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US pushes India for bolder reforms

The US wants India to open its economy to foreign investment and move aggressively with reforms despite political risks.

world Updated: Oct 25, 2007 11:22 IST
Arun Kumar

The US wants India to open its economy to foreign investment and move forward aggressively with reforms, despite political risks, as also work for successful conclusion of the Doha Round world trade talks.

"It is in the best interest of India, the United States and the world for India to continue and even accelerate the pace of economic reforms and openness," US Treasury Secretary Henry Paulson said on Wednesday ahead of a trip to India next week.

"Administrative restrictions of capital flows are blunt instruments and can have unintended consequences," Paulson told the Council on Foreign Relations taking note of steps taken by India to adjust the pace of capital outflows and inflows.

"They tend to inhibit efficiency and lose their effectiveness over time," he said asking "India to continue liberalising such restrictions."

Paulson's schedule in India includes meetings with Finance Minister P Chidambaram and Deputy Chairman of the Planning Commission Montek Singh Ahluwalia and an appearance at a conference in New Delhi on India's rise as an economic power.

"I hope to help the Indian government advance their economic reform agenda, which will benefit India's citizens and the world," he said, besides talking with the Indian government about making progress in the Doha Development Round.

"Working together to successfully conclude a Doha agreement will be the single most effective thing we can do to help raise living standards in India and around the world," Paulson said.

"A Doha agreement is within reach, and the potential is so great, that we must not let it slip through our grasp," he said suggesting India and the US together resist the protectionist sentiment.

"I am committed to working to maintain an open trade and investment climate in the US," he said.

Referring to the India-US civil nuclear deal stalled by Indian leftists, Paulson said: "The United States remains committed to this agreement that would help India achieve its economic development goals."

"The US and India also share the challenge of ensuring secure and clean energy supplies," he said describing economic growth and environmental responsibility as "necessary, compatible goals."

"Moving forward with the civilian nuclear agreement is one part of the solution. Working together on a post-2012 framework through the UN climate change process is another," he said.

Paulson said two other areas where the US wanted to work with India in advancing reform were helping with its plans to finance physical infrastructure improvements and to strengthen India's financial system by building an International Financial Centre (IFC)in Mumbai.

"Achieving these two goals will require a firm commitment to adopt international standards and to move forward aggressively with reforms, despite political risks," he said.

To further transform its economy, India is looking to the private sector to fund up to one-third of close to $500 billion that it needs to spend over the next five years to build physical infrastructure, Paulson said. "The US wants to support this effort to attract private financing."

Paulson, who will participate in the India Infrastructure Finance Conference in Mumbai, said: "At that conference and afterwards, we will highlight the opportunities of India's infrastructure initiatives to US businesses."

"Today, Indian firms in Bangalore play a key role in the back office operations of global, multinational firms. In this, India has revolutionised, forever, the way the world does business," he said.

The next step is for India to develop front offices in Mumbai that provide financial services to companies and investors in India and across the region, Paulson said. By establishing an IFC in Mumbai, India will build a financial system that will help large and small businesses.

He said Washington understood India's concern that increased capital flows could add to inflation pressures or make its currency exchange rate more volatile and said it was on the right track to handle those pressures.

"India has allowed greater flexibility in the exchange rate in recent months, and the appreciation in the rupee has helped to reduce inflationary pressures," Paulson noted, but wanted New Delhi to do more to reduce restrictions.

"For the most part, India is on the right path to reduce these risks. India has allowed greater flexibility in the exchange rate in recent months and the appreciation in the rupee has helped to reduce inflationary pressures."

Contrasting China's policy of managing its currency at relatively weak levels with India, Paulson said there was no sign the rupee's rising value was impeding India's rapid growth.

Calling China's currency regime as an "unnatural act" since Beijing's is highly integrated into the global economy in manufacturing and trade, Paulson said: "What has happened in India here is good news in terms of the exchange rate. I'll be encouraging them to stay the course and not backslide."