India's Continuing Growth Story : India's Finance Minister

Finance Minister’s Address “India’s Continuing Growth Story” at the India Investment Forum, September 21, 2011Following is the text of the Finance Minister’s Address “India’s Continuing Growth Story” at the India Investment Forum, September 21, 2011

“I am very happy to be here today and have this opportunity to speak on a theme, which as the Finance Minister of the country, is a matter of professional engagement and even a commitment for me. Growth is necessary for the opportunity that it creates for the teeming millions in India, who need to be lifted out of poverty and deprivation. Growth is equally important for the resources it generates for the Government to bridge the country’s social and physical infrastructure deficit. Indeed, it is the means that gives us a realistic chance of putting the economy on a path of high, self supporting and sustainable long-term growth.

The Indian economy has traversed a long way during the course of which it has stepped up its growth trajectory over successive decades, especially since the 1980s. It grew at a rate of around 3.5 per cent between 1950 and 1980, about 5.5 in the 1980s, going up to over 6 per cent in the 1990s and in the early years of this century. Since about 2003-04 it has moved further to a higher trend growth path of 8.5 to 9 per cent per annum. Between 2005 and 2008, India’s GDP grew at around 9.5 per cent per year making it one of, the fastest growing democracies in the world.

The economic slowdown in the wake of the global financial crisis also impacted India and its growth rate declined to 6.8 per cent in the crisis year of 2008-09. However the recovery was rapid and strong. The economy registered an average growth of over 8 per cent in the two years following the slowdown, demonstrating its resilience and the capacity to overcome adversities in its development path.

Though there has been some moderation in growth, with GDP increasing by 7.7 per cent in the first quarter of 2011-12, the fundamentals of the economy are still intact and the growth story of the Indian economy continues unabated. Continue it must in the next two decades so that we are able to deliver on the promise of meeting the developmental objectives that we have set for ourselves.

One of the defining features of the last two decades has been the shift in global economic power from the developed to the developing countries. G-20 and BRICS have emerged as groups that are guiding the world economy. The report on BRIC by Goldman Sachs made the world sit up and take notice of the potential economic clout of Brazil, Russia, India and China. Together these economies accounted for about 47 per cent of the contribution to global growth in 2011. We are glad that South Africa has now joined the BRIC cluster to give it a ‘plural dimension’ – BRICS. It is important for these partnerships to flourish if the global economy has to recovery quickly from the unprecedented downturn and to create a more stable and prosperous world in the coming years.

India has embraced a calibrated approach to globalization. The economy is gradually, but surely getting integrated with the global economy. There has been significant growth in India’s trade, investment and capital flows with the rest of the world. Globalization has offered new opportunities, but it has also posed new challenges. Indeed, while it may not have been easy to raise the annual growth rate of the economy to over 8 per cent, it is certainly getting more difficult to sustain high growth over an extended period of time. The global events and their impact on our economy in the past few years, make this amply evident.

The challenge for us is to manage this process in a manner that our developmental goals are not compromised and that we attain them in a reasonable period of time. So far, we may have managed to be on track, despite uncertainties and recurrent economic turbulence, but we may have much more to do, in the coming years.

The sustained high growth of recent years reflects a maturing of the economic management in the country. Industry and services have emerged as the prime drivers of growth. The Indian manufacturing sector has come of age and is making its presence felt globally in sectors like the automobile and auto components, pharmaceuticals, textiles and steel. The changing composition of our exports in favour of engineering goods apparent in the recent export data for 2010-11 is an indication of that fact.

The services sector, contributing about 58 per cent of GDP, has become an important driver and a stabilizing factor for our economy in the face of growing exposure to global business cycles. The large service sector is also helping us absorb domestic shocks and uncertainties associated with a monsoon-dependent agrarian economy. The agriculture diversification has added to its resilience in the face of uneven and delayed monsoons in the recent past.

The medium term growth prospects of the economy remain buoyant. The savings and investment rates have reached levels that are reminiscent of the East-Asian high growth economies. As the demographic dividend begins to pay off in India, the savings rate is likely to rise further, provided we are able to create productive employment opportunities. Private enterprise, has flourished in the past decade and its growing competitiveness is opening new doors to Indian companies in the global market place. Indeed, I am confident that we are in a position to sustain high economic growth in the coming years and create a more inclusive outcome for our society.

More specifically, as we put ourselves to the task of preparing the Twelfth Five Year Plan we are aiming at a GDP growth of 9 per cent, possibly more, for the Plan period 2012-17. It would imply raising the average growth rate by about one percentage point from 8.2 per cent, likely to be realised in the Eleventh Plan. However, we have to work towards ensuring that the incremental improvement in the growth rate comes essentially from States that so far have been lagging behind the national average. Since there are quite a few major States that need to catch- up with the rest and are at a relatively lower base level, that is, in itself, a source for sustaining high growth in the coming decades.

Sustainability of the growth momentum in the medium term depends critically on the quality and pace of infrastructure development. Our intention has been to attract and leverage private investment in infrastructure to meet the growing requirement of the economy. One trillion dollars of investment is required in the infrastructure space during the Twelfth Plan period. The policy and regulatory kinks are being smoothed out. Our policy thrust in this regard is on creating efficient regulatory structures and enhancing investment. In particular, we are emphasizing on effective public-private partnerships, given the difficulties involved in direct government provision of many infrastructure services.

Deepening of reforms in the financial sector and strengthening of overall regulatory architecture is being pursued. A Financial Sector Legislative Reforms Commission (FSLRC) has been set up to re-write the financial sector laws and bring them in harmony with the new liberalized environment and global best practices. The RBI has embarked on the process of giving some additional banking licences to private sector players. The agenda on financial inclusion has been clearly carved out and is being implemented successfully by the different stakeholders.To make the FDI policy more user-friendly, all prior regulations and guidelines have been consolidated into one comprehensive document, which is reviewed every six months. This has been done with the specific intent of enhancing clarity and predictability of our FDI policy to foreign investors. A consensus on allowing FDI in multi-brand retail is being evolved and will be operationalised in the near future. The Competition Commission of India (CCI) is now functional and is gradually developing traction on the ground to guard against anti-competitive practices and oversee mergers and acquisitions.

Focus is also being put on issues of governance and institutional reforms and strengthening. The Government aims to empower the people; especially the poor with universal access to education and health and facilitate their participation in the development process through gainful employment. This has been reflected as the Central theme of faster, sustainable and more inclusive growth in the Approach Paper to the Twelfth Plan.

The direct cash transfers for subsidies announced in the Budget 2011-12 will help the targeted beneficiaries of the government programme. UIDAI will be issuing 1 million aadhaar numbers per day. It will give identity to the poor and open their access to many facilities and public programmes. This is one of the most far reaching initiatives of the present government.

In India, different coalition governments at the Centre have guided policy making over the last twenty years, yet all have broadly agreed on the basic thrust and direction of reforms. Contrary to popular perceptions, India’s multi-party federal democracy has actually played a key role in implementation of reforms. Intensive deliberations on reforms has imparted to the economic policy-making a much-desired calibration that helps in safe guarding the interests of vulnerable sections of the society. Irrespective of political differences, the Central and State governments have worked together for furthering reforms. The biggest example of this is the gradually evolving consensus on the Goods and Services Tax. Besides, introduction of fiscal responsibility legislations in most Indian States and the Centre bears testimony to India’s success in pursuing reforms through a broad political consensus. Reforms are slow but sure with a broad based democratic sanction.

Let me conclude by saying that despite the challenges before us, I am confident that we are in a position to sustain high economic growth in the coming decades and create a more inclusive outcome for our society. I have faith in the Indian entrepreneurial spirits and the other stakeholders, and we have the political will to do the needful to meet the aspirations of our people.”

DSM/SS/GN
(Release ID :76153)

G-20 Agenda by India. Is it tug war..?

Dealing Effectively with Interrelated Issues of Global Imbalances, Financial Regulations , and the International Monetary System Central to Agenda of G - 20 : FM

Union Finance Minister Shri Pranab Mukherjee  has said that one of the central objectives of the G-20 has been to address the root causes of the global financial crisis, prevent a recurrence and, going forward, to take measures to achieve strong sustainable and balanced growth. Dealing effectively with the interrelated issues of global imbalances, financial regulation, and the international monetary system are central to this agenda,  he said. The Finance Minister was speaking at the international conference on ‘Global Cooperation on Sustainable Growth and Development, here today. He said that the conference had been organised around 5 broad thematic areas - global imbalances, financial regulation, international monetary system, development and commodity markets. He said that in each of these areas, the world is facing several immediate challenges and these issues are therefore the subject of ongoing discussions in the G 20.  He congratulated ICRIER and its partners for organizing this timely conference and bringing together eminent academics and policymakers from across 14 countries, to deliberate on these critical issues.                             Finance Minister said that the G 20 demonstrated its relevance to international policy making with the success of its coordinated response on the fall-out of the global financial crisis.  He said that the economic downturn was moderated and growth resumed in the second half of 2009 in most economies, although the pace of recovery remained uneven. The Finance Minister said that it appeared that policy makers had learnt theirs lessons from history by honing and harmonising the use of macro-economic policy and keeping markets open.  At the same time, countries in the developed and the developing world adopted revival strategies in keeping with the needs of their respective contexts, he said.                             Shri Mukherjee said that developments in recent months have been less encouraging and  there is widespread apprehension that even the tepid global economic recovery that we have seen so far is stalling. Growth in most advanced economies has declined in the second quarter of 2011 and emerging markets are witnessing a combination of moderation in growth and rising inflation, he said.                             The Finance Minister said that advanced economies, the Euro zone and the US, are seized with sovereign debt problems  which  is making financial markets nervous. He stated that elevated fiscal deficits and public debt have always followed deep recessions in the past, which could be overcome with stronger recovery in output and in the present instance,   the nominal output is yet to reach the pre-crisis levels. Shri Mukherjee said that there are structural constraints coming in the way of advanced economies returning to their trend growth path. As a result, their fiscal position looks increasingly unsustainable. He said that despite the aggressive fiscal and monetary policy, unemployment continues to be at its highest in many advanced countries. The question is what more can policy makers do to improve growth or to avoid another downturn, he said.             The Finance Minister said that emerging markets recovered quickly from global slowdown, but are facing elevated commodity prices, inflation, moderating growth and volatile capital flows all at once. Central banks have been forced to raise policy rates repeatedly, potentially compromising growth in the short-term. While raising rates may help stabilize growth, it may also invite more capital inflows. It is true that emerging economies are relatively better placed with regard to their public debt and fiscal deficit due to their stronger growth momentum and relatively robust banking systems. Their downside risks are on account of high oil and commodity prices and volatility in capital flows, partly due to the easy money policies in advanced countries, he said.             Shri Mukherjee said that unlike at the outset of the global financial crisis, when G 20 led policy coordination across economies could be achieved rapidly, it may be more difficult now. The advanced and developing countries are at different stages of the business cycle.  It is important, therefore, to       pause and think about what the G 20 agenda has been thus far and how it needs to evolve in future, he said.                           Shri Mukeherjee said that most observers believe that the proximate cause of the recent crisis lay in a small, sub-prime segment of the UShousing market. The ultimate reasons included the growing weaknesses in financial regulation and the build up of global imbalances. Since the international monetary system does not have an effective mechanism for preventing the build up of global imbalances, the G 20 took up the issue of its reform on a priority basis, he said. The Finance Minister stated that there is an understanding that the G 20 Framework for Strong, Sustainable and Balanced Growth may be the mechanism for adjusting these imbalances. This work-stream, in which India plays an important role as co-chair of the Framework Working Group, is vital for the success of the G 20, he said.               The Finance Minister said that strengthening domestic drivers of growth in developing and emerging economies is necessary for rebalancing of the global economy. As a result, the development agenda has become a central theme for the G 20 since the Seoul Summit. Moreover, as financial markets were seen to be destabilizing commodity markets, commodity price volatility and food security were also added to this agenda, he said.             Shri Mukherjee said that while welcoming these initiatives, we need to be cautious regarding the danger of working with a one-size-fit-all approach. Basel III is a good case in point.   He said that it is quite demanding on developing country banks. Different stages of economic development require different levels and quality of support from the financial sector. If capital adequacy standards become too high, there is a danger of inefficient dis-intermediation in markets. Emerging markets should use prudential regulation and close supervision rather than merely high capital standards, he said.             The Finance Minister Shri Mukherjee said that Global macroeconomic imbalances are at the heart of destabilizing sustainable economic growth at the international level.  He stated that    all imbalances are not bad as some of them reflect multi-paced growth, different savings-investment behaviour and productivity levels across economies and such differences may not be destabilizing per se. Shri Mukherjee said that at the same time, some imbalances reflect structural inefficiencies usually created by policy distortions relating to the external sector, trade, capital flows and exchange rate policies, financial markets, tax and subsidy regimes, which have to be addressed. The Finance Minister said that the reform of the International monetary system is high on the agenda of the G-20 and various issues including capital flows management, financial safety nets, measuring global liquidity, composition of the SDR basket are currently under discussion, he said.             The Finance Minister emphasised upon a few specific issues for the deliberations.  Firstly, he said that an issue of immediate concern for emerging economies is managing large capital flows. Large and volatile capital flows to  emerging markets can be destabilising as they lead to high exchange rate volatility and in some cases make it incumbent to maintain high levels of foreign exchange reserves as an insurance against sudden or large-scale flight of international capital, he added. Large and volatile inflows are also associated with asset price booms and encourage excessive risk taking by traders and investors and therefore threaten financial stability, said the Minister.             Secondly, the Finance Minister said that recent commodity and food price rise and their volatility have induced considerable threat to economic growth and food security in energy dependent emerging, as well as, developing economies. Factors behind recent price hikes are yet to be pin pointed. Even the G-20 is undecided on the role of speculation and global excessive liquidity on the international commodity prices. He said that though it does seem odd that commodity prices should be so buoyant even as the outlook for global growth is weak. He stated that we need more research and debate on whether speculation in currency and commodity markets has been playing a role in recent price rises.               Thirdly, the Finance Minister said that G 20 development agenda is understandably very vast and  covers areas that are also being handled by a number of developmental agencies. While we are committed to concerns of ‘development’ and of sharing the fruits of economic growth, it is imperative to prioritize among various development needs, he said. Shri Mukherjee said that one development issue that deserves priority is the recycling of global savings for infrastructure investment.Enhancing infrastructure investment in emerging economies and developing countries would have positive spin-off for rebalancing global demand. It would result in real investments with tangible growth. The G-20 is well placed to coordinate various stakeholders including governments, especially the ones that have large surpluses, the private sector, and multilateral development banks, for investment in developing economies, he said. He hoped that the conference can suggest innovative ways to recycle global savings and identify viable strategies to overcome the presumed hurdle of ‘lack of enabling environment’ for infrastructure investment in emerging and developing countries.             In his concluding remarks, the Finance Minister said that even though there are no simple answers or magic solutions to some of these issues,  he did not  see any reason for despair.  He hoped that the    deliberations would help in addressing global challenges at the current conjuncture and also the structural problems that confront us, in an innovative and cooperative framework.   He said that the need of the hour is global reforms with an eye on medium to long-term sustainability of economic growth. DSM/SS/GN (Release ID :75945)