Indian finance minister P. Chidambaram has the knack of disarming people with his readiness to acknowledge India’s failings even as he pitches the country’s strengths. He admits India’s infrastructure and regulatory regime in some areas are weak, its schools need improvement, and that China can show India how to “think big.” In an interview with the Boston Consulting Group and India Knowledge at Wharton conducted in Mumbai earlier this year, Chidambaram expressed confidence that India’s talent can power global R&D, and its factories and farms can produce “virtually anything” to feed and clothe half the world.

Knowledge at Wharton: We have seen reports on India’s growth, which is in the region of 7%-8%. This is a high rate. How can India manage that level of growth? It obviously has lots of opportunities, but it also faces challenges.

Chidambaram: Our industry is very mature; our services sector is extremely competitive. So we can achieve 7% to 7.5% growth if we continue to follow sensible economic policies and promote investment.

Knowledge at Wharton: In our discussions with corporations outside India, we find them concerned about the country’s infrastructure and regulatory environment. What do you have to say about how those might change or what the challenges are? Where do you expect to see progress?

Chidambaram: I admit that we are deficient in infrastructure. We have some ways to go before we have world-class roads, world-class ports, world-class airports, but we are making every effort to bridge these gaps. We have not paid enough attention to infrastructure. We also have some deficiencies in implementation. But we are trying to make up for all of that by better project design and better project implementation.

We are fast catching up in these areas, and I am sure that four or five years down the line, the infrastructure will have considerably improved. Even now, our telecom infrastructure is very good; our ports are getting better. We are constructing world-class roads. The point is: Are we addressing this issue with all the seriousness it deserves? I believe we are.

As far as regulators are concerned, our central bank, the Reserve Bank of India, and our securities regulator SEBI (Securities and Exchange Board of India), are world-class, I believe. In fact, in several forums, these regulators have been regarded as world-class institutions.

In some other areas the regulatory mechanism is new to us: Telecom, the power sector and the port sector are new to the game. But I think that every day, our regulators are gaining experience and new skills. So one can’t make a judgment about the regulatory environment of a country to say that within four or five years, the regulators’ skills would be in place. But they are getting better every day.

Knowledge at Wharton: Could you speak about education in India? This again is an issue discussed in the U.S. and European press. Questions are often raised about how to broaden and deepen India’s management talent.

Chidambaram: We have the best colleges and institutes in this country, and we have the worst schools in this country. We have a long way to go before we can make our school system first-rate. We are pouring huge amounts of money into expanding the school system and improving its quality. The democratization of education in India has no parallel anywhere in the world.

In the process of democratization, we have lost our top quality, the teaching and instruction quality in our schools and the quality of books. I admit those problems. But we are now spending large amounts of money on improvements. At the other end, we have among the best institutes in the world — institutes of technology, institutes of management and medical colleges. Therefore, as I said, we have the best and the worst. While we are proud of the best, we have to do a lot more hard work before we can make the worst better.

Knowledge at Wharton: Another issue that comes up a lot — especially concerning India — is innovation. For many large U.S. corporations, that is always No. 1 or No. 2 on their agenda. India is seeing a lot of activity in innovation, not just with Microsoft and Intel announcing big R & D investments, but also with Indian enterprises focusing on organic growth and innovation. How can India ensure a payback from these investments, especially to keep up the innovation effort?

Chidambaram: We spend a fraction of our GDP on R&D. That’s because the bulk of our resources are spent on much-needed social infrastructure and physical infrastructure. But we recognize the value of invention, discovery and innovation, which is why we don’t regret the fact that some of our best human resources have migrated to other countries to take advantage of the opportunities available there in research and development.

Many of them are coming back. Also, many countries are realizing that instead of allowing human resources to migrate, it is better that we take the work to where they are. This is why Microsoft has set up its largest research center outside the United States in India. General Electric and several other companies have also set up very large research centers in India, because the human resources are available here.

But all this requires a lot of money. The government is putting in some amount of money, but that is not enough. It’s the private sector which has to put in more money and I think our companies are realizing the value of this. For example, our biotech companies are putting more money into this.

The payback will come in the long run in terms of new products, new designs, new uses for old products, new inventions — it will come. But while we are a resourceful country, one has to be modest about one’s ambitions on R&D funded by India. We should actually leverage the splendid human resources we have to attract capital for R&D purposes.

Knowledge at Wharton: There is a lot of focus these days also on India’s companies becoming increasingly prominent players on a global stage. What has to happen to support this, from the perspective of both the companies and the government?

Chidambaram: Nothing. We encourage the process of acquisition. We allow companies to take out capital to acquire companies overseas. We recognize that our companies must become global and must also acquire global size. We will always be a net importer of capital, at least for many, many more years. We recognize the value of outsourced capital and we encourage our companies to do so. In fact, the last couple of years have seen a spate of acquisitions. The government’s policy is to continue to encourage Indian companies to acquire companies and grow globally.

Knowledge at Wharton: Wharton finance professor Jeremy Siegel has spoken about the implications for the world’s markets of the aging populations in developed countries, especially the U.S. He says the developing world, in particular India and China, will produce the goods for these older populations and buy their assets [to fund their retirement needs]. Do you agree with that assessment?

Chidambaram: I don’t think India and China are in the same boat. India is the only large country in the world where the size of the working-age population will continue to rise until 2025, before it begins to decline. That is not true of China. So, we have a demographic opportunity here over the next 20 years. The size of our working-age population is likely to be more than 500 million in about 15 years from now. We can educate and train this working-age population to add enormously to national output and GDP.

I think we have the capacity to produce virtually anything that is produced anywhere else in the world. And therefore, we will be a supplier of goods and services to the rest of the world. I’ve always believed that India can supply food and clothing to half the world. We can produce steel more efficiently; we can refine crude oil more efficiently. Therefore, as the developed countries become knowledge-based and innovative societies, the basic goods and services will indeed be produced by developing nations. And among them, in the forefront, will be India.

Knowledge at Wharton: With the R&D investments that some big global players are making in India, there are questions about the role foreign companies will play in India. How do you see that evolving over the next five to 10 years?

Chidambaram: We welcome foreign companies. We have had foreign companies for over 100 years. Their presence was modest [in earlier years]. But for the policies that we followed in the 1960s and 1970s, they would have grown in India; many of them withdrew from this country. But since 1991 we have opened up. We welcome foreign investment, especially foreign direct investment. We have no fear of foreign investment.

The bulk of India’s investment resources will come from India and from among Indians. It’s only in the margin that FDI plays an important part. But even at that margin — 2%, 3% or 4% of GDP — we are able to get through FDI, it adds value, it brings new technology, it brings new management practices, it opens up new markets for us, brings new products. We welcome foreign companies to come to India, but all that we say [to them] is: You will have stiff competition from the Indian companies as the years roll by.

Knowledge at Wharton: Knowledge at Wharton recently invited Indian and Chinese students to participate in international essay contest on “What can India and China learn from each other?” What do you think are the opportunities?

Chidambaram: I don’t know what China can learn from India, but I do know what India can learn from China. India can learn from China how to be extremely focused on goals. India can learn from China in the area of project implementation; the Chinese implement projects ahead of time. India can learn from China about dreaming big. China is now planning the world’s tallest building, the world’s largest deep-sea port, the world’s largest airport. I think we, too, should learn to dream big, like China.

Now, what can China learn from India? That question should be put to the Chinese.