State of the U.S.-India Economic Relationship

Catherine A. Novelli
Under Secretary for Economic Growth, Energy, and the Environment 
CSIS conference on "Deepening the U.S.-India Commercial Partnership"
Washington, DC
April 15, 2015

Thank you for that kind introduction -- it’s an honor to speak among such distinguished company, and I’m excited to be here today. It’s clear from today’s topics and the panelists chosen to discuss them that a lot of thought went into planning this conference. So I’d like to thank Dr. Hamre and Rick Rossow and all the hardworking staff at CSIS, for putting together such a comprehensive agenda. And of course, thanks to the Ananta Aspen Centre and the Wadhwani Foundation for co-organizing this conference on deepening the U.S.-India Commercial Partnership.


This topic holds particular resonance for me, because I’ve spent much of my career focused on deepening commercial partnerships. While at USTR from the early 90s to mid 2000s, I worked on trade and investment policy between the United States and over 65 other countries throughout Europe, the former Soviet Union, the Middle East, and North Africa. During that time, many of those countries undertook significant economic reforms, tearing down barriers to trade, opening up their markets, and achieving their long-unrealized potential.


India has followed a similar path: over 20 years ago, its policymakers realized that their economic policies were shackling their nation’s potential for growth and prosperity. Since then, dramatic economic reforms have drastically lowered non-agricultural tariffs, removed many non-tariff barriers, and relaxed rules on foreign investment in several important sectors. As a result, the Indian economy has seen tremendous growth and U.S.-India trade has quintupled in the last 15 years, to about 100 billion dollars.


I would like to focus today on the future, and how the United States and India can strengthen both of our economies by seizing on the unrealized potential in our economic relationship. To really reach its full potential, India’s economy will have to create approximately 240 million new jobs in the next two decades -- that’s a million new jobs a month. But for India to achieve that jobs target, it will need GDP growth of 9 percent per year, every year, for 20 years, making it a 10 trillion dollar economy by 2035 -- up from about 2 trillion today. Those are very big numbers. Achieving 9 percent growth year after year is not easy, and the Indian government has its work cut out for it.


But what is exciting is the active, whole of government, approach that Prime Minister Modi has taken.


He is working hard to help India make significant leaps in education levels, healthcare outcomes, agricultural productivity, manufacturing output, retail markets, financial access, digital connectivity, physical infrastructure, electrification, and urbanization. Realizing these achievements will require new technologies, new perspectives, and new policies. Meeting this potential will mean addressing many structural and institutional barriers that have to be overcome.


The first steps in this 20 year journey are already underway. Since it came into power, Prime Minister Modi’s government has taken several steps to boost growth and increase U.S.-India trade and investment. Two weeks ago, the government announced its first foreign trade policy, which aims to nearly double India’s exports of goods and services to $900 billion by 2020. And the new budget released a couple months ago focuses on infrastructure investment and tax simplification. We’ve heard from our private sector that these are key areas for business. For one, the budget set a target of April 2016 for the government to introduce a harmonized goods and services tax, which could add as much as 2 percent to India’s GDP.


These reforms are a great first step, and will help India meet the needs and aspirations of its burgeoning population, set to be the world’s largest by 2025. We want to do what we can, working together, to help integrate India more into globalized goods, services, and investment markets. That’s the way to boost job growth in India and ensure already competitive Indian companies become even more competitive.


This is a strategy the United States has followed for years, and we believe that strengthening our bilateral trade and investment relationship can be an important part of India’s development. We are already one of India’s largest trading partners, and President Obama and Prime Minister Modi have committed to raising our bilateral trade another fivefold to 500 billion dollars.


To chart out how to do that, our two leaders recently met twice over just a four-month period, which is unprecedented. It is a concrete sign of how serious the United States is about India. This high-level engagement has led to some important successes for our economic ties:

·        We were able to break through a deadlock on the Trade Facilitation Agreement at the WTO;

·        Through our Trade Policy Forum, we agreed on comprehensive work plans in services, agriculture, intellectual property, and manufacturing;

·        We resumed discussions to assess the possibility for a high-standard Bilateral Investment Treaty; 

·        We moved forward on issues that were impeding our civil-nuclear cooperation;

·        And we elevated our partnership to a Strategic and Commercial Dialogue.

These accomplishments are real, and they are important, but we have much left to do, if we want to seize the unrealized potential of our relationship. This potential exists in many sectors, but foreign investment and intellectual property protection are two key areas essential to India’s international competitiveness in a world increasingly dominated by a complex global value chain.


We believe U.S. investment into India could double if India continues to liberalize its investment regime. More U.S. companies could bring their comparative advantages in technology, expertise, and capital to India, to help India grow and create jobs. But companies involved in global manufacturing need transparency, predictability, and legal certainty.


I know you’ve all heard the sobering figures on doing business in India. Right now, India ranks near the bottom of the World Bank’s Ease of Doing Business index. Prime Minister Modi has expressed concerns about this issue as well.


In the enforcement of contracts, it ranks 186 out of 189.


It takes an average of nearly four years to enforce a contract in India, compared with only eight months in South Korea. And the cost of enforcement in India is almost four times higher. All of this serves as a disincentive to investment – particularly in infrastructure where the long term nature and high capital cost makes predictability and ability to enforce contracts critical. In the high tech world where I come from, four years can be an eon. Goods and services are increasingly made globally, through value chains with many moving and interlocking components.


Let me give you a couple of examples of policies that perhaps once made sense, but now make India less attractive to global manufacturers and service providers. We want to work together with India on ways to crack open these markets. For example, when I traveled to India this January, we discussed the country’s massive energy needs. Over 300 million people are still without reliable electricity in India. That is almost the same as the population of the United States.


The Modi government recently announced an ambitious target of 175 gigawatts of renewable energy by 2022. U.S. renewable energy companies have significant expertise they can bring in partnership with Indian companies. Yet there are still some obstacles in the way. Solar energy investment is conditioned on using local Indian made content raising the potential cost of solar energy and disincentivizing investment. Investing in India’s insurance industry, which is critical to funding infrastructure development, is now conditioned on having Indian management and control of the joint venture.


To reach its 10 trillion dollar GDP goal, India will need to expand financial access to 90 percent of its population by 2035 -- up from just 35 percent in 2014. But foreign banks are still restricted in their ownership and operation within the Indian market. Opening the sector more could go a long way to meeting India’s GDP growth and financial inclusion goals. India has world class software engineers. And the United States has expertise in shipping, warehousing, and logistics. Yet FDI in business-to-consumer e-commerce is restricted. These restrictions keep the United States and India from fully realizing our comparative advantages


Restrictive investment policies often arise from concerns that domestic companies are unable to compete with foreign ones. Yet Indian companies are world class and strong, and do not need government protection from outside competition.


Indian-owned companies have invested over $11 billion in the U.S. and employ over 44,000 people here. These Indian companies have proven their ability to thrive in the United States, one of the most competitive markets in the world. One tool we have to help facilitate greater U.S. investment into India is a high standard bilateral investment treaty. A high standard BIT would create transparent rules for U.S. investment, ensure that future rules will not discriminate against investors, and give investors access to neutral international fora to resolve disputes. It will also help open up more sectors to investment. In addition to needing room to configure their investments, domestic and foreign investors also need strong intellectual property rights to thrive and build their operations in India. Recent press articles have mentioned that innovative Indian companies are moving their IP to other countries, like the United States and Singapore. This includes well-known Indian startups like Flipkart, Myntra, and Zipdial. All moved their IP outside of India.


There are two main reasons for this trend: first, if a buyer transfers IP out of India post-acquisition, it is subject to a high tax rate on the value of the IP, which for a tech company is often a majority of its overall value. But the other, more fundamental reason is that investors are concerned about the strength of Indian laws and uniformity of its jurisprudence on copyrights, trademarks, and patent infringement. And for companies looking to invest in research and development -- in the very innovation that is so critical for a developing economy -- insufficient IP laws and lax enforcement are a major impediment.


U.S. companies are among the most advanced and innovative in the world, and we want them to lead the pack in doing business with India – partnering with Indian companies to bring new technologies and services to a middle class that will be the world’s largest by 2030. Improved intellectual property rights would not only help keep more of India’s homegrown innovation where it belongs -- in India -- it would also help attract more innovation from the United States.


We know the Indian government is working on these issues, and understands them well. The U.S. and India are also discussing these issues and trying to find mutually agreeable paths forward in our new High Level Working Group on Intellectual Property.


To conclude, I want to underscore how committed the United States is to India’s continued, and accelerated, economic growth and prosperity. We welcome India’s rise. It is good for the United States, and good for India.


The United States and India each have strong comparative advantages that become stronger when we work together. The United States and India have shared values and a shared commitment to democracy. Together, we are partners in upholding an international, rules-based order that ensures global peace, security, and prosperity. We want to seize this moment and bring to fruition the unrealized potential that still exists between our economies, for the betterment of the lives of both our citizens. Again, thank you for the honor of inviting me to speak here today, and I wish you a very productive conference.