Speeches and Remarks

"US-India Economic Relations" Remarks by Ambassador David C. Mulford

International Institute of Finance Program

Taj Palace and Towers Hotel, Mumbai
November 4, 2004

As prepared for delivery

U.S.-India relations are running at an all-time high. When President Bush and Prime Minister Singh met recently in New York, they went a step further by saying "The best is yet to come!" This is a remarkable assessment for a relationship, which a few short years ago, was plagued with national sensitivities and punitive sanctions. For decades India and the U.S. have recognized many shared values. Now for the first time, we are working together on the basis of not only shared values, but also shared interests.

There is widespread awareness today that important progress has been made in recent months in the new U.S.-India Strategic Partnership - the so-called NSSP. This is a key cornerstone for the future, but I have stressed since my arrival here in February that there is much more to our recent initiatives than the strategic element. I refer to the building of a comprehensive U.S.-India relationship unfolding into the 21st century and touching virtually every aspect of human endeavor between our two countries. The President's new Administration will assure the continued momentum and continuity of the U.S.-Indian relationship over these next four years.

Today I want to speak about the economic aspects of that comprehensive relationship, and in so doing, to make observations and suggestions helpful to its advance.

You are no doubt aware that despite having served for nearly a decade in the United States Government, and having acted over a long financial career as advisor to governments in various parts of the world, I am a strong advocate of private enterprise and free markets.

This combination often solves economic growth and development challenges far more effectively than governments. Governments set the rules - some of them at least - and they create both climates and climate change. Governments establish and enforce regulations that govern commerce and create a nation's interface with the world economy at large. But, governments are not the creators of wealth, the maker of markets, the wellspring of human energy and ingenuity. These are the productive forces of individuals, which in my view governments should encourage in their peoples and make a special effort to promote.

I address U.S.-India economic relationships on two levels. One is the lengthy list of irritants that we consistently work to resolve. These might be called "micro issues". There is nothing unusual about commercial irritants between friendly nations, although in India, there are perhaps more than the usual number, probably because of the way in which our relations have developed.

In any case, some of these issues have negative fallout for India's reputation and ability to attract trade and investment. Some are plainly unfair to the U.S., working to make for a playing field that is not level. Others, if resolved, would directly benefit the Indian economy and its citizens.

I will give several examples:


• Disputes in the power sector, such as Dabhol, and long-term instances of non-payment to U.S. power companies in Tamil Nadu are cases in point that, if unresolved, undermine India's ability to attract new foreign direct investment.
  
• McDermott Corporation, a U.S. company, is still awaiting payment in connection with a dispute dating back many years, which it has worked successfully through India's courts, all the way to the Supreme Court, which has judged in McDermott's favor. Yet the payment, which is due from the government, has not been made.
  
• The government's procurement policies in many instances favor India's public sector companies and discriminate against foreign corporations. Again, in tax policy various U.S. companies encounter barriers to trade in a variety of different industries, including soft drinks, imported wines and spirits, airline reservations and business process outsourcing.
  
• Finally, subsidies. India's fertilizer industry, for example, is subsidized to the tune of $2.8 billion annually. In the case of diammonium phosphate, India does not have a competitive advantage, and virtually none of the subsidies to domestic producers reaches the poor farmer in the field. U.S. companies could supply fertilizer to India's farmers at competitive prices, and the Indian government could redirect its current subsidies to the critical areas of health and education.
  

We will continue to work these problems in a friendly and constructive fashion in the hope that over time they are resolved, removing with them some of the disincentives in India to trade and investment with the U.S.

Let me now turn to the other part of the economic picture - call it the "macro" level of relations.

Herein lies the very nexus of U.S.-India relations in 2004. America formed its democracy and subsequently the American nation in the 100 years from the American Revolution to the Reconstruction, following America's Civil War. Today the U.S. economy is the envy of the world and democracy flourishes undimmed by a variety of adversities during America's development.

India today is also a flourishing democracy. It too is embracing change. Its leaders in both government and civil society are working to build a more productive, more open economy that will lift India's people and establish India as a world power.


We have much to learn from each other and great benefits to harvest in our growing collaboration. It is in this spirit and on this aspect of our relationship that I wish to concentrate your attention today.

The present government is clearly bent on implementing economic reforms. These of course must be politically possible to achieve, and they must enjoy sufficient consensus to survive.

We acknowledge these realities and seek to concentrate on what I would call strategic reforms that have major "fall out" throughout India's economy. These are not areas of dispute. Rather, these are challenges where the U.S. and India have a strong mutuality of interests and the U.S. can be a significant contributor to India's progress.

Perhaps the most prominent area is infrastructure. I have said many times before that India must put infrastructure development on a wartime footing.

I don't mean by that bringing in the Army. I mean that creating a world-class infrastructure must have the very highest national priority, bringing together federal and state authorities, and public and private players in a common national enterprise.

World-class infrastructure will be needed to provide the platform for faster, consistent growth and for India to become a major world economic power. Moreover, there will be lasting political support for those in power who provide infrastructure that India's rural population and urban dwellers can touch, feel and use to improve their lives.

Infrastructure challenges cannot wait, yet the public sector cannot now provide the necessary finances for India's infrastructure needs. India must therefore invigorate, as a matter of priority, private sources to finance long term project development, which inter alia means that federal and state regulations and attitudes that inhibit private investment in infrastructure must be changed.

Meanwhile chronic budget deficits at both the federal and state levels must be reduced. Capital will have to be freed from wasteful subsidies and India's financial markets will need further liberalization. Developing a truly long-term capital market must be a key objective for government, which through greater fiscal restraint and creative financial engineering needs to reduce its own crowding out effect in India's financial and banking systems.

India's insurance and pension industries hold out hope for mobilizing long-term capital. Lifting the ceiling on foreign direct investment in insurance would clearly help, as would expanding and liberalizing India's emerging pension industry. So too would reducing government's dominance in the banking industry, together with stronger encouragement and greater freedom for the growth of private domestic and foreign banks.

Let us turn to the next "macro" issue, intellectual property. India needs a world class IPR regime. The U.S. and India share a massive interest in and commitment to science and technology. India is proving it is a world-class player in these fields with enormous potential for further development. Its human talent resource base is widely recognized and respected today.

But, how is India to move up to the higher level of markets unless it takes fundamental steps to protect intellectual property? The challenge is especially visible today in India's pharmaceutical industry, where it can be a global player now for low value added generic drugs. Producing more innovative drugs and moving forward in the field of biotechnology, however, will require stronger patent protection and the enforcement mechanisms to back it up. The same applies in many other fields and industries critical to India's future development. With a world class IPR regime in place, the U.S. would contribute by becoming a major investor in India, a provider of capital, top quality science and technology, management expertise, and a creator of jobs.

A third critical "macro" area of reform is trade. International trade? Yes, and India is engaged, if somewhat cautiously, in the effort to achieve a more open, freer world trade system. That, however, is not India's most immediately pressing challenge. India urgently needs a Free Trade Agreement with itself.

The present system of cascading special customs duties and local taxes is a barrier to trade between states within India. Local taxes, restrictive regulations, and the remnants of the "license raj" hinder commerce within India itself and fragment its national market into regions.

The economic cost of these policies is passed on, translating into higher prices for ordinary consumers. Let me give an example: the basic customs duty on distilled spirits is 150%. But, state duties and other taxes raise this tax to over 500%. Also, 13 states restrict the sale of foreign spirits in their districts.

Collectively, these state taxes and regulation effectively close the distilled spirits market to foreign suppliers. They fragment the national market and encourage smuggling. The adoption of a nation-wide Value Added Tax and relegating the "license raj" finally to India's long and illustrious history is long overdue.

Finally, I want to revert to my opening comment about individuals. To ensure sustained growth and reduce poverty, India must empower the consumer.

Despite many economic reforms, and consistently impressive growth, tens of millions of Indians have been left behind. Their lives have been unaffected by the benefits of market-oriented reforms and globalization. As we saw in last spring's national election, these citizens demand to see the tangible benefits of reform in their every day lives.

Policies that promote national markets could help make these benefits a reality, especially if focused in agriculture and in retailing, where there would be significant beneficial effects in the form of lower prices for consumers, thereby raising living standards more quickly.

Today the government prohibits foreign investment in the retail industry and allows the preservation of internal barriers and countless middlemen that raise costs to the consumer.

International retail giants like Wal-Mart buy billions of dollars worth of goods in India and sell them to foreign consumers abroad through their own outlets. Current law prohibits these same companies from selling the same goods to consumers in India!

U.S. retailers have told me that after entering previously closed markets like China and Mexico, they passed along cost savings to the consumer of up to 30% on many goods. Their contribution to economic benefit was to hold down consumer prices and help raise living standards.

We have already seen this in the success of India's IT and knowledge-based industries. Foreign investment in retailing and related fields such as real estate development, law practice and accounting, together with the removal of internal barriers, would spur competition, create jobs and provide Indian consumers a wider variety of goods and services more readily available at lower prices.

I believe bold initiatives here would have a truly transforming effect on the economy, and generate political support from the population at large. Living standards would improve in ways the average citizen can feel and understand. Political credit would accrue to those in government with the vision to effect such change.

In conclusion, as India embarks on a second generation of economic reform, I encourage you as business and government leaders to be bold. The impressive results in the IT and telecomm sectors demonstrate the links between private and foreign investment, growth, and consumer benefit.

I hope that my observations and suggestions today illustrate the multitude of areas and opportunities for positive collaboration between the U.S. and India - both between our governments, and between our civil and commercial societies.