Speeches and Remarks

"World Class Infrastructure: Need for a War-Footing in India"

Remarks by Ambassador David C. Mulford
at GAIL (India) Limited's Looking Beyond Lecture Series

Hyatt Regency Ballroom
November 9th, 2004, 5:00 p.m.

As prepared for delivery

Thank you Chairman Banerjee and your GAIL Board for inviting me to speak to you today. The subject at hand and the timing of this lecture could not be more propitious.

The Comprehensive Relationship

The U.S. India relationship is running at an all time high. Here is how Prime Minister Singh described it in a letter to President Bush last week congratulating him on his re-election:

"Mr. President, during your first term in Office, our bilateral relations underwent a qualitative transformation, due in no small measure to your personal commitment and efforts. As India's integration with the global economy grows we need to chart out an economic road map that would be an integral element of our broader relationship. We must embark on a larger and a more ambitious agenda for broader strategic cooperation, high technology, commerce and defense…"

This is a remarkable assessment for a relationship, which a few short years ago, was plagued with national suspicions and punitive sanctions.

For decades India and the U.S. have recognized many shared values. Now for the first time, we are working together on the basis of not only shared values, but also shared interests.

Herein lies the very nexus of U.S.-India relations in 2004. America formed its democracy and subsequently the American nation in the 100 years from the American Revolution to the Reconstruction, following America's Civil War. Today the U.S. economy is the envy of the world and democracy flourishes undimmed by a variety of adversities during America's long development.

India today is also a flourishing democracy. It too is embracing change. Its leaders in both government and civil society are working to build a more productive, more open economy that will lift India's people and establish India as a world power.

We have much to learn from each other and great benefits to harvest in our growing collaboration. It is in this spirit and on this aspect of our relationship that I wish to concentrate your attention today.

Our shared interests today touch on almost every field of human endeavor. Today we are working together across the board - strategically, economically, politically, militarily, in the social sectors. Earlier this year, our two governments began an important new initiative, "Next Steps in Strategic Partnership." The NSSP will ultimately make the US-India relationship as close as any the U.S. has. We are expanding cooperation in three critical areas: civilian nuclear activities, civilian space programs, high-tech commerce and missile defense technology.

We also cooperate in the global fight against terrorism and proliferation, we work together to promote democracy, we consult with one another on regional stability, we are joining together to work on elimination of infectious diseases, trafficking in persons, climate change and the future of our shared environment.

This partnership, as it unfolds, will in many ways mark the course of the 21st Century.

Meanwhile, the new Administration of President Bush will assure the continued momentum and continuity of the U.S.-Indian relationship over these next four years.

Economic Reform and Infrastructure

India's new government is clearly bent on implementing economic reforms. These of course must be politically possible to achieve, and they must enjoy sufficient consensus to survive.

We acknowledge these realities and seek to concentrate on what I would call strategic reforms that have major "fall out" throughout India's economy. These are not areas of dispute. Rather, these are challenges where the U.S. and India have a strong mutuality of interests and the U.S. can be a significant contributor to India's progress.

Perhaps the most prominent area is infrastructure. I have said many times before that India must put infrastructure development on a wartime footing.

I don't mean by that bringing in the Army. I mean that creating a world-class infrastructure must have the very highest national priority, bringing together federal and state authorities, and public and private players in a common national enterprise.

World-class infrastructure will be needed to provide the platform for faster, consistent growth and for India to become a major world economic power. Moreover, there will be lasting political support for those in power who provide infrastructure that India's rural population and urban dwellers can touch, can feel and use to improve their lives.

Building a world-class infrastructure in a relatively short period of time is a very tall order for any country to fulfill. We all know that economic reform can be social and political dynamite. Coalition governments are notoriously difficult to manage, even when there is an agreed roadmap of common minimum policies.

If building a world-class infrastructure in India is truly to be a priority of the first order, there are two obvious conditions that must be met. One is overriding clarity of purpose. The other is courageous political leadership dedicated to accomplishing the mission.

India has successfully implemented a first generation of economic reforms - the Watershed being 1991. The results are there for everyone to see. One hundred million people lifted out of poverty since 1991. Growth rates of 7-8 percent, rather than 3-4 percent prior to 1991. A growing middle class with even faster growing disposable income. More consumer choice. Over $120 billion in foreign exchange reserves. $50 billion in exports. The India IT sector is the fastest growing part of the fastest growing industry in the world. An IT sector, which has transformed India's image overseas. An assertive and self-confident business class.

These accomplishments are most impressive. But the unanswered and increasingly serious question is: How can India sustain 8% plus annual growth, reform its agricultural sector, improve education and health care, open its economy to the benefits of globalization and emerge as a true world power if it is constrained increasingly by inadequate infrastructure development. Infrastructure is not the last area one develops in an era of great economic progress. It is, at the very least, an essential part, and often a prior condition, for great transformation.

Fortunately, this reality appears to be recognized at India's highest levels of leadership. It's now time to put ideology to one side and focus on practical "steps that work."

"Steps that work" must be based on a frank recognition of realities. These have to do with why the government must press ahead with fundamental economic reforms, many of which involve questions of governance. What are some of these realities?

Public sector participation in the economy remains large. The fiscal deficit is too large and causes government to preempt much needed investment capital from use by the private sector. Direct and indirect subsidies drain away resources from priority investments in education, health and infrastructure. Labor markets are restrictive and inflexible. Regulatory procedures are opaque in the eyes of foreign investors and therefore a disincentive to entry. The Indian economy remains highly protected. FDI caps in many sectors continue to dampen investment flows into India. A world class IPR protection regime is still lacking, a serious deficiency for any country that wishes to be a global economic power.

Building world-class infrastructure involves a multitude of complexities. Taken together, they can be quite overwhelming. Hence, my two admonitions - clarity of purpose and courageous political leadership.

We know that improvements in "human capital," such as better education and health care are important contributors to infrastructure creation.

So are the familiar "bricks and mortar" industries like roads, ports, airports, water and sewage systems, transportation facilities, crop collection, cold storage and distribution for farm produce, telecommunications and yes, a national gas grid.

Collectively these form the physical platform for future economic growth. If they are non-existent or sub-standard, future growth will be hampered. Job creation will lag, services will suffer, poverty reduction will falter as population growth proceeds - and in general, public dissatisfaction with both infrastructure and politicians will rise.

Building a world-class infrastructure in India also requires that Federal-State political, institutional and policy diversity be addressed. Hence, again, the need for clarity of purpose and political leadership willing to spend its political capital. When a nation decides to win a war, unity of purpose is essential and all efforts are bent to achieving that objective.

The Steps that will Work

Let us therefore ask, if there is unity of purpose, what are the "steps that will work?"

First, differentiation amongst different elements of infrastructure, prioritizing those projects that have the most far reaching fall out for the economy.

Second, sorting out those elements of infrastructure that can be developed immediately and primarily by private capital. Telecommunications is already an obvious example. Power and airports are other examples. These areas would require further liberalization under a strong, dependable, but enlightened regulatory regime. Private capital is key here together with world-class standards of governance.

Third, those areas that require a major change in public attitudes must be approached head on by political leaders. Water and electricity are cases in point. World-class infrastructure that delivers clean water effectively to the public cannot be built and successfully operated unless water is priced. This may challenge existing attitudes, but it is nevertheless the reality. Priced water has already been demonstrated to be doable and successful in India, but the problem is (a) scale of effort, (b) time required to make progress, (c) removal of political and regulatory obstacles. These are all matters that come back to clarity of purpose and political will.

One could go on, listing different elements of infrastructure and various projects. However, at the end of any such exercise one would be left with a handful of central issues that apply to the entire infrastructure challenge.

I wish to focus especially on those issues that impact the U.S.-India relationship. I have said earlier that we have a strong mutuality of interests, and this is certainly true when it comes to foreign direct investment and further development of India's capital markets.

I strongly believe that infrastructure challenges cannot wait; yet the public sector cannot now provide the necessary finances for India's infrastructure needs. India must therefore invigorate, as a matter of priority, private sources to finance long-term project development, which inter alia means that federal and state regulations and attitudes that inhibit private investment in infrastructure must be changed. Meanwhile chronic budget deficits at both the federal and state levels must be reduced. Capital will have to be freed from wasteful subsidies and India's financial markets will need further liberalization. Developing a truly long-term capital market must be a key objective for government, which through greater fiscal restraint and creative financial engineering needs to reduce its own crowding out effect in India's financial and banking systems. India's insurance and pension industries hold out important hopes for mobilizing long-term capital from India's abundant savings base. Lifting the ceiling on foreign direct investment in insurance would clearly help, as would expanding and liberalizing as a matter of urgency India's emerging pension industry. So too would reducing government's dominance in the banking industry, together with stronger encouragement and greater freedom for the growth of private domestic and foreign banks.

India should open up its retail, real estate, finance, and agro-processing industries to attract new investment. States should abolish restrictions on the private marketing of agricultural commodities. The Government should repeal the Essential Commodities Act and the Agriculture Produce Marketing Act. They are relics from the time India feared famines. Agricultural processing, storage, refrigeration, and marketing have received too little private investment in large part because of government disincentives and inefficient infrastructure and marketing networks that reduce returns to such investment. This has impeded the development of the large scale national markets needed to repay investment in infrastructure.

Lifting of such restrictions will enable national markets to flourish. Viewed from the perspective of U.S. investors, India has not reached its potential as a great emerging market because it is not a national market. Instead, restrictions and prohibitions on interstate trade mean that India is really a conglomeration of regional markets - most of which lack the size, depth and financial prowess to attract new investment.

National markets need national infrastructure systems to sustain them. As the regional markets evolve into a national market, you will see that there will be a greater pressure for systems such as a national gas grid, a national highways system, and an expanded aviation network. As these regional markets grow, so will the attractiveness of India as an investment destination.

When it comes to investment, whether foreign or domestic, a "culture of consistency" is vitally important.

If one changes the rules in mid-stream on a project already agreed, and which requires a lengthy period for execution, or even if newly arrived political players decide to put the on hold for review, one will quickly lose credibility with those providing capital and executing the project. The time for review is before the award. After the award is the time for "no nonsense" execution.

This is a reality of first importance and one that will be vital to address if India is to build world-class infrastructure as a matter of priority in partnership with private capital. This reality applies equally to both domestic and foreign players. Domestic players may have more patience with national bureaucracy than foreign investors, but it is very clear to me that one reason Indian investors don't comfortably buy long term debt (15 years and longer) or enter into similar long-term commitments secured by government initiated payment flows is that in general they do not have faith in the durability of commitments from government entities here at home.

The current epic saga of Bangalore Airport is a case in point, but Delhi Airport or the IMG Bharata Sports Complex Project in Hyderabad would do nearly as well as current examples.

Developers and providers of capital with large sunk costs over long periods are left in limbo when reviews, reversals or changes in terms of engagement move to center stage. Moreover, the reputational damage for India spreads far and wide, acting as a brake on future investment commitments.

These experiences, whether in the power sector in Tamil Nadu, the Airport in Bangalore, or highway projects in general, suggest that some sort of political consensus on creating a "culture of consistency" that governs infrastructure projects is essential. Once again, it is a question of clarity of purpose and courageous political leadership. It is also a question of governance. Preparations for projects must be thorough, procedures disciplined and transparent, and awards must be final and faithfully honored by the authorities involved, and their successors. When disputes or failures to perform arise, there must be timely and decisive arbitration and/or court action to enforce rights and obligations.

As the U.S.-India relationship deepens, we should be able to work together increasingly effectively in these areas of strong mutual interests. Recently, I had the great pleasure of signing the GAIL-USTDA Agreement with all of you here to finance preparatory work to enable GAIL to go forward with its vision of a national gas grid.

We hope this lays the basis for a major infrastructure breakthrough in your industry.

The U.S. has extensive experience in building large-scale infrastructure in a country with a Federal-State structure, using a combination of government and private sector inputs under time schedules of the highest priority.

One thinks here of the decision by the U.S. Congress in 1956 to build a national highway system - the Highway Act. This was a strategic project championed by the national government, implemented by the states and ultimately financed through the profits of companies who benefited from increased growth. As in India, you can well imagine the myriad of problems which had to be confronted and resolved across the fifty states.

Interstate highways were approached as a crash program, and most of our 42,700-mile highway system was built in the decade after 1956. The resulting highway system, together with our railroads from the previous century, and our developing air transportation system have allowed us to have the large, unified national markets, which we enjoy today. The cost of this effort was approximately $110-125 billion and I make a very confident guess that the system has paid for itself many, many times over.

$125 billion is not a very difficult sum for a country like India to raise. You have as much in foreign exchange reserves today. Can you imagine the cost saving simply from the most efficient and faster transportation of goods and the impetus to growth? The point I am trying to make is that we in the U.S. thought big and invested resources in a crash program. Today, and for some forty years since, we have enjoyed the benefits of that idea. India can surely think as big, and make the vision a reality.

Thank you.