February 16, 2007
HP-266
Remarks of Treasury Under Secretary for
International Affairs Timothy D. Adams
before the Asia Society Houston Center
Annual Conference:
U.S.-Indian Relations: Doing Business –
Opportunities and Challenges
Houston, Texas – I would like to thank the Asia Society for welcoming me back to Houston. I last spoke to this group less than a year ago, not long after a two-week visit to Asia. My comments focused largely on China and its importance to the global economy. It's fitting that I should return to discuss another great economic "success story" in Asia. Large emerging markets like China and India are becoming increasingly important engines of global growth. At the same time, they bear an increasing responsibility to take actions that enhance growth and stability.
Before I begin my specific comments on India, I'd like to set a framework by spending a few minutes on the state of the global economy. The global economy grew by about five percent last year, marking four consecutive years of solid growth. The world has not witnessed such balanced and consistent growth in decades. And, the global economic outlook for 2007 remains broadly positive.
Much of the global economy's success is due to the positive effects of globalization. One key has been a removal of barriers to international trade and investment, which has helped global trade and investment surge by over 60 percent since 2000. Opening markets to competition helps raise economic performance in a number of ways. It encourages workers and firms to invest in productivity, and it encourages policymakers to take pro-market measures that promote their economies' competitiveness.
India is playing a growing role in global trade and investment, and the U.S.-India economic relationship has become deeper. Annual U.S. exports to India have more than doubled since 2000, while annual imports from India are up by 75 percent. The value of U.S. direct investment in India has more than tripled over the last five years from $2.4 billion in 2000 to $8.5 billion at the end of 2005.
Enhanced bilateral trade and investment have benefited both India and the United States. I have made several trips to India in the past five years and have witnessed the country's dramatic economic transformation. India's annual GDP growth now exceeds nine percent, putting it second behind China as a major emerging market, and Indian growth has been over eight percent for the past three years. The country's economic performance has reduced the poverty rate from almost 40 percent to under 30 percent in a decade. Adult literacy rates and primary school completion rates have also increased, and technology has become more widely available. Cell phone usage increased 14-fold in the last four years and almost doubled in the last year alone, while internet use has increased by a factor of ten since the year 2000. India's commitment to growth is reaping huge social dividends for its people.
India's strong growth could not have occurred without government policies to open the country to competition. India's efforts at economic liberalization began in the early-1990s when current Prime Minister Singh was the Finance Minister. The government reduced trade tariffs, with the peak rate on nonagricultural goods falling from 150 percent in 1991 to about 13 percent today. India also eased non-tariff barriers, eliminating licensing restrictions on raw materials and intermediate and capital goods. The rewards of these policies have been clear: since 1990, India's total trade has grown from less than 15 percent to nearly 40 percent of GDP.
India has also taken steps to relax controls on foreign investment and borrowing. In the 1990s, India began to permit greater foreign investor participation in the stock market while expanding the number of sectors open to foreign direct investment. The government also allowed Indian firms to borrow money abroad with fewer restrictions. Reduction of these barriers to capital flows has lowered the cost of capital and helped Indian businesses benefit from the transfer of skills and technology.
India's reforms have brought it success in the global economy, but globalization also presents new challenges. To modernize and compete effectively in a changing global economy, India needs to focus on three things: (1) further reducing barriers to trade and investment, (2) liberalizing and modernizing its financial sector; and (3) improving its business climate. These are three themes that I have emphasized in our official dialogues with Indian policymakers.
Regarding trade and investment, India has made progress but still has a long way to go. Despite its size, India still accounts for less than two percent of world trade, which is just one-third of China's role. India's stock of foreign direct investment is less than half the size of FDI in China, Russia, or Brazil when measured as a share of GDP.
The Doha round of trade talks provides India and other major economies with an opportunity to further reduce trade barriers and enjoy substantial economic benefits. For Doha to be a success, all major trading countries need to make strong market access commitments in agriculture, manufacturing, and services, including financial services. Large developing countries such as India, Brazil, and China bear a special responsibility as major players in the world economy. They need to contribute by substantially cutting their applied tariffs on agricultural and manufactured goods. Despite reductions to date, India's tariff rates remain well above those in other advanced developing countries. Substantial progress on services must also be integral part of a successful Doha round.
On the investment side, India is making progress in reducing barriers to foreign direct investment. India now permits full foreign investment in a range of industries including many manufacturing sectors and urban infrastructure, but it retains significant barriers in others, including retail trade and the financial sector.
In the financial sector, India has taken some steps to open the banking, securities and mutual funds industries to foreign participation. However, compared to other emerging markets, India is still quite restrictive, and government ownership of the financial sector remains high. These restrictions need to be lifted if India is to build the world-class financial center it needs to sustain future growth.
India would gain tremendously from an open and competitive financial sector that expanded access to financial services for both individuals and firms. Today, more than 70 percent of India's population has no access to banking or financial services, and only three percent has insurance coverage. India's banking sector would also benefit from the transfer of skills. India needs insurance and pension firms to provide capital for its equity and bond markets, as they do in the United States. A recent report by the McKinsey Institute concluded that financial sector reforms in India could free up $48 billion of capital per year. India needs those funds to build its infrastructure, invest in its people's education, and reduce poverty.
To promote growth and reduce poverty, India also needs to strengthen its business and regulatory environment, which will support domestic and foreign investment and foster private sector activity. In this respect, India currently ranks quite low. The World Bank in its annual report on business climate conditions rates India as #134 of 175 economies. Key steps that India can take include: improving investor protection, creating more transparent regulatory and tax regimes, enforcing commercial contracts, and creating a more flexible labor market. Capital is a coward. It flees from abuse and goes to where it is treated well.
The same policy steps that will benefit Indian growth will also help American businesses, increase trade, and create jobs in both of our two economies. With that fact in mind, the U.S. government's engagement with India is arguably at an all-time high. The President traveled to India last March and advanced the strategic partnership between our two nations by improving cooperation on energy and the environment, security, and technology. The President and Prime Minister Singh gave great priority to economic issues and outlined an ambitious vision for further trade and investment links.
We help to advance that vision through a U.S.-India Economic Dialogue, under which U.S. and Indian agencies promote necessary reforms with a goal of doubling bilateral trade within three years. Private sector participants from the United States and India have been critical contributors to the Dialogue. In late 2005, a U.S.-India CEO Forum was launched, comprised of ten prominent CEOs from each country, led by Ratan Tata of the Tata Group and Bill Harrison of JP Morgan. The CEO Forum recommended a number of policy reforms to President Bush and Prime Minister Singh last year in areas ranging from infrastructure development to energy security to human resource development to technology exchange.
Senior policymakers from both countries, including Treasury Secretary Paulson, met with the CEOs in October to discuss the recommendations and assess the progress we've made thus far. For example, the Indian government has set up new institutions to promote infrastructure development. On the U.S. side, the State Department has eliminated the backlog of visa applications from India, and the Commerce Department has removed impediments to trade in strategic areas. In December, President Bush signed an historic civil nuclear agreement which will enable India to access clean energy while joining the global effort to stop the spread of nuclear weapons.
Treasury plays an active role in the Economic Dialogue and chairs a "Financial and Economic Forum" with our Indian counterparts. Our engagement includes regulators as well as policymakers and tries to address some of the tough technical issues that impede effective trade and investment on the ground.
Overall, we are enthusiastic about our engagement with India. India's outlook for growth is quite promising. A recent Goldman Sachs study estimates that the size of India's economy could surpass our own by 2042. To achieve this potential, India needs to continue to address the risks to its growth and stability and maintain competitiveness in a global environment. In particular, it needs to overcome the protectionist pressures that affect every economy and further improve its investment climate. If India succeeds, the future will be bright. We believe India's leaders are committed to strong economic performance, and we look forward to our future engagement with this dynamic country.
I am looking forward to hearing your views on opportunities and challenges in U.S.-Indian business relations.