4 Apr, 2013

Indian PM on the Economy: Corrective Strategies Need Correct Analysis of the Problem

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Prime Minister’s Office, 03-April, 2013 – Following is the text of the Prime Minister, Dr. Manmohan Singh’s address at the CII National Conference and Annual General Meeting, in New Delhi today:

“I am delighted to be here today to inaugurate the CII annual meeting for 2013. I have always believed that both government and business have to be partners in writing the story of development of this ancient land of ours, and CII has been a greatly valued partner over the past many years. As different governments have steered the economy through the complex task of implementing economic reforms, CII has consistently pushed the business case for reforms and helped our country to achieve its full economic potential.

I benefited greatly from this partnership as the Finance Minister in the 1990s and I welcome it today as Prime Minister. I thank my friend Shri Adi Godrej for giving me this opportunity to share my thoughts with captains of Indian industry, at a time when I know Industry is deeply interested in the state of our economy.

I last addressed your Annual session seven years ago in 2007. That was just before the global economic crisis, when the world was booming, the collapse of Lehman Brothers was a year away, and India was experiencing growth at over 9 percent per annum. Circumstances have changed since then, not just in India but all over the world.

In my last address I chose to strike a contrarian note. At a time when everything seemed to be going exceptionally well, I struck a note of caution. I said that while we have achieved much, we also have a great deal more to do to create a growth process that is truly inclusive. I also said that while the visible growth and prosperity of Indian big business, including especially its presence abroad, was in many ways a projection of India’s success, there was also need to reflect on the social responsibilities of business. I specifically mentioned the need for restraint in the matter of paying salaries and conspicuous consumption.

Some of my friends later told me that my remarks seemed unnecessarily downbeat at the time, but you will agree that these are precisely the issues that began to receive global attention in the aftermath of the global economic crisis.

I propose to strike a contrarian note once again. If the business mood was unduly optimistic in 2007, I think it is unduly pessimistic today. This needs correction. Let me explain.

In 2007, I often heard it said that government had become irrelevant because India will grow at 9 percent whatever the government does. The consensus today is that unless the Government acts swiftly, our growth, which has already decelerated, will be perennially stuck at 5 percent.

Naturally, I welcome the rediscovery on the part of business of the importance of government! More seriously, I do believe that the role of government at this stage is indeed crucial. I do not believe our future is 5 per cent growth. We grew at an average of about 8 percent in the last ten years and we can get there again. And that should be our combined endeavour. But this calls for speedy and decisive government action.

Government is not the prime mover of growth. In a private sector led economy – and I repeat, we are a private sector led economy with 75% of investment being in the private sector which includes farmers, small businesses and the corporate sector – the driver of growth is indeed private investment. But the private sector needs an environment in which enterprise can flourish and create both jobs and stimulate growth. It needs an environment, which will ensure that this growth is inclusive. The environment today is not what it should be, and that is what the Government must correct.

A corrective strategy must be based on a correct analysis of the problem. Our growth has slowed down to 5 percent, which is clearly disappointing. But this is not a permanent reduction in our longer-term growth potential. As I have said, our economy grew at 8 per cent over the past ten years. If we go back to 15 years the average was also 7.5 per cent. This kind of dynamism doesn’t disappear suddenly, and we must prove the prophets of gloom as wrong. We are seeing, I believe, a temporary downturn, which does happen. After all, business cycles have been a recurrent theme of all textbooks in economics in the past. I believe, we have seen a temporary downturn, which does happen from time to time. We must recognise it as such and take corrective action.

Part of the problem is due to the global slowdown, which has affected all countries. The world, which recovered well from the 2008 financial crisis, is stumbling badly over the second crisis, provoked by the sovereign debt problems of the Eurozone. Growth is negative in the Eurozone and zero in Japan. I have just returned from the BRICS Summit. Brazil is growing at the rate of 1.5 percent, South Africa at the rate of 2.6 percent and Russia at the rate of 3.7 percent. China has done much better at 7.5 percent, but this is much lower than the rate at which China was growing earlier.

We cannot do much about the global slowdown. We can only wait for the world to get back to more normal conditions. In the meantime, we have to accept that our exports will be weak and our current account deficit in the Balance of Payments, higher than it should be. We have to learn to cope with these problems.

But we can act forcefully to deal with the many domestic constraints that have arisen, which must be removed if the economy is to perform at its full potential.

The first step in dealing with our domestic problems is to restore macro economic balance. Over the past several years, our fiscal deficit expanded to a level, which is simply unacceptable. This is partly because of a conscious policy of fiscal stimulation, which was followed by many countries.

Most countries that followed this policy are now reversing the process. We must do so also. That is precisely what the Finance Minister has tried to do. He has targeted a reduction in the fiscal deficit of about half a percent of GDP in 2013-14 and announced continuing reductions of that order each year, up to 2016-17. We are determined to do everything possible to achieve this target.

I must emphasise that this reversal is necessary not just to satisfy international financial analysts. It is necessary to ensure that the financial savings in our system are available to support investment in the economy instead of being absorbed by government deficits. It is also necessary to bring inflationary pressure under control. Inflation has been a problem and though it is softening, it needs to be brought down further.

We have also taken calibrated steps towards rationalising fuel subsidies. Petrol is now fully decontrolled and that has worked well with petrol prices moving up and down with world prices. Diesel is moving gradually towards market based pricing over the next few months. The subsidy outflow on LPG has also been capped. We hope that the Direct Benefits Transfers arrangement, based on the Aadhar platform will ensure better targeting of other subsidies – particularly kerosene – and in due course other subsidies, and prevent leakages.

All these steps have sent a message of serious intent on fiscal consolidation, which is well appreciated internationally.

Fiscal expansion has led to an expansion in the current account deficit, which is expected to be around 5 per cent of GDP. This is more than twice the traditional comfort level of say 2.5 percent. We can expect some reduction from this level in 2013-14, reflecting the lower fiscal deficit targeted in this year’s Budget and also the lower subsidies on petroleum products. But this reduction will be modest initially. We must therefore plan to finance a higher than normal current account deficit in our Balance of Payments for a few years.

We financed a CAD of over $90 billion in 2012-13 without a loss in our foreign reserves. We will take all steps to ensure that inflows remain strong for the next two years. I believe a well-managed Indian economy, seen to be back on a high growth path can attract continuing capital flows of this order.

Restoring macro economic balance is one element of economic management. The other is the creation of an environment that is conducive to a revival of investment. The growth rate of the economy is strongly correlated with investment rate. The private sector is the major source of investment in India. But both public and private investment declined in 2011-12 as a share of our GDP. This decline in investment must be reversed.

The most important thing we can do to revive the investment climate domestically is to deal with the many impediments affecting the implementation of infrastructure projects. There are many projects that have been stuck either for want of regulatory clearances or, in the case of power projects because of fuel supply problems. For a variety of reasons, inter governmental decision-making has slowed down. One reason is a hesitation on the part of officials to take some critical decisions.

It is to deal with this problem that we set up the Cabinet Committee on Investment. It was designed to fast-track regulatory clearances for industry and infrastructure and to resolve inter Ministerial differences at the Ministerial level. I am encouraged by the progress that we have made in the last three months by the work of this committee.

In the petroleum sector, investments worth $20 billion for exploration and production activities in 40 oil blocks had been held up for many years because of lack of security clearances. The CCI has made a difference. Clearances have been given for five blocks. We hope to resolves issues relating to another 31 blocks within the next two weeks.

I believe the progress we have achieved is particularly significant because these blocks were awarded many years ago, but were held up for want of clearances.

In the power sector, issues relating to the NTPC’s proposed 2000 MW project in Jharkhand’s North Karanpura area have now been resolved. This project, to be built at a cost of Rs 14,000 crore, had been pending for the last 13 years because of differences between the Ministries of Power and Coal.

The CCI has also streamlined the processes of granting environment and forest clearances for mega projects. Clearances for 12 coal mining projects have been fast tracked. These projects would add 37 Million Tonnes to our annual coal production. Coal mining projects have now been exempted from public hearing for one time capacity expansion up to 25%, provided that public hearing had taken place earlier. It has also been decided that no fresh Environmental Clearance shall be required for a mining project at the time of renewal of mining lease, if clearance was earlier obtained under the Environmental Impact Assessment Notification of 2006.

Linear projects like roads, railways and transmission lines pass through a large number of villages. A number of such projects were getting delayed because obtaining consent of each Gram Sabha under the Forest Rights Act is time consuming. Such projects are now exempt from obtaining the consent of Gram Sabha provided that the rights of Primitive Tribal Groups and Pre-agricultural Communities are not affected and the State Governments have certified that all rights under the Forest Rights Act have been recognized and vested. This would help enormously reduce the time taken in obtaining Forest Clearances and would also ensure that the rights of forest dwellers are fully protected.

Often, linear projects involve only small stretches of forest land. Earlier work could not be taken up even on the non-forest portion unless Forest Clearance was available for the forest land. Now, work on the non-forest part can begin, subject to certain conditions.

The Supreme Court, on being approached by the government, has allowed delinking of Environmental and Forest clearances in case of linear projects. Procedures have been simplified to enable easier access to aggregates for construction work.

The Environmental Clearance procedure for Special Economic Zones has been brought in line with the framework prescribed for National Investment and Manufacturing Zones under the National Manufacturing Policy which would allow the State Governments to delegate powers to State Pollution Control Boards and would exempt individual units from public hearing if the Special Economic Zone as a whole had undergone public hearing.

This year’s Budget has also introduced some important initiatives to stimulate investment. It has proposed a 15% investment allowance over and above normal depreciation for investment of Rs 100 crore or more. I hope industry takes full advantage of this forward-looking measure.

The budget has also proposed zero customs duty for plant and machinery for semi conductor wafer FABs and extended the availability of non-tax benefits to micro small and medium enterprises for three years even after they graduate to a higher category. We must do more for supporting small and medium industry as this sector will be the key component support structure for larger industry and will be a major source of productive, creative jobs.

The full effect of all these decisions will be felt in the next few months, and I hope they will go far in improving investor sentiment. We will carry this process forward and do even more in the coming days.

In addition to supporting domestic investment, we have given clear signals that we welcome foreign investment which has a critical role in bringing in modern technology and globalising our economy. Even as our Indian industry steps out to invest abroad, we must welcome foreign investors coming to India, and using India as a part of their global supply chain. The liberalization of FDI in multi-brand retail, civil aviation and other areas, are important signals. We are reviewing the FDI policy comprehensively to see what more can be done in the coming months.

The recent legislative measures in the Banking Sector have paved the way for granting of new bank licences by the Reserve Bank of India. This step has been long awaited.

The scheme for Financial Restructuring of State Distribution Companies has been notified and several state governments are now working with the Ministry of Power to take advantage of the scheme. This should help restore the financial health of the power sector to a considerable degree.

The problem of fuel supply – both coal and gas – to power projects has been posing problems. The Ministries are working to reach a resolution of these problems in a time-bound manner. I hope we will see results in the next three weeks.

Other reform measures are also being contemplated. The Financial Sector Legislative Reforms Committee has made a number of recommendations, which will be carefully considered. The Land Acquisition and Rehabilitation and Resettlement Bill has been cleared by the Cabinet and will soon go to Parliament.

India is a young nation and this gives us the opportunity of reaping a demographic dividend. But to realise this dividend we need to build our human capital, through the scaling up of vocational training and apprenticeships. The National Skill Development Authority and the recent Budget announcement on promoting skill-based training through the private sector should help us in making our youth “work ready”. I firmly believe that good employment is the best form of inclusion. I want industry to work closely with government in promoting skill development. I also urge industry to pay greater attention to offer productive job opportunities to people from disadvantaged communities, Scheduled Castes, Scheduled Tribes; in other words the affirmative action must not remain simply a paper exercise, but a living reality.

I have briefly outlined the many areas where Government is taking steps to revive our economy. I would urge Indian industry to have faith in our determination and avoid getting swamped by a mood of negativism. One of the advantages of being a democracy is that our shortcomings and our deficiencies are always put before the public. And there are indeed many deficiencies. Corruption is a problem. Bureaucratic inertia is a problem. Managing coalitions is not easy. But these problems have not arisen suddenly. They were there even earlier, when the economy was growing at 8 per cent per annum.

We can in my view get back to 8 per cent growth even as we try to make the longer-term changes in our system to deal with these problems. And what is more, we can achieve growth of an inclusive kind.

The real message of the experience with the Eleventh Five-Year Plan, which ended in 2011-12, is that we not only grew at an average rate of 8 per cent, our growth was far more inclusive than earlier. Poverty declined much faster. Our agricultural growth rate accelerated. Real wages in rural areas grew much faster. Real consumption in rural areas grew much faster. And the poorer States of our Union grew much faster. This inclusive outcome was the result of a combination of faster growth with a structure that benefited rural areas combined with many government programmes, which encouraged greater inclusion.

If we did it in the Eleventh Five-Year Plan, there is no reason why we cannot do even better in the Twelfth Five-Year Plan.

I would like to conclude by saying that we have entered a decisive phase in our post independence economic history. If we can return to the high growth path that we were on a few years back, it would bring about a transformation in our economy in ten years generating new employment opportunities for our young people and reducing age old poverty to very low levels.

I sincerely believe that each one of us, and the world at large, has a stake in India’s economic rise as a plural, liberal and secular democracy. At times when our democratic processes frustrate us, do remember that it is this very democracy, this commitment to pluralism, commitment to these freedoms that we all cherish, that are the firm foundation of this ancient land’s resurgence as a modern nation.

I urge each one of you to keep faith and call on you to partner with the Government in our effort to put the economy back on the path laid out in our Twelfth Five-Year Plan. I wish this conference and the CII all success.