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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/

(


BANKI-41578DSA with DISTILLER
COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

TIM JOHNSON, South Dakota, Chairman

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

ROBERT MENENDEZ, New Jersey 

SHERROD BROWN, Ohio 

JON TESTER, Montana 

MARK R. WARNER, Virginia 

JEFF MERKLEY, Oregon 

KAY HAGAN, North Carolina 

JOE MANCHIN III, West Virginia 

ELIZABETH WARREN, Massachusetts 

HEIDI HEITKAMP, North Dakota 

MIKE CRAPO, Idaho 

RICHARD C. SHELBY, Alabama 

BOB CORKER, Tennessee 

DAVID VITTER, Louisiana 

MIKE JOHANNS, Nebraska 

PATRICK J. TOOMEY, Pennsylvania 

MARK KIRK, Illinois 

JERRY MORAN, Kansas 

TOM COBURN, Oklahoma 

DEAN HELLER, Nevada

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 

JOE MANCHIN III, West Virginia 

JERRY MORAN, Kansas

MILAN DILAL, Subcommittee Staff Director

LINDSEY JOHNSON, Republican Subcommittee Staff Director

(II)


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CONTENTS

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)


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(1)

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 


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2

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 

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vestment 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 proIndian 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 twoway 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 


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4

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 


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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. 


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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. 


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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 


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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. 


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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 regVerDate 0ct 09 2002 12:10 May 02, 2014 Jkt 000000 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 S:\DOCS\85986.TXT SHERYL

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ulatory 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. 


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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. 


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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 


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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 


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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 


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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, 


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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 


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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 


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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 


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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 


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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 


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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:]


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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 61⁄2 percent growth, and about 81⁄2 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 


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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 unidimensional 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 61⁄2 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 


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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 twoway. 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; 


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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/replfr/cfsrlall.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/

121126lStokeslBITandBeyondlweb.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. 


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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 


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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 unidimensional 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.


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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


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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 


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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 


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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/


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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 


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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).


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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. 2The Economic Times. ‘‘Sensex Outlook by Morgan Stanley,’’ September 4, 2013. http://articles.economictimes.indiatimes.com/2013-09-04/news/41765729l1lbroad-market-earningssensexearnings-growth-bear-case-scenario. 3 Urban Land Institute and Ernst & Young. Infrastructure 2013: Global Priorities, Global Insights. Washington, DC: Urban Land Institute, 2013.

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. 

• 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

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 


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4The World Bank. Global Financial Inclusion Database. 

new airports. Most of these projects will be public-private partnerships with 

half the investment expected to come from the private sector. 

• 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. 

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 


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5Deloitte. 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.

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. 

• 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. 


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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 


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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.


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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?


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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 


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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 mediumterm 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. More 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. Dominance 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. Regulatory Consistency: As outlined in my testimony, financial services regulations in India change too dramatically, 


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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. More 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. Better 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.


BANKI-41578DSA with DISTILLER