Archives

US-India Economic Relations

Speech by US Ambassador to India Robert D. Blackwill to the American Chamber of Commerce in India and the Indo-American Chamber of Commerce, New Delhi, India
January 28, 2002

I thank the American Chamber of Commerce in India and the Indo-American Chamber of Commerce for hosting this event today. I especially recognize Lalit Ahluwalia, Chairman of AMCHAM, and R. Veeramani, National President of IACC, for assembling such a distinguished group of their respective members for lunch.

Introduction: Transforming the Relationship

Ladies and Gentlemen, I intend today to speak directly. As Demosthenes wrote twenty five hundred years ago, an Ambassador is responsible "for his reports. . . for his advice . . ., and. . . for his integrity or lack of it in acquitting all his responsibilities . . . ." With those ancient and wise words in mind, this is the blunt headline I wish to develop in the next few minutes. Although broad US-India ties are being transformed every day under the leadership of President Bush and Prime Minister Vajpayee, I am seriously worried about our systemic economic relationship which is largely stagnant. Let me begin by putting this sharp concern of mine in context.

At the beginning of last September, I spoke on two separate occasions about the Bush Administration's foreign policy and US-India relations. My first speech described the strategic context in which the Bush Administration approached foreign policy: one of a distinctive American internationalism founded on multilateral coalitions of countries with shared democratic values, national interests, and diplomatic and military capabilities.

In my second speech, I underscored that the US-India relationship is essential to this approach. Long before he took office, President Bush made it clear that the US would intensify its collaboration with India in order to transform the bilateral relationship. He wants to get America's big relationships right. As the President again stressed to me when I saw him a few weeks ago in the Oval Office, India ranks high in the Administration's priorities.

This transforming process was underway when the tragic and historic events of September 11 intervened. Instead of diverting the United States and India from intensified interaction, these calamitous circumstances accelerated the fundamental redefinition of the relationship. Drawn together in the war against international terrorism, our two governments are talking in collaborative ways, with a frequency and transparency, that is unparalleled in more than a half century of US-India diplomatic relations.

Over the past two weeks, the pace of high level exchanges between Washington and Delhi has been unprecedented: Secretary of State Powell, Environmental Protection Agency Director Governor Christine Todd Whitman, FBI Director Robert Mueller, Defense Intelligence Agency head Admiral Thomas Wilson, and the State Department's Counter-terrorism chief Francis Taylor all have traveled to Delhi to meet with the leadership of the Indian government. My most important professional mentor, Henry Kissinger, was also in this country for six days during this period. For India's part, Home Minister Advani and Defence Minister Fernandes visited Washington where they met with the most senior members of the Bush Administration. All in two weeks.

The Economic Component: Grounds for Concern

Yet, in spite of the extraordinary advances made in our political, diplomatic, military, and intelligence ties over the past several months, one area lags behind: US-India economic relations. Here, Shakespeare's words in Julius Caesar come to mind, "We must take the current when it serves, or lose our ventures." Friends, in the US-India economic domain, we have yet to take the current that is transforming our bilateral relationship.

So I ask myself these basic questions: Why have US-India commercial interactions not improved, as have our links with China and other emerging market countries? Has anxiety in India over the pace and direction of globalization as well as government regulation and red tape entrenched, if not elevated, barriers to trade between our two countries? Have US businesses failed to calibrate their strategies for success in the Indian marketplace? Are American companies missing business opportunities in India? More recently, are external factors -- the current world economic downturn; the jarring of US consumer confidence, post-September 11; or a fundamental incompatibility of our two economies -- somehow to blame?

Whatever the answers to these questions, I am convinced that the long-term success of the US-India bilateral transformation will hinge importantly on a parallel invigoration of our economic relationship. US-India economic interaction has the potential to provide a strong wind in the sails of our bilateral ties. The current danger is that, instead, it can become an anchor and significantly slow our progress.

Here are some of the problems, and some tentative answers.

Economic Reforms

Both the United States and India depend on sustained economic growth and development to secure bright economic futures for our citizens. Without question, India has made significant progress in market reforms over the past decade, a relatively short time for any country to dismantle one economic model and embrace another. That said, a creeping reform process begins to look a little like no process at all. The reform rabbit can become a turtle, which can become a rock. With each passing session of Parliament in which legislative action is not taken to implement economic reforms -- in areas such as the power and agricultural sectors, intellectual property rights, labor, and fiscal discipline -- India's timeline before it realizes its full economic potential is extended.

From the American experience, I can testify that it takes more than policy pronouncements and good intentions to produce positive government actions. If I can borrow a concept shared in recent weeks on another crucial subject by every Indian I encounter, words are fine but implementation is what really counts. True in India-Pakistan relations. True in Indian economic reform.

Bilateral Trade

One important result of the reform process in India has been a reconsideration of the concept of trade. No longer seen strictly as a means to earn hard currency to purchase products not available in India, trade is now recognized by most as a means to leverage this nation's comparative advantage to promote national growth, development, and a better life for its citizens.

Trade offers more than material benefits. As President Bush noted last May in a speech before the Council of the Americas:

"Open trade is not just an economic opportunity, it is a moral imperative. Trade creates jobs for the unemployed. When we negotiate for open markets, we are providing new hope for the world's poor. And when we promote open trade, we are promoting political freedom."

Yet, when I look at bilateral trade levels between the United States and India, particularly US exports to India, they strike me as disappointing. While India's exports to the United States have steadily expanded since the mid-1990s (from $5.7 billion in 1995 to $10.7 billion in 2000), US trade flows to India since 1995 have stagnated: $3.3 billion in 1995; $3.3 billion in 1996; $3.6 billion in 1997; $3.5 billion in 1998; $3.7 billion in 1999; and $3.7 billion in 2000. The trend in these numbers is as flat as a chapati.

In 2000 India was the United States' 25th largest commercial partner, sandwiched between Australia and Sweden, countries with populations of 19 and 9 million people, respectively. While business with the US represented roughly 15 % of India's $94 billion in total exports and imports for the year 2000, India constituted only 0.6 % of American global trade. This is a pitifully small figure given the aspirations we have for the US-India relationship.

There are many reasons for these distressing numbers. Some are macroeconomic and relate to changes in the global economy, which are outside the control of governments and companies. Others have to do with changing corporate strategies, as some US firms rein in overseas investments and shift resources away from risky markets in response to contracted economic conditions back home.

Often I am asked to assist US business on a wide range of commercial problems they face here in India, a responsibility to which I attach a very high priority. For some, resolution of the problem at hand can either make or break their India strategy. Their pervasive concerns are instructive, and offer several possible explanations for our weak bilateral trade.

• High Tariff Walls: At 30 %, India's average tariff ranks among the highest in the world and, without question, blunts trade. For Indian manufacturers, it increases costs and lowers the competitiveness of their exports. Agricultural products fare no better. Large quantities of California raisins never reach Indian dinner tables because of India's towering115 % tariff wall. The discerning Indian consumer deserves more taste choices and variety. The aggregate duties on imported distilled spirits and wines range from 464 % to 706 %, levels that have effectively blocked legitimate trade.
• Non-tariff Barriers: Onerous labeling requirements for pre-packaged goods, compulsory detention and laboratory testing of every imported food product (far in excess of international norms), and other non-tariff barriers further stunt trade. The world's largest ice cream manufacturing plant, located in tiny Le Mars, Iowa must accommodate onerous Indian labeling regulations that add to the costs of production and render it less competitive in the seizable Indian market. Last year the Indian government raised the duty on imported aircraft from 0 to 3 %, a move that will eventually force the Indian business traveler and domestic tourist to pay more for air travel. Imports of 131 commodities must comply with Indian quality standards, with the exporters or manufacturers required to obtain a certificate from the Bureau of Indian Standards before exporting the goods to India. Some might view this as slipping back to the days of the license-permit Raj. I see it as less than productive government intervention. Why should policy-makers second-guess the price and quality conscious Indian purchaser who will assuredly decide if imported dry cell batteries are up to standard?
• Tariff Rationalization: In some cases, tariff rates on primary and intermediate products are the same or higher than the duties on the finished product. This tariff inversion punishes the foreign firm that has invested millions and contributes materially to a local economy. A US manufacturer of a pesticide used in the production of cotton and rice, for example, is facing hard decisions over the future of its $20 million plant in Maharashtra State. An intermediate good used to make the pesticide, "symtet", attracts the peak Indian duty of 35 %, the same rate for the pesticide. Gates India is a US company that makes high-pressure hydraulic hoses for earth-moving equipment at its state-of-the-art plant in the Punjab. Indian tariffs on its raw materials average 67 % while the finished hoses attract the same rate. Can this be right?
• Intellectual Property Rights Protection: India's large domestic pharmaceutical industry and burgeoning biotechnology sector represent potential areas of high growth in trade between the US and India. One major obstacle, however, is the lack of a world class, WTO-consistent product patent law that protects innovation, promotes technology transfer, and safeguards public health. The Indian government has made a concerted effort to increase the size and capabilities of the Indian Patent Office. The US Government applauds this important development, yet remains discomfited by the estimated backlog of 30,000 pending patent applications.

In citing these problems, I know that no economy in the world, including the United States, allows completely unfettered access to foreign goods and services. But the days of bald protectionism -- the "ally of isolationism," in the words of a former US national security adviser -- ought to be over. That certainly applies to my country. My message simply is that further reduction of tariff and non-tariff barriers, harmonization of existing tariff structures, and IPR protection in India will over time help to boost trade with the United States to volumes that are commensurate with the transforming relationship between our two nations.

Foreign Direct Investment

In his recent book, Does America Need a Foreign Policy, Henry Kissinger makes this telling point, "It would be satisfying to believe that the spread of deregulation, privatization, and the removal of trade barriers resulted from the eloquence of American economists or from the preachings of the US Treasury and International Monetary Fund. What in fact has persuaded most of the world has been the indispensability of American capital markets. . . ."

In that sense, no less critical for an expansion of US-India economic relations is increased American investment in India, investment that many Indians believe this country needs. Again, current performance is disheartening. In the calendar year 1995, US investment in India was $192 million; in 1996, $255 million; in 1997, $737 million; in 1998, $347 million; in 1999, $431 million; and in 2000, US investment in India totaled $336 million. Perhaps even more telling is that US firms ended up investing only 38 % of that approved by the Government of India.

When it comes to foreign investment, I detect two, opposing strains of thought in India. In certain quarters there still seems to be an elemental distrust of foreign investment. Observe closely the arguments that are made, for example, against foreign ownership of the print media or FDI in the retail sector.

At the same time there is an opposite view here that foreign investment is essential for India's economic growth and development. Several years ago a World Bank study concluded that the greatest long-run benefit on FDI may come from the direct and indirect effects on improving productivity in this country. During his September 2000 state visit to America, Prime Minister Vajpayee acknowledged FDI's crucial role in India's economic development when he called for $10 billion in FDI annually from the United States. (Again, in 2000 it was $336 million, or 1/30, of the total the Prime Minister seeks.)

In spite of this conceptual tension over foreign investment, the Indian government has taken some steps to make India more attractive as an investment destination: Elimination of approval for equity investments in a large number of manufacturing activities, and the establishment of automatic approval in a number of other key sectors.

From the perspective of the foreign investor, innumerable rolls of red tape stretching to the horizon are a major deterrent to investment, a view seconded by Commerce Minister Maran during an appearance before the Indian Parliament last August. The Federation of Indian Chambers of Commerce and Industry recently released a study that detailed the number of man days that are consumed obtaining local, state and federal clearances for a typical foreign investment. According to the FICCI study, acquiring Foreign Investment Promotion Board approval, a land acquisition permit, pollution clearance, drug license, factory license, electricity connection, Reserve Bank of India approval, sales tax deferral notification, water connection, and more might take a whopping 3,456 man-days within the Indian government. Ten years of effort for a single person. Another example. Even after being approved for investment, a power project may require as many as one hundred additional clearances. Let me repeat. As many as one hundred additional clearances. Can you believe it?

The recent AMCHAM/McKinsey & Company report on FDI describes the need for multiple or dual approvals for power projects produces delays, causes budget overruns, and severely affect the economics of a power project. In the processed foods sector, a new product approval takes seven steps and two years in India; two steps and three months in the United States; and one step and seven days in Singapore. What foreign investor wants to be wait-listed for two years when boarding cards for a seven-day, one-stop shopping trip are immediately available?

This feature of investment in India prompts me, at times, to ask this question. Why do most investments need to be approved by government in the first place? Is investment a dangerous, external threat that must be carefully limited? It seems to me that, with the exception of a few areas of the economy -- for example, defense and atomic research -- the opposite holds true. The United States welcomes FDI; in 2000, the US received $316 billion. That same year, China took in nearly $41 billion. In India, the figure was $4.5 billion. Again, these comparative figures speak for themselves.

One final word on investment in India. The Dabhol dispute feeds a chronic perception among the overseas investing community that India may not be ready yet for big time international investment. I hear a frequent buzz from the United States that the sanctity of contract may now be in doubt here, a concern that can spell death to potential investments. I hear this often from the giants of American business. Therefore, the long-term repercussions of this case could be profound. The sooner the Dabhol matter is resolved and we can put it behind us, the better.

Doha and Beyond

Earlier I alluded to some Indian trepidation about the process of globalization. On this subject I agree with my good friend, United States Trade Representative Bob Zoellick, when he described India's ability to adapt to globalization as one of the central challenges before it. Or, as Bill Emmott, editor of The Economist, put it in a New Delhi interview a few days ago, "For anyone interested in the world economy, India is the biggest test case." India has a window of opportunity to embrace the globalized economy, but the process will not wait for India or any other country.

India's approaches in the multilateral trading context suggest that a growing constituency, in both government and industry, desires to put on the "golden straitjacket" of globalization, as Tom Friedman terms it in The Lexus and the Olive Tree. The results of the recently concluded WTO Ministerial Conference in Doha -- the Doha Development Agenda -- should encourage this Indian constituency.

Implementation concerns will be addressed, peak industrial tariffs and tariff escalations will be discussed, and the collective importance of TRIPS, public health and intellectual property rights protection have been endorsed. Further, negotiations on investment, competition, trade facilitation, and government procurement will commence after consensus is reached on how the negotiations should be structured.

The opportunity for India to leverage these gains to advance its domestic economic reform agenda, to improve the competitiveness of Indian industry and agriculture, and to increase trade and investment flows is evident. And the United States and India should exploit the particular areas where our post-Doha interests especially overlap: agriculture, services, reducing industrial tariffs, and intellectual property rights protection.

The US-India Economic Dialogue

Committed to invigorating our economic relationship, President Bush and Prime Minister Vajpayee formally launched the bilateral Economic Dialogue in Washington last November 9. As one of the most ambitious and substantive channels for engagement on economic and commercial issues that America has with any government in the world, the US-India Economic Dialogue focuses on broadening and deepening our official interactions -- at all levels.

We see very big things for the Economic Dialogue -- a vehicle not only to help us realize the vast potential of our bilateral relationship, but also as a forum for serious discussions about world and regional economic matters of import to both our countries. Issues such as Afghanistan reconstruction, energy security, the global trading system and the new trade round, development assistance flows, and climate change are examples of subjects that the Indian and US governments should regularly be talking about, even when we do not entirely agree.

Another and more fundamental objective of the Economic Dialogue is to expand commercial opportunities for our respective business communities. This is a dimension of the Dialogue that the US government takes seriously and on which it will be fully engaged.

Implementing such a profound change in the way our two governments view our economic ties is not something that happens overnight. Ingrained attitudes and habits die slowly. Still, we are making progress. Movement is underway along five, broad fronts: trade, environment, finance, energy, and the private sector.

• Last August, USTR Bob Zoellick and Commerce Minister Maran launched the Trade Policy Dialogue. The two subsequently met several times after that, in Mexico City, Singapore, and Doha. And just last Thursday night, members of my Mission, along with Commerce Ministry officials and their counterparts in Washington, held a digital videoconference to discuss a range of bilateral and multilateral trade issues. It was an innovative use of an available technology that has significant implications for how our two governments interact. A second DVC is scheduled for mid-March.
• Two weeks ago we welcomed Governor Christine Todd Whitman, head of the Environmental Protection Agency and a member of President Bush's Cabinet, to New Delhi. Governor Whitman and the Minister of Environment and Forests kicked off the Environment Dialogue with an Memorandum of Understanding that will provide a framework for long-term environmental cooperation to include capacity building for air quality management, environmental governance, and promoting the environmental health of children. We are also looking forward to the February visit of Under Secretary of State for Global Affairs Paula Dobriansky who has policy-level responsibilities on climate change.
• Deputy Treasury Secretary Kenneth Dam will visit India next week to further the Finance Dialogue. His program will include meetings with cabinet-level officials in the Indian government, including Finance Minister Sinha, and focus on a wide range of issues, including: global economic conditions, economic reform, the war on international terrorism, and development assistance flows. Ken Dam's visit will also set the stage for a more intensive Treasury-Finance interaction at the sub-cabinet level, culminating with the anticipated visit of Secretary Paul O'Neill to New Delhi later this year.
• Energy security and power sector issues, including collaborative work on clean energy technology, are areas for productive engagement in our Energy Dialogue. The US Department of Energy and other US agencies, in discussion with their Indian counterparts, are actively exploring ways to bundle the many threads of our existing energy/power sector interactions with the Indian government. A visit by Energy Secretary Spencer Abraham in 2002 would add momentum to the Energy Dialogue.
• Finally, and a particularly notable feature of the Economic Dialogue, is the focus being given to the full and proactive participation of the private sector. As I mentioned earlier, a major objective of the Dialogue is to facilitate the expansion of US-India economic and commercial ties and opportunities. To this end, the business community's involvement and advice are essential. Already the US-India Business Council (USIBC), under former Ambassador to India Frank Wisner, has proposed a series of innovative and thoughtful recommendations to make the US private sector an active contributor to the governmental dialogue. We will also be looking to the business community to help bridge sectoral gaps and make linkages in those areas that hold great promise for expanding the US-India commercial relationship. I have in mind IT, telecommunications, biotechnology, and pharmaceuticals -- the knowledge-based industries that increasingly bind our two nations.

US Commercial Success Stories

I do not mean to suggest in this speech that the news in the US-India economic relationship is all bad. In India, a number of American companies -- large and small -- are doing well. We can learn from their collective experiences.

• Let me begin with General Electric. A majority of GE's businesses worldwide have a presence in India today -- aircraft engines, broadcasting, capital services, lighting, medical systems, and more -- with a total of nearly 19,000 GE professionals based here. Its ultimate vote of confidence in India's vast reservoir of highly skilled engineers and scientists was demonstrated by the establishment of the John F. Welch Technology Centre in Bangalore, India's first and largest industry multidisciplinary research center.
• After only two years in business, Owens Corning India has turned its Mumbai glass fiber manufacturing plant into the largest single exporter in Maharashtra State with annual foreign exchange earnings of over $50 million. Using state-of-the-art technologies and employing 400 Indian college graduates, Owens Corning India has become Owens Corning's most successful venture in Asia.
• Proctor and Gamble India, based in Mumbai, prides itself on its collaborative management and high safety standards. In order to provide staff with advancement opportunities, P & G has sent abroad 300 Indian employees over the past decade to other P & G operations throughout the world.
• Ford India has invested over $400 million in its Tamil Nadu plant and is now exporting its popular Ikon model to South Africa and Mexico.
• Tecumseh Products India Limited, the employer of 2,500 skilled and unskilled workers at its cutting edge Haryana and Andhra Pradesh plants, operates the only air-conditioning compressor manufacturing plant in India in accordance with the industry's highest internationally-recognized technical standards.
• Last week Chubb Corporation and the Housing Development Finance Corporation Ltd. (HDFC) announced the establishment of a joint venture to sell non-life insurance in India.
• In business in India since 1902, Citibank has grown its retail banking over the past 15 years with a focus on customer service. It is the largest clearing bank in India and the largest issuer of credit cards. Citibank's contribution to Indian society is embodied in its micro-credit programs focused on assisting women in urban slums.

While each success story varies in its details, common lessons for US companies to succeed in India run throughout. Demonstrate a high level of commitment. Patrol the halls of government to keep the bureaucracy focused. Fashion India-specific marketing and distribution strategies, since what goes over well in Peoria or Prague may not fly in Pune. Choose local partners like Indian parents would choose a husband for their daughter: carefully. Work with the local community. Be environmentally sensitive. And, perhaps most of all, demonstrate patience and keep expectations realistic.

The Road Ahead

With respect to the potential of the US-India economic relationship, we can profit from examining India's information technology miracle. In a few short years, Indian drive, ingenuity, and technological prowess created a world class industry. I marvel at the symbiotic relationship that evolved between the United States and India in this important chapter in the history of the IT industry.

Indian-trained software engineers arrived in Silicon Valley and made groundbreaking advances across the IT spectrum. Back home, Indian entrepreneurs nurtured small startups into software and services titans now listed on the New York Stock Exchange, companies that count US Fortune 500 corporations as their chief clients. Leading US firms looked first to India to establish call centers and back office operations, so much so that, as the Indian writer Chidanand Rajghatta details in The Horse That Flew, "the consensus is that India is the forerunner to be the back office to the world." Throughout it all, the hand of government was barely visible. Could there possibly be a lesson here?

The IT wonder in India provides a vivid example of how the US-India economic relationship can and should expand. Where barriers are minimal, trade will flourish. The investor that encounters little red tape and has a positive experience will lure other interested investors. The IT example demonstrates that greater, and not less, integration with the globalized economy makes domestic industry more competitive.

It was once said that a Bureaucrat's credo is as follows: 1) When in charge, ponder. 2) When in trouble, delegate. 3) When in doubt, mumble. I think you will agree that I have not mumbled here today.

Instead, I have spoken to you directly and without diplomatic niceties. I have done so because I believe the economic dimensions of the transforming US-India relationship are so very important, indeed indispensable in the long-term. So I invite all involved in this crucial element of our bilateral ties to ask themselves every single day this question, "what have I done today to advance the US-India economic relationship?"

A century ago, the American President Woodrow Wilson said that, "If you want to make enemies, try changing something." Despite this aphorism, I trust that I have made no enemies in this gathering this afternoon.

Thank you for your attention.