November 10, 2005
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Remarks by Secretary Snow

U.S. Treasury Secretary John Snow
Delhi, India
Hosted by FICCI, AmCham, USIBC
"Opportunities for Indo-U.S. Economic Ties"

Thank you.   It is a great pleasure to be with you today.  I would like to
thank my hosts, Mr Kanwar from the Federation of Indian Chambers
of Commerce and Industry, Mr. Singh of the American Chamber of
Commerce, and of course, Torkel Patterson.   I also want to thank my very good friend, Minister Chidambaram, and the Prime Minister, for hosting my delegation this week.

Before I begin my remarks I first want to offer my deepest condolences for
the losses India has faced in the tragic attacks that occurred here most
recently on October 29th.  The U.S. condemns the triple terrorist attacks
perpetrated on innocent civilians and we stand with India in efforts to
fight against terrorism.  The news of bombings in Jordan also serves as a
reminder that our constant vigilance against terrorism is needed.

I also want to express my condolences for the loss of your former president,
Kocheril Raman Narayanan His long and distinguished service to the people of
India is truly remarkable.

This is an important time for relations between our two nations.  Our strong
Indo-U.S. relationship continues to gain significance in many aspects and at
no time in our history have our relations been stronger and deeper than they
are today.  As countries with strong democratic traditions -- India is the
world's largest democracy, while the United States is the world's oldest --
we share a common vision of the importance of democratic institutions and
the inherent wisdom of our citizens.  We share respect for a free and open
press and respect for the rule of law.  Our political and security
cooperation is growing, as reflected in the agreements reached with Prime
Minister Singh and President Bush in July that ranged from cooperation in
agriculture technology and aviation to the civil nuclear sector.  Moreover,
I am proud to say that over 2 million people of Indian heritage call the
United States their home, likely more than in any other country outside of
India, and hundreds of thousands of young Indians come to study in the U.S.

Our bilateral economic engagement has also expanded significantly in the
last decade to the benefit of both India and the United States.  Both
America and India rely on private enterprise to generate economic growth.
America is India's largest trading partner.  I was told a remarkable fact
this week in meetings with Indian investors that about 80% of private equity

funds in India come from the United States.

Foreign direct investment has been growing in India. But it's important to
recognize that the potential here has only been glimpsed.  Looking ahead
15-20 years, the U.S-Indian economic relationship should become a key pillar

of strength for both our countries and for the global economy.

I have had the opportunity to meet with India's leaders, both here this
week, and in our bilateral meetings in Washington and elsewhere, and it's
clear to me that there is a firm commitment to pushing forward on economic
reforms to improve the standards of living for Indian citizens.  India is
truly fortunate to have such talented economic officials to lead this
economy.  I have come here to work with India's economic officials and to
encourage continued progress.  I am here to listen, to learn more about
India's goals and strategies for achieving success, and how we can help each

other.  And I want to highlight America's great interest in seeing India
succeed.  India's success is important for India, but it is also important for
America.

I look forward to reporting back to President Bush with ideas on how to
further strengthen our relationship in advance of his visit next year.

Since 1991, India has made great strides in shaking off the legacy of a
state-dominated economic system, and this has translated into steady, strong
growth rates.  India's economic leadership, from successive governments, has
moved ahead with policies to liberalize and modernize the Indian economy,
and this has shown real results.  It's no secret that good policies tend to
lead to good results.  India has been able to put in place a stable
macroeconomic environment, with inflation under control.  Foreign exchange
reserves have grown significantly and India has pursued an enlightened
policy allowing flexibility of its currency.  And while further development
and liberalization of India's financial services sector would be helpful,
the central bank has put in place good supervisory policies so that Indian
banks do not face the same systemic risks we see in other emerging market
economies.

India's privatization policies are helping to lead to efficient markets that
provide better goods and services to consumers at the best price.  I was
pleased to see the announcement this week to liberalize the
telecommunications sector.  Progress in the retail sector could also bring
benefits.

Real progress has also been made in India's equity markets.  Earlier this
week I visited the National Stock Exchange and the National Commodities and
Derivatives Exchange.  I was greatly impressed by the talent and technical
capacity of these very important markets.  They will add immeasurable value
to the Indian economy and play a significant role in directing capital to
its best uses.  It is this combination of dynamism and efficiency that help
to create growth and prosperity.

India's natural advantages make it poised to take a leading role in the
global economy.  In fact, India has the potential to be an economic
powerhouse.  India's population will continue to provide new sources of
labor, well after European, Japanese, and even Chinese labor resources begin
to wane.  Indians are properly focused on future job creation for this labor
pool, and the investments that India is making now in primary education will
pay dividends in the years to come, as more people can participate in the
knowledge economy.  And, India's widespread English-language skills give it
a key edge in the global marketplace.  Finally, I would point to India's
democratic tradition as providing important political legitimacy and
stability.

The achievements in India are significant, but there is so much more to
accomplish.  I have heard the sentiment that so much progress has been made
that now it is time to slow the pace of reforms in India.  The pace of
reforms will be decided by India's economic leaders and the demands of the
global economy, but I think it's important to recognise that there are costs

to going too slow.  With huge segments of the population unemployed,
underemployed and living in poverty, more rapid growth is an imperative.
Furthermore, when reforms are rapid in some sectors of the economy but
slower in others, not only are there lost opportunity costs, but risks can
develop that can threaten an economy.  Reforms in all sectors must
"catch-up" to keep pace and prevent distortions.

I believe India could and should play a major and productive role on the
international economic stage.  India should be at the forefront of large
emerging markets, demonstrating how such economies can contribute to global
growth and reap significant benefits.  In this context, India now has a
unique opportunity to become a leader in the effort to open world markets by

taking a proactive negotiating position in the Doha round in favor of
liberalized agriculture, manufacturing and services sectors.  The World Bank

has estimated that India would be one of the largest beneficiaries from a
successful Doha round, but these gains will not be forthcoming if the Doha
round fails due to unambitious offers.

To support additional foreign trade, India also faces challenges at home.
As the government has recognized, weak infrastructure is a major constraint
on trade and growth in India.  In a recent survey of worldwide corporate
leaders by McKinsey, about 60% of Indian executives cited infrastructure as
a significant constraint on growth, compared to less than a quarter of
executives worldwide.  To meet the government's goal of raising average
annual GDP growth from 6.5% to 8%, the IMF estimated that an additional 4%
of GDP in annual infrastructure investment will be required.  The public
sector alone will not be able to finance such investments, so activating
private resources is essential.

I think there is a real opportunity here to help India meet its goals.  The
financial sector could play a much more important role in supporting growth
in India, especially in infrastructure.  The same McKinsey survey noted that
about half of Indian executives cite the lack of access to capital as a
significant hindrance on growth.  And, I expect the percentage would be
higher for small and rural enterprises.  Indeed, only about half of small
businesses in India have active bank credit lines, compared with 75% of
small businesses in Brazil.  The relatively high price of capital in India
is part of the reason that India's services sector, which requires less
capital, has grown more quickly than manufacturing.  It is striking that
India's service sector is about 55% of GDP while industry is only 23%.  In
China, industry is a whopping 53% of GDP, compared with services of 33%.
While there is no preferred ratio, these figures point to distortions in
both the Indian and Chinese economies.

A focus of my visit this week has been to underscore the role that financial
sector reform can play in helping this nation achieve its goals in building
infrastructure.  India's pool of domestic savings has been rising in recent
years and will likely continue to do so.  The key will be to use market
mechanisms to channel such savings into financial institutions that can
on-lend them efficiently to productive uses.  Currently, bank deposits
represent only about 60% of GDP, compared with levels in Japan and China
that are 2-3 times higher.

Even after deposits flow into the financial system, they are often not put
to the most productive use.  Government borrowing is having the effect of
crowding out lending that could be made to the private sector.  Of their
deposit base, Indian banks have put over 40% into government bonds.  Further

progress in meeting the fiscal responsibility law would help to reduce
crowding out, and reining in state level deficits is necessary to further
free up resources for the private sector.

In my view, additional liberalization of the Indian financial sector would
also go a long way towards addressing India's pressing needs.  In the banking
sector, for example, allowing for more engagement by foreign banks would add
capital to the banking system, spread credit availability, bring in
additional managerial expertise and technology, and result in more capital
being channeled to more productive investments.  Some may argue that Indian
banks are not prepared for global competition.  But India's banks have made
substantial improvements in their risk management abilities, and many of the
banks are eager to expand abroad to prove their competitiveness.
In a similar vein, liberalization of Indian markets in insurance, pensions,
and fund management would lead to the development of new sources of capital,

provide new services for consumers, and deepen India's domestic capital
markets.   India's insurance industry is an example of the positive effects
of competition.  Liberalization has led to impressive growth in insurance
markets.  In 2004, Indian insurance companies mobilized over $21 billion,
nearly three times as much as in 1999.  This kind of capital mobilization
provides crucial resources for investment in infrastructure, businesses,
long-term bonds, and municipal projects.  I welcomed the move yesterday to
allow more foreign investment in asset recovery companies.

Many of these policies would be self-reinforcing.  A stronger financial
sector, combined with steps like the liberalization of the retail sector and
more effective use of technology in the agricultural sector, would
jump-start a surge in investments in India throughout the agriculture and
food processing sectors that would add jobs and increase productivity.

Part of strengthening the financial sector involves protecting it from abuse
from criminals and potential terrorists.  India has taken a significant step
forward this year with the enactment of the Prevention of Money Laundering
Act.  To meet international standards, India will need to aggressively
implement its provisions and address some deficiencies that hamper its
effectiveness.  In addition, proper regulations need to be developed for
informal financial systems such as hawala as risks for illicit financial
facilitation in this sector remain high.

India also faces challenges in improving its investment climate.  The World
Bank's recent study on "Doing Business" around the globe puts India at 116
out of 155 countries.   This is 25 slots below China and just below
Indonesia and Philippines.  One problem is international trade.  It takes
three times as many official signatures to export a good from India than it
takes to export one from China.  As McKinsey argued several years ago, India
could raise its growth rate by nearly 5 percent per year by removing product
and labor market distortions and reducing government ownership of
enterprises.

Conclusion

I have benefited from discussing these issues during my visit with many
Indians from the official sector, private sector and NGOs.  India's leaders
are well aware of the economic challenges ahead and the policies that it
will take to increase sources of credit, finance infrastructure, and
integrate with the world economy, all of which are essential to support
growth, reduce poverty, and improve the lives of the Indian public.

I would like to end this speech by quoting one of my gracious hosts, Prime
Minister Singh.  Just three months ago, he told an Indian audience that "we
must seize this moment and grab this opportunity.  We need to have the
resolve to make our country prosperous.  We must have the self confidence to
realize that we are second to none, that Indians are as good as the best."
With that spirit, India has a great future ahead of it, and we are ready to
be partners in your endeavors.