"There can be no growth without reforms."
Finance Minister Jaswant Singh
October, 2002
Introduction
I return today to a subject that has compelled me since my arrival in India in the middle of last year, andthat I have spoken about in the past, most recently in a speech a few weeks ago in Bangalore - that is, theprospects for US-India economic relations in the context of the future of the Indian economy. As is my habit,I will speak frankly, although I am mindful of an old US Department of State saying that, "There are oldbureaucrats and there are bold bureaucrats, but there are no old, bold bureaucrats." Let's now test thataphorism.
This audience in particular understands that, like all other nations, India faces a new and much acceleratedglobal economic challenge. Fueled by knowledge and innovation, the international market place is more rapidand encompassing than ever before. Some fear the speed of these developments. Some hope that governments canslow globalization through public policy. That cannot and will not happen, not least because the most decisivedecisions regarding globalization occur in the private sector, in millions of daily choices far beyond thereach of the babus.
Any perusal of the Internet, as I do early every morning for a couple of hours regardless of where I am, willdemonstrate the truth of this proposition. Globalization carries with it advancement, as individuals aroundthe world reap through wealth creation the rewards of economic change. The United States has been abeneficiary of this globalization. So has India. And this pervasive and dynamic phenomenon can contributecrucially to the transformation of US-India economic relations. That opportunity currently exists. Workingtogether, can we seize it?
The Importance of US-India Economic Ties
But, you might ask, why should Washington policymakers care about the vitalization of our bilateral economicrelationship, and more broadly about the future of the Indian economy? After all, there are over 190 nationsin the world. What is so special about India in this regard? Last month, the Bush Administration issued"The National Security Strategy for the United States of America," which sets forth our diplomaticand security approach to the current openings and dangers within the international system, an approach basedon America's democratic values. If you have not read this deeply authoritative document, I strongly commend itto you. You can get it on the US Mission's website. 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 toemphasize that India and the US are the world's "two largest democracies ... committed to politicalfreedom" and to common national interests in creating a stable Asia, fighting terrorism, and enhancingthe free flow of commerce.
This is a reiteration of President Bush's "big idea" of transforming the relationship between theUnited States and India. The American historian Barbara Tuchman described the concept in a different context30 years ago: "Friendship of a kind that cannot easily be reversed tomorrow must have its roots in commoninterests and shared beliefs, and even between nations, in some personal feeling. " We are livingTuchman's wise words every day in the US-India relationship - interests, beliefs, and feelings. Thistransformation of our bilateral ties can be seen in the unprecedented stream of Washington policymakers whocontinue to visit New Delhi, nearly 100 in the past year. These officials engage intensively with their Indiancounterparts in US-India diplomatic collaboration, counter-terrorism efforts, defense and military-to-militarycooperation, intelligence exchange, law enforcement, development assistance, joint scientific and healthprojects including on HIV/AIDS, and the global environment.
This is all occurring because there are no fundamental differences in vital national interests between theUnited States and India, including our identical objective of helping to bring about a peaceful and democraticSouth Asia -- free from terrorism, either domestic or of the murderous cross-border variety. But, US-Indiaeconomic relations lag far behind major advances in all these other areas.
I now want to make a point central to my presentation today. As I used to teach students in my course onstrategy at Harvard University, national economic strength is a prerequisite for sustained diplomaticinfluence and military muscle. The close US-India collaboration that I have just enumerated would be made morewide reaching and successful by a fundamentally reformed and globalized Indian economy. I openly admit,therefore, that there is a certain amount of American self-interest at work as we hope for the best forIndia's economic performance in the years ahead.
On the geopolitical side, an India that takes full advantage of its extraordinary human capital to boost itseconomy would be a more effective strategic partner of the US over the next decades, including in promotingpeace, stability and freedom in Asia. An India that enters into a full fledged series of second generationdomestic economic reforms would inevitably play an increasingly influential role in international affairs writlarge, 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'sdustbin would be ever more competitive in the international capital markets, and that would bring increasedAmerican investment into this country. An India that vitalizes its economy would buy more US goods andservices. And finally, an India that brings its people out of poverty through economic growth at a more rapidrate would be an inspiration to democracies everywhere, and to the international community as a whole. Thismodernization of US-India economic interaction based on Indian economic reform is the missing piece in ourtransforming bilateral relationship.
Thus, as US Ambassador to India, I do not come before you to nag from Mount Olympus. As you all know, Americaassuredly does not live there. Rather, I speak out on this subject because US national interests will besignificantly affected by India's economic performance in the years ahead. Put simply, the United States hasmajor strategic stakes in India's economic success. That is why Ken Juster - Under Secretary of Commerce; AlanLarson - Under Secretary of State for Economic Affairs; and Paul O'Neill - Secretary of the Treasury will allvisit India in the coming month.
US Commercial Success Stories
Some American companies have come to India to invest, to sell products, to manufacture, to provide services.I, therefore, spend much of my time dealing with bilateral economic and trade policy issues. This month I madeseveral trips away from New Delhi, to southern India and to Mumbai, where I met with business leaders andlistened to their views on commercial conditions. In these sessions, I acquired a better understanding of howsome US companies make a successful go of it in India.
In Mumbai two weeks ago, I attended the launch of the HDFC-Chubb General Insurance Co. Today, India'sinsurance industry is moving because it has opened up to foreign investment. Three years ago there was noforeign investment in this critical service sector. Now, at least five US insurance companies have entered themarket in joint ventures with their Indian partners. This is called good news where I come from. It deepenscapital markets; it provides a new pool of higher-paying jobs; it is another step in developing a serviceeconomy. Most importantly, it gives the Indian consumer more choices.
Another player in financial services is American Express. That company is doing its customer servicing fromIndia, and has also set up an analytical group for different markets around the world. It has 3,000 employeesin India. Chairman and CEO Kenneth Chenault was in New Delhi recently to inaugurate Amex's new global servicescenter in Gurgaon.
In the manufacturing sector, American positive experiences in India are rare. One exception is Ford MotorCompany. I toured Ford's plant in Chennai earlier this month. It is producing 20,000 units a year and has awork force of 900 -- many hired without previous employment experience. Women hold 15% of the assembly linejobs.
A US manufacturer I called on in Chennai is a US automotive systems company, Visteon, which operates threeplants in India. One of them makes automobile starters and alternators for the European market. With $43million in sales, it is the largest such exporter in India. The company has over 1,100 employees.
Virtually every major American IT firm has a presence in southern India. Any one of them could be an exampleof a winning foreign investment here, but I single out General Electric because it recognized India's IT andengineering talent at an early stage, and because I recently visited one of its facilities in Hyderabad.
In its Indian operations, GE has $1 billion in sales, 31 separate businesses, and 18,000 employees, of whom1,000 are scientists, mostly PhDs. GE alone accounts for 8% of India's software exports. All of GE'smedical-product research is done in India. Most of the company's employees support other GE businessesworldwide. But few of GE's activities here are geared to the domestic Indian market, and that is a telling anddisturbing fact.
Partly because of this weakness of the Indian domestic market, total US-India trade last year was only $15billion. By comparison, the threshold to be one of America's top ten trading partners is $33 billion. Evenhigher is the exclusive club of America's top four trading partners -- Canada, Mexico, Japan, and China. Thethreshold for admission there is $120 billion in two-way trade. We have a long way to go before India moves upfrom 25th place on the US bilateral trade list.
Why More Investment Is Not Coming To India
Americans hesitate to invest in India because of the uncertainty over India's economic reforms. Thedisinvestment debate in the last two months is only the latest example. Potential US investors stress to methat Indian taxes and tariffs here are still too high, and there remains too much government interference overbusiness decisions. With respect to intellectual property rights, US pharmaceutical and biotech companieswould expand their presence here if India had a modern legal framework to protect product patents. The need toraise the FDI caps is a theme I also hear frequently. In addition, as you know no FDI is permitted inretailing. If that sector were opened up, there is little doubt that FDI would induce domestic investment aswell -- by stimulating business in related activities such as packaging, transportation, advertising, andbusiness support services.
In addition, you all are more than familiar with what needs to be done regarding Indian domesticinfrastructure and the power sector. As I have said before, within the US business community there is anerosion of confidence about whether the sanctity of contracts will be honored in India. There is also noquestion that tensions between India and Pakistan and communal violence further dampen investors' urge to comeinto the Indian market. Finally, as Indira Gandhi observed in 1975, "In a traditional society likeIndia's, scandals are unavoidable. This is, in fact, the first consequence of the most ancient of socialdiseases, corruption."
It is in this problematical context that commercial exchange between the United States and India languishes.Last January, I gave a speech on the state of US-India economic relations. In it, I described US exports toIndia and investment flows as being "flat as a chapati." Sadly, nothing much has changed. Ourcommercial ties remain far below their full potential.
Unfortunately, the image among many US investors -- and the underlying reality -- is that India Inc. is onlypartially open for business. Henry Kissinger once wrote that, " Statesmen stand or fall on theirperceptions of trends." I venture to say that the same is true of business executives. In a globalizedeconomy, such perceptions are especially decisive, and the present American view is largely that China is aplace where foreign companies can make money, and India is not. Why is that so? Disinvestment Minister ArunShourie said this on October 26, "Labour reforms, privatisation, reforms of the power sector...what havewe not announced in the last decade? For which of them have we not in the last decade pledged ourselves totime-bound targets? Yet on everything a 20-metre sprint and inertia overwhelms us." Or, as I put in myJanuary 28 speech, "The reform rabbit can become a turtle, which can become a rock."
India And China
Indian entrepreneurs and officials often raise with me comparisons between the respective economicperformances of India and China. Indeed, this happened last night at a dinner at Roosevelt House. The twocountries launched their economic reform programs from different historical experiences. Nonetheless, the factremains that in the last 10 years, China has forged ahead on most economic measures.
Let us then briefly examine the respective economies of India and China. The following statistics do not sayeverything about the Indian economy. They do not address India's comparatively high GDP growth rate over thelast decade, its impressive foreign reserves, its low inflation, and its high savings rate. And these numbersdo not describe the serious and well-known structural problems in the Chinese economy. But I think you willagree 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 isabout $900, roughly twice that of India.
* In 1991, China produced 670 billion kilowatt hours of electricity, India 290 billion. In 2001, China'sproduction 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. Thecomparative figures for India were $1.4 billion in 1991, and $3.04 billion ten years later.
* FICCI has long had an interest in promoting knowledge-based industries. In a study it recently commissionedwith consulting firm KPMG, it found that cellular phone penetration in India is less than one percent of thepopulation, compared to over 11% in China.
* In 1991, India and China started off from about the same base, with less than one computer for everythousand individuals. By 2000 China's rate is three times India's, with more than 15 computers for everythousand persons, compared to 4.5 in India.
* In 1990, manufacturing in China was about 37% of the economy; today that relative weight has increased toabout 45%. China now produces 50 % of the world's cameras, 30 % of the air conditions and televisions, 25 % ofthe washing machines and 20 % of the refrigerators. In the last 12 years, manufacturing as a percentage of theIndian economy has decreased, falling to about 24% of the economy from 30%.
* China's trade in goods and services as a percentage of GDP grew for 35% in 1991 to 49% in 2000. During thesame 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 foreigninvestment going to developing countries. India's FDI figure was about $4 billion, less than 2% of that total.That gap would not close even if India made FDI accounting adjustments as some have recently suggested.
* In 1990, China's exports were $62 billion, which were three-and-a-half times greater than India's. TodayChina's annual exports are over $266 billion, and the comparative gap has widened to over five-and-a-halftimes 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.
These comparative trends obviously affect the investment decisions of private companies. GE's Chairman and CEOJeffery Immelt told the press here recently that, from his company's perspective, the healthcare markets inIndia and China were nearly the same size in 1995. The China market is now six times bigger in terms ofcompany revenue, fueled by China's fast growing domestic market. The preponderance of GE's foreign investmentin Asia is now going to China -- not to India.
As I mentioned earlier, I have had many conversations with thoughtful Indian business leaders and governmentofficials on the subject of China's economic development. But I sometimes encounter what in my view aredefensive responses and rationalizations. Two of them in particular come to mind.
The first goes like this: "India has made great economic progress in the past 10 years. The first wave ofeconomic reforms produced remarkable achievements, especially in the light of where we were in 1991. Foreigninvestors 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 ITindustry, India is in the front rank of global competition. But the problem with this argument is that it isentirely retrospective. Alas, foreign investors are not economic historians. They do not care a whit about howfar a country's economic policy has come. Instead, they make their investment decisions on the prospects ofthe present and likely future policy environment in a given country. For India, that present calculus on thepart of international investors is obviously not heartening. References to past Indian economic achievementswill not change that fact.
