October 24, 2007
HP-636

Remarks by Secretary Henry M. Paulson, Jr.
on the Economic Power and Promise of India
before The Council on Foreign Relations

Washington, DC--Thank you, Peter. It is good to be with the Council here in Washington. I appreciate the opportunity to talk with you today about the economic power and promise of India.

Earlier this year, Prime Minister Singh referred to India's history as "An open house, an open society, open to the free flow of ideas and scholarship." I will travel to India next week, and look forward to being a guest in India's house. My objective is to contribute to the strong, growing partnership between India and the United States. I hope to help the Indian government advance their economic reform agenda, which will benefit India's citizens and the world.

India is a vibrant nation, whose strength lies in its commitment to equal rights – and to speech, religious and economic freedoms that enrich the lives of all citizens. India is not only the world's largest democracy; it is also a secular, pluralistic society, committed to inclusive growth.

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 bring India into the nuclear nonproliferation mainstream, providing access to the technology which can help it reach its economic and environmental objectives. The United States remains committed to this agreement.

The ties of our governments are, in some sense, catching up to the long history of personal and professional friendships among Indians and Americans. 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. They are a vital part of the United States' economic and social fabric. Because of this long history, the bonds among our people and our cultures will remain strong.

Prime Minister Singh is to be commended for beginning the process of transforming India into a global economic power by initiating economic liberalization in the early 1990's. 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.

The great Indian poet Tagore wrote that he had become his own version of an optimist. He said, "If I can't make it through one door, I'll go through another door – or I'll make a door." The revolution in Indian economic thinking is "making doors" and invigorating the Indian economy. India is a young country, with a young population that will be looking for stable, well-paying jobs to support their families. These reforms will help provide the jobs they will need.

Through dramatic increases in mutual trade and foreign direct investment, the United States has been a partner in India's economic emergence. In the last few years, Indian exports to the United States have almost doubled to $21 billion, while U.S. exports to India have doubled to $10 billion. Similarly, investment flows have increased dramatically. Indian firms have invested $2 billion in the United States. And U.S. companies invested about $2 billion in India last year.

As the Indian government has embraced greater economic openness, the creativity and expertise of the Indian workforce has been unleashed onto the world economic stage. We share Indian policymakers' belief that market-based policies and programs will spread opportunity to all levels of society – reaching aam aadmi, the common man.

The success of India's software industry is often told, and the story bears repeating here. Through the combination of expertise gained at the Indian Institutes of Technology, and through innovative thinking, Indian industry has demonstrated that it can, as the CEO of an Indian software company recently said, "Take the work from any part of the world and do it in any part of the world."

India's GDP grew nearly 10 percent in 2006, compared to the world average of five and a half percent. India's economic reforms have taken root, and by accelerating them, the government can help ensure that India's growth rate will be, as projected, at least 8 percent for the foreseeable future. I am optimistic about India's prospects.

In pursuing economic growth, India and the United States share similar values and similar challenges. We understand that the global economy is here to stay. To keep growing and leading the world in innovation and opportunity, the United States and India must trade freely, openly, and according to the principles of the global marketplace. Trade also brings a wider variety of lower priced goods, and this especially benefits lower-income citizens.

I look forward to talking with the Indian government about making progress in the Doha Development Round. 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. A Doha agreement is within reach, and the potential is so great, that we must not let it slip through our grasp.

We also understand how rapidly-changing economies can lead to uncertainty, causing many to doubt that trade brings greater benefits than costs. Together, India and the United States must resist this protectionist sentiment. I am committed to working to maintain an open trade and investment climate in the U.S.

Both India and the United States recognize that an integrated world economy requires protecting the global financial network against those who want to harm our people and our free economic systems by financing terrorism, weapons proliferation or other, dangerous illicit activity. We will continue implementing financial system safeguards to help ensure our countries' and our citizens' security.

The U.S. and India also 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.

It is in the best interest of India, the United States and the world for India to continue, and even accelerate, the pace of economic reform and openness. As with any democratic transformative effort, India faces political challenges – something the United States also knows well.

The government is to be applauded for what it has already accomplished, and encouraged to move forward. We stand with them as a partner as they do. Other countries are also developing financial sophistication and global integration. If India slows its pace now, it risks losing the ground it has worked so hard to gain.

Now, let me talk about two areas where the United States, and particularly the Department of Treasury, wants to be a partner in advancing reform and inclusive economic growth.

First, by assisting the government's plans to finance physical infrastructure improvements, which will benefit Indian families' daily lives and fuel the economy. Second, by supporting steps to strengthen and expand India's financial system by building an International Financial Center, a so-called IFC, in Mumbai.

Achieving these two goals will require a firm commitment to adopt international standards and to move forward aggressively with reforms, despite political risks.

The Indian government estimates that to further transform its economy, it needs to spend close to $500 billion over the next five years to build physical infrastructure that will deliver power to cities and villages, and transport people and goods to markets. Given India's fiscal constraints, it is looking to the private sector to fund up to one-third of this needed investment.

The United States wants to support this effort to attract private financing. During my trip, I will participate in the India Infrastructure Finance Conference in Mumbai. At that conference and afterwards, we will highlight the opportunities of India's infrastructure initiatives to U.S. businesses.

This infrastructure investment is important to helping India achieve its second Green Revolution, as Prime Minister Singh has called for. Our private sectors must take an active role in developing a sophisticated agricultural market in India, where farmers can tap modern supply chains and processing technologies to improve their productivity and the lives of their families.

The government can do more to encourage this private investment by establishing more hospitable investment, regulatory and financial regimes. Capital limitations, combined with on-going uncertainty about contract enforcement and regulatory consistency, will make infrastructure investment more difficult to obtain.

Let me turn now to the expansion of India's financial sector, specifically, establishing a financial center in Mumbai. 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."

Properly-regulated and well-functioning financial markets are critical for balanced development and strong, inclusive growth. This is an area of enormous opportunity for India. Efficient markets link capital with ideas and ambition – they are the economic lifeblood through which people find the means to rise out of poverty. This is true in India, in the United States and around the world.

Today, Indian firms in Bangalore play a key role in the back office operations of global, multinational firms. In this, India has revolutionized, forever, 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.

By establishing an IFC in Mumbai, India will build a financial system that will help large and small businesses. Shopkeepers, farmers and craftsmen need access to credit, financial and insurance products, as much as the large, industrial manufacturer does.

The Indian government has recognized this need, and commissioned a report from a High Powered Expert Committee. The Committee's report outlined the requirements and a timetable for developing an IFC in Mumbai. The Report is bold, thorough and ambitious. I believe it is the right path. A financial footprint in Mumbai makes a door through which the world can invest in India, and India can invest in the world. Equally important, it gives India an important stake in the rapidly growing financial services industry.

The Report identifies the needed changes to fiscal and monetary policy, and to financial regulation. It also outlines that Mumbai's own urban infrastructure must be improved. This demonstrates the wisdom of the Indian government's emphasis on physical and financial infrastructure improvements. Both goals must be met in order to achieve the transition that will provide inclusive growth.

India has already made significant accomplishments in developing its financial sector, and the economy has responded positively. India's stock and commodity exchanges are thriving. Since deregulation, the asset management industry has grown and now manages over $100 billion in assets.

By reducing constraints on financial firms, India's government can foster a more efficient allocation of financial resources. This will free capital to finance infrastructure investment, develop new innovations in other industries, and extend financial services to a larger portion of the population.

India's large and growing middle class stands to benefit from new financial products that will help them to achieve homeownership and to invest in the best possible education for their children.

Many of the world's leading financial firms have already opened offices in Mumbai; they are eager to do their part in building an International Financial Center. I urge my Indian colleagues to move forward quickly on the recommendations of their expert committee report.

The United States will continue as a partner with India in its economic transformation. Treasury and the Finance Ministry have led an ongoing dialogue for several years among U.S. and Indian regulators to share experiences and best practices. We will kick-off another session to help advance the Indian government's economic reform agenda when I am in New Delhi next week. Mumbai's development into an IFC is an important element of that agenda.

U.S. experience can help Indian government and industry as they work to develop an IFC in Mumbai. And the 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.

We understand that Indian officials are concerned that greater capital flows associated with a financial center could add to inflationary pressures, destabilize the domestic financial sector 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.

India's development plans will require additional capital, innovative financial instruments and a commitment to financial openness. Recent growth in India's savings base and in the number of global firms setting up shop in India suggest that all of this is possible --- that India can be a significant exporter of financial flows and investment in the years ahead.

The development of Mumbai as a financial center will take some years to come to fruition. Nonetheless, it is a path worth taking, a path that will yield benefits all along the way for India and for the global economy.

The remarkable growth brought about by India's economic reforms has proven the wisdom of those reforms and their promise for the future. As Prime Minister Singh said, India is "an open house." It can become more open, more integrated into the global community. This will bring the inclusive growth which is India's aim – an economy in which the small farmer, the craftsman and the next Indian entrepreneur with a dream makes a door, and fulfills that dream.

India and the United States have made a very good start at delivering on our new partnership, and we can do more to reach our full strategic and economic potential. I look forward to learning from my Indian colleagues during my visit, and to working with them on these, and future, initiatives.

Thank you and I welcome your questions.