BI Norwegian School of Management
Address by P. Chidambaram
Finance Minister, India
October 24, 2007
I thank you for the invitation to address the Norwegian School of Management. I understand that your school is an important and fast growing institution of higher education that attracts students from many parts of the world. That is good. Knowledge has no borders. The thirst for knowledge also cannot be contained within borders. A good school and a good student will always attract each other.
2. Today, I am happy to see before me a distinguished audience of professors and scholars and young men and women who will go on to become leaders in the world of business. It is a world in which India seeks a place and Indian business is increasingly in the limelight. The India growth story has drawn considerable attention in recent years and I am sure that scholars at this school too would have kept track of that story. I wish to take this opportunity to share with you the milestones that we have crossed on the road travelled so far and what lies ahead.
3. The key to growth lies in openness. We are an open society: there are still inward looking communities; but education, communication and urbanisation are prising open the doors and liberating the people. The energy that you will find in India – especially among young Indians -- is a direct result of a more open society. We are also an open polity: among all the countries that became free from colonial rule in the 1940s and 1950s, India has resolutely remained on the road of democracy. While some countries are still experimenting with one-party democracy, India has always been a multi-party democracy that accommodates every shade of political opinion. And, above all, it is our intention to create an open economy, a task in which we have achieved a significant measure of success in the last 16 years. As I shall tell you presently, we have opened our economy cautiously and through carefully calibrated measures. Consequently, we believe, we have been able to minimise the risks of globalization.
4. India has witnessed three distinct periods of growth. The first phase lasted three decades, when the State was firmly in the driver’s seat. It was a period of licensing and control, controls on exports and imports, controls on foreign exchange, nationalisation of major industries and services, high tariff walls and high rates of taxation. India’s GDP grew at an average rate of 3.5 per cent a year. However, with the population growing at 2.1 per cent during this period and with persistent inequality, little benefit accrued to the poor. At the end of 1978, fully 51.3 per cent of the population was below the poverty line.
5. The second phase was the ten year period in the 1980s. A feeble attempt was made to limit State monopolies and allow competition from the private sector. More licences were given to the private sector in mining, mineral based industries, steel, cement, petroleum and petrochemicals, pharmaceuticals and road transport. The result was a sharp rise in the rate of growth to an annual average of 5.6 per cent. Yet, because the financial sector still remained tightly controlled, the financing of that growth through huge borrowing led to macro-economic instability.
6. The third phase began in 1991. That year, the paradigm changed. That year marks the beginning of the India growth story. Between July 1991 and March 1992, we wrote a virtually new script, albeit with a number of riders and caveats: trade controls were removed, industrial licensing was abolished, price controls withdrawn, controls on foreign exchange relaxed and foreign investment allowed. The first bold steps were taken to liberalize the financial sector. The economy responded admirably and, if I may add, almost according to the text book. Between 1991 and 2000, the GDP grew an average rate of 5.7 per cent a year and between 2001 and 2007 the GDP has grown at an average rate of 6.9 per cent a year. Since 2003-04, the average for the four years has been 8.6 per cent. In particular, 2006-07 was a splendid year with GDP growth at 9.4 per cent.
7. Apart from growth, it is the return of macro-economic stability that is of great significance. We have enacted the Fiscal Responsibility and Budget Management Act: under the Act, we are obliged to bring the fiscal deficit to 3 per cent or less by 2008-09 and wipe out the revenue deficit by that year. We are on course to achieve those targets. Savings have increased to 33.7 per cent of GDP and investments to 35.1 per cent of GDP. Foreign exchange reserves stand at US $250 billion.
8. India's Reforms: Let me walk you through the reforms that have been accomplished since 1991. The process has touched almost all sectors of the economy, encompassing the real, monetary, financial, fiscal, and not the least, the external sector.
9. The financial sector has been restructured with independent regulatory bodies for the capital market, insurance and the pension sectors.
10. The Government of India -- along with the State governments -- has made serious efforts to create a business environment that encourages and facilitates entrepreneurship and business initiative.
11. India's policy regime for foreign direct investment (FDI) is remarkably liberal. Barring a small negative list, FDI is on the automatic route. India is a signatory to MIGA. India has also signed bilateral investment protection agreements (BIPA) and double taxation avoidance agreements (DTAA) with a large number of countries. The Rupee is convertible on the current account and, as far as the foreign investor is concerned, on the capital account as well. Investments made in India are safe and secure, and are governed by the rule of law.
12. Fiscal reforms have been a key element of the economic reform process. The fiscal environment has been marked by drastic reductions in import duties and tax rates. The broad approach has been to keep tax rates moderate and stable, and administer tax laws in a tax payer-friendly manner.
13. Outcomes: The Indian economy has responded well to these reforms. The upturn in economic growth has been accompanied by a marked increase in the rate of savings and rate of investment in the economy. Gross domestic savings was only 22.8 per cent in 1990-91; at the end of 2006-07, it is estimated to be 33.7 per cent. Similarly, gross domestic capital formation was only 26.0 per cent in 1990-91; in line with the increase in the savings rate, the rate of investment in the economy is estimated to have increased to 35.1 per cent in 2006-07.
14. There has been an upsurge in industrial growth, which touched 10.9 per cent in 2006-07. The highlight on the industrial front has been the manufacturing sector, which grew at 12.3 per cent that year. The services sector has maintained its vigorous performance and its growth rate in 2006-07 is estimated at 11.0 per cent.
15. The performance of external trade has also been healthy. India’s exports in US dollar terms have continued to grow at around 20 per cent a year crossing the US$ 125 billion mark in 2006-07. The external environment has been supportive, with the invisible account remaining strong, and stable capital flows financing the moderate level of current account deficit. Foreign exchange reserves at US$ 250 billion provide a high degree of comfort against any financial turbulence.
16. The buoyancy of investment including foreign investment flows testifies to the confidence reposed in India's capital markets. With a market capitalization of 101 per cent of GDP at the end of December 2006, India compares favourably not only with emerging market economies but also with Japan (112 per cent) and South Korea (93 per cent). An important feature is large retail participation. In 2006-07, US $ 8.43 billion was raised in the Indian market through equity and rights issues; in the current fiscal, companies have already raised US$ 7.16 billion. Assets under management of mutual funds are presently valued at US$ 120 billion.
17. The progress on the fiscal front has been very satisfactory. The combined fiscal deficit of the Central government and the State governments has come down from a high of 9.4 per cent in 1990-91 to 6.4 per cent in 2006-07. Thanks to unprecedented levels of devolution of funds from the Central government to the State governments, the States have done better than the Centre. The tax-GDP ratio of the Central government has steadily risen to 11.8 per cent in 2007-08 (budgeted). I am happy to say that we have moved in the desirable direction of fiscal consolidation.
18. Strong economic performance in the framework of an open economy has thrown up its own challenges. We face the challenge of abundant international capital flows and their impact on the domestic economy, particularly on prices and the exchange rate. On the demand side, higher growth in reserve money and robust credit growth have exerted pressure on prices. At the same time, from time to time, we are faced with a mismatch between supply and demand in the case of primary commodities, including food articles.
19. The Central Bank has played its part in containing demand side pressure on prices. The Government, on its part, has responded to such developments by moving further on the path of economic openness by increasing access to the external markets. There are indications that on the agriculture front some of the supply side constraints may be eased in the current year. On the whole, despite occasional spurt in prices, growth has come about with modest inflation. The current rate of inflation measured according to the wholesale price index is about 3 per cent.
20. Distinguishing features of the reform process: What are the distinguishing features of the reform process in India? This is an important question, not merely because India has done well on the growth front, but also because it holds certain lessons for managing growth in a complex, multicultural and pluralistic country. I would like to share with you some thoughts on the subject.
21. Firstly, the reform process has been gradual and calibrated. Secondly, there is a consensus that reform is a process and not an event; and almost every change during the reform process has been made after considerable debate in full public view. Thirdly, we believe that reform is not an end in itself, but the means to an end, the ultimate goals being the abolition of poverty and the spread of prosperity among all sections of the people. Our approach, therefore, has been non-doctrinaire. And finally, we have constantly emphasised the need for inclusive growth. Consequently, we have not hesitated to use a part of the resources to provide a modest safety net for the poor and provide them with basic goods and services. The model that we have adopted may be unorthodox, but it has served us well so far.
22. What has changed: Many of the preconditions required for rapid growth were already present even before the reforms got underway in the 1990s. What was needed was to lift the dead weight of an overpowering State and unleash the creative and entrepreneurial energies of the Indian people.
23. Indian firms are no longer only seekers of foreign technology or producers of staple goods or providers of low-end services. Their engagement with the world has acquired new dimensions. India is a now a hub for many manufacturing and service industries. Our prowess in software is now well known; equally, we have companies which are among the leading companies of the world in steel, aluminium and other metals, cement, automobiles, petroleum and petrochemicals, pharmaceuticals, biotechnology, textiles, leather goods, telecommunication and construction. These companies have gone beyond India’s shores, acquired businesses abroad, and become truly multinational both through their presence in many countries and through employing a multinational workforce. Increasingly they are now proving to be good corporate citizens of their respective host countries.
24. India provides to foreign investors an opportunity that is almost unrivalled. No other country in the world, save perhaps China, needs and can absorb such large amounts of foreign investment in its infrastructure sector.
25. India has built up a wealth of scientific manpower that has time and again proved its mettle in areas ranging from Space to the Oceans. In order to take advantage of the pool of high-quality scientific talent, many multinational companies have established large R&D centres in India. We have the capacity to launch satellites. We have established research stations in the Antarctic. We have just commissioned a tsunami-warning network. We have introduced many new and inexpensive drugs and research is underway on many molecules.
26. Challenges: Ladies and Gentlemen! I have no desire to conclude this lecture on a triumphal note. I am acutely conscious of the numerous, almost formidable, challenges that face India.
27. Social and human development: India ranks low – at number 126 -- among the countries of the world according to the Human Development Report, 2006. Many of the Millennium Development Goals appear, at present, just beyond our reach by the year 2015. We still have many children out of school and many more children do not complete five or eight years of school education. We still have many mothers who deliver babies without institutional care. We still have to reach electricity and roads, drinking water and sanitation, and schools and healthcare facilities to thousands of villages. We still have to create millions of jobs that will provide decent employment and fair wages to our youth. We still have to deal with endemic diseases such as diarrhoea, tuberculosis and malaria.
28. Infrastructure: We also recognize the need to provide world-class physical infrastructure – roads, railway, airports, seaports, power and telecommunication in order to meet the requirements of a fast growing economy.
29. Environment: We are fully alive to the consequences of climate change and to our responsibilities to the environment. We accept the fact that we must de-couple economic growth and carbon emissions and that development, in the true sense of the term, must be environmentally sustainable.
30. Ladies and Gentlemen! What I have described to you is only the beginning of a long journey. Never in the history of the world have a billion plus people been mobilized to lift themselves out of poverty and discover their true place in the world. If you add the transformation being wrought in China, you will agree with me that this is the most exciting period of human development. We have crossed many milestones in our journey -- and each one of them is etched in my memory as well as in the history of India. The journey will not be completed in my lifetime; it will be continued by the next generation, and the next. In the ultimate analysis, there may be no end at all, only more milestones that have been crossed and more milestones ahead. One milestone will be marked ‘The End of Poverty’. When we cross that milestone, it will be the end of poverty as we have known it for over 5000 years. I look forward to crossing that milestone and I know that you will join us in celebrating that day.
31. Thank you for your kindness and patience.