us to enhance our bilateral partnership. They will enable us to foster economic growth. They will enable us to reduce poverty. They will enable us to protect the environment. And they will enable us to promote global economic stability.

By seizing these opportunities, India will achieve its well-deserved position of global leadership. The U.S. and India have made great progress together, and I am confident our partnership will only deepen further as we address these critical issues together in the years to come.

Thank you for your kind attention.