Speech by the European Commissioner for External Relations, Mr. Christopher Patten

Harnessing globalisation :  the EU-India business relationship

Let me begin by thanking you for inviting me to open the fourth of what have become increasingly high-profile and successful EU-India Business Summits.

The first three Summits have progressively deepened the vital dialogue between the business communities and political leaders of the EU and India. This dialogue has led to an increasingly strong and important partnership, with concrete results such as the Joint Initiative for Enhancing Trade and Investment, which we set in motion in New Delhi two years ago.

I expect that this fourth Business Summit will be every bit as successful as those that have come before it.  The CII, FICCI, Confindustria and UNICE must be congratulated on the programme that they have put together for us.

In thinking about the business and trading relationship between India and Europe, I’m struck by the extent to which we face a shared challenge. It’s challenge to which out response has of necessity to be a joint one.  A challenge which by its nature strips away the pretence that there can be national, and nationalistic, solutions to economic problems. I refer, to course, to the challenge of globalisation. An unlovely word, but an inescapable concept.

Let me start by putting the discussions that we will have today in context. It is undeniable that the EU economy has been going through a difficult patch. We have had several months of slow economic growth, and some of our economies are having to take painful measures to correct structural problems. But we only have to look at current indicators – the consumer confidence index, business climate indicator, or purchasing managers index – to see that things are picking up. We are expecting a growth rate of some 2% in 2004 and higher the following year. Our business people can once again look to new opportunities for expansion.

The Indian economy has been following a similar course. All the figures indicate that the economy is pulling away from its period of slow growth. After a subdued performance of 4.3% growth in 2002/03, the forecast is 7% plus in the coming year. India’s middle class has expanded by 17% in the last 3 years, and is projected to grow by 24% in the next 4 year for one do not believe that even those impressive statistics convey India’s true potential.

An enhanced business relationship between India and the EU will allow us jointly to build on that potential, responding to the economic and political challenges of globalisation. The EU and India have enjoyed a good and important business partnership for many years. This has grown out of a deep-rooted cultural relationship, built on the bedrock of shared values. We have the same views on terrorism, trans-national crime, the drugs trade, the environment, democracy, fundamental rights and many other issues. And we both recognize the important role the UN and multilateral institutions have to play in addressing them.  We need to build on those common interests and those common values, harnessing our relationship to strengthen each of us.

Let’s explore these opportunities and incentives by looking first at trade. Total trade with India has nearly trebled from $9.9 billion to $27 billion since India’s structural reform process began in 1991. Between 2001 and 2002, it grew by over 7%. Europe is the largest export market for Indian products. It is also the largest source of imports for India. There is huge potential here. We must build on it.

The European market is crucial to Indian exporters not only because of its size, but because Indian exporters are more successful in Europe than in any other market.  This is because the EU is one of the most open export markets to Indian goods in the world.  Out of a total of some 10,300 tariff lines, Indian exports are subject to either zero or reduced tariffs on 9,100 lines. Some ‘fortress Europe’.

European exporters to India, however, do not find trade as easy. India retains the reputation of a hard country to do business with.

This is largely down to tariffs. While Indian import tariffs have substantially decreased as result of the last decade’s economic reform programme, they are still high by international standards. India imposes a number of non-tariff barriers, such as quantitative restrictions, import licensing, mandatory testing and certification for a large number of products, as well as complicated and lengthy customs procedures. Lower tariffs would not only benefit European exporters and Indian importers. They would benefit Indian industry as a whole, by providing cheaper inputs, and most of all Indian consumers, who would enjoy more competitive prices and greater consumer choice.

Beyond these immediate concerns, we should look at perhaps less direct and obvious measures, which would serve to increase India’s trade opportunities with the EU. Let us take the example of Maritime Transport. At the moment, it is quicker and cheaper for an EU company to transport goods from Bangkok or Shanghai than it is from Mumbai or Chennai.  An agreement with the EU could help India to modernise its maritime transport industry. The gains to be had from such an agreement, in reduced shipping costs and time, and therefore increased trade, would overwhelmingly offset any short-term localised losses. Now is the time to make this agreement happen.

Let us now turn to investment.  Foreign Direct Investment opens the path to new technologies, production and management methods. Above all it is a way of finding investment capital. The EU is a major source of FDI to India. And when we ask EU companies present in India about their investments, their reactions are overwhelmingly positive. On the whole, these companies are pleased with the results of their investment and their profitability. There are clearly benefits on both sides.

Yet India retains the reputation of a hard country in which to do business. The problem lies in actually ‘getting in ‘. Excessive red-tape, poor infrastructure and rigid labour laws are the constraints most commonly cited by EU business. Of course, these constraints affect not just EU companies. They hamper Indian business too! Nobody in this audience will need to be convinced that an economy such as that of India, which is growing strongly and has the potential to grow even more, urgently needs investment. Let us therefore build on the opportunities and the incentives to improve investment conditions thereby encouraging further investment.

This is not to say that there has been no progress in improving our business relations, and in harnessing the benefits of doing business together.  In the latest round of the Joint Initiative for Enhancing Trade and Investment, we took stock of the progress made on the recommendations put forward by the Indian and EU business sectors. Later today my Deputy Director General, Herve jouanjean, will present to you the results of this exercise. Other analyses produced in India demonstrate similar results.

We must not forget that India has introduced important reforms over the last decade – all of which work towards improved business conditions, which should encourage trade and attract investment.  It is hard perhaps to remember that in 1991, only 4% of tariff rates were below 60% and there were exchange controls on current accounts. Successive Governments have cut government expenditure, privatised state-owned companies, increased labour market flexibility, started to reform the tax system, liberalised the power and energy sector and deregulated telecommunications. India is short of neither economic know-how nor the will to act.

Good as all this is, this is not enough. The reform process must continue and accelerate. Reforms in the areas I have just mentioned must be reinforced. And new reforms must be introduced. A reform of the tax system is needed, for example, to provide for a more even distribution of the burden of essential public spending.  Too much of the burden is currently borne by customs and excise. The chronic discrepancy between revenue and expenditure crowds out private sector investment and drives up interest rates. This discourages FDI.

I’m not suggesting that ‘another Asian miracle’ would be needed in order to achieve these reforms. I’ve often said in my past ‘Asian life’ that I did not believe in economic miracles. My conviction has been reinforced by the Asian crisis. I believe that a steady pace of reforms, guided by the principles of democracy and good governance, is the best recipe for success. This is what India is trying hard to do.

The challenge is great. I would not claim that economic reform is easy in a democracy. I speak from personal experience. There are always voices, often influential ones, saying that what you are doing is wrong, that it is hurting the country, or that it simply won’t work. And there are painful trade-offs to make along the way. But reforming a country is a challenge which must be endlessly pursued.

We must   also work together to make the Doha Development Round of WTO negotiations a success. Cancun showed us where many of the problems lie. Globalisation shows us that we must find solutions to them.

These are exciting times in India, and in the European Union’s relations with India. Our determination to boost trade and investment is stronger than ever before. I can see it from the large attendance here and from the ambitious agenda of this fourth Business Summit.

I therefore wish you all the best in your important task of improving the conditions needed to boost our trade and to encourage investment from EU business. And I look forward to seeing our business relationship grow, from strength to strength.