16 Dec, 2012

Indian Leaders Discuss Economic Future in the face of Headwinds, Downturns

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Two speeches by the Indian Prime Minister Dr Manmohan Singh and Union Finance Minister Mr P Chidambaram on 15 December and 14 December discussed the state of the Indian economy, the challenges posed by the global downturn and the efforts being made to keep the economy chugging. Following are the texts of the two speeches.

Prime Minister Dr. Manmohan Singh at 85th Annual General Meeting of Federation of Indian Chambers of Commerce and Industry, FICCI in New Delhi on 15-December, 2012:

“I am delighted to be with you in this 85th annual general meeting of FICCI. It is almost five years since I was last here in this building for a similar annual event. These have been five challenging years for us in India and if I am a say so for the world economy as a whole. In 2008, the Indian economy had experienced five years of unprecedented growth, registering an annual growth rate of close to 9.0 per cent per annum. There was therefore an air of reassuring optimism all around, and many were celebrating the India’s rise.

But some months later most countries were affected by the global economic downturn. We weathered the impact of the trans-Atlantic financial crisis reasonably well. India was held up as an example of responsible and responsive economic management. But, with time the global slowdown took its toll and we too have been impacted.

Today, we meet after a year or two of excessive pessimism at home, which in turn has hurt the growth process. But, I stand before you to re-assure you that our Government is committed to doing everything that is possible to alter the policy environment, to accelerate economic growth and to make the growth process socially and regionally more inclusive.

The global economy is still passing through turbulent times. The economic situation in Europe has been a source of concern for quite some time. The US economy is not completely out of the woods. China too is witnessing a slowdown. There is considerable uncertainty about when the global economic situation will improve. However, as you have seen in these past few weeks, our Government has acted to reverse the cycle of negative expectations, and stimulate investment.

I wish to utilize this occasion to outline three broad themes – first, to underline the importance of accelerating economic growth and making the growth process socially and regionally more inclusive; Second, to draw your attention to the measures that we have already taken towards this end; and finally, outline steps we still need to and we intend to take.

We have been able to accelerate the pace of economic growth over the last decade, with an average growth rate of over 8%. Even now, we are the second fastest growing large economy in the world.

Our per capita levels have reached a point where India may soon be required to graduate out of IDA, the low cost lending facility of the World Bank. When I came into government forty years ago, IDA was an important source of funding for us. Today we are able to extend such low cost funding to other countries, particularly countries in the neighborhood and countries of Africa.

While this is certainly a cause for satisfaction, I am pained when I see the level of social and regional inequalities that continue to exist in our country. Disparities in income and wealth cannot be eliminated overnight or in the short run. But, disparities of the kind we have in India, even in terms of access to basic facilities such as health, education, safe drinking water, electricity, rural infrastructure and even banking, is something that the nation can ill afford. The inflation rates in the last two years have also increased to unacceptably high levels and need to be brought down to no more than 5 to 6 percent per annum.

The years of high growth enabled us to generate resources that have been deployed to improve the well-being of our people. But we need to do more to eradicate poverty, ignorance and disease from this blessed land of ours. We need to have a growth process which is socially and regionally far more inclusive than what we have today. That is also essential for the long term stability of our polity and our society.

Broadening the social base of development not only improves well-being but also widens the home market for business. Thus, equitable growth can by itself generate more growth. A more educated and healthier workforce is more productive. Better rural infrastructure integrates rural economy far more effectively into the larger national economy. A healthy agricultural economy facilitates faster growth of industry. A more prosperous and better connected populace is a source of larger demand and markets for goods and services.

This is why our government has committed large resources to social and human capital development – in education, in health care, in rural development, in housing and in rural infrastructure. It is our endeavor to ensure that all marginalized groups and regions join the dynamic growth processes in the mainstream economy.

Despite the challenges we continue to face, we must recognize that poverty has declined at a pace never seen in the past two hundred years. More effective social safety nets are falling in place. People look forward to a brighter future for themselves and their children.

It is in this context that we should see the major drive we have launched recently towards Direct Cash Transfers. The drive is to transfer government benefits directly to the bank accounts of individual beneficiaries. The Unique Identification program of having Aadhaar numbers for all residents is going to be the basis of this huge transformation. The government is rolling out Aadhaar based services rapidly so that benefits like scholarships for students, pensions for the aged, health benefits, MNREGA wages and many other benefits are transferred directly into bank accounts using Aadhaar as a bridge. This will reduce leakages, cut down corruption, eliminate middlemen, target beneficiaries better and speed up transfer of benefits to eligible individuals. It will, at one go, bring in crores of people into our banking system and mainstream them into our economy.

Even as we make our growth process more inclusive, we cannot lower our guard in pursuing policies that restore growth momentum to the economy. This task has become more onerous because the global environment for growth has become less supportive. Between 2003 and 2008, the years of 9.0 per cent growth, the Indian economy benefitted from a more benign global environment. Since 2009 this environment has become more challenging. As a result and also because of some domestic constraints, economic growth rates have come down to a range of 5.5 to 6.0%. Our export growth has declined and the fiscal and current account deficits have gone up.

This has had a ripple effect, dampening economic growth as well as investor sentiment. We are today seized of the need to step up investment and savings rates commensurate with the requirements of 8-9 percent GDP growth in the 12th Five Year Plan. It is with this objective in mind that our government has taken a series of measures aimed at reviving investor sentiment, controlling the fiscal and current account deficits and improving infrastructure.

Some of the decisions we have taken were politically difficult and the naysayers and the cynics have tried to halt us in our tracks. But we had the courage of our conviction and the interests of our people at heart.

Well targeted subsidies have an important role to play in softening the harsh edges of extreme poverty. But, it is necessary that we all understand that the subsidy bill, as it has grown in recent years, is constraining the government in its efforts for the economic well-being and empowerment of our people. Under pricing of energy, particularly electricity and petroleum products, has greatly affected the resources available for investments in infrastructure as well as and social development. The subsidies on oil alone are more than what the government spends on health and education put together. We need to address these issues even as we ensure that the poor and the vulnerable are effectively protected.

Last year the central government’s fiscal deficit touched a high of 5.9% of our GDP. This was clearly unsustainable. The Finance Minister has come out with a roadmap to reduce it to 5.3% this year and to 3.0% by 2016-17. Our government is serious about moving in this direction. Our action in correcting distortions in energy pricing, reducing diesel and LPG subsidies, was aimed to achieve this objective.

As challenging as the fiscal deficit has been the rising current account deficit in the balance of payments. Given the global environment, investors have become risk averse and global trade has slowed down. To address this challenge we have liberalized our policy on foreign direct investment. Our decision on Foreign Direct Investment in Multi-brand retail, civil aviation, power-trading exchanges and broadcasting must also be viewed in this larger context. Bills on liberalising FDI limits in banking and insurance are currently before parliament. Each of these decisions is based on sound economic logic. But they were also based on larger concerns about national security and the need to insulate India from the persistent global economic slowdown. I am afraid that those who oppose these moves are either ignorant of global realities or are constrained by out-dated ideologies. For example, when I hear the debate on Foreign Direct Investment in Retail, what I hear are arguments against large scale organized retail, and not against Foreign Direct Investment in retail.

The steps we have taken recently are only the beginning of a process to revive our economy and take it back to its trend growth rate of 8.0 to 9.0%. We need to complete the exercise that was begun on GAAR and taxation of the IT sector. The day before yesterday, the Cabinet has approved the constitution of a Cabinet Committee on Investment. This would help in the issue of clearances for major projects in a time bound manner. We will speed up the disinvestment process which will also revive our equity markets.

We are bringing greater clarity the FDI policy in the pharma sector. The Railways are working on a Rail Tariff Authority which will make fare setting a more rational exercise. We have already put in place a package for reviving Discoms contingent on better performance. The Direct Tax Code and the Goods and Services Tax Bills are high on our priority. The Land Acquisition Bill recently approved by our Cabinet with all the misgivings that Mr. Kanodia has expressed, will soon user in a more fair and transparent regime for land acquisition.

I have listened with great interest and respect what your President Mr Kanodia had to say. The time is ripe once again to establishing a new social compact between business, government and society. And our government welcomes the constant dialogue with our captains of industry. Five years ago, while addressing a similar conference of Indian business I had spelt out a Ten Point Social Charter for business and government. I do not to wish to repeat those points today but would only say that the corporate sector must own up its responsibility in supporting affirmative action designed to provide employment opportunities for the under-privileged sections, persons with disabilities and our women. The private sector should also play a more active role in the areas of Research and Development, education and skill development, health and rural development.

I have often praised the spirit of enterprise of Indian business. For centuries our sub-continent has been home to teachers and traders, to artisans and peasants, to creators of wealth and knowledge. Indian enterprise has every reason to stand tall and take pride in its achievements. Our government will work together with captains of industry to realize the latent growth potential of our economy.

Your association, FICCI, should feel proud that you have a talented and a patriotic leader in Mr Raju Kanoria. I would like to compliment Mr Kanoria, for having provided excellent leadership to FICCI over the last one year. He has done a tremendous job, and has given valuable advice and support to our government from time to time. I have been heartened by his unwavering support to our policy efforts.

I would also like to note that FICCI is going to have its first ever Lady President when Smt Naina Lal Kidwai takes over after this AGM. She has been an icon to many young ladies in our country and has been a role model for women to aspire to reach the top. I am sure she will steer the ship of FICCI well in the coming year.

For my part, I assure you that our government will do its best to promote Indian enterprise and the well-being of all our people, working classes and other segments of our society. We are committed to a new social compact with industry as well as with labour. This is what our country expects and this is what to which I commit our government to do.

Union Finance Minister Mr P Chidambaram’s speech at the Delhi Economics Conclave on 14 December 2012

Source: Ministry of Finance.

i. I welcome you to the Delhi Economics Conclave organized by the Ministry of Finance in collaboration with National Institute of Public Finance and Policy (NIPFP) and Confederation of Indian Industry (CII).  Let me congratulate the team in the Economics Division for organizing this conclave for the third successive year and thank NIPFP and CII for their support and cooperation.  I understand that, besides the plenary sessions on the first and second days, there are satellite conferences organized by other organizations as part of this Conclave.  Let me offer my thanks to those organisations too.

ii. The theme of this conclave is “Reviving Growth”.  Nothing can be more topical.  As far as I know, this is the subject that is engaging the attention of all countries of the world.  Be it the G-7 or the G-8 or the G-20 or the G-24 comprising the developing countries, at every forum the prime topic of discussion is how to revive global growth.  The world economy is passing through its most difficult phase since 2008.  The Euro zone as a whole is, technically, in recession with negative growth in the second Quarter and the third Quarter of 2012.  Growth in the US has too slowed as a result of political uncertainty over the “fiscal cliff”.  Other major economies such as Japan and Brazil have seen their growth stalled.

iii. The emerging economies are affected not only because of the fall in international demand for their products, but also because of the severely diminished policy space they have to stimulate their economies after the crisis. Higher inflation and higher fiscal deficits make it hard for the emerging economies, with few exceptions, to resort to standard counter-cyclical measures.

iv. The immediate fallout has been a sharp deceleration in global economic growth.  As per the IMF’s World Economic Outlook, October 2012, growth in world output is expected to decrease to 3.3 per cent in 2012, from 5.1 per cent in 2010 and 3.8 per cent in 2011.  Advanced countries, as a group, are expected to grow only by 1.3 per cent, down from 3.0 per cent in 2010 and 1.6 per cent 2011. Emerging market and developing economies are expected to grow by a modest 5.3 per cent, as against 7.4 per cent in 2010 and 6.2 per cent in 2011. There has been a sharp decline in growth all over the world since 2009.

v. Global trade has also been affected. The volume of world trade (goods and services) is expected to grow by 3.2 per cent in 2012, after growing at 12.6 per cent in 2010 and 5.8 per cent in 2011.

vi. India’s GDP growth that was 8.4 per cent in 2009-10 and 2010-11, slipped to 6.5 per cent in 2011-12, partly due to the fallout of the euro zone crisis.  A closer look reveals that the slide in growth is correlated with the intensification of the euro zone crisis, which began worsening towards the middle of fiscal 2011-12. Since the first Quarter of 2011-12 when the GDP grew at 8.0 per cent, there has been a secular decline in the growth rate in every successive Quarter.  The growth rates in Q I and Q 2 of the current fiscal (2012-13) have been 5.5 per cent and 5.3 per cent respectively.

vii. The performance of India’s external sector has also not been encouraging.  The country’s trade deficit was 10.3 per cent and the current account deficit 4.2 per cent of GDP in 2011-12. This was because, while export growth slowed considerably, imports continued to remain high due to high international oil prices and gold imports.  This is unlike the situation during the 2008-09 global crisis.  At that time, oil prices plunged following the collapse of Lehman Brothers in September 2008.  Further, the decline in imports was sharper than the decline in exports.  In my view, the present challenge is therefore different and calls for bold and innovative measures.

viii. External sector vulnerabilities are affecting the Indian economy because of the rapid globalization of the economy.  The economy is more open.  This can be gauged from the fact that the trade in goods and services, which was 22.9 per cent of GDP in the 1990s (i.e. the average for the decade), increased to 55.7 per cent of GDP in 2011-12.  Similarly, payments and receipts on the capital account, which were at 15.1 per cent of GDP in the 1990s, increased to 48.2 per cent of GDP in 2011-12.  As a result, global developments have an increasingly larger impact on the Indian economy through the trade and capital account channels. Besides, in the global environment of uncertainty and low investment, the impact is also transmitted to the economy through the confidence channel.

ix. In such a situation of uncertainty and low investment, Government has been making every effort to turn the economy around and create a more investor-friendly climate.  We have taken a number of steps to encourage foreign direct investment, including allowing, recently, FDI in multi-brand retail, civil aviation and some broadcasting services. Against considerable opposition, we also raised the prices  of  certain petroleum products in order to contain the subsidy bill and to discourage over-consumption. We have initiated measures to move all cash benefits to a technology-enabled platform so that the benefits are transferred directly to the bank accounts of the beneficiaries; we expect that the Direct Benefit Transfer Scheme will be a game-changer and will eliminate nearly all leakages, duplication and falsification and bring a greater degree of transparency and efficiency.  We are also addressing some tax issues that have created uncertainty in the minds of the investors and we have made it clear that our objective is to have clarity in tax laws, a stable tax regime, a non-adversarial tax administration, a fair mechanism for dispute resolution, and an independent judiciary. Yesterday, the Cabinet took some important decisions.  Among them was a decision to set up the Cabinet Committee on Investment to quicken the pace of decision making in critical infrastructure projects.  The Cabinet also approved a landmark draft Bill on Land Acquisition and a  new investment policy for urea plants.

x. It is too early to say whether the measures have begun to bear fruit, although it is our expectation that they will do so.  Manufacturing PMI has risen to a 5-month high. Foreign portfolio capital inflows have been robust in the last few months, amounting to USD 21 billion up to November 30 this calendar year. The stock markets leading indices have risen by about 11.5 per cent between August 1 and December 13, 2012, pointing to growing investor confidence and the return of the small investor. While headline inflation has moderated to 7.5 per cent, inflation measured by the consumer price index remains sticky at 9.9 per cent.  There is no reason at all to become complacent.

xi. What scope is there for international co-operation in reviving growth, the theme of this conference?  In their declaration at Los Cabos earlier in the year, G-20 leaders declared that “all G20 members will take the necessary actions to strengthen global growth and restore confidence.”

Dr. Manmohan Singh, Prime Minister of India, said at Los Cabos, “Infrastructure investment in developing countries assumes special importance in this context. It lays the foundation for rapid growth in the longer term, while providing an immediate stimulus for their economies and also for the global economy, by providing a robust source of demand.”

He added, “An expansion of investment in infrastructure in developing countries is only possible if they can get access to long term capital to finance such investment. This is difficult at a time when capital flows are disrupted. The Multilateral Development Banks can play a major role in this context.”

xii. I would like to remind this Conference that the G-20 Leaders asked their Finance Ministers and Central Bank Governors to consider ways in which the G20 can foster investment in infrastructure and ensure the availability of sufficient funding for infrastructure projects, including financing and technical support by the Multilateral Development Banks (MDBs).

xiii. However the fiscal challenges faced by the advanced economies give them little appetite to shore up the resources of the MDBs. On the other hand, gross savings as a share of GDP have increased significantly in a number of the Asian countries who are members of G20.  Keeping in mind these realities, I propose that the Asian G-20 countries, including China, Japan, South Korea, India, Indonesia, Australia and possibly Russia, should take the initiative to enhance the resources of the leading MDB in the region, the Asian Development Bank (ADB).  The ADB plays a crucial role in regional investment and development.  If we do that, the ADB will be in a position to play a greater and more defining role in regional infrastructure financing, which in turn will allow countries like India to contribute to a greater degree to domestic and world growth.  I appeal to the Asian G-20 members to come together in an effort to increase the resource base of the ADB so that we can co-operatively carry forward the G-20 agenda.

xiv. India weathered the crisis very well in 2008 and I am confident that the steps we have taken – and some more steps that we will take in the next few weeks – will help turn the Indian economy around.  However, every country has to introspect on whether the domestic and external issues have been diagnosed correctly and whether the policy options have been exercised adequately and effectively.  What are we missing and what else do we need to do to ensure sustainable growth in the coming years? I am sure with the distinguished group of invited speakers with diverse backgrounds, the questions discussed in this Conclave and the answers that will be thrown up will serve as useful policy inputs for us in the Government, especially the Ministry of Finance.

xv. Let me once again congratulate the organizers in bringing together a galaxy of experts from different areas and from different parts of the world to discuss the crucially important issue of how to revive growth.