Luncheon Meeting With H. E. Mr Robert D Blackwill, US Ambassador to India on "Doing Business With India"
October 29, 2002, New Delhi

Special Address by H E Mr Robert D. Blackwill, US Ambassador to India

Introduction

Dr. Amit Mitra, Mr. Y.K. Modi, honored guests, ladies and gentlemen: I thank FICCI for arranging this event. 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 - that is, the prospects 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 old bureaucrats and there are bold bureaucrats, but there are no old, bold bureaucrats." Let's now test that aphorism.

This audience in particular understands that, 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.

Any perusal of the Internet, as I do early every morning for a couple of hours regardless of where I am, will demonstrate the truth of this proposition. 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?

The Importance of US-India Economic Ties

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? After all, there are over 190 nations in 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 diplomatic and security approach to the current openings and dangers within the international system, an approach based on America's democratic values. If you have not read this deeply authoritative document, I strongly commend it to 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 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. The American historian Barbara Tuchman described the concept in a different context 30 years ago: "Friendship of a kind that cannot easily be reversed tomorrow must have its roots in common interests and shared beliefs, and even between nations, in some personal feeling." We are living Tuchman's wise words every day in the US-India relationship - interests, beliefs, and feelings. This transformation of our bilateral ties can be seen in the unprecedented stream of Washington policymakers who continue to visit New Delhi, nearly 100 in the past year. These officials engage intensively with their Indian counterparts in US-India diplomatic collaboration, counter-terrorism efforts, defense and military-to-military cooperation, intelligence exchange, law enforcement, development assistance, joint scientific and health projects including on HIV/AIDS, and the global environment.

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. But, US-India economic 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 on strategy at Harvard University, national economic strength is a prerequisite for sustained diplomatic influence and military muscle. The close US-India collaboration that I have just enumerated would be made more wide 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 for India's economic performance in the years ahead.

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. Rather, I speak out on this subject because US national interests will be significantly affected by India's economic performance in the years ahead. 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.

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 made several trips away from New Delhi, to southern India and to Mumbai, where I met with business leaders and listened to their views on commercial conditions. In these sessions, I acquired a better understanding of how some 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's insurance industry is moving because it has opened up to foreign investment. Three years ago there was no foreign investment in this critical service sector. Now, at least five US insurance companies have entered the market in joint ventures with their Indian partners. This is called good news where I come from. It deepens capital markets; it provides a new pool of higher-paying jobs; it is another step in developing a service economy. Most importantly, it gives the Indian consumer more choices.

Another player in financial services is American Express. That company is doing its customer servicing from India, and has also set up an analytical group for different markets around the world. It has 3,000 employees in India. Chairman and CEO Kenneth Chenault was in New Delhi recently to inaugurate Amex's new global services center in Gurgaon.

In the manufacturing sector, American positive experiences in India are rare. One exception is Ford Motor Company. I toured Ford's plant in Chennai earlier this month. It is producing 20,000 units a year and has a work force of 900 -- many hired without previous employment experience. Women hold 15% of the assembly line jobs.

A US manufacturer I called on in Chennai is a US automotive systems company, Visteon, which operates three plants in India. One of them makes automobile starters and alternators for the European market. With $43 million 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 example of a winning foreign investment here, but I single out General Electric because it recognized India's IT and engineering 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 whom 1,000 are scientists, mostly PhDs. GE alone accounts for 8% of India's software exports. All of GE's medical-product research is done in India. Most of the company's employees support other GE businesses worldwide. But few of GE's activities here are geared to the domestic Indian market, and that is a telling and disturbing fact.

Partly because of this weakness of the Indian domestic market, total US-India trade last year was only $15 billion. By comparison, the threshold to be one of America's top ten trading partners is $33 billion. Even higher is the exclusive club of America's top four trading partners -- Canada, Mexico, Japan, and China. The threshold for admission there is $120 billion in two-way trade. We have a long way to go before India moves up from 25th place on the US bilateral trade list.

Why more American Investment is not coming to India

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. As I have said before, within the US business community there is an erosion of confidence about whether the sanctity of contracts will be honored in India. There is also no question that tensions between India and Pakistan and communal violence further dampen investors' urge to come into the Indian market. Finally, as Indira Gandhi observed in 1975, "In a traditional society like India's, scandals are unavoidable. This is, in fact, the first consequence of the most ancient of social diseases, 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 to India and investment flows as being "flat as a chapati." Sadly, nothing much has changed. Our commercial ties remain far below their full potential.

Unfortunately, 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."

India and China

Indian entrepreneurs and officials often raise with me comparisons between the respective economic performances of India and China. Indeed, this happened last night at a dinner at Roosevelt House. 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.

Let us then briefly examine the respective economies of India and China. The following statistics do not say everything about the Indian economy. They do not address India's comparatively high GDP growth rate over the last decade, its impressive foreign reserves, its low inflation, and its high savings rate. 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.
• FICCI has long had an interest in promoting knowledge-based industries. In a study it recently commissioned with consulting firm KPMG, it 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% 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 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. 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. 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.

These comparative trends obviously affect the investment decisions of private companies. GE's Chairman and CEO Jeffery Immelt told the press here recently that, from his company's perspective, the healthcare markets in India and China were nearly the same size in 1995. The China market is now six times bigger in terms of company revenue, fueled by China's fast growing domestic market. The preponderance of GE's foreign investment in Asia is now going to China -- not to India.

As I mentioned earlier, 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. 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 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. For India, that present calculus on the part of international investors is obviously not heartening. References to past Indian economic achievements will not change that fact.

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.

This seems wrong to me. India is capable of high growth rates without compromising its democratic governance. The values of democracy and free markets are mutually reinforcing. Both are based on freedom of choice, the rule of law, and transparency.

The Prime Minister and his economic advisors have already outlined policies that incorporate these principles. What is required is consistent implementation.

As the American strategist Michael Mandelbaum observes in his new book, The Ideas That Conquered the World, three notions dominate the international system at the dawn of the twenty-first century: peace as the preferred basis for relations between and among different countries, democracy as the optimal way to organize political life, and free markets as the indispensable vehicle for the creation of wealth. While not practiced everywhere, Mandelbaum argues that these concepts have --for the first time in history --no serious rivals.

With this in mind, I believe that India's great democracy is an asset and not a liability over the long term as this nation seeks to bring more affluence and quality of life to its people. Prime Minister Vajpayee has the same view. On October 17, he told the India-ASEAN Business Summit that "Our reform process continues to target high growth with balanced equitable development. Our ambitious GDP growth target of eight percent exhorts us to stay on this path. There can be no looking back."

Conclusion

I began my presentation with the observation that US-India ties have been dramatically transformed since the Bush Administration came into office, with the exception of lagging bilateral performance on trade and investment. I repeat that this is currently the missing piece in our bilateral relationship. Unleashing India's economic dynamism would generate a burst of new and expanded commercial exchange between our two countries. It would enhance our mutual bonds across the full panoply of state-to-state and people-to-people interaction. Comprehensive Indian economic reform would bring economic opportunities for both India and the United States; and the more reform, the more opportunity.

India's large and talented labor pool makes it possible for it to become yet another "Asian miracle." Indeed, it already has shown its mettle through the information technology and software accomplishments. As President Bush remarked to the Prime Minister in New York on Sept 12, human resources and intellectual capital are India's greatest asset. This advantage will have a multiplier effect on the economy when second-generation policy reforms present businesses and consumers with the right incentives. There is so much pent-up dynamism at the micro level of India's economy that Indian entrepreneurs and workers will amplify the benefits of these reforms as they are introduced.

Looking over the horizon, an economically resurgent India, with one billion producers and consumers, would certainly be one of the "great democratic powers of the 21st century."

Let me close with this simile. 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. As I said at the outset, 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.

Thank you for your attention.