FROM THE OFFICE OF PUBLIC AFFAIRS

Good Afternoon.  It is a pleasure to be here.  I would like to thank the host organizations – CII and AMCHAM – for arranging this luncheon today.

On behalf of President Bush, we appreciate the commitment of CII, AMCHAM and others of you represented in the audience today to promoting economic relations between India and the United States – the two largest democracies in the world. 

As our world has become ever more interconnected, the relationship between India and the United States has become ever more vital.  We are bound together by economic ties, in flows of products, investment, people, and ideas.  We share a common language, common political ideals, much history, and today we share a common battle against the forces of terror, and those who would finance that terror.  Common prosperity and security are our clear mutual interests, and I am hopeful that my visit this week will lead to a greater understanding of how we can work together to advance both.

Traveling through India, I am struck by the extraordinary potential of this nation, and the persistent challenges to economic progress.  I have met with U.S. businessmen investing millions of dollars in India, and rural Indian entrepreneurs who are drawing on microfinance loans to create jobs that diversify their local, agricultural economies.    I have seen amazing examples of world-beating high-technology production facilities in Hyderabad’s Hi-Tec City, and in the same day, I have seen an HIV/AIDS clinic struggling against a burgeoning AIDS epidemic, and a police project to crack down on child labor practices and get more children into school.

India, it seems, has two faces.  It is a center of technological progress and modernity.  It is also a land still burdened by massive poverty. 

I believe the path to progress can be found in the concept of productivity.  By productivity, I mean the amount of value that each individual can create, and therefore the amount of income each individual can earn.  Greater productivity is the key to higher incomes and higher living standards in all economies, and in all ventures. 

India’s high-tech facilities, whether foreign, domestic, or jointly owned, demonstrate some of the highest productivity levels in the world.  The leading technology and management institutes here are among the best, and students graduating from those programs are capable of unmatched productivity and value creation.  Many often are lured away by top multinationals.  But some do stay to set up local businesses.  Unfortunately, these well-educated local entrepreneurs and engineers represent only a very small fraction of the population.  A third of this nation lives on less than a dollar a day.  Almost two-thirds depend on rural agriculture, where productivity lags dramatically. 

Productivity in the public sector matters as much as productivity in the private sector.  Government programs that achieve meaningful, clearly-defined objectives efficiently and with the minimum intervention in the private sector generate greater value for each taxpayer dollar or rupee spent.  Unproductive government programs waste money that could have been invested in job creation, sap private productivity with unnecessary and arbitrary interference, distort markets, and undermine public confidence in the nation’s leadership.

In my view, the key to economic growth in India is to spread the accelerating productivity evident in India’s best ventures to the broader population, as well as to the government.  With steady, widespread productivity gains, especially in sectors such as agriculture that have traditionally lagged, there will be no limit to India’s economic growth.

I am optimistic that this can happen because productivity is at its heart the practice of implementing new ideas, in which the Indian people have an illustrious record of success.  Mahatma Gandhi pioneered the vision of nonviolence to effect change, one of the most influential and effectively-implemented ideas of modern world history.  In economic matters, Indian entrepreneurs have pioneered countless new technologies in both India and the United States, and have shown great aptitude for invention and implementation.  Indeed, what is any technological progress other than a new idea made real?

The ideas needed to unleash Indian productivity are out there, and are being used in the leading firms in many industries.  Public and private sector leaders need to identify those ideas, adapt them to India’s unique cultural context, and then put them into effect.

Of course, that is easy to say, and much harder to do.  It is especially difficult when the private sector is unable to attract the investment it needs to fund new ideas; when the environment does not support market experimentation and implementation of new ideas, when entrepreneurs and investors are intimidated by excessive regulation and corruption; and when the government fails to effectively invest in the people, so that people have the education and good health that are prerequisites for achieving their goals and raising standards of living.  These failures are most prominent in the largest sectors of the Indian economy, such as agriculture, where entrenched interests resist changes that would benefit the greater whole of the Indian nation.

To unleash the potential for higher living standards and job creation, a nation’s leaders must make an unflinching commitment to good governance, economic freedom, and investment in people.  Without these principles in effect, even a people as capable and aspiring as the Indian people cannot succeed.

Good governance means ruling justly, enforcing laws and contracts fairly, respecting human rights and property rights, and fighting corruption.  Encouraging economic freedom means removing barriers to trade with neighbors and the world, opening the economy to foreign and domestic investment and competition, pursuing sound fiscal and monetary policies, and divesting government from business operations.  Economic freedom also means recognizing that it is the private sector – individuals implementing new ideas and pursuing their dreams – that creates prosperity; not central planning or bureaucracies.  Finally, investing in people means ensuring access to health care, clean water, and education, so that people have the necessities that allow them to strive for a better life.   People everywhere know that basic health is a prerequisite to prosperity.  Yesterday in Hyderabad, I met people who are faced with the challenges of HIVAIDS and realize the importance of proper health care delivery.  I also saw how communities can work together to link informal and formal education for children - an innovative example of communities building the foundations for progress.

Over the past fifty years the world has seen that these principles work, as long as a nation’s leaders are committed to pursuing them, and as long as those leaders are held accountable for measurable progress.  India has come a long way, moving from a command economy toward a more market based system.  Economic freedom has not yet sprouted in many major industries where the government remains deeply involved in production, which limits competition, which in turn limits innovation and growth.  Legal restrictions on market entry and onerous regulations also prevent private sector dynamism.  Fiscal policy is weak, with a federal deficit exceeding 5% of India’s GDP last year, and state deficits another 4.5% of GDP. 

In India, average import tariffs are over 32% and more than three times higher than many other Asian economies – Indonesia, Malaysia, Philippines and Sri Lanka to name just a few.  This figure does not include many hidden obstructions to free flow of goods across the borders.  Various indices of trade and investment restrictiveness rate India among the most restrictive countries in the world.  Barriers to enhanced trade on the sub-continent remain very high.
 Just as Canada and Mexico are the largest trading partners of the United States, India’s trade with its closest neighbors should be equally strong.   With regard to good governance, corruption and bribery are widespread, frightening away honest businessmen and investors.

Consider the effects of poor governance and a lack of economic freedom on foreign investment.  As Ambassador Blackwill noted in his address last month, U.S. investment in India has languished over the past decade, falling from a peak of $737 million in 1997 to only $336 million in 2000.  By comparison, U.S. investment in China went from $1.25 billion in 1997 to $1.6 billion in 2000.  India’s strong English language skills and democratic system of government – should make it a preferable to U.S. investors over a country lacking both.  And India desperately needs that investment to fuel domestic growth and innovation.

While several large companies have invested in India, many more have stayed away.  Respect for property rights and protection against public or private thievery is an essential requirement for economic success. 

This is not merely a matter pertaining to foreign investors.  Domestic savers are the greatest source of investment for any economy, and a nation that does not respect ownership deters its own citizens from putting their money to work in the economy through bank deposits and capital markets, instead of hiding their precious savings under the floorboards.

Unleashing that homegrown capital would create a pool of resources for local entrepreneurs to set up small businesses and diversify the economic base.  After all, homegrown small businesses demonstrate the opportunities available to others in a local community, and show the way for those who would also pursue their unique ideas.  Today, there are microfinance institutions around the world lending small amounts to individuals with the initiative to be self- employed and start new ventures.    Microfinance institutions also provide crucial guidance to new entrepreneurs on the technical knowledge needed to start and grow a business.  Yesterday I visited a microfinance project in Hyderabad funded by an organization called SHARE.  The organization has managed to circumvent India’s serious problem with land ownership rights and lack of collateral by lending to groups of entrepreneurs and making them all liable for each borrower’s repayments. It is my hope that sustainable microfinance programs will continue to expand in India, even as India frees the formal financial system from unreasonable constraints on lending.

Unreasonable regulation also deters international businesses and local entrepreneurs alike from entering new markets and creating value.  No one wants to spend time and capital fighting a system that is unfriendly to success and fears competition.  The exceptions prove the rule: When India lifted regulations on the cellular phone industry, demand rose and prices fell.
 When the government of India opened the door to foreign investment in automotive manufacturing and relaxed licensing requirements for car makers, employment in the industry grew by 11% and overall productivity increased by 256% from 1992-1999.

Investment in people is the third-leg of necessary economic leadership.  Individuals who lack basic health care, education, and even clean water cannot free themselves from subsistence to make a greater contribution to the economy and their own livelihood.  Government programs should target these areas, and target the people who truly need help.  One of the greatest challenges facing India, and many of the world’s nations today is the fight against AIDS, and the United States is working to support nations that fight AIDS.  I was pleased to hear of the Gates Foundations’ generous gift to India to reinforce AIDS prevention efforts here.  The U.S. government has also prioritized HIV AIDS in its assistance to India: USAID has major AIDS prevention and control activities, the U.S. Center for Disease Control supports treatment and care programs, and the U.S. National Institute of Health contributes to applied research in this field.

During the course of this short trip I have seen the successes and the challenges in India.  From interacting with a range of talented Indians throughout my lifetime, I know that the human capital is strong.  The key is harnessing the innate ability to rebuild India’s productivity – in other words, creating a reverse braindrain as Indians bring ideas back here to deploy.  There are some excellent companies and organizations out there aimed to do just that – the technology firms that are setting up their business in India, or the organizations like Indicorp that bring educated Indian–Americans back to work with local communities to solve local problems.  Whichever route – India will be one step closer to becoming a more productive economy.

I am eager to see the people of India reach their potential for healthy, productive lives.  We know the foundations for success – just rule, economic freedom and investment in people.  Let’s work together to make them a reality, for the sake of the millions whose lives would improve.

Thank you.