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United States has major strategic stakes in India’s economic success

The Indian Express (October 31, 2002)

Excerpts from the US Ambassador to India’s address to the Federation of Indian Chambers of Commerce and Industry in New Delhi on Tuesday, October 29, 2002

I return today to a subject that has compelled me since my arrival in India in the middle of last year, and that I have spoken about in the past, most recently in a speech a few weeks ago in Bangalore—the prospects for US-India economic relations in the context of the future of the Indian economy. I will speak frankly, although I am mindful of an old US Department of State saying that, "There are old bureaucrats and there are bold bureaucrats, but there are no old, bold bureaucrats."

Like all other nations, India faces a new and much accelerated global economic challenge. Fueled by knowledge and innovation, the international market place is more rapid and encompassing than ever before. Some fear the speed of these developments. Some hope that governments can slow globalization through public policy. That cannot and will not happen, not least because the most decisive decisions regarding globalization occur in the private sector, in millions of daily choices far beyond the reach of the babus.

Globalization carries with it advancement, as individuals around the world reap through wealth creation the rewards of economic change. The United States has been a beneficiary of this globalization. So has India. And this pervasive and dynamic phenomenon can contribute crucially to the transformation of US-India economic relations. That opportunity currently exists. Working together, can we seize it?

But, you might ask, why should Washington policymakers care about the vitalization of our bilateral economic relationship, and more broadly about the future of the Indian economy?

Last month, the Bush Administration issued "The National Security Strategy for the United States of America". This report, which bears President Bush’s personal stamp, describes India as one of the "great democratic powers of the 21st century." The document goes on to emphasize that India and the US are the world’s "two largest democracies ... committed to political freedom" and to common national interests in creating a stable Asia, fighting terrorism, and enhancing the free flow of commerce.

This is a reiteration of President Bush’s "big idea" of transforming the relationship between the United States and India. This transformation can be seen in the unprecedented stream of Washington policymakers who continue to visit New Delhi, nearly 100 in the past year. This is all occurring because there are no fundamental differences in vital national interests between the United States and India, including our identical objective of helping to bring about a peaceful and democratic South Asia -- free from terrorism, either domestic or of the murderous cross-border variety.

On the geopolitical side, an India that takes full advantage of its extraordinary human capital to boost its economy would be a more effective strategic partner of the US over the next decades, including in promoting peace, stability and freedom in Asia. An India that enters into a full fledged series of second generation domestic economic reforms would inevitably play an increasingly influential role in international affairs writ large, and that too would be beneficial for the United States.

With respect to the economic dimension, an India that tosses its License Raj and red tape into History’s dustbin would be ever more competitive in the international capital markets, and that would bring increased American investment into this country. An India that vitalizes its economy would buy more US goods and services. And finally, an India that brings its people out of poverty through economic growth at a more rapid rate would be an inspiration to democracies everywhere, and to the international community as a whole.

This modernization of US-India economic interaction based on Indian economic reform is the missing piece in our transforming bilateral relationship. Thus, as US Ambassador to India, I do not come before you to nag from Mount Olympus. As you all know, America assuredly does not live there. Put simply, the United States has major strategic stakes in India’s economic success. That is why Ken Juster, Under Secretary of Commerce; Alan Larson, Under Secretary of State for Economic Affairs; and Paul O’Neill, Secretary of the Treasury will all visit India in the coming month.

Americans hesitate to invest in India because of the uncertainty over India’s economic reforms. The disinvestment debate in the last two months is only the latest example. Potential US investors stress to me that Indian taxes and tariffs here are still too high, and there remains too much government interference over business decisions. With respect to intellectual property rights, US pharmaceutical and biotech companies would expand their presence here if India had a modern legal framework to protect product patents.

The need to raise the FDI caps is a theme I also hear frequently. In addition, as you know no FDI is permitted in retailing. If that sector were opened up, there is little doubt that FDI would induce domestic investment as well—by stimulating business in related activities such as packaging, transportation, advertising, and business support services. In addition, you all are more than familiar with what needs to be done regarding Indian domestic infrastructure and the power sector. There is also no question that tensions between India and Pakistan and communal violence further dampen investors’ urge to come into the Indian market.

It is in this problematical context that commercial exchange between the United States and India languishes. Last January, I gave a speech on he state of US-India economic relations. In it, I described US exports to India and investment flows as being "flat as a chapati." Sadly, nothing much has changed.

The image among many US investors -- and the underlying reality -- is that India Inc is only partially open for business. Henry Kissinger once wrote that, "Statesmen stand or fall on their perceptions of trends." I venture to say that the same is true of business executives. In a globalized economy, such perceptions are especially decisive, and the present American view is largely that China is a place where foreign companies can make money, and India is not.

Why is that so? Disinvestment Minister Arun Shourie said this on October 26, "Labour reforms, privatisation, reforms of the power sector...what have we not announced in the last decade? For which of them have we not in the last decade pledged ourselves to time-bound targets? Yet on everything a 20-metre sprint and inertia overwhelms us." Or, as I put in my January 28 speech, "The reform rabbit can become a turtle, which can become a rock."

Indian entrepreneurs and officials often raise with me comparisons between the respective economic performances of India and China. The two countries launched their economic reform programs from different historical experiences. Nonetheless, the fact remains that in the last 10 years, China has forged ahead on most economic measures.

The following statistics do not say everything about the Indian economy. And these numbers do not describe the serious and well-known structural problems in the Chinese economy. But I think you will agree that these data do tell us something important and worth thinking about.

* Over the last 20 years, China’s GDP has grown at about 10% a year, compared with India’s 6% growth rate.

* A decade ago, India and China had close to the same per-capita income. Today China’s per-capita income is about $900, roughly twice that of India. * In 1991, China produced 670 billion kilowatt hours of electricity, India 290 billion. In 2001, China’s production was 1.14 trillion kilowatt hours while India’s was about 450 billion.

* In 1991, China’s receipts from tourism were $2.8 billion. This had grown to $14.10 billion by 2001. The comparative figures for India were $1.4 billion in 1991, and $3.04 billion ten years later.

* A study recently commissioned by FICCI with consulting firm KPMG found that cellular phone penetration in India is less than one percent of the population, compared to over 11% in China.

* In 1991, India and China started off from about the same base, with less than one computer for every thousand individuals. By 2000 China’s rate is three times India’s, with more than 15 computers for every thousand persons, compared to 4.5 in India.

* In 1990, manufacturing in China was about 37% of the economy; today that relative weight has increased to about 45%. China now produces 50 % of the world’s cameras, 30 % of the air conditions and televisions, 25 % of the washing machines and 20 % of the refrigerators. In the last 12 years, manufacturing as a percentage of the Indian economy has decreased, falling to about 24% from 30%.

* China’s trade in goods and services as a percentage of GDP grew for 35% in 1991 to 49% in 2000. During the same period, India’s percentage rose from 18% to 30%.

* Since 1980, China has welcomed over $336 billion in foreign investment; India has received only $18 billion.

* Last year China attracted $47 billion in direct foreign investment—nearly 21% of the world’s foreign investment going to developing countries. India’s FDI figure was about $4 billion, less than 2% of that total.

* In 1990, China’s exports were $62 billion, which were three-and-a-half times greater than India’s. Today China’s annual exports are over $266 billion, and the comparative gap has widened to over five-and-a-half times India’s current exports.

* And we all know what an enormous investment China is putting into its domestic infrastructure—airports, roads, port facilities, telecommunications, and so forth.

I have had many conversations with thoughtful Indian business leaders and government officials on the subject of China’s economic development. But I sometimes encounter what in my view are defensive responses and rationalizations. The first goes like this: "India has made great economic progress in the past 10 years. The first wave of economic reforms produced remarkable achievements, especially in the light of where we were in 1991. Foreign investors should give us credit for that when making their current decisions."

Let me be clear. The economic strides India has made in the last decade are notably impressive and in the IT industry, India is in the front rank of global competition. But the problem with this argument is that it is entirely retrospective. Alas, foreign investors are not economic historians. They do not care a whit about how far a country’s economic policy has come. Instead, they make their investment decisions on the prospects of the present and likely future policy environment in a given country.

The second argument I frequently hear is along the following lines. "China has made impressive economic steps because it has an authoritarian form of government that can easily change policy and redirect resources. India is a large and complex democracy, which requires lengthy political consultations and hence a slower rate of change. In short, our hesitant pace of economic reform is the inevitable price we pay for our democratic system."

What troubles me about this line of argument is that it seems to advance the notion that democracies cannot achieve rapid economic reform leading to much greater prosperity. India is capable of high growth rates without compromising its democratic governance. The values of democracy and free markets are mutually reinforcing. India’s great democracy is an asset and not a liability over the long term.

The global economy is like a high-speed train. More and more business executives and a much smaller number of government officials around the world get on it. The train does not wait. It is never cancelled. It makes its journey across the globe day after day, night after night. Some people believe that this train is going too fast. Others think that maybe it should not pass through their neighborhood. But no one knows how to slow it down, or to change its direction. It is the future.

America’s strategic interests would be significantly served if India—through a new wave of economic reforms—climbs firmly aboard the globalizing train. This would produce an India fully prepared to take on the influence and responsibilities of a great power in the international system. That would certainly be a very positive development for the United States of America.

The decision, of course, is entirely India’s to make.