The question of whether economic reforms in India have been progressing quickly enough is likely to be a major debating point during the second India-United States Financial and Economic Partnership talks, if comments by Indian Finance Minister Pranab Mukherjee and U.S. Treasury Secretary Tim Geithner indicated the general mood here.

Speaking at a panel discussion organised jointly by the Confederation of Indian Industry and the Brookings Institution Mr. Geithner hinted that the U.S. hoped for a more rapid pace of reforms. He said, “From our perspective the key thing is the outlook for reform... India is now at the point where future growth will depend on the success of the next wave of reforms, not just in the financial sector, but importantly in the financial sector.”

Arguing that the Indian economy had “outgrown its financial system,” Mr. Geithner also said he would be speaking to Mr. Pranab “about things that are important to us as the Indian authorities look for ways to improve the quality of the investment environment.”

Yet Mr. Pranab appeared to disagree with such an assessment of the investment climate and pace of reform. He said that in India “the rate of savings and investment is reasonably high” and “the various structural reforms that we had undertaken and which will come in the course of time... will ensure that there is an investment-friendly environment, which can attract investment from different parts of the world.”

The Minister added that while questions had been raised over the drop in foreign institutional investment flows in the Indian economy earlier this year, “Almost every year, in the first few months of the calendar year, FII flows slow down.” However this gets offset by a rise in flows in later parts of the year, he said.

Deeper social-structural concerns also appeared to be topmost on the minds of Indian officials speaking at the event, including the thorny question of land acquisition for infrastructure and other projects.

Untapped potential

While both the Minister and the Secretary admitted that there was $1 trillion worth of untapped potential for investments to meet India’s infrastructural demand, R. Gopalan, Secretary of the Department of Economic Affairs of India, said, “There are issues such as land acquisition, environmental clearances, rehabilitation of displaced persons which cause concern on account of their potential to introduce time and cost overruns.”

However, Mr. Gopalan assured, there is a “sustained and continuous policy churn which is happening in these areas, with a view to resolving these impediments.”

Direct Tax Code

Mr. Mukherjee also sought to defend the case that India was expending considerable effort toward reform by citing the Direct Tax Code, India’s role in the Financial Action Task Force, the fact that foreign entities meeting Know-Your-Customer conditions could invest directly in mutual funds, and the evolving National Manufacturing Policy as examples of actively debated policies.

Even as the Minister explained that “To make the FDI policy more user-friendly, all prior regulations guidelines have been consolidated into one comprehensive document, which is reviewed every six months,”, Mr. Geithner pressed him further on the question of what the U.S. hoped to get out of this dialogue with India.

Mr. Geithner said that even though the U.S. valued “the relative absence of drama” in its strategic relationship with India, the most important thing that the U.S. wanted to see was more progress with financial sector reform that provided deeper, more liquid capital markets, but also for India “allow a little bit more access” of U.S. firms to participate in those markets.

The Treasury Secretary also predicted that with the gradual rise in wages in India, the outsourcing industry may be impacted as some economic activities shifted back to the U.S. However this “modest shift” would pose no risk to India’s growth, he added.

There was however strong appreciation from the U.S. side on India’s role in the G-20, as indeed for the expanded role of the G-20 itself in addressing major global issues.