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Remarks by Franklin L. Lavin

Under Secretary of Commerce for International Trade

U.S.-India Business Council
U.S. Chamber of Commerce, Washington D.C.
November 20, 2006

As Prepared

Thank you for having me here today. This is my third meeting with the USIBC over the past year, and I always value the open exchanges here. I particularly appreciate the invitation at this time, as I prepare to lead a business development mission to India next week.

I would like to take a few minutes to discuss the U.S.–India economic relationship and India’s opportunities for a more prosperous future. This fits in directly with the goals of the mission.

I. Mission

Our economic policy and trade promotion activities go hand in hand. When President Bush and Prime Minister Singh met in March, the Department of Commerce was given a mandate: improve the policy framework and promote business. The primary policy tool for doing this is called the Commercial Dialogue, chaired by Secretary Pillai on the Indian side, and by me on the U.S. side.

This mission is in direct response to that mandate. I am pleased to report this business mission will be the largest ever led by the U.S. government. We currently have 238 business leaders representing 186 companies participating on the trip. With this in mind, let me congratulate the Government of India for their support and economic leadership. The U.S. Department of Commerce has worked hard to build this mission, but if it were not for India’s strong economy and increased openness, we would not have seen this historic level of response. With this mission we are bringing the best of American business to meet with the best of Indian business.

The participants in the mission come from every sector and corner of America. Small entrepreneurs alongside some of America’s leading companies are participating, from sectors including infotech, healthcare, industrial machinery, telecoms, chemicals and more. It’s a delegation as diverse as the U.S. economy, but what the members have in common is an interest in the Indian market – a multifaceted market full of potential, but with its share of challenges as well.

The statistics almost shout as to the potential. For some 15 years India has enjoyed high rates of economic growth. For the past three years, India has been one of the top performing economies in the world with annual growth rates of about 8 percent. Here’s another way of looking at this growth: The growth in India’s economy last year ($719.8 bn @ 8.4 percent= $60.4bn) is the equivalent to an entire Indian economy of 35 years ago ($57.6bn 1970@ 1995 current USD-Source World Bank).

Or look at trade. India’s trade with the world is booming and has more than doubled in the past three years. Trade with the U.S. has grown at more than 20 percent this year, with American exports up by nearly 25 percent. Trade with the United States this year (about $32 bn) is more than India’s trade with the entire world in 1987 ($28.1bn, source: CIA World Factbook).

This economic transformation is good news for the average Indian citizen. In Gurcharan Das’s recent article in Foreign Affairs, he cites per capita income gains of more than 250 percent since 1980 (at purchasing power parity).

II. Good News and Good Progress

Much of this success is due to the policies of the Indian government. We also should credit Indian businesses and groups such as USIBC, which play a vital role as a voice for reform. Thank you for your hard work.

Let me give a few examples of the reforms that have been made:

1) In civil aviation, we signed an open skies agreement that has increased the number of flights and passengers traveling between the U.S. and India by more than 60 percent in a little more than a year.

2) India has begun to make the right moves by lowering tariffs on industrial goods from 15 percent on average to 12 ½ percent this year.

3) In 2005 India extended patent protection to pharmaceuticals, agricultural chemicals and various food products.

4) And in the past two years, India relaxed investment caps in areas like telecommunications, single brand retail and civil aviation.

III. Challenges

These reforms suggest additional steps that could be taken to help India’s economy continue to grow and benefit all Indians. Let me give you three examples.

  1. First, lifting ownership caps and opening the Indian economy to international competition will bring greater efficiencies to the Indian economy. For instance:
    • The Indian government recently began to open India’s retail sector by allowing foreign majority ownership in single brand retail outlets. Significantly greater benefits will come through allowing foreign multi-brand retailers to compete for Indian consumers. This will increase efficiencies across the entire supply chain. For example, more than 30 percent of India’s agricultural output spoils before it gets to market. With improved supply chains and more efficient retailing, this waste will be significantly reduced.
    • Similarly, eliminating foreign equity caps in the financial services, banking and insurance sectors will allow investment to flow into the areas where it is needed the most. Right now investment caps are very low. In insurance, it is 26 percent, and foreign companies are prohibited from participating in the pensions sector. More open markets will lower borrowing and premium costs, increase the volume and effectiveness of capital allocation, and enhance the breadth of product offerings Indian consumers deserve.

      As of 2005, India had received $45 billion in foreign direct investment, with $8 billion of that from the United States. Compare that to tiny Singapore, which as of 2005 received more than $186 billion in FDI, with $48 billion coming from the United States.
  2. Second, India’s tariffs are still high compared with the rest of the world, and exceedingly high in some areas. India’s tariffs average more than 20 percent and in some cases with cascading tariffs are more than 100 percent. Although the tariff on industrial goods has been lowered from 15 percent to 12.5 percent, this is still higher than the Indian government’s stated goal of 10 percent. And even at that point, India’s tariffs will still be 250 percent higher than the 4 percent average in the U.S.
  3. Third, the creation and enforcement of laws that protect the rights of patent and copyright holderswill encourage Indian entrepreneurship and creativity by protecting innovations and brands. Robust intellectual property rights protection will encourage the investment of foreign technology into India’s markets, and give India an edge in technology rich environments such as healthcare, energy and aerospace over countries that don’t meet international standards.

    I have spoken of some positive statistics earlier, now let me give you some more concerning statistics. It gives me no joy to report that in the World Bank’s Ease of Doing Business study India ranks right at the bottom-173 of 175 countries in the area of enforcing contracts. Right now an estimated 74 percent of software in use in India is pirated, and India is one of the world’s leading manufacturers of counterfeit pharmaceuticals. Even the entertainment industry in India has suffered as the result of the inability to adequately protect its movies and music. My impression is that Indians are an endlessly innovative people, and when they invest in creative pursuits they deserve to benefit from their hard work.

There are other areas where we can work together to improve the U.S.-India economic relationship including:

  • Allowing more U.S. investment in broadcasting and telecoms;
  • Ensuring common sense postal reform to allow continued competition from express delivery companies, like UPS and FedEx;
  • Creating and enforcing clear, consistent and transparent laws and regulations;
  • Eliminating non-tariff barriers to trade in areas such as medical devices.

IV. Conclusion

The question in front of us is this: we have seen reform in India and India is reforming today, however is India on a long-term path of reform, or are we simply looking at “the Indian moment?” Will these reforms continue, or will India pull back? The Indian people and their government will answer this question.

This business mission, and in a larger sense, the Commercial Dialogue, are designed to fit into this process. The United States supports India’s reform efforts, and on a business basis we want to see both of our economies continue to expand and improve. What I would like to see is for every Indian company to have access to the American market as possible, and for every American company to have as much access as possible to Indian consumers.

I leave on this mission with a sense of optimism. I know the companies that will be joining me are serious about doing business in India. Indians tell me regularly they want to do business with Americans and are just waiting for the right opportunity. To them I say: your wait is over. Your opportunity is today. We are prepared to work with you, and we are ready to be your partner in a world that is getting smaller and is within reach right now.

Thank you. I’ll now be happy to take your questions.