[Senate Hearing 113-131]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 113-131

 
    ASSESSING THE INVESTMENT CLIMATE AND IMPROVING MARKET ACCESS IN 
                      FINANCIAL SERVICES IN INDIA

=======================================================================


                                HEARING

                               before the

                            SUBCOMMITTEE ON

         NATIONAL SECURITY AND INTERNATIONAL TRADE AND FINANCE

                                 of the

                              COMMITTEE ON

                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

                                   ON

   EXAMINING U.S.-INDIA ECONOMIC RELATIONS, INCLUDING REGULATORY AND 
  STATUTORY BARRIERS TO FOREIGN DIRECT INVESTMENT IN THE BANKING AND 
   INSURANCE INDUSTRY AND LOOKING AT PROSPECTS FOR LIBERALIZATION OF 
           MARKET ACCESS FOR THE FINANCIAL SERVICES INDUSTRY

                               __________

                           SEPTEMBER 25, 2013

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs


                 Available at: http: //www.fdsys.gov /




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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                  TIM JOHNSON, South Dakota, Chairman

JACK REED, Rhode Island              MIKE CRAPO, Idaho
CHARLES E. SCHUMER, New York         RICHARD C. SHELBY, Alabama
ROBERT MENENDEZ, New Jersey          BOB CORKER, Tennessee
SHERROD BROWN, Ohio                  DAVID VITTER, Louisiana
JON TESTER, Montana                  MIKE JOHANNS, Nebraska
MARK R. WARNER, Virginia             PATRICK J. TOOMEY, Pennsylvania
JEFF MERKLEY, Oregon                 MARK KIRK, Illinois
KAY HAGAN, North Carolina            JERRY MORAN, Kansas
JOE MANCHIN III, West Virginia       TOM COBURN, Oklahoma
ELIZABETH WARREN, Massachusetts      DEAN HELLER, Nevada
HEIDI HEITKAMP, North Dakota

                       Charles Yi, Staff Director

                Gregg Richard, Republican Staff Director

                       Dawn Ratliff, Chief Clerk

                      Kelly Wismer, Hearing Clerk

                      Shelvin Simmons, IT Director

                          Jim Crowell, Editor

                                 ______

 Subcommittee on National Security and International Trade and Finance

                   MARK R. WARNER, Virginia, Chairman

             MARK KIRK, Illinois, Ranking Republican Member

SHERROD BROWN, Ohio                  JERRY MORAN, Kansas
JOE MANCHIN III, West Virginia

                Milan Dilal, Subcommittee Staff Director

         Lindsey Johnson, Republican Subcommittee Staff Director

                                  (ii)


                            C O N T E N T S

                              ----------                              

                     WEDNESDAY, SEPTEMBER 25, 2013

                                                                   Page

Opening statement of Chairman Warner.............................     1

Opening statements, comments, or prepared statements of:
    Senator Kirk.................................................     3

                               WITNESSES

Arvind Subramanian, Senior Fellow, Peterson Institute for 
  International Economics and Center for Global Development......     4
    Prepared statement...........................................    22
    Response to written questions of:
        Senator Kirk.............................................    61
Richard M. Rossow, Director, India & South Asia, McLarty 
  Associates.....................................................     6
    Prepared statement...........................................    39
    Response to written questions of:
        Senator Kirk.............................................    61
Reena Aggarwal, Ph.D., Robert E. McDonough Professor of Business 
  Administration and Professor of Finance, and Director, 
  Georgetown Center for Financial Markets and Policy, McDonough 
  School of Business, Georgetown University
    Prepared statement...........................................    55

                                 (iii)


    ASSESSING THE INVESTMENT CLIMATE AND IMPROVING MARKET ACCESS IN 
                      FINANCIAL SERVICES IN INDIA

                              ----------                              


                     WEDNESDAY, SEPTEMBER 25, 2013

                                       U.S. Senate,
                      Subcommittee on National Security and
                           International Trade and Finance,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Subcommittee met at 2:35 p.m. in room SD-538, Dirksen 
Senate Office Building, Hon. Mark Warner, Chairman of the 
Subcommittee, presiding.

          OPENING STATEMENT OF CHAIRMAN MARK R. WARNER

    Senator Warner. I call to order this hearing of the 
National Security and International Trade and Finance 
Subcommittee. Today we are going to be--the topic of the 
hearing is ``Assessing the Investment Climate and Improving 
Market Access in Financial Services in India,'' and I thank the 
witnesses for being here, and I thank my good friend, the 
Ranking Member, Senator Kirk, for being here. And I apologize 
for being a couple of minutes late.
    I am going to do a brief opening statement. Then I will 
turn it over to Senator Kirk, and I will then introduce the 
witnesses. Let me go ahead and I will get through this 
relatively quickly.
    Again, I want to thank Senator Kirk for joining me. He and 
I are both members of the Senate India Caucus, which we are 
proud is the largest bilateral caucus in the Senate and 
something with the Prime Minister coming tomorrow we want to 
emphasize.
    India is now the world's fourth largest economy in terms of 
purchasing power parity, and obviously, with Prime Minister 
Singh here meeting with the President, economic issues will be 
at the forefront of many of their discussions.
    It is my hope that in this hearing we can explore some of 
the areas where we can improve our bilateral relationship and 
strengthen the foundation for a long-term strategic 
partnership.
    One area where the relationship can blossom and I think one 
of the things that I think is most interesting about the U.S.-
India relationship--Senator Kirk has got a deeper background in 
international affairs and foreign affairs than I do, but it was 
not that long ago where the relationship between India and the 
United States was tepid at best, and then we moved from that 
tepid to a period, particularly under President Clinton and 
President Bush 43, where it was quite strong, I think, our 
friendship; and now it has to move into a more mature 
partnership. And I think those are some of the challenges we 
face.
    But as we look at these issues, according to the Financial 
Times, India will have the third largest business system 
measured by assets by 2025. Yet as we think about this 
bilateral relationship, there are only three foreign banks that 
have more than two dozen branches to serve this country of 1.3 
billion people, soon to become the world's most populous 
country. And at a time when India's growth is slowing, opening 
access to financial markets, including banking, insurance, 
commodities, trading, foreign exchange, and the mutual fund 
industry, I think there could be benefits not just to India but 
obviously to American companies as well.
    I welcome the overtures made by the new Reserve Bank 
Governor Rajan to liberalize the banking system. Dr. Rajan said 
just 3 weeks ago that, ``India has a number of foreign owned 
banks, many of whom have been with us for a long time and 
helped fuel our growth. They have been in the forefront of 
innovation, both in terms of improving productivity, as well as 
in terms of creating new products.''
    I like that quote. I hope he will use the central bank to 
encourage the government to move forward on those issues.
    I am going to ask our witnesses on that subject. I will 
also ask our witnesses to provide their views on the overall 
investment climate in India, and the Indian Government has 
recently opened several sectors for increased financial 
investment. I know things like multi-brand retail have been a 
challenge, but I think, again, these are ways that, as we move 
into a more mature partnership between our two countries, where 
our strategic interests are so closely aligned, we need to see 
if we can continue to press on this.
    Let me make a couple of quick comments as well on where I 
hope the Prime Minister's meetings with President Obama will 
focus later this week.
    I think--and I know we had some momentum a while back, and 
we need to keep the momentum. I really do think we need to move 
forward on a bilateral investment treaty. A BIT will increase 
regulatory stability and reduce investor uncertainty. 
Particularly as you see India's economy slow a little bit, we 
have got to increase that investor security if we are going to 
have the FDI that we need to see.
    Second, I believe we need to press our Indian friends on 
some of the aspects of their retroactive tax system. This is an 
area that, as somebody who was in the wireless industry and 
managed to do pretty well, and did investments in countries 
abroad, it would have--I would have felt that we were going to 
come back and have those licenses repriced or our tax system 
relooked at after the fact, it would have paused with our 
investment.
    Finally, I hope that India will continue the process of 
liberalizing foreign access to their domestic market. I know 
that the Finance Minister said that insurance was an area that 
would be looked at. Again, I hope it is an area that they will 
pursue.
    Let me also say that this--I have outlined some of the 
things that India needs to do to kind of encourage increased 
FDI and particularly opportunities for America to invest. I 
think this has to be a two-way street. We need to look at other 
ways for continued investment from Indian companies into 
Illinois, Virginia, and across our country. And I continue, as 
somebody from the tech sector, to be concerned that on H-1B and 
other programs that we do those in a fair way for both 
countries.
    So I look forward to hearing from our witnesses, and I want 
to turn it over to the Ranking Member, Senator Kirk, for his 
comments.

                 STATEMENT OF SENATOR MARK KIRK

    Senator Kirk. Thank you, Mr. Chairman. I will take your 
pro-Indian feelings and up them one. I have long felt that the 
best way out of Afghanistan is through New Delhi, is to have a 
military alliance with India, that we encourage India to roll 
into Afghanistan to be a nonterrorist base, because as I 
remember, the last time I was in India, the Indian military 
briefed me that they were fighting about 30 separate terrorist 
insurgencies. So the two countries have strong national 
security common interests which could propel the BIT forward in 
joint business.
    My hope is eventually by being an ally of the United States 
that India just makes sense to both sides, being the largest 
democracy on Earth, and for us the most powerful democracy on 
Earth, it just makes sense to get rid of these barriers. And 
the one barrier that I would like to highlight is the 
requirement in India that a foreign insurance business has to 
be 49 percent owned by Indians.
    There is a whole Nehruvian economic culture in India that 
has triggered a loss of a whole generation's progress, and I 
think, as I remember from my visit to India, the total focus of 
the Indian body politic was the economic and military 
competition with China, that because of that tradition of 
Indian socialism, they basically skipped a generation. And in 
reality, the Chinese fell behind because Mao was such a 
disaster economically, that had the Chinese modernized, they 
would have shot way ahead of India based on the performance 
that we have seen.
    My vision for insurance is someday a good Chicago, 
Illinois-based company like State Farm and maybe a Virginia-
based company like GEICO, so that State Farm and--those two 
insurance companies could fight it out across the Indian 
subcontinent for what could be one of the largest auto markets 
on the planet.
    Senator Warner. Amen. Well, I agree with Senator Kirk, and 
I would say one of the things I hope our witnesses will 
mention, he mentions the importance of the strategic defense 
relationship, which I concur with. Part of the challenge--
again, this is a two-way street as we try to encourage India to 
look at purchasing American military equipment. We have to be a 
little more willing to kind of recognize India as an ally and 
partner, and that means what we sell, some of those things on 
those restricted lists, needs to be reexamined in light of the 
nature of this new partnership. So, again, I thank Senator Kirk 
for his comments.
    We have got two incredible witnesses today: Dr. Arvind 
Subra--Subramanian--I apologize, sir. You would think as 
someone who is the co-chair of the caucus could do a little 
better.
    [Laughter.]
    Senator Warner. He is the Dennis Weatherstone Senior Fellow 
at the Peterson Institute for International Economics and a 
Senior Fellow at the Center for Global Development. He is a 
recognized authority on international economic issues. He has 
written on growth, trade, development, international aid, oil, 
India, Africa, and the World Trade Organization. His 
scholarship is published widely in academic journals as well as 
the New York Times and Financial Times. He has advised the 
Indian Government in different capacities, including as a 
member of the Finance Minister's expert group on the G-20.
    Mr. Richard Rossow--I will see if I can also butcher your 
name a little bit, too--is Director for South Asia at McLarty 
Associates, leading the firm's work for clients in India and 
the neighboring region. Mr. Rossow has extensive business 
experience in India. Before joining McLarty, he was with the 
New York Life Insurance Company--so it is a subject I think he 
will be an expert on in terms of State Farm and GEICO and other 
competitors getting into that market--where he served as head 
of international government affairs and developed strategic 
plans for the company's global M&A work, including in India. 
From 1998 to 2008, Mr. Rossow served as director of operations 
of the U.S.-India Business Council.
    Regretably, we had a third witness, Dr. Reena Aggarwal of 
Georgetown University, who was not able to join us for today's 
hearing, but we wish her well. We will make sure that her 
written statement will be written into the record.
    Senator Warner. Arvind, would you like to go ahead and 
continue?

   STATEMENT OF ARVIND SUBRAMANIAN, SENIOR FELLOW, PETERSON 
  INSTITUTE FOR INTERNATIONAL ECONOMICS AND CENTER FOR GLOBAL 
                          DEVELOPMENT

    Mr. Subramanian. Thank you very much, Chairman Warner, 
Senator Kirk, for providing me this opportunity to testify 
before you. Sorry for having such a difficult name to 
pronounce. My apologies.
    In the short time available, I want to make two 
observations, one prediction, and two recommendations.
    So observation number 1, the Indian economy recently 
encountered serious turbulence and will require important 
reforms to stabilize the economy. Part of this reflects, of 
course, India's financial integration with the world. For 
example, between 2010 and 2012, India received about $160 
billion in foreign capital, and the threat of taper by the U.S. 
Federal Reserve meant that some money had to flow back, 
creating trouble. But, of course, India's problems have more 
durable domestic origins, and my New York Times piece 
elaborates on those, and clearly, going forward, reforms will 
be necessary to kind of stabilize the economy. I think fiscal 
consolidation by eliminating some of the wasteful subsidies and 
introducing what seems to be a very promising new tax, which I 
think is possible in the near future, these will be critical. 
But looming elections ahead complicate some of these 
challenging actions.
    Observation number two is that this economic uncertainty 
over the last year paradoxically has triggered unprecedented 
liberalization of FDI and other capital inflows. This seems 
paradoxical, but it is consistent with international experience 
that governments, when facing a sense of crisis--you know, I do 
not have to talk about this in this chamber at these times. 
When a sense of crisis looms, I think governments undertake 
action, and India has liberalized extensively in several 
sectors--multi-brand retail, defense, petroleum and natural 
gas, telecommunications, et cetera. Limits on foreign inflows, 
debt, equity capital have been relaxed considerably. You know, 
in terms of telecom, the PMA, what is called the preferential 
market access, at least for the private sector, has been put on 
stay for the moment as another encouraging sign.
    My prediction number one, after having made two 
observations, is that my belief is that further opening to 
foreign investors, especially providers of financial services, 
is likely. A new pension-related bill has just cleared one of 
the two houses of parliament, and I think it has reasonable 
prospects for passage. And the famous draft insurance 
legislation, which would allow much greater FDI, up to 49 
percent in the insurance sector, I think the problem it is more 
held up for, you know, political reasons rather than 
substantive. In fact, I would say there is bipartisan support 
for that bill, so it is a matter of time, not a matter of 
principle, before the insurance bill is passed.
    My recommendation number one based on these observations 
and prediction is that the time may be ripe now for pursuing a 
BIT, as you had set forth in your letter, Senator Warner, and I 
think there are two reasons why that is the case:
    One, India has actually liberalized extensively on the FDI 
so that domestic actions necessary to, you know, engage in 
international negotiations are being undertaken;
    And, second, I do not think it is any secret that the fact 
that the United States and China are also negotiating a BIT is 
going to put a little bit of extra pressure on India as well. 
The competitive pressure to liberalize is going to begin to 
work. I think we should be under no illusions. There will be 
very difficult issues. But I think these should be overcome, at 
least can be overcome with some skillful negotiation and kind 
of realism on both sides.
    My second and final recommendation is perhaps the most 
important. A bilateral investment treaty in my view is but a 
stepping stone for creating a broad and strategic framework for 
U.S.-India economic relations. Senator Kirk, you alluded to 
some of the defense imperatives. But I think this framework is 
essential, and it would include as a critical element, I think, 
embracing the principle of and working toward or at least 
initiating preparatory work toward a free trade agreement in 
the future.
    Now, why is this framework necessary? I think for about 
four or five reasons. Senator Warner, you referred to one of 
them. I think the prize is big. India is a big economy, a 
growing economy. Indian demand for infrastructure, imports of 
natural gas, financial services is going to be huge, and my 
colleague Brad Jensen shows that the United States has a 
comparative advantage in this and will have a key role in 
meeting Indian demand.
    Second, I think the framework is necessary because India 
and the United States are going to face a number of challenges 
going forward. That is just in the nature of having a mature 
relationship. And I think we need a credible mechanism to 
resolve these ongoing challenges.
    Point number three, the reason to have a framework is that 
India and the United States are really inflicting a lot of 
discrimination on each other while negotiating these free trade 
agreements with every other trading partner. India is 
negotiating free trade agreements with all of Asia, also with 
Europe, it is in the process, and all this discriminates 
against U.S. business in India. And this discrimination is very 
expensive because India has pretty high barriers and it is a 
growing market. So the discrimination on U.S. business is, I 
think, going to be more and more going forward, and this needs 
to be rectified. Of course, the United States is doing similar 
things to India because of the TPP and TTIP.
    I think point number four, I think it is very important to 
realize that the U.S.-India relationship has a key role to play 
in keeping China tethered to the multilateral system and in 
more generally ensuring China's peaceful rise.
    Last, but not least, I think this framework is necessary 
because I think the relationship needs to ``go big.'' Going big 
is necessary because this is a relationship between two 
democracies, this is a marathon not a sprint, it is a multi-
dimensional not a uni-dimensional relationship. And, 
paradoxically, I think going big is the best way to address 
even the small. I have said it before. I think you cannot solve 
problems relating to chicken just by talking chicken. I think 
you need a broader framework.
    And so my colleague C. Fred Bergsten and I will soon be 
finalizing a book, ``Breaking Ground by Breaking Barriers: An 
Economic Partnership of the Largest Democracies,'' in which we 
will elaborate on what this framework should consist of, its 
rationale, content, the impediments to achieving it and how 
they can be overcome.
    Thank you.
    Senator Warner. Dr. Subramanian, I thank you for that.
    Mr. Rossow.

 STATEMENT OF RICHARD M. ROSSOW, DIRECTOR, INDIA & SOUTH ASIA, 
                       McLARTY ASSOCIATES

    Mr. Rossow. Thank you. Chairman Warner, Ranking Member 
Kirk, let me also echo Arvind and thank you for this 
opportunity to present in front of the Committee just ahead of 
the Prime Minister's visit. Allow me to state the views I am 
expressing are my own, not of my clients or my firm. I do 
represent clients in the financial industry in India, but these 
are my own views.
    First, let me share some surprising news. With a lot of 
talk about India's worsening fiscal situation combined with 
recent investor concerns, one would assume that American trade 
and investment into India has collapsed. But, actually, the 
opposite has taken place. This year, 2013, exports to India 
through July are up 11 percent, on track for an all-time record 
of exports to India. American imports of Indian products are up 
5 percent, also on track for a record. Foreign direct 
investment into India is up 7 percent over last year in dollar 
terms, at $12.5 billion. And I say dollar terms because if you 
do it in rupee terms, it is actually up 13 percent, so what 
they are feeling from foreign direct investment in India is 
actually a pretty big increase from last year.
    Even foreign institutional investment, which is often 
referenced as having trailed off dramatically in June, July, 
August, has actually perked back up in September and is net 
positive for the year pretty dramatically. So the numbers, real 
investors, real business leaders, are still make a decision to 
go to India despite the negativity that we read in the press 
every day. But as I am sure we all agree, there is a larger 
untapped potential, and particularly in financial services.
    Now, market access into India's financial service, as has 
already been discussed, varies by industry from lows of 26 
percent for insurance and pensions all the way up to 100 
percent for a variety of activities under what India calls the 
nonbanking financial corporation, asset management and things 
like that. But I am not going to focus as much on market 
access. The actual line numbers and everything are included in 
my written testimony. But let me give you another perspective 
from a business point of view about the Indian market.
    There is another filter that executives make when 
determining about whether to make their investment into India 
or another market, which is, What is the likely return on the 
investment and what are the risks?
    In India, regulatory risk presents a significant barrier to 
business planning. India's financial regulators have been quick 
to reshape fundamental aspects of the sectors they govern. A 
financial services investor cannot reasonably assume that 
critical regulations governing their product distribution model 
or tax treatment will be stable over a 5-year window.
    A powerful example of this comes from the life insurance 
industry, the sector that I know best. Four years back, life 
insurance premiums made up almost 5 percent of India's 
economy--5 percent from this one sector, life insurance 
premiums. In 2010, reacting to concerns in the market that 
agents were mis-selling the primary product in the market, the 
regulator changed how the product is structured, and the life 
insurance market in India has trailed off since then, and it 
now contributes only about 3 percent to India's GDP. That is 
one sector of the economy. India's regulator was reacting to a 
need in the industry, which was the mis-selling of a product. 
But unlike what we see from regulators around the world, 
instead of trying to change how agents sell the product, they 
actually changed the structure of the product. They made it 
less incentivized to sell and less profitable for the companies 
to sell.
    So when you look at what has happened in India's economy 
and how it has declined, most people look at a top-down 
approach. There are these huge macro factors that have taken 
place that have impacted the economy. From my perspective, if 
you look across the variety of industries, several of which I 
cover in my written testimony, there are actually bottom-up 
reasons why a number of the key drivers of India's growth over 
the last 10 years have trailed off in the last couple years.
    Now, there are three suggestions that I have as to how the 
U.S. Government can continue to support the growth of economic 
relations with India.
    First, as has already been referenced, is sign a high 
standards bilateral investment treaty. But I want to reiterate 
that, because it is not just about the political significance, 
which is typically what is mentioned when talking about the 
BIT. When you talk about what are the major areas that we are 
talking about for investor concerns right now, local content 
rules, FDI caps. Our model BIT has got provisions for both of 
those. National treatment and establishment is code for FDI 
caps. And our model BIT has a section on performance 
requirements, which India's treaty does not, that could 
potentially take care of some of these local content rules. So 
there is a lot more substance behind the BIT that I think is 
given credit, too, in some discussions.
    Second, we need to engage more deeply with India's state-
level leaders. There are a lot of smaller parties in India that 
actually control their own states and, thus, want to see 
development, and at the same time have solid representation in 
India's parliament. Going to these states, engaging with them, 
and showing partnership is critical to getting their support 
for reforms. And I point again to the insurance industry. The 
insurance regulator is based in Hyderabad, which is in the 
southern state of Andhra Pradesh. No other regulators or 
government offices are based in Andhra Pradesh. Why is it 
there? Because when the first bill was passed, in 1999, to open 
the market, a local party in that state had 29 votes. They 
supported the opening in exchange for getting the regulator 
located in their state. Those kind of deals are terrific. It 
gives me an opportunity to go to Hyderabad every time I go to 
India on insurance business.
    The third suggestion is more frequent review and reshaping 
of the areas that we choose to engage India. The general 
perception is that maybe they are not moving fast on things, 
but that is only the things that we are talking about. They are 
moving extremely fast on financial inclusion, access to health 
care, and promoting domestic manufacturing.
    Coincidentally, India's drive to increase their capacity in 
those three areas has also harmed our companies. The very 
things that India wants to do are the things that have been 
hurting us. If we want to avoid collateral damage on India's 
moves in the future, we need to make sure that the areas we are 
focusing our partnership are areas that India is actually 
moving on. Pushing rocks downhill is much easier than pushing 
them uphill.
    So, to summarize my remarks, increased market access is 
critical for investors, but the lack of regulatory 
predictability has also diminished India's attractiveness as an 
investment destination.
    I will conclude with a great point made by Ravi Venkatesan, 
who is the former Microsoft India chairman, in his new book, 
``Conquering the Chaos.'' Ravi points out that most of the 
growth in the world over the next 50 years is going to come 
from places that look a lot more like India than, say, Canada. 
So all of our work on helping American companies succeed in 
India will help ensure that American companies remain global 
players over the next 50 years as well. So it is pretty 
critical that we win in India.
    Thank you.
    Senator Warner. Thank you. Thank you both.
    We will do 5 minutes, and then we can just have more of an 
open session here.
    You know, the first question, I guess--and I am starting 
with you, Dr. Subramanian--Mr. Rossow raised some of the good 
points, that American FDI has actually not declined that much. 
But if we look in a macro sense, I was last in India about a 
year past, or not even a year past, and there were concerns 
that India's growth might fall to 6 percent and 5 percent. Now 
I think we are at 4.4, and we have seen the rupee decline about 
40 percent over the last 2 years. Part of that is obviously, I 
think, due to some of our actions at the Fed, but I guess the 
question I would have for both of you is: This both growth 
decline and decline of the rupee, is this just a cyclical 
challenge or is it a reflection of a greater structural 
concern? I will start with you and then Mr. Rossow.
    Mr. Subramanian. That is a great question, Senator Warner. 
The way I think about this is that, you know, there is a kind 
of structural problem here which is that India has relied a lot 
on using its IT talent, you know, the call centers and so on, 
to be the engine of growth. It has not done sufficiently well 
in mobilizing its low-skill labor in order to do manufacturing. 
So in one sense, therefore, I think we need a structural reboot 
to the economy, if that is going to happen.
    But on the other side, the reason I am hopeful that that 
reboot will happen is actually something that, you know, Rick 
touched upon in his second comment, which is that the real 
impetus for change in India, including this kind of structural 
reboot, is actually happening at the level of the states. And 
the way it is happening is that, you know, more and more power 
is now with the states, particularly in economic. So what 
happens is that if some governments, like Gujarat or, you know, 
Tamil Nadu or Karnataka or Andhra Pradesh start doing well, 
that becomes a powerful model for other states to follow, not 
just in a kind of general sense, but also in the specific sense 
that they manage to attract capital and people to the detriment 
of others. So there is a kind of race to the top that this, you 
know, competition between states dynamic is introducing.
    And what is even more hopeful is that in the last two 
election cycles, those governments that are delivering on 
governance and, you know, economic performance are getting 
reelected. Secretary of Defense Donald Rumsfeld used to say 
that, you know, you go to bat with the army that you have. In 
India, you go to bat with the political system you have. You 
know, the system is democracy, so change has to happen through 
democracy and through the democratic process, and this 
competition between states is the way in which this is 
happening, change is happening, which is why I think even 
though there are some structural problems, I can kind of see a 
way out back to 7-, 8-percent growth in the not too distant 
future.
    Senator Warner. Rick, do you think it, again--is this more 
cyclical or structural or--I think you partially addressed 
that.
    Mr. Rossow. Yeah. I touched on one sector in particular, 
insurance, which, again, made up almost 5 percent of the Indian 
economy, and because of a regulatory change, you know, for 
reasons that we understand, has trailed off. Arvind mentioned 
another: IT services. You know, it had been growing during the 
heyday at 30, 40, 50 percent per year. And that has trailed off 
because they cannot pump out enough graduates to work. There 
has been some regulatory changes there as well. They removed a 
tax benefit that companies took advantage of.
    Another sector I will point to: telecom. Telecom services, 
a reform in 1999, which in my opinion was India's most 
important reform it has ever done, called the New Telecom 
Policy, essentially freed up the telecom market, which also 
helped fuel the growth of the IT service industry because it 
opened up international telephony and prices came down. The New 
Telecom Policy, that is really when India went from 1 percent 
teledensity up to its current level of 80 percent or so.
    People still get on stage, and they talk about India's cell 
phone market growing by 10 million subscribers a month. I still 
hear people talking about that. That is old news. In the last 
12 months, India's cell phone subscribership has dropped by--
let me see, I have got the number here--60 million. A 60 
million drop in cell phone subscriptions. Cell phones. That was 
one of the fastest growing areas when India was at 9 percent. 
Insurance was growing by 40, 50 percent per year. IT-enabled 
services, the growth of those industries, still growing but not 
at the clip that they were. Mutual fund management. Different 
reasons, none of them necessarily related to Fed action, 
tapering, or even the lack of new reforms, not even related to 
that necessarily, the stuff that India could have done that 
would have moved 9 percent back in the day up to 15-percent 
growth--roads, electricity, airports, things like that.
    So I think a bunch of the sectors that make up a huge chunk 
of the economy, individual reasons for each of them, but they 
just happened to come together at about the same time, 
different regulators, different government moves that have 
undercut growth or in some cases, like telecom, you just reach 
a certain teledensity, and it is difficult to grow past that.
    Senator Warner. Let me--I am going to make one comment and 
get one more question before I turn it over to Senator Kirk. I 
would concur with your comments about the ability to do 
business with the states in India. I think that is sometimes--
American businesses fail to understand that. I have worked with 
a lot of higher education institutions in America who have been 
waiting for Delhi to pass a higher education reform bill, and I 
think recently many of them have just decided to go straight to 
the states. Now, they are maybe not full 4-year institutions, 
but I think there is a growing opportunity at the state level 
to emphasize that point that Arvind made.
    I guess one of the things--let me go back to the BIT before 
my time runs out. What should we expect--recognizing Indian 
elections coming up, recognizing, you know, we are not exactly 
a model of efficient governance at this point either, what 
would be a realistic timeframe--if you can do this fairly 
briefly--do you think, that we should look at in trying to 
expect to get a BIT actually negotiated and passed?
    Mr. Subramanian. An honest answer would be I think it is 
unlikely that, you know, you could actually finish something 
before the next election. I think it would have to wait until 
after that, because it is more difficult to undertake these 
reforms are you are going to the elections.
    But, also, I suspect that there will be, you know, some 
difficult issues that have to be worked through, and for both 
of those reasons, I would--a realistic timetable would be more 
toward the end of next year to 2015 rather than, you know, 
early 2014.
    Mr. Rossow. I concur. I think it could happen easily before 
the end of the Obama administration, but to say it would be 
dramatically earlier than that--India has not even reviewed 
its--has not completed the review of its model BIT. I hear by 
the end of the year is what India is hoping for for that in 
conversations, but, you know, we are not even going to have 
another round of talks until that takes place.
    Senator Warner. Senator Kirk.
    Senator Kirk. I would just worry that in the cases of the 
United States and India, it is the government that is going to 
screw this up. And I would say that my worry about the White 
House is that the White House generally has to clear all trade 
agreements through the AFL-CIO, who always will say no to a 
trade agreement, that that, I think, is strongly against the 
interest of my State. When you look at Illinois, we had about 
$1 billion in exports, up 41 percent. And when I think about 
our exports, I think about the people who work for Deere and 
Caterpillar, you know, for Moline, Peoria, and look at this 
enormous potential market that it should be opened up by policy 
of the United States and should not be blocked by policy of 
India clinging to a dying ember of socialism, which has hurt 
their country immeasurably.
    That is it.
    Senator Warner. Let me move to a question I have. One of 
the things I am still a little uncertain on--I would like both 
witnesses to address this. You know, I think Prime Minister 
Gandhi at one point 20-odd years ago nationalized a lot of the 
banks. How much of the banking sector in India is now in 
private hands, even amongst the Indian banks?
    Mr. Subramanian. The exact number I think is that today 
around 74 percent of deposits and close to 72, 73 percent of 
assets are still managed by the state-owned banks, so about a 
quarter of the sector is not in state hands.
    Senator Warner. And when you are saying state owned, even 
like the State Bank of India, is that entirely state owned, or 
is there private----
    Mr. Subramanian. It is a state-owned bank, a majority 
ownership----
    Senator Warner. And the other state-owned institutions are 
100--are they starting to move to privatize some more of these?
    Mr. Subramanian. Well, some of them have sold some partial 
stakes to the public, so it is not 100 percent owned by the 
government.
    Mr. Rossow. Most of the stakes that the banks have sold 
have actually been to other Indian financial institutions, by 
my recollection. So Life Insurance Corporation, which, you 
know, like Arvind mentioned, actually owned 75 percent of life 
insurance sales by the government-owned insurer, and they are 
also a major shareholder in other government-owned corporates 
throughout the economy.
    Mr. Subramanian. Senator Warner, on that can I just----
    Senator Warner. Please.
    Mr. Subramanian. The one point I think I want to make is 
that, you know, the Indian approach to going past the socialism 
that Senator Kirk has rightly warned against has been much more 
to open and allow new entrants into the private sector rather 
than to take on privatization. So if you look at airlines, 
telecommunications, banking, the approach has been, you know, 
let us allow new entrants, allow private sector entry, so that 
you grow the private sector and shrink the public sector rather 
than, you know, privatize the public sector head on, because 
the political costs of laying off employees are much greater. 
And this has been a very successful model. In telecom and in 
airlines, where I think India has made a lot of progress, you 
know, basically private sector, the carriers have come in.
    So in the banking sector as well, that is the policy. You 
know, a number of new banks, private banks, have been licensed 
in the last 10 years, they are doing very well--HDFC, ICICI, 
YES Bank, Kotak Mahindra Bank. And now, as you know, the new 
Governor has said in his first speech that, by January, new 
banking licenses will be awarded. We do not know how many and 
to whom, but I think we are going to get substantial new 
private sector entry into the banking sector.
    Senator Warner. Let me just do one follow-up question 
before I turn it back over to Senator Kirk. The last time I was 
in India, I gave a proposal to then-Finance Minister Mr. 
Mukherjee around electronic payments, and this may not be 
either of your exact expertise, but Ajay Banga, who is a good 
friend and CEO of MasterCard, has got, I think--and I know 
there are some other very provocative and, I think, really 
forward-leaning proposals about electronic direct payments that 
might be able to be used to try to cut out some of the graft 
and cut out some of the corruption as India looks at different 
distribution models, particularly the poor. Do you have any 
comments on that? And I know there was--my memory is fading. 
The American guy from California was going to come in with a 
major system and--in terms of a national ID system that might 
help allow that. What is the progress on electronic payment 
systems? And do you think that has the kind of hope that it at 
least appears to me?
    Mr. Rossow. There are kind of three pieces to this. First 
is to establish, as you mentioned, the national ID--``Aadhaar'' 
it is called--and they have got, I think, 400, 500 million 
people that have been signed up for it so far, with the 
expectation it will hit 600 million next year. That is moving 
along very well. Still very controversial.
    Then the corollaries to that are that they are finding the 
relatively unbanked communities--because only about half of 
Indians have a bank account, and trying to establish a bank 
account oftentimes attached to this unique ID.
    The third piece to it then, as you mentioned, is the 
electronic delivery of a lot of the subsidies or other payments 
from the government that the individuals should be getting.
    In my opinion, this is the single most transformational 
thing taking place in India right now. As I mentioned, you 
know, we try to cooperate with India on a variety of fronts, 
but sometimes it is pushing rocks uphill. This is one where it 
is pushing a rock down a hill. Every company that I consult 
with and talk to about what is the thing that you should be 
knowing in India right now, you have got to be figuring out how 
to take advantage of this.
    For Aadhaar, there is going to be a unique ID, a biometric 
ID, for an insurance company. That will help you to know the 
identity of the citizen. You know, a lot of communities where 
you have got to go in and start selling different types of 
financial services, this is going to provide a heat map for you 
on where people are actually using financial services that 
otherwise have been completely dark before.
    So I think it is transformational. It appears to be 
working, from what I can understand, with the exception of the 
third part where it has been rolled out relatively slowly, 
which is actually sending subsidies down the pipeline. They 
have got 50-something districts, I think, so far that that has 
been launched so far, and not every government program yet. But 
they are making a strong attempt to do so.
    Mr. Subramanian. I agree with completely with what Rick 
said, but just to add a couple of points, I think the name you 
were looking for, Senator Warner, is Nandan Nilekani. He is the 
one who is implementing this Aadhaar scheme. He was the CEO of 
Infosys, you know, the iconic Indian company.
    I think this Aadhaar biometric identification is going to 
be--that along with the GST tax that they plan to implement are 
going to be the two kind of transformational policy actions 
from a macro point of view, because, you know, a lot of the 
subsidies that India gives out are actually very wasteful, 
ineffective. The former Prime Minister, Rajiv Gandhi, said that 
for every one rupee of subsidy, probably 15 cents--or the 
equivalent of 15, reaches a person, so about 80 to 85 percent 
waste.
    So this Aadhaar biometric identification will allow many of 
these schemes to be kind of almost rolled into a cash-based 
transfer scheme, and, in fact, that has already begun. For 
example, the cooking gas subsidy, I think now about 500,000 
people have already been converted to this. And the other point 
is that this is going to be enormously transformational in 
terms of the financial inclusion agenda of the government, 
which the new Governor has actually also put on top of his 
priorities, and that is a huge investment opportunity for U.S. 
business as well when there is more financial inclusion.
    Senator Warner. Senator Kirk.
    Senator Kirk. Let me just follow up. When you talk about 
the Aadhaar ID, it just seems that to give greater and greater 
electronic access of large numbers of people to the Indian 
treasury. Then I think about is India bankable at all. You 
know, if it is going to accelerate the provision of subsidy 
services to many people, it sounds like it is less and less 
bankable.
    Mr. Subramanian. You mean less bankable in the sense that 
it is going to be better or----
    Senator Kirk. I would just say that if I was buying an 
Indian bond, that would alarm me.
    Mr. Subramanian. Senator Kirk, I think the way to look at 
it is that at the moment India spends something like--I would 
say something like between 3 and 5 percent of its GDP on these 
subsidies.
    Now, if you were to reduce that from 5 percent to 1 percent 
and be as effective because you are targeting it better, I 
would buy India bonds because the fiscal situation would be 
much better.
    Mr. Rossow. There are two components to it. One is money 
that the government is already giving directly, and the process 
for doing that--there are actually trucks of rupees that go 
down roads and deliver----
    Senator Kirk. Let me actually ask you guys, the thing that 
I noticed when I was in India was the competition with China if 
we look at financial services like insurance. You know, these 
kind of problems you do not hear about when you are in Beijing 
with foreign companies, which is a strong go signal for 
everybody to go ahead and modernize and service that market and 
innovate to bring all those good things to bear in the Chinese 
market.
    Mr. Rossow. Having worked in both in the insurance 
industry, it is more stable in China. It is much more stable. 
They have got a 50-percent foreign direct investment cap for 
life insurance versus 26 percent in India. But there are 
behind-the-border restrictions in China that companies face. 
You go to a different office to get licenses to open up in new 
provinces. Growth for foreign companies is slower in China than 
in India.
    In India, once you are in, at 26 percent, the domestic 
companies, really there is no different treatment than there 
are for foreign companies.
    So with China you have more regulatory stability, a greater 
FDI cap, than you do in India, but a little bit less 
transparency in terms of what might be the next regulations 
coming up. And also there are behind-the-border restrictions 
against foreign companies operating there. So it is a mixed 
bag. Some is good in one, and some is good in the other.
    Mr. Subramanian. Just to add, I have written a book on 
China recently, so I think on financial services, you know, 
many in manufacturing, China is much more open to FDI than 
India is. But in financial services, China is not very far 
ahead of India. You know, life insurance might be different, 
but in banking and other--you know, investment banking, 
commercial banking, retail banking, I would say that India in 
some sectors is actually more open than China has been.
    Senator Kirk. Would that be followed by an impression that 
China is a better place to invest than India?
    Mr. Subramanian. I think as Rick said, I think that really 
there is much more regulatory uncertainty in China. The way I 
think about it, Senator Warner and Senator Kirk, is that, you 
know, if you have a top-down centralized system, you know, you 
can get certainty because it is basically by fiat. Or you have 
a system like the United States, very democratic but rule-of-
law based. India is a little bit stuck in between. It is not 
top-down, but, you know, the bottom-up process, democratic 
process, is still a work in progress. So that is where I think 
the problem is in India.
    Senator Warner. I mean, I would argue that it might be 
easier to get into China, but in terms of actually getting your 
money out, I would take the chances on India. India is messier. 
Democracy is messier. And I think as you see the long-term 
investments that American and other companies have made in 
India, that have sorted finally through the regulatory maze, 
they stay for a long time. I look at a lot of the big 
multinationals, I think, who were having--they got swept up in 
a euphoria about China, but are starting to have some second 
thoughts now as they try to say how do you actually maximize 
profits and take them out of the country, which raises one 
other--kind of moving off just the financial sector for a 
moment, you know--and, Arvind, I think you wrote part of this 
in a recent op-ed in the New York Times about why India's 
economy is stumbling. You talked about some of the regulatory 
burden. And clearly, after we saw the enormous tragedy in 
Bangladesh, nobody here is advocating laxer environmental or 
safety laws, but whether it is textile on the one hand or 
compared to China on the other in terms of mid-level 
manufacturing, you know, what would you prescribe, both of you, 
for India to be able to--as I think both of you recognize, the 
IT sector led for a long time. That is wonderful. It is high 
end. How do you have some of these mid-level sectors that 
others like manufacturing or textiles, enterprise zones, other 
ideas? Suggestions?
    Mr. Rossow. They have special economic zones, and those 
have been a moderate success, to my understanding. But the 
physical infrastructure is a huge impediment to doing 
manufacturing in-country.
    Arvind mentioned one tax reform that is on the docks, the 
goods and services tax. This for India's economy is the single 
biggest reform that they could undertake, and there is a 
reasonable chance it could happen, even before India's national 
election.
    There is a parliamentary committee chaired by the 
opposition that recently issued a report on the goods and 
services tax, and it is fairly favorable. Most of the 
negotiations on this----
    Senator Kirk. Could you educate me on the GST? Is that 
like----
    Mr. Subramanian. VAT. It is like a VAT.
    Mr. Rossow. Every state, and even some local 
jurisdictions----
    Senator Kirk. Yeah, so we would expect the whole Indian 
economy to slow down like the European economy under a VAT.
    Mr. Rossow. Well, every state and local jurisdiction in 
India has its own customs union right now, so, for instance, an 
Indian CEO I was talking to a few months ago said that to move 
an auto product from Delhi to Mumbai, you get stopped 12 times 
by in-country customs duties. And there is a way around that, 
which is to pay a bribe. If you want to do it the right way, 
your truck waits in line. And I am sure you have been to India. 
You have seen the miles and miles of trucks that sit at every 
one of these checkpoints. That is what you deal with in 
manufacturing. And the goods and services tax, you know, one 
person called it ``India signing a free trade agreement with 
itself.'' I think manufacturers expect that that is going to be 
a huge boon. But, still, the more intractable issues are the 
infrastructure issues where there has been very little movement 
on so far.
    Mr. Subramanian. But to come back to your question--I mean, 
I agree with everything that Rick said. I think if India 
could--you know, infrastructure is a lot of things, but I think 
more specifically, if we could get our power, you know, under 
control, more investment in power, you know, make it--you know, 
get rid of the subsidies in power, just that one, I think, 
piece--because the power subsidy in India is the source of a 
lot of problems. If we could do that in a way that, for 
example, the state of Gujurat has done very effectively, if we 
could get more models, more investment in power, I think the 
kind of multiplier effect that that could have, including in 
kind of creating the groundwork for manufacturing, could be 
quite positive.
    So if I were the new government in power, I would focus on, 
you know, getting the power sector in shape as a top priority.
    Senator Warner. I would just add, that was one of the areas 
I was going to head on. I think utilities are about--Indian 
utilities are about $35 billion in arrears at this point, 
collectively, and they are running at an efficiency rate of 
about 30 percent. When you have the threat of brownouts and 
blackouts, you are not going to--it is hard to make those 
investments, which kind of goes back to the--an area that I 
think we all had great expectations for and I think was one of 
the times, at least from my view, when the Indian American 
diaspora kind of came of age politically in this country was on 
the Civil Nuclear deal. And we are still waiting, and, you 
know, it seems like--I know we have got to sort through these 
liability issues, but either one of you want to make any 
predictions about this? And I know there are some expectations 
that maybe out of this--the predictions were that the Prime 
Minister was going to bring a letter with him on at least a 
small move forward on that item.
    Mr. Subramanian. I was told that, you know, the cabinet in 
India cleared--kind of gave the go-ahead to what is being 
called either sort of a pre-works agreement on the Westinghouse 
thing. So I am hoping that there will be some progress at least 
on one of the two deals with Westinghouse via a works 
agreement, which is, you know, basically getting the two sides 
together and saying let us talk, let us see what needs to be 
done to push this forward, because we are not even at that 
stage now.
    Of course, the whole liability law is going to--you know, 
is there in the future to deal with. But at least let us get 
something off the ground, and that is what I am hoping will be 
one of the deliverables from this visit.
    Mr. Rossow. Yes. Hearing the opposition to what the cabinet 
decision was and the potential work-around and liability issue, 
hearing how loud the opposition has been, so I do not have any 
internal as to what the Prime Minister is bringing, but when 
the opposition gets this loud on something, I tend to believe 
there is a little substance there. So in terms of the PM's 
visit, this could be potentially like the culmination of what 
we have been working on with the nuclear deal, if we are able 
to actually get a shovel into the ground on this one.
    Senator Kirk. I would just say that I supported that 
nuclear agreement to make sure that there is steady, reliable 
power to this economy that hopefully could take off with 
reliable power.
    Senator Warner. Do either of you want to make a comment 
on--I think Senator Kirk--I know we are focusing mostly on 
business issues at this point, but do either of you want to 
wade into the Afghanistan circumstance?
    Mr. Rossow. No great expertise on my side.
    Mr. Subramanian. Yeah, you know, that is way above my pay 
grade.
    [Laughter.]
    Senator Warner. You guys are--you can tell they are not 
politicians.
    [Laughter.]
    Senator Warner. We obviously--again, on the defense 
investment side, though, there have been some disappointments 
and some wins. Do you have any prescriptions, both prediction-
wise and also suggestions on what we can do both in terms of 
furtherance of our strategic partnerships? Because I agree with 
Senator Kirk, our interests align so often, but sometimes there 
is, I think, a reluctance, and understandably, in India's 
history to perhaps acknowledge how closely our interests align 
because of the long tenure of the leaders of the nonalign 
movement. But how can we----
    Mr. Subramanian. Sorry.
    Senator Warner. As a former wireless guy, that is the sound 
of money to me, Arvind, so that does not bother me.
    [Laughter.]
    Senator Warner. That does not bother me at all. The 
audience heard an annoying sound. I heard, ``Ka-ching, ka-
ching.''
    As Senator Kirk mentioned as well, India's military and 
interior forces are more and more engaged in certain levels of 
civil unrest. This is, again, a natural place for alignment, 
predictions as well as what we can do from the Congress' side 
to help that relationship foster particularly on the 
procurement side.
    Mr. Rossow. I think give Ash Carter, you know, an 
``attaboy.'' Ten years from now, when we look back on, you 
know, what I think most people consider treading water right 
now in the relationship, I think 10 years from now when you 
look back, or 15 years, we are going to look back on the work 
that Dr. Carter is doing on building a stronger relationship 
between the Pentagon and India's military is going to be the 
most transformational thing that is taking place right now 
with, you know--we have seen deals signed already, $10 billion. 
There are certain countries that we sign that much with on an 
annual basis, so for a 10-year period, that is not necessarily 
our record breaker. But they are laying the groundwork.
    I mean, I think the assumption by companies that by their 
involvement in supporting the nuclear deal and getting involved 
strategically that every deal to come our way did not yield the 
fruit that we had hoped at the time. And we are still feeling 
each other out. But the process for actually engaging them and 
talking about how India plans to buy--and India's acquisitions 
right now, too, are a bit paralyzed. You know, there have been 
so many allegations of corruption against India's procurement 
process that the Minister has been going slow. So with an 
election, with the new Minister, maybe a new outlook on this--
the process work is being done very well right now to get our 
two sides aligned. The deals hopefully will follow once India 
starts to release some of the funding that it has.
    Mr. Subramanian. Just a couple of brief thoughts on that. I 
think I agree with what Rick said. I think, in fact, there is 
so much cooperation on defense taking place, you know, below 
the radar screen that has to be very promising for, you know, 
defense contracts and defense sales by the United States. And 
to be fair, I think that is--in relative terms, that has been 
one of the successes of the U.S.-India partnership.
    A final point there is that there is, in fact, a 
procurement bill in India which, if it gets passed, I think 
will go some way toward kind of clearing up the paralysis now 
that has happened in procurement because of all these 
allegations of corruption and so on. So I am hoping that, you 
know, India passes this procurement bill, government 
procurement bill, it signs up to the government procurement 
agreement in the WTO, and we will see, you know, much better 
procurement, more open, efficient, transparent procurement, 
which should be good for U.S. defense suppliers as well in the 
long run.
    Senator Warner. I have one more question but before----
    Senator Kirk. Let me just add one other thing.
    Senator Warner. Go ahead, please.
    Senator Kirk. Two cases where the United States and India 
overlap considerably on interest is missile defense, which is 
why India has become such a large purchaser of Israeli missile 
defense military hardware. This is tremendously encouraging to 
see that link between Israel and India being status quo 
democratic powers, who I think are good bets for the defense 
equipment business.
    Mr. Subramanian. I agree.
    Senator Warner. I would just share one of the things--
actually, the last time I was in Israel, was this notion of 
trying to----
    Senator Kirk. I would interrupt you, Mr. Chairman.
    Senator Warner. No, please. Go ahead.
    Senator King. I just think that we ought to do a hearing in 
this Subcommittee on a China BIT, and I would just say that the 
Senator from Hawaii, Mazie Hirono, and I have decided to 
restart the China working group in the Senate that I had in--I 
put it together in the House. We had 77 members focusing on 
economic opportunities in the China market. I think we ought 
to----
    Senator Warner. We will look at that as well.
    Senator Kirk.----do that for this Subcommittee's work.
    Senator Warner. Well, I want to follow up on your--before I 
ask my last question, I want to follow up on your last point, 
that one of the relationships that I do not think is 
acknowledged as strongly as perhaps it should be is the 
alignment between the United States, India, and Israel. I think 
already Israel is--or India----
    Senator Kirk. It's a tremendous alliance.
    Senator Warner. India procures on the defense side about as 
much from Israel as it does from the United States or a little 
bit behind, and a lot of alignment of common interests. I know 
it is somewhat of a challenge sometimes to politically 
acknowledge that in India, but I think it is--anyone want to 
make a comment on that.
    Mr. Rossow. I agree. I have heard the same.
    Mr. Subramanian. Yes.
    Senator Warner. Let me just close with just kind of a more 
general question with one specific item. I want to thank you 
both for your testimony, and I think we all hope that the Prime 
Minister and President's visit is going to be successful, and 
recognizes well some of the constraints inside India until the 
next elections come about. I remember when I was there last 
year, and they said, ``We have to wait until after the state 
elections,'' and then the state elections came with a little 
bit, not a lot of clarity, and now we have to wait for the 
national elections. I am starting to sound like----
    Senator Kirk. Ain't democracy grand?
    [Laughter.]
    Senator Warner. It is starting to sound a little bit like 
us. I guess, you know, one item that I want to highlight, 
before I ask you the general question, is that one of the 
things that we worked on last time I was there was, as India 
looks to develop its skills requirement--you know, everybody 
knows about IITs, and everybody knows about the incredible 
talented workforce that is in, again, specifically the IT 
sector. But, you know, India has very ambitious goals around 
community colleges and skills development. As we think about 
manufacturing elsewhere, that is an area that I believe more 
could be done. We have tried to initiate certain areas between 
some of our State community colleges----
    Senator Kirk. Senator, I would like to----
    Senator Warner. Please.
    Senator Kirk. I would like to follow up on one thing. One 
of the coolest things I have discovered in Chicago is a new 
project called ``Englewood Codes.'' This is in the toughest 
police district in Chicago where murders have been highest, 
where kids learn how to code to make Web sites saying that--all 
of us in the United States have been put on help lines to 
somebody in India who does not share your circadian rhythm and 
does not seem to be able to talk to you very well. But my 
vision with these kids was if Englewood Codes could be 
connected to a help line and you are always talking to an 
American kid who may be an at-risk youth in the South Side of 
Chicago, that was the area that I was hoping that we would 
really take the Indians on IT support.
    Senator Warner. I do remember one of my first visits to 
India. The flip side of that was there was an Indian program 
that a nonprofit, an NGO, had put together called ``Computers 
Without Walls,'' and it was in one of the most kind of decrepit 
slums around Delhi. We went. There were all these kids. It was 
basically a block building with computers inside. No teachers, 
no training. They just left the kids in, and it, again, 
reinforced the fact that these kids were almost self-taught and 
extraordinarily bright and talented. And I remember one of them 
came up to me, and I am coming in as the politician. They 
asked, you know, ``Tell me what your name is.'' And I say, ``It 
is Mark Warner.'' And I ask, ``Why do you want to know my 
name?'' He said, ``Because I want to Google you to see if you 
are important.''
    [Laughter.]
    Senator Warner. And that was in 2005. I do think, you know, 
this is a partnership and a relationship that I believe very 
strongly is one of the most critical, if not the most critical 
relationship of the 21st century, and we have got to do all we 
can to continue to grow it and nurture it. We have talked about 
some of the financial challenges, We have talked about the BIT. 
We have talked about trying to move insurance up from 26 to 49. 
I share some of your concerns about infrastructure. Again, the 
last time I was there, lots of talk about opportunities, but 
not even American, any other kind of--some of the large 
infrastructure entities have not seemed to be able to break 
through in a major way.
    But do you have any kind of closing comments? Both of you 
gave great opening statements on this relationship, but do you 
have any closing comments that you would hope that we would see 
kind of the next 3, 6, 9 months as we go into the Indian 
election cycle in the spring of what you would hope we could do 
and what we as friends in the Congress of this relationship 
should do? Arvind and then Rick.
    Mr. Subramanian. One specific and one general, Senator 
Warner and Senator Kirk, if I may. I think in the short run, I 
think, you know, if ever the immigration bill is taken up in 
the House, I think that there is--I think it is a very laudable 
effort. You know, it is going to, from the U.S. point of view, 
going to bring in much more high-skilled talent into the United 
States, which is desirable. But I think it also has a number of 
restrictive elements which are not so good for the United 
States because it is like--you know, it is like imposing a tax 
on chips, you know, imposing restrictions on skilled labor 
coming into the United States. So it is kind of self-defeating 
for the United States. But at the same time, also, it kind of 
has--it is problematic from an Indian point of view as well. 
You know, the IT model is affected.
    My colleague calculates, for example, that, you know, this 
generates a lot of revenue for Indian nationals, and, frankly, 
it is a symbol of cooperation, but also people-to-people 
cooperation.
    So I think it is really important going forward to get this 
bill right as kind of sending a signal that this is a really 
important relationship.
    I think more broadly, I think that I would say that the 
Indian economy has to recover, has to gain back its strength. 
And once that happens, I think we can move into a new phase 
where, you know, the economic relationship can blossom more. 
And at that stage, I think we do need to be thinking about 
something much more ongoing, substantive, and big, moving 
beyond a BIT. Because as you said, this is a long-term 
relationship. We need to nurture it. The potential is big. And 
it is a two-way relationship.
    So you need a framework for addressing this, and that is 
why I am keen that at some point the two countries will embrace 
the principle of, you know, maybe even working toward an 
economic partnership or a free trade agreement.
    Mr. Rossow. I would just say keep pushing. Since this level 
of engagement really kicked off with Secretary Kerry's visit to 
India in June, he brought with him a couple baskets of issues: 
local content rules, tax concerns, FDI, patents. Those are the 
four big blocks of concerns that American companies have raised 
that he brought up.
    Since his visit--and we have had--the Vice President went 
out, we have had several Indian cabinet officials, now the PM, 
and then the Finance Minister comes back out. Since Kerry's 
visit, India has adopted safe harbor rules for transfer 
pricing, which I see are being fairly warmly received by 
companies. Arvind mentioned some of the small changes, but 
important, that they made in FDI rules. And they postponed the 
introduction of the preferential market access.
    So this level of engagement has actually yielded fruit on 
the things that were raised so prominently back then. So, you 
know, it is a simple thing to keep doing what we are doing. 
This idea that India's election precludes big moves I do not 
buy. The Indian electorate does not care about 99 percent about 
what we have talked about here. The insurance bill is not what 
takes an Indian to the polls. They do not pull the lever 
depending on how somebody voted on the insurance bill or 
defense trade, or nuclear, even, for that instance. You know, 
most voters care more about electricity and water and things 
like that.
    So India still has some elbow room to work on these issues. 
So just also do not give up. I hear the same thing that you do, 
that elections are coming, it is too late. The single biggest 
decision this Government made during its first term, from 2004 
to 2009, was signing the Safeguards Agreement on Nuclear 
Cooperation. It forced the confidence motion in parliament. 
Parties were jettisoned. They had to find new allies, and they 
barely survived the confident vote. That was 8 months away from 
the national election. So there is a chance to do more.
    Thank you for both of your interest in this, and the India 
Caucus has been just a terrific advocate, and thanks for 
everything.
    Senator Kirk. I would say eventually if we succeed, we will 
see State Farm and GEICO battle it across the subcontinent, and 
I think we both agree an American insurer should be capturing 
that auto market in India.
    Senator Warner. Or a well-run Indian competitor as well, as 
long as it is, you know, on a level playing field. And so I 
want to thank both of the witnesses. I think this is an issue 
of enormous concern. Senator Kirk and I have worked together, 
and I have worked with my co-chair of the India Caucus, Senator 
Cornyn. We got a resolution through welcoming Prime Minister 
Singh that he will receive from the Senate, that he will 
receive when he gets here, I believe tomorrow. And it points 
out the strengths and importance of our relationships, but one 
of the things that I think, as we move from a friendship into a 
partnership, we need to not only talk about us being two great 
democracies, but as partners being able to have a little--as I 
think, Rick, you mentioned as well, a little elbowing of each 
other occasionally, but continuing to work forward. And I think 
both of your comments about the need for this continued 
engagement at the most senior levels is very important.
    So, again, I want to thank the witnesses, and the hearing 
record will remain open for 7 days for any additional comments 
and for any additional questions that might be submitted for 
the record.
    With that, the hearing is adjourned. Thank you.
    [Whereupon, at 3:41 p.m., the hearing was adjourned.]
    [Prepared statements and responses to written questions 
supplied for the record follow:]
                PREPARED STATEMENT OF ARVIND SUBRAMANIAN
   Senior Fellow, Peterson Institute for International Economics and 
                     Center for Global Development
                           September 25, 2013
    This testimony draws upon my ongoing Peterson Institute for 
International Economics project with C. Fred Bergsten, Breaking Ground 
by Breaking Barriers: An Economic Partnership of the Largest 
Democracies, supported by the U.S.-India Business Council (USIBC) and 
the Smith Richardson Foundation (SRF).
Summary and Recommendations
    Observation 1: The Indian economy recently encountered serious 
turbulence and will require important reforms to stabilize it. To some 
extent, India's problems reflect India's deep and ongoing financial 
integration with the world economy. For example, between 2010 and 2012, 
India received about $160 billion in foreign capital inflows. With the 
U.S. Federal Reserve planning to reverse its unconventional monetary 
policy and as the U.S. economy has rebounded, some of this money is 
flowing back to the United States, causing currency declines and 
turmoil in several emerging markets, especially India. But India's 
problems also have deeper, domestic origins, and require serious 
reforms to overcome them (elaborated in my recent New York Times 
article (attached)). Fiscal consolidation, based on eliminating 
wasteful subsidies and introducing new taxes, will be critical. But 
looming elections could complicate reform actions and perpetuate 
uncertainty and turbulence.
    Observation 2: Economic uncertainty over the last year has 
triggered unprecedented liberalization of foreign direct investment 
(FDI) and other capital inflows. This seems paradoxical, at first 
blush, but is consistent with international experience that governments 
take action when a sense of crisis looms. In the last year, India has 
liberalized its FDI regime in several sectors-multi-brand retail, 
defence, petroleum and natural gas, stock exchanges, 
telecommunications, infrastructure--to a greater extent than in recent 
history. In order to attract foreign capital, the government also 
relaxed a number of constraints to foreign equity, portfolio, and debt 
inflows.
    Prediction: Further opening to foreign investors, especially 
providers of financial services, is likely. A new pension-related bill 
has just cleared one of the two chambers of the Indian legislature. 
This bill paves the way for foreign investment--up to 26 percent--in 
the sector, with additional increases in the foreign limit linked to 
the draft insurance legislation. This insurance legislation, if passed, 
would allow for increased foreign ownership of insurance firms from 26 
percent to 49 percent. The new Governor of the central bank has 
signaled an openness to reforming the financial sector and to 
encouraging foreign participation in the Indian banking system.
    Recommendation 1: The time may be ripe for pursuing a bilateral 
investment treaty (BIT). The recent spate of FDI liberalization--as 
well as competitive pressure from U.S.-China investment negotiations--
could pave the way for India to pursue a BIT. Although negotiations 
will have to address some difficult issues, including investor-state 
disputes and visa issues, the domestic actions necessary to allow 
international negotiations are being taken.
    Recommendation 2: A BIT is but a stepping stone for creating a 
broad and strategic framework for U.S.-India trade. This framework 
would include as critical elements embracing the principle of, and 
initiating preparatory work toward, a free trade agreement in the 
medium term. This framework is necessary for a number of reasons. 
First, the prize is big. India has had 30 years of close to 6\1/2\ 
percent growth, and about 8\1/2\ percent in the last decade. In 2012, 
it became the world's fourth largest economy after the United States, 
China and Japan (PPP dollars). Its trade in goods and services is about 
a billion dollars. It will need investments in infrastructure, and 
imports of natural gas and services, in all of which the United States 
has comparative advantage as a supplier. Moreover, India-U.S. trade is 
well below potential (about 50 percent) which a free trade agreement 
could rectify.
    Second, the framework is required to address the broader regulatory 
challenges facing U.S. business in telecommunications, preferential 
market access policies, intellectual property, tax uncertainty and 
others. These challenges will be ongoing and some credible mechanism 
needs to be in place as a means for resolving them.
    Third, more importantly, it is required to address the 
discrimination that each country is imposing on the other. India has 
signed (or is negotiating) free trade and economic partnership 
agreements with its largest trading partners that are all major 
competitors to the United States: Europe, Japan, Singapore, ASEAN, and 
possibly ASEAN-plus 6 (which includes China and South Korea), and 
Canada.
    Soon, if not already, this discrimination may be the biggest 
challenge for U.S. business in India. These RTAs are neither as 
comprehensive in their coverage across and within sectors as the FTAs 
negotiated by the United States, nor as expeditious in the timeframe 
for implementation. Because India's barriers are high and the market is 
large and growing, the disadvantage to American companies can be 
substantial. The United States is inflicting similar discrimination on 
India by negotiating the Trans-Pacific Partnership (TPP) and Trans-
Atlantic Trade and Investment Partnership (TTIP).
    Fourth, the broader framework will be necessary to re-vitalize the 
multilateral trading system by moving beyond a Doha Round to what 
Aaditya Mattoo (World Bank) and I have called a China Round of trade 
negotiations (http://piie.com/publications/
interstitial.cfm?ResearchID=1999). The U.S.-India relationship has a 
key role to play in keeping China tethered to the multilateral system 
and, more broadly, ensuring its peaceful rise.
    Finally, the broader framework will represent ``Going big''. And 
going big is necessary because this is a relationship between two great 
democracies with deep commonalities; because this is a marathon not a 
sprint; because this is a multi- not uni-dimensional relationship; and 
because Going Big is the best way to address even the small. You can't 
solve problems relating to chicken (or even financial services) by only 
talking chicken or insurance.
I. Recent macroeconomic background, challenges, and reforms
    India has experienced close to 6\1/2\ percent growth for over 30 
years since 1980. As a result, India is now a 2 trillion dollar economy 
(measured at market exchange rates). In purchasing power terms, it 
became in 2012 the world's third largest economy (US$4.7 trillion). Its 
trade in goods and services is close to a trillion dollars, and 
expected to double every 7 years.
    But recently, India has experienced a bout of severe turbulence. 
After a decade of rapid growth, averaging close to 8.5 percent, India's 
GDP started to decelerate from late 2010, reaching a low of 4.4 percent 
in the first quarter of 2013 (Figure 1).
    The recent turbulence also reflects India's deep and ongoing 
financial integration with the world economy. For example, between 2010 
and 2012, India received about $160 billion in foreign capital inflows. 
With the U.S. Federal Reserve planning to reverse its unconventional 
monetary policy and as the U.S. economy has rebounded, some of this 
money is flowing back to the United States, causing currency declines 
and turmoil in several emerging markets, especially India. The rupee 
declined by about 20 percent against the dollar within a short period 
of time and has now recovered some ground (Figure 2). Looming elections 
will remain a source of uncertainty.
    But domestic factors--fiscal populism, weak governance, and policy 
uncertainty--have also played an important role. Consumer price 
inflation has remained at or close to double digits for over 3 years. 
There are recent signs of a let-up especially in wholesale and core 
inflation but fundamental inflationary pressures remain a source of 
serious concern (Figure 3). Another worrisome trend is the 
deterioration in India's external balances. India's current account 
deficit that has remained less than 3 percent of GDP for many years, is 
now about 4.5 percent of GDP (Figure 4). This current account deficit 
and the need to finance it has been the proximate cause of the recent 
troubles, including the decline in the rupee.
    Underlying the problem of inflation and external imbalances is the 
fiscal position. As a result of rising expenditures, mainly devoted to 
the social sectors and transfers, which have doubled in per capita 
terms over the last decade, the government's budget deficit has 
remained close to 10 percent of GDP (Figure 5).
    Late last year, in response to these adverse developments, and in 
order to head off a looming investment downgrade by the foreign credit 
ratings agencies, the government undertook reform actions. It enacted 
measures to reduce fuel subsidies on diesel and limit the subsidy on 
cooking gas. The reductions are ongoing and take the form of small but 
steady increases in the consumer price of diesel. It approved greater 
foreign direct investment (FDI) not just in multibrand retail but in 
aviation, broadcasting and power exchanges.
    In response to the recent troubles, a number of measures have been 
taken to encourage foreign capital inflows into the Indian market. The 
qualified foreign investor (QFI) scheme has been expanded to cover a 
wider range of permissible investments, including mutual funds, equity 
and corporate bonds. Limits on inflows into Indian government and 
corporate securities have been increased to US$81 billion today, up 
from 66 billion at end-2012 while the withholding tax on these 
investments has been lowered to 5 percent. The limit on foreign debt 
borrowing (External Commercial Borrowings, ECBs) has been raised to $40 
billion today, up from 20 billion in May 2011. Within this limit, 
priority is accorded to ECBs for infrastructure financing. There are 
virtually no limits on foreign portfolio investments in the Indian 
equity market. In response to exchange market turbulence, some 
restrictions have been placed on the ability of Indians (but not 
foreigners) to invest or send remittances abroad.
    Economic stability can be restored through major reforms to cut 
inefficient spending and raise taxes, thereby pruning the deficit and 
taming inflation. On the spending side, the subsidies for fuel, power, 
and fertilizers need to be cut. On the tax side, India's version of the 
value-added tax (the Goods and Services Tax, GST) needs to be 
implemented expeditiously. The GST will place the Indian finances on a 
sounder medium-term footing, make them more transparent, and also go 
some way toward creating a common market in India. These steps need not 
come at the expense of the poor. For example, India is implementing an 
ambitious biometric identification scheme that will allow targeted cash 
transfers to replace inefficient welfare programs.
    India can still become a manufacturing powerhouse, if it makes 
major upgrades to its roads, ports and power systems and reforms its 
labor laws and business regulations. But the country is in pre-election 
mode until early next year. Elections increase pressures to spend. So 
India's weakness and turbulence may persist for some time yet.
II. Trade and Investment background
    In the last decade, U.S. exports of goods to India increased about 
700 percent in the last decade. Exports of services have doubled in the 
last 4 years. U.S. FDI has increased from US$200 million to US$6 
billion.
    Reflecting the combined impact of policy liberalization, 
technological change and India's internal dynamism, India's trade 
surged during the last decade (Figure 6). Exports of goods and 
nonfactor services surged sevenfold in just over a decade from US$60 
billion to US$420 billion. And imports also increased sevenfold from 
US$75 billion in 2000 to US$525 billion in 2011. As the chart shows, 
India recovered robustly from the impact of the global financial 
crisis. India's openness ratio (the ratio of trade to GDP) doubled over 
the course of a decade from about 25 to 50 percent. Indian global 
integration is thus well under way.
    Similarly, India's FDI has also increased but from a very low base 
of about US$3.5 billion in 2000 to US$43.5 billion just before the 
crisis. FDI has not completely recovered from the global financial 
crisis but recent measures should carry forward the momentum 
established earlier (Figure 7). India's FDI inflows remain well below 
those of China (which have averaged close to US$100 billion over the 
last decade), so India has to catch up for the nearly two decades of 
surging FDI that China has benefited from.
    This surging trade and investment has benefited the United States 
and India. India's exports to the United States has increased by about 
250 percent since 2000, from US$9 billion in 2000 to US$32 billion in 
2011 (Figure 8a). The United States is India's largest export market. 
More dramatically, U.S. exports of goods to India have increased by 
nearly 700 percent, from US$3 billion to US$23 billion (Figure 8b). 
However, China has overtaken the United States as India's largest 
supplier of goods and services, and the United States is not even 
amongst the top three sources of imports for India. It is important to 
note that U.S.-India trade is broadly balanced unlike India-China and 
U.S.-China trade, so that the scope for trade frictions from exchange 
rate and macroeconomic policy is minimized in the case of India-U.S. 
trade.
    Trade between India and the United States in services is also 
surging. Between 2006 and 2010, U.S. exports of services to India 
(cross-border delivery plus sales by U.S. foreign affiliates) have more 
than doubled from about US$12 billion to nearly US$25 billion. This 
remarkable growth occurred during the global financial crisis. A 
similar trend characterizes India's exports of services to the United 
States (Table 1).
    In terms of FDI, two points are worth noting. First, the United 
States is not the largest investor (consistently) in India. According 
to OECD data (Figure 10), U.S. FDI to India surged from about US$200 
million to nearly US$6 billion in 2010. But the United States was 
surpassed by the United Kingdom for the most recent period and by Japan 
in earlier periods. So, the potential exists for large increases in 
U.S. FDI to India.
    Second, FDI like trade in goods and services is also increasingly 
becoming two-way. A study commissioned by Federation of Indian Chamber 
of Commerce and Industry (FICCI) showed that between 2004 and 2009, 90 
Indian companies made 127 Greenfield investments worth US$5.5 billion 
in metals; software and IT Services; leisure and entertainment; 
industrial machinery; equipment and tools; and financial services. 
During the same period 239 Indian companies invested in excess of US$20 
billion in merger and acquisitions in different states and across a 
wide range of sectors. As a result, tens of thousands of direct jobs 
(predominantly U.S. citizens), supporting many more indirect ones, have 
been created.
III. Recent and Prospective Liberalization of Financial Services
    India has undertaken a series of reforms in the financial sector 
aimed at making it more competitive but also more resilient to shocks. 
For example, India is one of the 14 countries (out of 27 that are Basel 
Committee members) that have issued final Basel III capital rules.
    Two outstanding pieces of draft legislation relate to pensions and 
insurance. Recently, the draft pensions bill was passed by India's 
lower house of parliament. This bill paves the way for foreign 
investment--up to 26 percent--in the sector, with additional increases 
in the foreign limit linked to the draft insurance legislation.
    More uncertain is the fate of the draft insurance legislation that 
would allow for increased foreign ownership of insurance firms from 26 
percent to 49 percent. At the moment, there does not seem to be 
political consensus to ratify this bill which may have to await the 
conclusion of elections, currently scheduled for early next year.
    However, the medium term prospects (after the next elections) for 
more reform of the financial services sector appear promising. Even on 
the insurance bill, the differences between the two main parties are 
more tactical, relating to extraneous political issues, than 
substantive. Both broadly share the objectives and content of the draft 
legislation.
    Perhaps, more importantly, the new Governor of the central bank has 
signaled an interest in broader reform of the financial sector. In 
2009, Dr. Raghuram Rajan authored a report which laid out a road map 
for reforming the Indian financial system (http://
planningcommission.nic.in/reports/genrep/rep_fr/cfsr_all.pdf). For 
example, in relation to the banking system, which is still dominated by 
state-owned banks, he said:

        India has a number of foreign owned banks, many of whom have 
        been with us a long time and helped fuel our growth. They have 
        been in the forefront of innovation, both in terms of improving 
        productivity, as well as in terms of creating new products. We 
        would like them to participate more in our growth, but in 
        exchange we would like more regulatory and supervisory control 
        over local operations so that we are not blindsided by 
        international developments. The RBI will encourage qualifying 
        foreign banks to move to a wholly owned subsidiary structure, 
        where they will enjoy near national treatment on a reciprocal 
        basis. We are in the process of sorting out a few remaining 
        issues so this move can be made.

    He also indicated an interest to internationalize the rupee, to 
remain open to capital flows, and to liberalize restrictions on 
investment and position-taking in India's financial markets.
IV. Bilateral Investment Treaty (BIT)
    The rationale for a BIT between the United States and India was 
succinctly laid out in a letter sent to President Obama In December 
2011 by a number of Senators, including Senator Mark Warner. Matthew 
Stokes and Niraj Patel of the Center for Strategic and International 
Studies (CSIS; http://csis.org/files/publication/
121126_Stokes_BITandBeyond_web.pdf) discuss in detail the case for a 
BIT between the United States and India, including the rationale, 
content and likely political impediments. India has signed at least 80 
such agreements, including European nations, ASEAN, and Japan which 
arguably leads to discrimination against U.S. investors.
    For India, two additional and recent developments might increase 
the incentives for India to embark on BIT negotiations with the United 
States.
    First, in the last year, India has liberalized its FDI regime--to 
multi-brand retail, defence, petroleum and natural gas, stock 
exchanges, telecommunications, infrastructure--arguably to a greater 
extent than in recent history. In multibrand retail, some of the more 
onerous sourcing and other requirements were also relaxed.
    This recent spate of FDI liberalization paves the way for India to 
pursue a BIT. Although India still has a number of sectors in which FDI 
is partially restricted (for example, defence production, civil 
aviation, banking, insurance, broadcasting, stock exchanges, 
depositories), the climate for liberalization has become more 
propitious.
    Second, it will not go unnoticed in India that the United States 
and China have made progress in their BIT negotiations. There will 
therefore be competitive pressure on India to engage similarly with the 
United States.
    Clearly, negotiations will have to address some difficult issues, 
including pre-establishment rights, investor-state disputes and visa 
issues, but the domestic actions necessary to allow international 
negotiations are being taken, and moreover, the external competitive 
pressure to do so have increased.
V. Investment climate: States versus Center
    In recent years, there has been a considerable shift in economic 
and political power to the states. Indeed, most issues that critically 
concern investors--land, infrastructure, human capital, law and order--
are largely the domain of states. So, even if there is an improvement 
in governance in the Federal Government, what happens in the states 
will increasingly determine India's economic fortunes.
    It is not that leadership in the states is better on average than 
at the center, but in a decentralized India, a few visibly successful 
experiments can have powerful repercussions for the economy. Capital 
and labor can and will flow from the laggard states to the performing 
ones because India is broadly an economic union. The laggards will have 
fewer excuses for nonperformance if the experience of a neighboring 
state is better. In the past, the southern states were the pacesetters. 
This is no longer the case today. There are encouraging improvements in 
states across India--in the north (Delhi, Haryana, and Himachal 
Pradesh), west (Gujarat), east (Bihar and Chattisgarh), and Central 
India (Madhya Pradesh).
    This competitive dynamic is one cause for hope. The other is that 
the Indian voter is increasingly rewarding good governance. Until 
recently, India's political system was characterized by anti-
incumbency, with identity politics trumping good governance and 
economic performance. As a result, politicians had little incentive to 
deliver essential services and enact lasting reforms. Recently, though, 
Indian voters have reelected many incumbents who improved economic 
outcomes while throwing out poor performers, as exemplified by the 
ousting of the Communist party in West Bengal. These trends portend 
reasonable rates of economic growth in India even if the scorching 
rates of the past decade prove elusive.
    These trends reinforce the need for outsiders to deal increasingly 
with state governments, especially the better governed ones. At this 
stage, these contacts will have to involve dealings between these state 
governments and the private sector and private investors. India's 
constitutional structure will not allow state governments to take on 
direct international obligations. One possibility in the future is for 
state governments to push the Federal Government to take on 
international obligations on their behalf. For example, India could 
join the WTO's Government Procurement agreement, in which the list of 
covered entities could be state government and their agencies. But in 
relation to the financial sector, this might be more difficult because 
many or most of the laws and regulations in this sector come under the 
domain of the Federal Government. Decentralization is not without 
risks. The governance of the economically best performing states is 
based on leaders who, while democratically elected, have few checks and 
balances. Decentralization has also arguably not gone far enough 
because the states have been very reluctant to extend its advantages to 
local governments, which has had a pernicious effect on urbanization. 
Cities in India need more autonomy and their leaders need to be held 
more accountable.
VI. The Way Forward: A New Strategic Framework
    Trade and economic relations between India and the United States 
need a broad strategic framework. This framework would include as 
critical elements embracing the principle of, and initiating 
preparatory work toward, a free trade agreement in the medium term. 
This is so for a number of reasons.
    First, the prize is big. The starting point for forging a 
cooperative partnership is the recognition that despite frictions, the 
underlying potential is enormous. In my recent book Eclipse: Living in 
the Shadow of China's Economic Dominance, I project that the Indian 
economy has the potential to post medium-term growth of about 8 
percent. Once India navigates the current turbulence, this 4.7 trillion 
dollar economy will double every 7-10 years; the trillion dollar trade 
could also double every 7 years so that by 2018, it could reach close 
to 2 trillion dollars.
    Moreover, currently U.S.-India trade is well below potential. They 
are mutual under-traders. Prachi Mishra (of the International Monetary 
Fund) and Devesh Roy (International Food Policy Research Institute) 
calculate that, all things equal, U.S. exports to India should be 50 
percent greater than current levels. India's exports to the United 
States should be about 25 percent greater too. Emiko Fukase and Will 
Martin (World Bank) estimate that a comprehensive U.S.-India FTA would 
almost double U.S. exports of goods and services to India; and increase 
Indian exports to the United States by 15 percent. While both countries 
would gain, the United States would gain substantially.
    India will need about a trillion dollars worth investments in 
infrastructure, its demand for energy, including for natural gas, will 
be enormous, as to will its demand for services, including financial 
services. My Peterson Institute colleague Brad Jensen has shown that 
the United States could disproportionately benefit from these 
developments because it has a comparative advantage in supplying 
services.
    Second, the framework is required to address the broader regulatory 
challenges facing U.S. business in telecommunications, preferential 
market access policies, intellectual property, tax uncertainty and 
others. These problems will inevitably be of a recurring nature. To 
resolve them without excessive frictions, the two countries will need 
an ongoing mechanism of dialog backed up by more formal arrangements, 
including possibly a free trade agreement.
    Third, the framework is required to address the discrimination 
faced by U.S. business in Indian markets and vice versa. A BIT cannot 
be this mechanism because of its relatively narrow scope. And for that 
reason it offers limited scope for trading mutually advantageous 
concessions. The BIT, desirable as it may be, will need to be 
complemented in the medium term by a broader strategic framework.
    Soon, if not already, this discrimination may be the biggest 
challenge for U.S. business in India. U.S. firms and businesses are not 
being targeted for direct discrimination. Rather this discrimination is 
happening indirectly but substantially because of India signing (or 
being on the verge of signing) free trade and partnership agreements 
with nearly all the major competitors to the United States.
    A major development of India's trade policy over the last decade 
has been the aggressive pursuit of regional trade agreements, 
especially but not confined to Asia. In addition to comprehensive 
economic partnership agreements with Singapore and Japan, India is 
either negotiating or has negotiated some form of RTAs with a number of 
countries and regional groupings.
    These include: Agreement on South Asia Free Trade Area (SAFTA) with 
Afghanistan, Bangladesh, Bhutan, and Maldives; India-Thailand FTA, 
which will include ASEAN-plus tariff concessions; India-ASEAN 
Comprehensive Economic Cooperation Agreement (CECA); Regional 
Comprehensive Economic Partnership (RCEP) Agreement among ASEAN + 6, 
the latter comprising Japan, Korea, and New Zealand, Australia, China, 
India); India--EU Broad Based Trade and Investment Agreement (BTIA); 
Global System of Trade Preferences (GSTP).
    Now these RTAs are neither as comprehensive in their coverage 
across and within sectors as the FTAs negotiated by the United States, 
nor expeditious in the timeframe for implementation. But they signal 
India's interest in seeking access to markets abroad. Equally more 
important, the strong ``Look East'' nature of the policy is a reaction 
to China's strong and growing economic presence in East Asia.
    All these agreements provide more favorable access to non-American 
suppliers and because India's MFN tariffs and barriers can be high in 
some sectors, the discrimination can be substantial. And add to that 
the fact of India's large and growing market, and U.S. suppliers can 
really be disadvantaged.
    Of course, it must be added that the United States is reciprocating 
this discrimination (also indirectly) against Indian business when it 
negotiates the Trans-Pacific Partnership (TPP) and the Trans-Atlantic 
Trade and Investment Partnership (TTIP).
    Fourth, the broader framework will be necessary to re-vitalize the 
multilateral trading system by moving beyond a Doha Round to what 
Aaditya Mattoo (World Bank) and I have called a China Round of trade 
negotiations (http://piie.com/publications/
interstitial.cfm?ResearchID=1999). The U.S.-India relationship has a 
key role to play in keeping China tethered to the multilateral system. 
The United States and India, individually and collectively, have a 
vital interest and key role in ensuring China's peaceful rise as argued 
by Ashley Tellis (Carnegie Endowment for International Peace) and C. 
Raja Mohan (Observer Research Foundation).
    Finally, the broader framework will represent ``Going big''. And 
going big is necessary because this is a relationship between two great 
democracies with deep commonalities; because this is a marathon not a 
sprint; because this is a multi- not uni-dimensional relationship; and 
because Going Big is the best way to address even the small. To put it 
more colloquially, ``you can't solve problems relating to chicken (or 
even financial services) by only talking chicken (or insurance).''
    My colleague C. Fred Bergsten and I will soon be finalizing a book, 
Breaking Ground by Breaking Barriers: An Economic Partnership of the 
Largest Democracies, which will elaborate fully on such a broad 
framework, its rationale, content, the impediments to achieving it and 
how they might be overcome.
Figure 1. India: Quarterly GDP Growth, 2005-2013 (in percent)


Source: Reserve Bank of India

Figure 2: India: Exchange Rate Developments, 2001-August 2013


Source: Bank for International Settlements
Figure 3. India: Inflation, 1996-2013 (in percent)


Source: IMF, International Financial Statistics

Figure 4. India:Current Account Deficit (in % of GDP)


Source: IMF, World Economic Outlook
Figure 5: India: Government Budgetary Position (Net lending in percent 
        of GDP)
        
        
Source: IMF, World Economic Outlook

Figure 6. India: Trade in Goods and Services, Trade Openness Ratio, 
        2000-2011
        
        
Source: World Bank, World Development Indicators
Figure 7. India: Foreign Direct Investment, Net Inflows


Source: World Bank, World Development Indicators

Figure 8a. India: Top 5 Export Markets in 2011 (US$ bn.) 1/


Figure 8b. India: Top 5 Sources of Imports in 2011 (US$ bn.) 1/


Source: OECD STAN Bilateral Database
 1/ Excludes India's trade with the United Arab Emirates

Figure 9. Top OECD Foreign Direct Investors in India, 2001-2011, 
        (million of US dollars)
        
        
Source: OECD
Table 1. India-US Trade in Services, 2006-2010



References
Bergsten, C. Fred, and Arvind Subramanian (2013). Breaking Ground by 
    Breaking Barriers: An Economic Partnership of the Largest 
    Democracies, PIIE Book, forthcoming.
Fukase, Emiko, and Will Martin (2013), ``Economic Implications of a 
    Free Trade Agreement between India and the United States.'' Chapter 
    in Bergsten & Subramanian (eds.) Breaking Ground . . . (op. cit; 
    forthcoming).
Jensen, Brad (2013). ``Opportunities and Challenges: Tradable Services 
    in a U.S.-India FTA.'' Chapter in Bergsten & Subramanian (eds.) 
    Breaking Ground . . . (op. cit; forthcoming).
Mattoo, Aaditya and Arvind Subramanian, 2011, ``A China Round of 
    Multilateral Negotiations,'' Peterson Institute for International 
    Economics Working Paper, 11-22.
Mishra, Prachi, and Devesh Roy (2013). ``India-U.S. Trade And 
    Investment: Have They Been Up To Potential?'' Chapter in Bergsten & 
    Subramanian (eds.) Breaking Ground . . . (op. cit; forthcoming).
Raja Mohan, C. (2013), ``Securing India's Rise: The Strategic Context 
    of India-U.S. Economic Ties,'' Chapter in Bergsten & Subramanian 
    (eds.) Breaking Ground . . . (op. cit; forthcoming).
Rajan, Raghuram (2009). A Hundred Small Steps. Report of the Committee 
    on Financial Sector Reform. Planning Commission, Government of 
    India. New Delhi: SAGE Publications.
Stockes, Matthew, and Niraj Patel (2012). ``BIT and Beyond: Advancing 
    the U.S.-India Economic Relationship,'' Center for Strategic & 
    International Studies report. November.
Subramanian, Arvind (2011). Eclipse: Living in the Shadow of China's 
    Economic Dominance. Washington: Peterson Institute for 
    International Economics.
Tellis, Ashley (2013), ``Protecting American Hegemony: The Strategic 
    Context of U.S.-Indian Economic Ties,'' Chapter in Bergsten & 
    Subramanian (eds.) Breaking Ground . . . (op. cit; forthcoming).

    
    
    
               PREPARED STATMENT OF REENA AGGARWAL, Ph.D.
      Robert E. McDonough Professor of Business Administration and
  Professor of Finance, and Director, Georgetown Center for Financial
                           Markets and Policy
          McDonough School of Business, Georgetown University
                           September 25, 2013
    Thank you Chairman Warner, Ranking Member Kirk, and distinguished 
Members of the Subcommittee for giving me the opportunity to testify at 
today's hearing.
    I am Dr. Reena Aggarwal, Robert E. McDonough Professor of Finance 
and Director of the Georgetown Center for Financial Markets and Policy 
at Georgetown University's McDonough School of Business. The Georgetown 
Center for Financial Markets and Policy provides objective and unbiased 
Thought Leadership for Global Finance. As indicated in my bio, I serve 
on the boards of three U.S. financial services firms, none of which 
operate in India. I am pleased to provide testimony on assessing the 
investment climate and improving market access in financial services in 
India.
Current Investment Climate
Short-Term Problems
    In the short-run, the investment climate in India looks bleak. The 
last few months have seen devaluation of the rupee by 22 percent, 
economic growth has slowed from a high of 10.5 percent in 2010 to 4.4 
percent in 2013, and the growth rate is expected to be below 5 percent 
in 2013-2014. The current account deficit has reached 4.8 percent of 
GDP. At the same time, inflation of 5.8 percent is a challenge. If the 
situation continues to deteriorate, then the threat of a ratings 
downgrade exists. India cannot afford to have its current rating of 
BBB- drop, particularly because any further drop would imply a rating 
below investment grade.

    Devaluation of the Indian rupee was expected; however, the 
        sharp devaluation over a very short time period of time has 
        shaken investor confidence. The weakening of the rupee makes 
        oil imports more expensive, and India relies heavily on oil 
        imports. The devaluation has already led major Indian oil 
        refiners to announce an increase in petrol prices and diesel 
        prices.\1\ An increase in oil prices will put further pressure 
        on both inflation and the current account deficit. At the same 
        time, the weak rupee benefits Indian exporters, and we should 
        see a pick-up in exports.
---------------------------------------------------------------------------
    \1\ Reuters. ``IOC to raise petrol, diesel prices from Sunday,'' 
September 1, 2013.  http://in.reuters.com/article/2013/08/31/india-
fuel-prices-idINDEE97U04J20130831.

    In addition to the weak macroeconomic conditions, there is 
        political uncertainty with elections coming up in May 2014. 
        Therefore, the government is not expected to take bold measures 
---------------------------------------------------------------------------
        in the short-term to improve the investment climate.

    Estimates of earnings growth for Indian corporates have 
        been cut by analysts. The Indian stock markets have been weak, 
        and volatility has increased.\2\
---------------------------------------------------------------------------
    \2\ The Economic Times. ``Sensex Outlook by Morgan Stanley,'' 
September 4, 2013. http://articles.economictimes.indiatimes.com/2013-
09-04/news/41765729_1_broad-market-earnings-sensexearnings-growth-bear-
case-scenario.

    If the macroeconomic conditions continue to remain weak then 
investors are likely to stay away from India both for FDI and portfolio 
investment. In the short-run, the Indian economy and the financial 
sector face a number of challenges.
Long-Term Opportunities
    However, the weak macroeconomic situation is not likely to persist, 
and economic growth should start to pick-up. Macroeconomic growth is a 
strong indicator of growth in the financial sector. As economic 
conditions improve in India, the financial sector will also benefit. In 
the long-run, there are tremendous opportunities for foreign firms to 
participate in the Indian banking and financial sector.

    India has huge needs for financing. Infrastructure 
        investment is expected to be $1 trillion over a 5-year period, 
        amounting to 10 percent of GDP.\3\ The government's ambitious 
        plans include 20,000 kilometers of new and upgraded roads, 120 
        bridges, $250 billion investment in electric plants and power 
        grids, and 17 new airports. Most of these projects will be 
        public-private partnerships with half the investment expected 
        to come from the private sector.
---------------------------------------------------------------------------
    \3\ Urban Land Institute and Ernst & Young. Infrastructure 2013: 
Global Priorities, Global Insights. Washington, DC: Urban Land 
Institute, 2013.

    The middle class is expected to grow from about 20 percent 
        of the population in 2015-16 to above 37 percent by 2025-26. 
        The middle class and the younger generation have the spending 
        power, they have a strong credit culture, and they are becoming 
        financially sophisticated. This has resulted in growing demand 
        for credit cards, auto loans, home loans, retirement planning, 
---------------------------------------------------------------------------
        and wealth management.

    The Indian corporate sector is globalizing and conducting 
        acquisitions around the world. These activities require 
        advisory expertise and financing from around the world, a 
        competitive advantage for foreign banks.

    Financial penetration and inclusion is a major issue in 
        India. A large segment of the Indian population is excluded 
        from formal banking services with only 1 in 6 villages having 
        access to banking services. Only 35 percent of the population 
        has bank accounts.\4\ As shown in Figure 1, India has far fewer 
        ATMs and bank branches (relative to its population) than other 
        emerging markets such as Brazil and South Africa. The 
        government has launched an aggressive program of financial 
        inclusion that presents both challenges and opportunities for 
        foreign financial firms.
---------------------------------------------------------------------------
    \4\ The World Bank. Global Financial Inclusion Database.
---------------------------------------------------------------------------
Financial Services in India
    The financial sector is the backbone of any economy and is critical 
for economic development. However, the financial crisis of 2008 has 
shown that the financial sector can become the epicenter of a major 
economic crisis. Both developed and developing economies have started 
to take a more cautious approach to financial development and financial 
innovation.
    The question whether foreign financial institutions can profitably 
operate in India has several dimensions to it, two of the most 
important ones being 1) the business opportunity and 2) regulation and 
government policies. In some cases, the business opportunity is not 
compelling. For example, Fidelity decided to exit India even though the 
asset management business in India is not burdened with ownership 
restrictions. After 4 years, Wells Fargo decided to close its real 
estate investment arm citing lack of profitability. Businesses operate 
in order to make profits, and if profit margins are not sufficient to 
compensate for risk, businesses will not operate in that market. The 
financial services sector is highly regulated all over the world. 
Regulation and governmental policies place several restrictions on 
foreign banks and insurance companies that make the cost of doing 
business in India higher than several other countries. The biggest 
issues are uncertainty and ambiguity in policy, as I will discuss 
later. Recently, both UBS and Morgan Stanley have decided not to pursue 
their banking license in India. But, they will continue to conduct 
business in India as a nonbank financial institution. At the same time, 
other financial institutions have entered the Indian market in recent 
years, including Credit Suisse, ANZ and ICBC.
    Banking in India is still dominated by public sector banks, 
accounting for 73 percent of the banking sector assets which reached 
$1.5 trillion. As of March 2013, there were 43 foreign banks operating 
in India with 333 branches. Overall, demand for credit has grown, and 
deposits are expected to see healthy growth. Access to the banking 
system has improved; however, there is much to be done in terms of 
financial inclusion and meeting the needs of the Indian people.
Opportunities for Foreign Financial Institutions
    The three largest foreign banks in India are Standard Chartered, 
Citibank and HSBC. As shown in Table 1, the average profitability of 
foreign banks in India is higher than that of all private sector banks, 
and much higher than that of public sector banks. The profitability of 
foreign banks in India is also higher than their operations in most 
other countries. During the period, 2007-2012, among the three largest 
foreign banks in India, the profitability of Standard Chartered was the 
highest. For 2012-13, Citibank in India reported a significant increase 
in profits partly due to increased demand for loans from small and 
medium companies, as well as for mortgages and trade loans for global 
clients, and partly due to payoff from cost cutting. However, the 
market share of foreign banks in India is still very small.

    Foreign banks have been successful in the credit card 
        business and have captured a disproportionate share of the 
        credit/debit card market. Their customers hold 27 percent of 
        all credit cards in India. Increased consumerism will result in 
        continued strong growth credit card use. Reserve Bank of India 
        (RBI) has recently encouraged the use of debit cards over 
        credit cards. Prior to 2012, banks could charge 1-2.5 percent 
        for debit and credit card transactions, but now, banks are only 
        allowed to charge 0.75-1 percent for debit card purchases while 
        credit card fees remain the same.

    Foreign remittances to India were approximately $70 billion 
        in 2012 and provide foreign banks a competitive opportunity 
        with their global network, although it is a saturated market.

    High net worth individuals and total wealth holdings are 
        expected to grow from $362 billion in 2009 to $2.95 trillion in 
        2020.\5\ This presents opportunities in the wealth management 
        sector due to the growing number of high-net-worth individuals, 
        few regulatory issues, and demand for innovative products.
---------------------------------------------------------------------------
    \5\ Deloitte. Growth Opportunities for financial services in India: 
Investing for the long term in the world's largest democracy. New York 
City: Deloitte Development LLC, 2012.

    Indian firms are interested in diversifying their revenue 
        base outside of India. Foreign banks have a competitive 
        advantage in helping finance Indian corporates' acquisitions 
        abroad. They have bigger balance sheets and a lower cost to 
        fund dollar and foreign currency transactions; therefore, they 
---------------------------------------------------------------------------
        can lend at cheaper rates than local banks.

    The two largest stock exchanges in India are the National 
        Stock Exchange and the Bombay Stock Exchange. The stock market 
        has been hit hard in 2013 and India has been one of the worst 
        performing countries. In April 2013, the government increased 
        the limits for investment by FIIs, and they are now allowed to 
        invest up to US$25b in longterm government bonds and up to 
        US$51b in corporate bonds. Starting in January 2012, foreign 
        individuals are allowed to invest directly in the market. 
        Previously, they were allowed to invest only through mutual 
        funds or institutional investments. Credit default swaps (CDS) 
        were introduced in 2011 in order to bring liquidity to the bond 
        market. CDS provide buyers with protection against credit risk 
        in the event of default or bankruptcy by the bond issuer.

    There are no ownership restrictions on asset management 
        foreign firms in India. Assets under management have grown by a 
        rate of 23 percent over the last decade (Figure 2), but margins 
        are a challenge. Indian Corporates invest through mutual funds 
        due to tax advantages but retail participation is very low, and 
        most assets flow to fixed income funds. The culture to invest 
        in gold and property continues to be strong.

    Mobile and online banking products can provide foreign 
        banks a low-cost alternative to branches to leapfrog their 
        penetration in the market and compete with local banks that 
        have a vast branch network. There are almost 1 billion mobile 
        subscribers in India.
Regulatory Challenges and Uncertainty faced by Foreign Financial Firms
    One of the major issues facing foreign banks is RBI's 
        proposal that existing foreign banks of a certain size form a 
        wholly owned subsidiary (WOS) in India rather than operate as 
        branches of their overseas parent companies. RBI's motivation 
        is to ``ring fence'' the Indian financial system in order to 
        restrict foreign banks from shrinking their operations in India 
        as happened during the 2008 crisis. The RBI sees this approach 
        as helping to 1) insulate the Indian unit from troubles at the 
        parent-level; 2) protect Indian depositors by having a clear 
        definition of laws pertaining to jurisdiction; 3) foster better 
        regulatory oversight control during a crisis; 4) encourage 
        focused management and corporate boards as well as effective 
        corporate governance. The WOS would have a separate board of 
        directors and would be capitalized separately. If foreign 
        banks, such as Citibank, Standard Chartered, HSBC, opt for 
        creating wholly owned subsidiaries, then they will be treated 
        the same as other local banks and will not have the 
        restrictions on opening new branches. However, they will also 
        be required to lend 40 percent of their total portfolio to 
        priority sectors, such as agriculture, small enterprises, and 
        low-cost housing. Some might argue that the branch structure 
        with some modifications could address RBI's concern and the WOS 
        is not the best way to achieve RBI's objectives. A WOS 
        structure with its own capital base would not benefit from a 
        global bank's infrastructure and would impose higher costs.

    According to the regulators, wholly owned subsidiaries of 
        foreign banks would not get full national treatment but would 
        be in a much better position than the foreign bank branches 
        operating in India but less than that of domestic banks. This 
        raises several questions: What activities will be limited? Why 
        should a WOS not get full national treatment? Why would a WOS 
        need to meet priority lending if they don't get full treatment?

    Banks that operate only in the wholesale market, e.g., 
        JPMorgan, Morgan Stanley, can keep their branch status as long 
        as they operate fewer than 20 branches. Banks operating more 
        than 20 branches will need to meet the 40 percent priority 
        lending requirements, instead of the current 32 percent. 
        Earlier, there was some concern that all foreign banks would be 
        required to become a foreign subsidiary.

    There is much regulatory uncertainty in the financial 
        sector in India. RBI first issued its road map for foreign 
        banks in 2005, and it is still in the process of sorting it 
        out. Only now some clarification is emerging on important 
        questions such as: Who would need to convert to a wholly owned 
        subsidiary? Will banks not servicing retail customers be 
        allowed to operate as a branch? How will RBI determine 
        systemically important banks and will they be mandated to 
        operate as a WOS? What would be the tax consequences of 
        converting to a WSO? Will there be control/voting restrictions 
        on the WOS?

    The insurance sector in India is controlled by the public 
        sector with one major player. Attempts to change the direct 
        investment cap from 26 percent to 49 percent have not been 
        successful in Parliament.

    Several foreign insurance companies are looking to exit 
        their joint venture insurance venture due to regulatory 
        uncertainties.
Summary and Conclusion
    There are many opportunities for foreign financial services firms 
in India in the long-term. India is not only an emerging market but 
also proving to be an emerging power. It is not an option for a global 
financial services firm not to be present in the Indian market.

    India has reached a critical juncture in its economic 
        development. The country desperately needs foreign investment 
        to support growth. This presents an opportunity for foreign 
        firms to invest in India.

    The bureaucracy in India presents a challenge to foreign 
        firms looking to participate in the market. Currently, there is 
        much uncertainty surrounding policy due to continuous changes 
        in regulation, inconsistencies in interpretation and 
        enforcement, and ambiguity. At the same time, there are areas 
        in which regulators have made it easier for foreign firms to 
        conduct business. Regulators, such as Securities and Exchange 
        Board of India (SEBI) which was formed only in 1992, have 
        played a positive role in the development of Indian capital 
        markets. This offers promise for the future.

    India is also being held back by massive corruption, lack 
        of transparency, and political bickering. Based on Transparency 
        International's Corruption Perception Index, in 2012, India 
        ranked 94 out of 176 countries.

    Foreign firms will require a great deal of patience when 
        doing business in India, and some may run out of patience and 
        consider exiting the market. If the playing field is not level, 
        then foreign firms will not operate in the market.

    In order for firms to succeed in India, they will have to 
        figure out how to serve the ``bottom of the pyramid.'' Based on 
        the country's needs, national priorities, and government 
        regulations formulated to support those priorities, firms will 
        need to reach the poor and those living in rural areas. They 
        will also need to improve their distribution to small and 
        medium sized firms. This will require them to offer localized 
        products and services and devise innovative strategies that 
        will allow them to be successful with these segments of the 
        market. Technology can prove fruitful in reaching out to these 
        segments in a cost effective way.

    Foreign firms will need to be part of the solution in 
        helping solve the plight of India's rural poor and address 
        other development issues that the country faces. Financial 
        inclusion is a huge problem in India. A large portion of the 
        population is unbanked, resulting in a large shadow banking 
        system. Foreign banks have only 21 ATMs in rural India which is 
        home to 830 million people.

    The Indian government can help remove the uncertainty and 
        ambiguity in policies and regulations regarding banks and 
        insurance companies. This will boost investor confidence and 
        encourage foreign investment across the economy.

    India needs foreign capital to meet its growth needs and 
        fulfill its ambitious infrastructure program. The telecomm 
        sector in India has been very successful in penetrating the 
        rural Indian market; the financial sector should be similarly 
        incentivized to innovate and reach the masses, while clearly 
        recognizing that the risk needs to be managed.

    Recently, there has been some easing of restrictions on 
        foreign investment in government and corporate bonds. As the 
        financial sector matures, it is important for the country to 
        develop a vibrant bond market, securitization market, and 
        consider sovereign bonds eventually leading to municipal bonds.
        
        
        
        
        
        
   RESPONSE TO WRITTEN QUESTIONS OF SENATOR KIRK FROM ARVIND 
                          SUBRAMANIAN

Q.1. The trade relationship between the U.S. and India is not 
limited to goods, but also includes skills and ideas. For this 
reason, I have continually supported maintaining and expanding 
the H-1B visa program to allow high skilled workers, from India 
and other countries, to fill employment vacancies in American 
companies. Can you speak to the importance of immigration 
reform in the context of trade with India?

A.1. Did not respond by publication deadline.

Q.2. Bilateral Investment Treaties mean different things to 
different countries. What would such a treaty mean to the 
United States?

A.2. Did not respond by publication deadline.

Q.3. What elements/standards should be included in the BIT to 
make it a valuable agreement for U.S. firms? What features 
should be included to add value for Indian firms?

A.3. Did not respond by publication deadline.

Q.4. You mention that in addition to the BIT, what other 
strategic goals should the U.S. be pursuing to further enhance 
bilateral trade and investment between the U.S. and India?

A.4. Did not respond by publication deadline.

Q.5. Elections in India have to take place before May next 
year. Given it is election season, do you think that additional 
reforms in the financial services sector can be accomplished?

A.5. Did not respond by publication deadline.

Q.6. Investor pessimism has led to international investors 
withdrawing roughly $12 billion in shares and debt from India's 
markets since the beginning of June this year. What measures do 
you think that the Indian Parliament and Central Bank could 
make to shore up investor confidence?

A.6. Did not respond by publication deadline.
                                ------                                


 RESPONSE TO WRITTEN QUESTIONS OF SENATOR KIRK FROM RICHARD M. 
                             ROSSOW

Q.1. The trade relationship between the United States and India 
is not limited to goods, but also includes skills and ideas. 
For this reason, I have continually supported maintaining and 
expanding the H-1B visa program to allow high skilled workers, 
from India and other countries, to fill employment vacancies in 
American companies. Can you speak to the importance of 
immigration reform in the context of trade with India?

A.1. Movement of persons is an important issue to any modern 
company with international operations. The most skilled people 
for certain business functions may reside in any part of the 
world. In other cases, some functions simply do not need to be 
replicated in every market. So, need only a small number of 
these technical experts spread around the company's global 
footprint, ready to help individual operations with key issues. 
So being able to move team members in and out of certain 
jurisdictions allow companies to run more efficiently.
    In the India context, it takes on a heightened level of 
importance. The IT services industry, which sends a large 
number of the H-1B visa holders to the United States, is a 
visible and influential constituency in India. IT services 
exports made up nearly 4 percent of India's GDP in fiscal year 
2012-13, at around $69.1 billion. The industry played a 
critical role in encouraging India's continued engagement with 
the West on economic issues. And the success of India's IT 
service industry has given confidence to other industries in 
India that they, too, can compete globally. America wants to 
see India engaged in global economic issues, and India's IT 
services industry has been at the forefront in pushing 
domestically for this engagement.
    To put is in its simplest terms: Visas are important to 
India's IT services firms. India's IT services firms are 
important to American interests. Therefore, a supportive U.S. 
visa policy toward India's IT services firms is important to 
American interests.

Q.2. This year the Indian Parliament considered increasing the 
FDI caps for the insurance sector from 26 percent to 49 
percent. This same proposal has been considered for nearly a 
decade with no progress. In your opinion, what is some of the 
rationale for Indian Parliament not approving this increase? 
Why is this increase so critically needed?

A.2. Parliament has not been able to approve the deal purely 
for political reasons. Voters in India are generally 
unconcerned with FDI-related issues. Voters are more concerned 
about availability of water, power, education and related 
issues. So the opposition parties that continue to push back 
against allowing a vote on the FDI increase in insurance are 
doing so for their own interests instead, as opposed to 
conveying the interest of their constituents.
    What political muscle the Congress-led Government has 
leveraged to get successful votes on difficult issues has 
largely been spent on laws that increase social programs. These 
include the Food Security Bill, the Land Acquisition Bill, and 
the Mahatma Gandhi Rural Employment Guarantee Bill.
    The increase is quite important to India's insurance 
industry. Premiums, in particular for the life insurance 
industry, remain depressed from their 2009 level. Insurers have 
shed staff and agents, and the Government-owned Life Insurance 
Corporation is again dominating the sector. Private companies 
need an infusion of capital to regain their footing and expand 
their operations. Moving the FDI cap to 49 percent will also 
allow the domestic and foreign companies to bear business 
risks--and rewards--more equally.

Q.3. Just as we have seen through the promulgation of 
regulations required under Dodd-Frank here in the United 
States--often the greatest challenge to financial firms can be 
regulatory uncertainty. There are a number of regulatory/
legislative proposals being considered in India--is this 
uncertainty an issue for financial firms in India?

A.3. Regulatory uncertainty is definitely a concern in India, 
as highlighted in my written and verbal testimony in front of 
this Committee. In recent years the regulator has dramatically 
overhauled the internal structure of the market's dominant 
product. Commission rates for sales channels have been slashed. 
And government-owned banks will soon be forced to break their 
existing distribution deals with domestic and foreign insurers 
to accommodate government concerns about sales practices.
    Apart from the regulatory changes that have been 
introduced, there are also major alterations to the regulatory 
framework that remain in limbo. For example, the Finance 
Ministry has been reviewing a change to India's tax code (The 
Direct Tax Code) that would have steeply increased the 
corporate tax rates for the life insurance industry. And the 
regulator, Insurance Regulatory & Development Authority (IRDA), 
continues to look at ways to alter the existing banc assurance 
(bank-led sales of insurance) relationships. These pending 
changes have been hanging over investors' heads for many years. 
Without clear guidance as to how these issues will ultimately 
be addressed, investors cannot easily develop medium-term 
business plans reliant on a particular strategy.

Q.4. The first exchange in Asia was established in India in 
1875. The Indian stock exchanges have more companies listed 
than any other country partly because India has a strong 
history of entrepreneurship. Does India have the potential to 
become a major global financial hub? What are the impediments?

A.4. I would love to say that Mumbai, a place I hold dear, will 
be a major global financial hub. But frankly the impediments to 
getting there are so great, it is difficult to see happening in 
the coming decades. One popular list for ranking the world's 
top financial centers, the Global Financial Centres Index 
(GFCI), ranks India in 66th place.
    Allow me to point out a few of the obstacles I see to 
fulfilling this long-held goal:

  1. LMore Openness to Global Markets: Until India removes 
        foreign investment caps in all financial services, as 
        well as other impediments to equal national treatment, 
        foreign firms will not make India a base of operations. 
        To do so, the local market must have great weight. So 
        far, this is not the case for India.

  2. LDominance of State-Owned Enterprises: In the banking and 
        insurance fields, government-owned companies are still 
        dominant. In the life insurance industry, in fact, the 
        government-owned competitor has started to take market 
        share away from the 23 private companies. There are 
        many reasons for the continued dominance of government-
        owned financial firms, and result in a less-competitive 
        domestic market.

  3. LRegulatory Consistency: As outlined in my testimony, 
        financial services regulations in India change too 
        dramatically, too fast. When a company decides to 
        establish a major international base of operations in a 
        market, the investor wants stability in how that entity 
        will be treated--both in terms of its local exposure, 
        as well as its international exposure. Open, stable and 
        transparent rules governing tax policy, foreign 
        exchange convertibility, labor mobility, and other core 
        functions are critical.

  4. LMore Talent: While India has a large population, 
        investors find a dearth of key talent such as actuaries 
        for life insurance firms. Colleges are altering 
        curriculums to try to keep up, but the pace of India's 
        growth and the quality of some educational institutions 
        mean that the country's technical experts are in high 
        demand, with too few coming through the pipeline.

  5. LBetter Living Conditions: For many foreigners, living in 
        Mumbai can still be considered a hardship post. Traffic 
        is horrendous, flooding during Monsoon season is 
        dangerous. Public transportation is decrepit. And the 
        space for building a ``New Mumbai''--as an 
        international hub--is sorely lacking.




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