Interview: Kamal Nath (Forbes Asia, November 27, 2006)
By Pranay Gupte
Kamal Nath, India's Minister of Commerce and Industry, is widely credited with raising his country's profile in the global arena – and with persuading ever increasing numbers of foreign sources to invest in the booming Indian economy. A longtime member of the Congress Party, Nath has served as Minister of the Environment and Forests, and of Textiles, in prior administrations. He's believed to be particularly close to Prime Minister Manmohan Singh, and to India's most powerful political figure, Sonia Gandhi, the Congress Party President. Nath, who has been a member of India's Parliament for the last 26 years, has also served as General Secretary of the Congress Party, which leads the United Progressive Alliance government in New Delhi. There's broad recognition that his political skills have helped him become one of the country's most effective policy-makers and executives.
Nath's tenure as Commerce and Industry Minister has witnessed major trade policy initiatives. These include a comprehensive foreign trade policy that creates a coherent roadmap with a twin focus on exports and employment. Major bilateral trade initiatives have been taken with the European Union, Japan, and Latin American countries. He's also led the efforts toward greater economic engagement in the South Asia region. Nath is a leader of developing countries in their negotiations at the World Trade Organization. He was in New York recently to meet with participants at the Indo-U.S. CEO's Forum. The following are excerpts from an interview:
PRANAY GUPTE: What image would India like to project to the international community?
KAMAL NATH: The strength of India lies in the credibility of its institutions – whether it's the stock markets or the judiciary. Most of all, the credibility of India lies in its unswerving commitment to democracy, its rule of law, and the enforcement of laws. Our policies are human resource-driven. I always emphasize that foreign capital is safe in India. India believes in competition and in being competitive. Our markets are becoming increasingly open to the world.
Isn't the concept of the free market relatively new to India? Can India handle this?
India has been a country doing business and trading not just for centuries, but for millennia. Well before Christopher Columbus made his famous discovery, India was trading energetically with the world as it was known then. The business of the bazaar comes naturally to Indians.
You're India's chief salesman – but how do you support your assertions?
You don't have to take my word for it. Just take a look at how we've established a credible record. The economy has grown at more than 8 percent year on year for the past three years; the industrial sector is growing at between 10 percent and 12 percent a year; and our services sector is racing ahead at more than 20 percent per annum. We've created a million new jobs each year for the last three years. Our exports this year will be $126 billion, exactly double what they were just three years ago! Our engagement with the global economy– our total trade in goods and services – this year will be $350 billion. I'd set the target to be $500 billion by 2008, but it looks like we’ll be achieving this in2007 itself. The overall growth has been swift, deep and sustainable across a range of sectors. And in the process, India is offering a diverse set of value propositions for investors across the globe.
What are those value propositions?
We are now among the world's most competitive producers of steel, automotive components, pharmaceuticals and chemicals – besides our traditional strengths in textiles and gem jewelry. While India has established itself unequivocally as the back office to the world, playing a key role in the business transformation of thousands of global businesses by offering an unbeatable combination of low cost and high value, we are now emerging as a major manufacturing hub because of cost-effective production, and skilled work force.
But can't the same thing be said about China, your major competitor in Asia?
It's not an issue of China versus India. It India and china. We have our genius, they have theirs. [The bilateral trade between the two countries has grown from $4 billion to $20 billion annually during Mr. Nath's tenure – approaching the $25 billion trade with the United States.] While the sheer population numbers alone present an opportunity for both India and China, it is India's demographic profile that holds the key to the future. India is a young country – and it's getting older much slower than others. The India of tomorrow is an India of savers and spenders, making India a huge market. Even now, with comfortable foreign-exchange reserves of $166 billion, we aren't just exporters but major importers. Our imports this year will be over $170 billion. India has a large pool of skilled, highly educated workers.
Isn't there new concern that India doesn't have enough skilled workers to meet with the demands of the market?
Actually, our skills are in surplus. But we are ensuring that the level of the human-skill reservoir we have doesn't go down.
And how are you doing that?
Through increased education and the creation of more training facilities. We are emphasizing constant upgrading.
There are conflicting figures about the size of India's middle class – ranging from 100 million to 450 million. What's the real figure?
India has about 200 million with disposable income in different degrees. Various studies suggest that India's middle class is slated to more than double by the end of this decade – every year, we are adding 25 million to our middle class, almost a whole Malaysia or Thailand.
What competitive advantage does India really enjoy in the global bazaar?
The global economic architecture is undergoing enormous design changes. Demographics will shape that architecture, as will natural resources. As the world turns more competitive, global corporations understand the value of leveraging India's natural advantage in the global knowledge economy. As the center of economic gravity shifts from Europe and the Atlantic to Asia and the Indian Ocean, India has already demonstrated its readiness to play a global role. India has moved up the value chain of global perception. In fact, India has put itself on the radar screen of every investing entity in the world.
What specific initiatives are you taking to attract more foreign direct investment to India?
We recently undertook a comprehensive review of our FDI policy with the objective of consolidating the liberalization already effected, and to further rationalize FDI policy. As a result of this exercise, major policy changes have been made – 100 percent foreign investment is now permitted in enterprises in several sectors, including construction. Total FDI this year is expected to be nearly $12 billion, compared to barely $4 billion two years ago, when Prime Minister Manmohan Singh took office. The good news is that these are first-mile investments – that's to say, for new projects.
Where do you want this investment to go?
We are new to wide and varied types of funds, and to different types of investment platforms. We are seeking investment, first and foremost, in our infrastructure sector – highways, roads, ports, airports, power generation, and telecommunications. The new model of infrastructure development is also being pursued through the public-private partnership route, which offers immense opportunities for overseas investors. For example, the projected investment in our national highways alone will be $50 billion in the next six years.
Do you sense any "India fatigue" among investors?
On the contrary. There's never been more enthusiasm for India. During this trip to New York, a number of CEO's told me that they would form a $5 billion fund for investing in our infrastructure, and that they sought only minimal government participation. This is very encouraging. We also expect investments totaling and additional $6 billion in the next two years in our Special Economic Zones [SEZ's]. Some of the global brands that have set up such zones include Nokia, Adidas and Motorola.
How would you reassure foreign investors who may feel skittish about India's domestic political situation and uncertainties over internal security in the country?
India's attraction for investors lies in the sustained economic growth that we've experienced. There's the inherent stability of India's democratic institutions, its multiculturalism, its highly competent professionals, and its hugely successful Diaspora. The unbeatable combination of a young country and an ancient civilization embracing economic globalization in a context that's open and democratic is what really makes India an emerging giant, and a magnet for investments.
Hasn't Sonia Gandhi sided with farmers who oppose SEZ's?
Mrs. Gandhi has said, and rightly so, that State governments should not acquire for industrial use or for SEZ's, property that's prime agricultural land. This makes abundant sense not only from the point of view of farmers, but also from a public policy planning angle.
How are you addressing this concern?
This issue has been taken care of. The guidelines for SEZ's now clearly state that SEZ's can only be developed on non-prime agricultural land. Whenever there's any land acquisition for SEZ's, there will be full and fair market compensation for that property. In our system it’s the free market that’s at work here, not seizure by government. We believe that private landowners should make the decision to sell, or not sell, based on the conditions and rules of the market. If at all there is compulsory acquisition, it will be only of non-irrigated land, and after due process of law and full market compensation.
But many foreign investors continue to express concern about the cost of doing business in India – that means, of course, corruption, not only in the bureaucracy but also in sectors such as construction. How are you dealing with these concerns?
I don't want to gloss over the problem of corruption. But I must say this is definitely declining. I believe this has to be a process driven by deregulation and more transparency – like the recent enactment of the "Right to Information Act." Tightening legislation against corruption has already led to a large number of prosecutions at the political and bureaucratic levels. We are attempting to ensure unshackling of various regulations so that even the scope for corruption gets eliminated. We are on the fast track – but there is no overnight cure.
What about export-driven growth as opposed to manufacturing-driven growth? Is there a potential conflict here?
Most of all, India's growth is domestic-market driven, and not export-market driven – unlike China, whose growth is export-market driven. Both exports and manufacturing are two sides of the same coin. Manufacturing growth fuels export growth, and vice versa. Most importantly, both are engines of economic growth as the prime sources of employment generation and foreign-exchange earnings. Manufacturing is, in fact, crucial in our scheme of things because we don't want jobless growth, but growth that will lift millions out of poverty through job creation.
Wouldn't full convertibility for the Indian rupee be beneficial for India? Your foreign-exchange reserves are approaching $200 billion, and India has always been prompt in servicing its external debt of $75 billion. So what's coming in the way of convertibility?
A high-level committee has offered recommendations for rupee convertibility, and our Finance Ministry – under whose jurisdiction the matter falls – is addressing the issue. I hope you can appreciate that all I can say at this point is that these recommendations are under active consideration.
Is the mindset concerning the free market changing in India?
It's not only that the world's perception about India has changed – our own perception about ourselves has changed. We are no longer only looking for a better life for our children and grandchildren, but for a better life for ourselves in our own lifetime. So there's definitely a paradigm shift. Despite all the hues of parties and political alliances coming to power – including some professing lack of faith in the economic-reform process – reforms have been undertaken without a gap.
But there are some who say that there's indeed been a gap, several gaps. There's a perception that the reforms have been fitful. What would you say to that?
India's reform process has been a calibrated approach, and has followed an India-specific model. That is why one of the most successful reform stories of our contemporary era is that of India. And I can assure you that it will continue to be so. We proudly proclaim: 15 years, 6 national governments, 5 prime ministers, 1 cohesive economic policy, 1 direction – upward. I can understand the impatience in certain quarters with the pace of reforms. But what matters is sustained reforms.
Could you offer some examples?
The insurance sector is one example of what I'm saying. After economic liberalization began, only 26 percent FDI was permitted in that sector. Now we're looking at almost doubling it, to 49 percent. Similarly, while foreign banks were allowed to do business in India, the number of branches they could open annually was restricted. Here again, we're allowing these banks to open more branches each year, on a calibrated basis. Frankly, I question why some people assert that there are gaps in the reform process. We've experienced 8 percent growth in our GDP year after year. There's a new paradigm today.
And what would that be?
The new paradigm is an India where there's broad consensus across the political spectrum that only accelerating economic reforms can bring prosperity to the common man.
But aren't the reforms nevertheless hostage to political maneuvering? How much of the opposition to reforms is political theater, and how much genuinely reflects popular discontent that economic liberalization has created a new class of haves and have-nots in India?
Some would say that one way of looking at politics, of course, is that everything's theater. But the reforms are irreversible. So much so that even in States where there are leftist governments, leaders leverage the economic-reform process, instead of boycotting it. Regardless of the complexion of governments and political alliances in the last decade, the economic reform process has continued. I, for one, believe that sustained progress will result in fewer economic disparities. I know that in a country of 1.1 billion people, some 300 million earn the equivalent of less than $1 a day. That's just not acceptable. But what's the solution to alleviating poverty? The answer clearly lies in creating jobs, widening education, offering better health care. And that means more investment.
As a veteran politician, aren't there constraints in your role as a policy-maker?
The biggest challenge for us in a lively democracy such as India, and for me as a politician directly accountable to the people, is to ensure all-inclusive growth and income distribution. Having been in the political domain for so long, I am always deeply conscious of this -- and of the need to sensitize others. Economic policy to be successful and sustainable must be mandated not only by deep but also wide political conviction. Having been in politics from a very young age, and being elected for the last 26 years from one of the most economically backward regions of the country, I'm always deeply conscious of the need to build into policy the social dimensions of economics.
How do you see the prospects for greater bilateral trade between India and the United States, now India's largest trading partner?
The strategic partnership between the world's oldest and largest democracies assumes a convergence of beliefs, a common sense of respect for commonly treasured values, and a shared vision of the future of the world. India and the U.S. have these ingredients in a large measure – and, therefore, a deepening and widening of our commercial engagement would act as a fulcrum for international growth, benefiting not just our two nations, but or regions as well, and the world as a whole.
Could you offer some specifics about where bilateral trade is going?
Today, our merchandise trade with the US is about $25 billion annually. We've agreed to at least double this figure by 2008. And while there's been remarkable growth in our trade in the last two or three years, I won't be satisfied until India becomes America's largest trading partner [it is currently Number 17]. If we are to realize our ambitious targets, we need to work methodically to remove the barriers that keep our markets apart in many spheres, and restrain and restrict trade in goods as well as services.
How do you "plain talk" with protectionists in America and other rich countries about India's view on the subject?
By making my American protectionist friends comprehend the realities on the ground – that, in the current cost structures of global trade, it's a win-win situation for both if markets are opened more, and trade barriers are lowered. With increased globalization, in the long term, if it's not win-win, it'll never work.
Do you see any advancement in the World Trade Organization's Doha Round? You lead the Indian delegation to the Doha Round, where India has emerged as one of the six key players that include, in addition to India, the United States, the European Union, Brazil, Japan and Australia.
Both India and the U.S. must lead the world in ensuring a rule-based, non-discriminatory multilateral trading system. I am deeply committed to this. It's important that the Doha Round negotiations, currently stalled, are resumed in the spirit of the original agenda promoting development. Trade should not only be free, it should also be fair. It's important for the WTO to resolve the issue of inequitable integration through both political and institutional measures. At the political level, we must recognize the current asymmetries, and agree to do away with them in the present round of negotiations.
What would this involve?
In agriculture, for instance, this would involve a clear understanding on the removal of distortions caused by the industrialized countries' measures, as well as an understanding on the measures regarding special and differential treatment required by developing countries to manage their concerns about subsistence, small and low-income farmers, food security and livelihoods in their agricultural sectors.
What about manufacturing and the services sector?
The concerns of small-scale and labor-intensive manufacturing sector must be taken into account by foreign investors. Don't forget – the rich nations benefit through the skills that developing countries such as India have acquired in providing services and personnel in fields such as technology and back-office processing. For globalization to be a win-win scenario, the comparative advantage of developing countries should not be stifled by protectionism of their economically more advanced partners.
But you've also been termed an obstructionist because of your demands that rich countries reduce their agricultural subsidies. Are you holding up the Doha Round?
I'm not holding up any round. I've only urged the rich countries who subsidize their agriculture not to use those subsidies to enable their farmers to access markets in poor countries. The Indian farmer can compete with the American farmer, but not with the U.S. Treasury.
What is your vision of India as an economic superpower?
As the world's largest democracy, India has always enjoyed a unique political legitimacy. With added economic clout, this legitimacy will grow. India's newfound might as a producing and consuming nation means that we are ready and able to play an increasingly significant role as a responsible and credible country in influencing international markets and the multilateral trading system. India's capacity to assimilate, synthesize and modernize is infinite – that, in fact, is India's genius.
But even genius can be stymied. Is there any guarantee that India's economic momentum won't falter?
As I've already said to you, India has put itself on the radar screen of every investing entity in the world. The world recognizes that it would be impossible to do business without India. It is also beginning to accept India as tomorrow's tiger. Its assets – both tangible and intangible – are going to play a crucial role in the way the world develops in the years to come. While India may be behind in the sprint, we are winning the marathon. Mark my words.