WASHINGTON, Oct 25 (Reuters) US Treasury Secretary Henry Paulson said India needs to open its economy to foreign investment to help finance its growth rather than restrict flows of capital into the country.
''Administrative restrictions of capital flows are blunt instruments and can have unintended consequences,'' Paulson told the Council on Foreign Relations yesterday ahead of a trip he will make to India.
''They tend to inhibit efficiency and lose their effectiveness over time,'' he added, ''I encourage India to continue liberalizing such restrictions.'' Paulson arrives in India on Sunday and will meet Indian Finance Minister Palaniappan Chidambaram and other senior officials in Mumbai and New Delhi before returning to Washington next Wednesday.
He said Washington understood India's concern that increased capital flows could add to inflation pressures or make its currency exchange rate more volatile and said it was on the right track to handle those pressures.
India's rupee hit a nine-year high against the dollar earlier this month.
BENEFITS IN RUPEE RISE ''India has allowed greater flexibility in the exchange rate in recent months, and the appreciation in the rupee has helped to reduce inflationary pressures,'' Paulson noted, but he added it should do more to reduce restrictions.
''It is in the best interest of India, the United States and the world for India to continue, and even accelerate, the pace of economic reforms and openness,'' Paulson said.
During a question period, Paulson said there was no sign the rupee's rising value was impeding India's rapid growth and contrasted it with China's policy of managing its currency at relatively weak levels that U.S. and European companies say is unfair.
''What's happened in India here is good news in terms of the exchange rate. I'll be encouraging them to stay the course and not backslide,'' Paulson said. He criticized China's currency regime, calling it an ''unnatural act'' since China is highly integrated into the global economy in manufacturing and trade.
Paulson noted that India estimates it must spend 500 billion dollars over the next five years to build infrastructure like power plants and said that will be easier if it promotes private-sector participation.
FEWER RULES, MORE INVESTMENT ''The government can do more to encourage this private investment by establishing more hospitable investment, regulatory and financial regimes,'' he said. ''Capital limitations...will make infrastructure investment more difficult to obtain.'' Paulson noted the United States and India have agreed on a deal -- now stalled by Indian opposition parties -- that would let India import US nuclear fuel.
''The United States remains committed to this agreement,'' Paulson said, which he said would help India achieve its economic development goals. It was unclear whether he will discuss the deal while in India.
Undersecretary of State for Political Affairs Nicholas Burns said on Tuesday that India needs to decide soon whether to proceed with the deal or not.
''We don't have an unlimited amount of time,'' Burns said at another Council of Foreign Affairs event in New York since the United States was approaching an election year and it was hard to pass legislation at such times.
REUTERS SKB BD0919