October 29, 2007
HP-648
Remarks by Secretary Henry M. Paulson, Jr.
on the United States as a Partner in India's
Continued Growth at the US-India Forum
Mumbai, INDIA--Thank you, Bill. It is a pleasure to be here with my friends Minister Chidambaram and Deputy Chairman Ahluwalia. The U.S.-India CEO Forum has worked particularly well because of strong leadership and the natural affinity between the people of our two nations. Montek and my colleague, Al Hubbard, have done an excellent job facilitating government engagement with the CEO Forum. And, of course, Ratan Tata and Bill Harrison have provided real leadership for the highly engaged group of CEOs that has provided concrete, actionable recommendations towards reaching a number of ambitious goals, including the doubling of U.S.-Indian trade in three years.
I have participated in U.S.–India CEO Forum events in the United States. Thank you, Chairman Tata, for gathering us in Mumbai. Since President Bush and Prime Minister Singh ushered in a new era of cooperation between India and the United States, we have seen just a glimpse of what that cooperative future can bring. The Forum is an important part of this, by providing a venue for Indian and American businesses to raise issues that impact our economic relationship.
Through President Bush and Prime Minister Singh's leadership, political, economic, and cultural ties between the United States and India have never been stronger. These ties enjoy bipartisan support in both countries. In the last few years, we have launched important initiatives in areas including counter-terrorism cooperation, space research, clean energy, agriculture, education, and economic development.
The historic agreement on civilian nuclear cooperation is an important part of the U.S. – India relationship, and it is beneficial to both countries. India is one of the world's largest and most peaceful states with advanced nuclear technologies, and has been isolated from the rest of the world on nuclear issues. This agreement will provide India access to the technology which can help it reach its economic and environmental objectives. The United States remains committed to this agreement.
The U.S. and India share the challenge of ensuring secure and clean energy supplies. We understand that economic growth and environmental responsibility are necessary, compatible goals. Moving forward with the civilian nuclear agreement is one part of the solution. Working together on a post-2012 framework through the UN climate change process is another. And, if we are to be successful in meeting our energy and environmental challenges, it must be against the backdrop of a strong economy.
The Prime Minister and Finance Minister are to be commended for beginning the process of transforming India into a global economic power by initiating economic liberalization in the early 1990s. These economic reforms have continued at varying speed throughout the past 15 years, regardless of the party in power. Observers do not question whether India's reforms will continue; they ask only about the pace.
And the United States will continue to partner with India, as India moves forward with its economic reform agenda that will spread growth to the benefit of all of India's people. The United States understands that this is a democratic, transformative effort and that India faces political challenges. That is something our governments also share, and we share the history of meeting and overcoming difficulties.
I urge my Indian colleagues to continue, and accelerate, their efforts to liberalize the economy and develop the financial system -- to assure that the vibrancy and growth that the Indian economy now enjoys continues well into the future.
U.S. – India Economic Policies
In pursuing economic growth, India and the United States share similar values and similar challenges. We understand that a globalized economy is here to stay. Trade links India with the world, and brings diverse and attractively-priced goods to the Indian people. During my trip, I hope to have productive talks with the Indian government about making progress in the Doha Development Round. A Doha agreement is within reach, and the potential benefits are so great, that we must not let it slip through our grasp. Working together to successfully conclude a Doha agreement will be the single most effective thing we can do to help raise living standards in India and around the world.
We also understand how the dislocations from trade and rapidly-changing production technology can lead some to doubt the benefits from competition and trade. Together, India and the United States must resist protectionist, anti-trade policies that mean slower growth, fewer jobs, and lower incomes in the U.S., India, and around the world. Openness to competition has made the U.S. economy dynamic, has created better jobs and higher incomes, and has kept the United States on the cutting edge of innovation. We must remember that pro-growth policies will smooth transitions by supporting job creation.
The United States welcomes foreign investment. It creates high-quality jobs, spurs healthy competition that leads to greater innovation by American workers and companies. It contributes to our domestic economic expansion and supports local communities across a wide span of industries. It is important that the United States and India work together to resist protectionist sentiment that would limit foreign investment in both our countries.
We also welcome the contributions of the many Indians who have come to study, work, and live in the United States. For decades, Indians have immigrated to the United States, joined our communities and raised their families while maintaining their cultural heritage. Indian–Americans are physicians, engineers, CEOs, professors, teachers, entrepreneurs. As a result, there is a long history of personal and professional friendships among Indians and Americans. Indians are a vital part of the U.S. economic and social fabric.
The President asked the U.S. Congress to help meet the need for high-skilled workers as a part of comprehensive immigration reform. That bill has not yet become law; political constraints are a reality in the United States as they are in India. Our government has also taken steps to reduce the backlog of visa applications from India.
Now, let me talk about two of the ambitious and worthy goals the Indian government has outlined towards further economic transition and inclusive growth, which the United States supports and hopes we can assist.
First, as this conference highlights, is the improvement of physical infrastructure. Second, and I think necessary to accomplish the first, is improving India's financial infrastructure. A critical part of this will be taking the steps to build Mumbai into an International Financial Center.
Improving India's Physical Infrastructure
Over 30 U.S. firms are represented at this conference dedicated to investment opportunities in Indian infrastructure. They are a resource for completing the $500 billion the Indian government estimates it needs to invest over the next five years on roads, ports, housing, railways, airports and telecommunications. Given India's fiscal constraints, India is looking to the private sector to fund up to one-third of this investment. In response, the government has developed an ambitious public-private partnership framework.
The United States supports this effort to attract private financing. I trust that the discussions – among financial investors, project developers and government officials – will be productive. After this conference, we will continue to highlight the opportunities of India's infrastructure initiatives to U.S. businesses.
The Indian Government has made an impressive effort to promote awareness of these investment opportunities. It has prioritized those projects considered most critical to India's growth, and provided best practice guidance to states developing private sector contracts. These efforts are to be commended – and judging by the conference's attendance – I would say they have already met with some success.
Looking forward, the result of India's efforts will ultimately be seen in the kilometers of new roads added to India's highway system, the megawatts of capacity added to India's power grid, and the homes that gain access to clean water. Already, India can point to successful examples, such as the Golden Quadrilateral highway system and the Delhi metro.
Our private sectors must also play a more active role in developing a sophisticated agricultural market in India. This investment will help India achieve its second Green Revolution. It will help farmers tap modern supply chains and processing technologies that will improve their productivity and the lives of their families.
Continued economic reform will also encourage investment more broadly. Investors, especially those who must make long-term commitments as in most infrastructure projects, want certainty in their operating environments. This means transparent and independent regulatory frameworks. In sectors where government entities act as both regulators and providers of financial services, this sort of independence is difficult to achieve, and private sector investment will be difficult to attract.
Investors also want to know that contracts can be legally enforced, and that they have recourse to a fair and timely arbitration or judicial process when needed. In order to meet infrastructure investment needs, real efforts must be made to address this area.
Mumbai as an International Financial Center
The Department of Treasury also supports steps to strengthen and expand India's financial system by developing Mumbai into an International Financial Center, a so-called IFC. In 2006, Prime Minister Singh said that it is possible for Mumbai to "emerge as a new financial capital of Asia, and be the bridge between Asia and the West in the world of finance."
Expansion of the financial sector through the development of Mumbai into an IFC is an enormous opportunity for India. Properly-regulated and well-functioning financial markets are the economic arteries through which balanced development and inclusive growth flows. Efficient markets provide the means to help all people, including the ones most in need, improve their lives. This is true in India, in the United States and around the world.
Today, Indian firms in Bangalore and other cities play a key role in the back office operations of global, multinational firms. In this, India has revolutionized the way the world does business. The next step is for India to develop front offices in Mumbai that provide financial services to companies and investors in India and across the region.
Experience with new financial centers in other countries demonstrates that the overwhelming majority of jobs created will be for Indians. In addition to financial services positions, many new jobs will be created in sectors providing support to the financial services industry. As new workers locate in Mumbai, they will also create additional jobs as they seek housing, food, transportation and other services.
Mumbai's development as a financial center will help not just large, but also small businesses. Shopkeepers, farmers and craftsmen need access to credit, financial services, and insurance products, as much as large, industrial manufacturers do. India's middle class will also benefit from new financial products that can lead to homeownership and funding for the best possible education for their children.
In recognition of this need, the Indian government commissioned a report from a High Powered Expert Committee. The Committee's report outlined the requirements and a timetable for developing Mumbai into an IFC. The Report is bold, thorough and ambitious. I believe it demonstrates the right path. With Mumbai as an internationally competitive financial center, the world can invest in India, and India can invest in the world. Equally important, an IFC would give India an important stake in the rapidly growing global financial services industry.
U.S. experience can inform the Indian government as it works to develop Mumbai into an IFC. Our private sector stands ready to share their experiences in dealing with the development of domestic bond markets and other elements that create the backbone of a financial center. Infrastructure investment requires long-term financing. The development of corporate bond markets will provide opportunities for such long-term investment by insurance companies and pension funds.
For several years, the Department of Treasury and the Finance Ministry have led an ongoing dialogue among U.S. and Indian regulators to share experiences and best practices. We will begin another session tomorrow in New Delhi. Issues related to developing Mumbai as an IFC are an important element of that agenda.
We understand that Indian officials are concerned that greater capital flows associated with a financial center could add to inflationary pressures, destabilize domestic financial markets or add to exchange rate volatility. For the most part, India is on the right path to reduce these risks. India has allowed greater flexibility in the exchange rate in recent months, and the appreciation in the rupee has helped to reduce inflationary pressures.
India has also taken administrative steps to adjust the pace of capital outflows and inflows. As recent experience in the region has shown, administrative restrictions of capital flows are blunt instruments and can have unintended consequences. They tend to inhibit efficiency and lose their effectiveness over time. I encourage India to continue liberalizing such restrictions. Steps to broaden and deepen the domestic financial sector will also help to mitigate the risks posed by greater capital flows.
In the long term, India can take a number of steps to become even more competitive, such as reducing requirements that financial institutions hold large amounts of government debt, reducing requirements for banks to provide credit to certain priority sectors, and removing various restrictions and caps on foreign investment. Limits on debt and equity financing, and asset allocation restrictions on financial institutions, are impediments to putting resources to their most productive use.
Conclusion
India's remarkable growth has proven the wisdom of economic reforms and their promise for the future. The United States looks forward to working closely with India in advancing your economic reform agenda to provide inclusive growth.
The development of India's infrastructure and capital markets will take some years to come to fruition. We recognize this, and do not minimize the challenges ahead. Experience shows, however, that once on the path, it is better to move steadily and expeditiously toward that goal. India's people will see many benefits all along the way.
I expect that, when I have completed this three day visit to Kolkata, Mumbai and New Delhi, I will be even more optimistic about India's future. As the Finance Minister said recently, "The goal of a country committed to democratic development is to measure up to the rising aspirations of its people." The Indian people's aspirations are many, and the country is rising to meet them.
I look forward to my upcoming meetings with my Indian colleagues, and to working with them on these, and future, initiatives.
Thank you.