WASHINGTON, DC – I would like to thank the Carnegie Endowment for International Peace for hosting me today. Your upcoming launch of “Carnegie India” in New Delhi reflects another important step in what I see as a deepening of relationships between Indian and American opinion leaders, our business communities, and our respective official sectors. The ever-increasing interest and engagement between India and the United States, and the stakes that both sides have in facilitating that relationship, is one of the main themes that I will cover in my remarks today.
Next week Secretary Lew will host the 6th annual U.S.-India Economic and Financial Partnership (EFP). The EFP has served as a framework for collaboration for two Treasury Secretaries with three Indian finance ministers in two different governments. This will be the last EFP of the Obama Administration, and I feel confident that we are passing on to the next administration a strong institutional framework for engagement. I am convinced that our next Secretary will continue to build on our progress as the U.S. and Indian economies become ever more entwined.
In this context, I would like to focus my comments today on India’s emergence as a global leader, the importance of bilateral interaction between India and the United States, Treasury’s engagement with India, and how we are working together to achieve stronger growth and prosperity not only in our own countries but in the global economy as well.
The U.S.-India Economic & Financial Partnership
To begin, I think it would be useful to take a step back and describe the EFP. It approaches Treasury’s long-standing engagement with China’s Ministry of Finance in terms of the duration of our commitment, the seniority with which we engage, and the breadth as well as depth of our work together. Each of our ministerial meetings has featured participation by senior officials of our central banks and other key policymaking agencies. At our upcoming meeting, our Indian interlocutors will include Finance Minister Jaitley, Reserve Bank of India Governor Rajan, and Chief Economic Advisor Subramanian. To put it bluntly, the EFP is a big deal for both sides.
The engagement of the U.S. Treasury with India has a long history. Over the last twenty years, several Treasury Secretaries – under both Republican and Democratic administrations – have traveled to India. What distinguishes Treasury’s engagement under the Obama Administration is our recognition that India is truly a key economic partner for the United States.
India, every day, becomes a more important contributor to the global economy. But we do not see India solely as a large and growing market for U.S. firms. We also recognize that our two countries have much in common. When we look at India, we see a familiar spirit of entrepreneurship, and we see an economic structure – including a federal system and a large domestic market – that mirrors our own. These shared experiences and values, along with interconnected markets, are reflected in our mutual commitment to working toward growth, stability, and broad-based prosperity.
Even so, our economic relationship presents a robust set of issues to navigate. To be sure, India’s rise has at times generated frictions. We don’t always agree on key issues regarding the international economic agenda or our bilateral relationship. And it has not always been easy for U.S. firms to export to India, or to participate in India’s vast market on equal footing with Indian competitors.
What the EFP does is help manage a robust and maturing relationship. It brings together policymakers from our two countries to discuss macroeconomic, financial, and related structural policies in a way that enables us to clarify where we agree, where we may disagree, and how we can work together to resolve our differences. This is a win-win partnership.
Since the inaugural EFP in 2010, which I attended as an official from the Federal Reserve, we have discussed challenges facing both of our economies and the global economy at large. We have strengthened cooperation to combat money laundering and terrorist financing. And our financial regulatory agencies have convened to discuss issues pertinent to our financial sectors, including the reforms we are undertaking to enhance their efficiency and resilience. We have discussed measures to deepen Indian capital markets as a means for mobilizing financing to key sectors of the economy. The EFP has facilitated discussions between our tax authorities. The outcomes from these discussions have had a positive impact on our firms, and on India’s attractiveness as an investment destination. In sum, the EFP has become a robust, wide-ranging forum for managing the economic and financial issues that arise in the U.S.-India relationship.
India’s Policies That Have Supported Growth
Heading into this year’s EFP, the good news is that the Indian economy is one of the few bright spots among emerging markets, with growth this year likely to continue at around 7 percent. Strong consumer demand and rising public investment are driving growth, and private investment is starting to recover. I understand that Finance Minister Jaitley will be addressing an audience here at Carnegie next week. I don’t think I will be stealing his thunder, however, if I touch on a few of the positive developments in the Indian economy.
First, through the decisive actions of Prime Minister Modi’s government and the Reserve Bank of India, India has strengthened its macroeconomic fundamentals. The Modi government took office facing twin deficits and high inflation, in an environment where investors were focused on the vulnerabilities that might arise in emerging markets in the event of a shift in the stance of monetary policy in advanced economies. Indian policymakers have moved aggressively to reduce inflation, improve external stability, and put India on a course of fiscal consolidation. Low oil prices have undoubtedly been supportive of growth, but policy improvements have helped strengthen investor confidence in India’s macroeconomic stability.
Second, the Modi government’s sustained focus on improved governance and the private sector as an engine of growth is an important innovation in the trajectory of policy. Prime Minister Modi has underscored his determination to make India an easier place to do business, and we are encouraged by the government’s focus on creating conditions for entrepreneurs to grow their businesses and create employment. There is a well worn cliché that “India grows at night” – that is, when the government is closed. One cannot expect to see fundamental changes immediately in a country as complex as India, but the Modi government deserves credit for changing the tone at the top.
Third, we are impressed with the decision of the federal government to provide Indian states with greater authority to shape their economic futures. India’s more dynamic states – some of which are larger than major emerging market economies – now have greater scope to independently implement policies that improve business conditions, attract investment, and create jobs.
Fourth and finally, while it is not a new priority, the Modi government has identified infrastructure as a prime objective for growth. The budget has included greater financing for infrastructure over the past two years, and the government has cleared stalled projects and funded new initiatives in roads, railways, and other transport. Infrastructure spending should also help create opportunities and incentives for increased private investment.
Leveraging the EFP to Further Benefit India’s Economy
Looking toward this year’s EFP discussions, we will consult on India’s successes, but we will also touch on areas where its policies could be strengthened. We will encourage India to continue to open up and liberalize its economy. Such action will allow India to increasingly serve as an engine of global growth, as well as provide opportunities for Indian and American workers, firms, and consumers.
A consistent theme of Treasury’s engagement has been that private capital is essential for the development of India’s infrastructure and manufacturing sectors. As anyone who has done business in India knows well, significant impediments remain – including onerous paper work, a multitude of required approvals, restrictions on the types of investments allowed, currency conversion limitations, and differentiated treatment across investor classes. Investors want to come to India and deploy more capital, but the conditions to wholly support this interest are not yet in place. Even where the vision of India’s policymakers is clear, the complexities associated with implementation are sometimes significant.
On this front, we will continue to discuss with our Indian counterparts the need to move more forcefully toward addressing capital account and financial market restrictions. In particular, India can provide improved opportunities for markets to intermediate saving, both foreign and domestic, into productive investment. This is important as India will need to increasingly look toward private sources to fund its population’s growing insurance and pension needs.
Central to any discussion of financial market development is the government bond market, access to which remains limited for foreign participants. We understand, given their recent experiences with strong inflows and outflows, Indian policymakers’ concerns regarding volatility. However, further liberalization and consistent application of policies will be necessary to provide the liquidity, hedging options, and exit opportunities that support market efficiency and increased foreign investment. The bedrock of domestic capital markets is the development of a deep and liquid government bond market, including appropriate opportunities for foreign participation.
We launched the U.S.-India Investment Initiative as a sub-dialogue in the EFP in 2015 in order to identify specific policies, regulatory reforms, and technical collaboration aimed at mobilizing capital from both domestic and foreign investors to build infrastructure and create jobs. The Initiative includes a dialogue between government officials and the private sector in order for policymakers to hear directly investor experiences and concrete recommendations for strengthening India’s capital markets. It also includes government-to-government technical cooperation. For example, the U.S. Treasury and India’s Ministry of Finance recently concluded a Terms of Reference to collaborate on India’s government debt management program.
What we know is that a robust government bond market provides the foundation for deep and liquid corporate and municipal bond markets. We also know that India needs a dynamic corporate bond market given the challenges facing the banking system.
India’s banks struggle with a range of problems, including weak profitability, high costs, and accumulating non-performing loans. As a consequence, lending capacity in the banking sector remains weak, which limits economic growth and impedes the transmission of monetary policy. The underlying challenges include legacy policies that have forced Indian banks to lend to enterprises in specific sectors, as well as the continued dominance of the state-owned banks.
Some positive steps have been taken. For example, the government is seeking to pass comprehensive bankruptcy legislation this year, which will help address the asset stress in the banking sector, support corporates deleveraging, and develop Indian capital markets. We are also encouraged by the development of proposals for a more robust bank resolution framework.
However, broader banking sector reforms, whether through privatization, consolidation, governance improvements, removal of priority sector lending requirements, or resolution of non-performing loans, are also needed to help kick-start credit expansion. A vibrant banking system that supports increased investment and financial inclusion, and, in turn, increased employment, benefits all parts of the Indian economy.
Turning to macroeconomic policies, while India’s size and diversity are part of its strength, they also can create challenges, both economic and environmental. This is an issue that many vibrant democracies must confront. As a prominent Indian author has noted, “India lives simultaneously across 400 years.” For example, the dichotomy in living standards across groups and states is profound, which has prompted India to implement and sustain an array of subsidies and social programs. Notably, India is slated to spend approximately $40 billion this year on subsidies of all kinds, nearly as much as it does on infrastructure.
Through the EFP, we have discussed the Indian government’s efforts to better target and reduce subsidies, an area in which Indian policymakers have achieved some notable progress. In particular, low oil prices have provided the perfect opportunity for India to reform its inefficient fossil fuel subsidies. Consistent with this observation, India has moved in recent years to cut subsidies on diesel and gasoline. Such efforts help achieve the important goals of supporting the health of public finance, reducing India’s external vulnerabilities, and contributing to the G-20’s mutually agreed climate priorities, while protecting the poorest.
On the revenue front, the Third International Conference on Financing for Development prioritized domestic resource mobilization as key to helping countries finance their development. Given India’s tremendous needs, its very low tax ratio, at 10 percent of GDP, is notable. Accordingly, there is meaningful scope to address tax policy and compliance.
This is also where the pending Goods and Services Tax is of paramount importance. The deadweight loss that flows from India’s states treating their internal boundaries as though they were international borders is apparent to all. The resulting inefficiencies include slow transit times, unnecessary red tape in tax administration, and disruptions in the business climate. We support the government’s ongoing efforts to accomplish this important reform.
Through the EFP, we are also making progress on our bilateral tax issues. The United States and India negotiated and signed a reciprocal intergovernmental agreement to implement the Foreign Account Tax Compliance Act, or FATCA, pursuant to which both countries will collect and exchange information about the financial accounts of their respective tax residents. This is an important tool to combat tax evasion in both our countries. In addition, the two countries will begin accepting applications for bilateral Advanced Pricing Agreements; this will benefit industries participating in cross-border business.
To conclude, the EFP is certainly not the only way the U.S. engages with India. For example, the Departments of State and Commerce conduct regular high-level discussions under the Strategic and Commercial Dialogue. But the EFP provides the venue for Treasury and our counterparts in India to cooperate on issues of mutual concern. While India faces some significant challenges, it also has important ingredients to sustain a dynamic economic trajectory: a young and ambitious population, motivated policymakers, and an international investor community eager to participate. You can count on Treasury to remain closely engaged as India draws on these ingredients to build its future.