Prime Minister of India - Dr. Manmohan Singh

PM's address at ' The Economist ' Round Table on India

"I am delighted to be here with you to speak about a rapidly changing Indian economy. I hope this Round Table on India will give you an insight into the trends that characterize the Indian economy and help you take a more informed view of our performance and our prospects. I also hope it will enable The Economist itself to be a bit more positive when it covers India!

Earlier this week I have been told BBC reported results of a worldwide opinion poll it had commissioned on the global image of various countries. It was heartening to see India emerge on top as a country that had 'most improved' its global image. There are good reasons for this. The Indian economy is doing better and Indians are doing better, both at home and abroad. I do sincerely believe that the best is yet to come.

Our economy is probably on a growth path which if sustained for a decade or so, will enable us to eradicate the ancient scourges of mass poverty, ignorance and disease to a very substantial extent. For the first time in our history our economy has recorded over 8% growth in national income for three consecutive years. Last year the economy grew at over 9%. Many analysts believe that our economy has moved on to a new high growth trajectory. There are some, including The Economist, who believe that the economy may be 'over-heated'! You have my assurance that our macro-economic authorities have a creditable track record for macro-economic management. They have taken, and will take, whatever steps are required to ensure the sustainability and the stability of our growth process.

I do believe there is today an air of justified optimism about India's economic prospects. There are at least three reasons for such optimism. First, and foremost, our savings and investment rates are rising and are presently at around 32% and 34% of our GDP, respectively. I have often felt that official statistics in India understate the true values of these figures. I also have reasons to believe that they will rise further by another 5% in 5 to 6 years to come. As the monetised part of the economy expands and there is an increase in productivity, the total savings and investment rates will certainly go up further. As more people shift from agriculture to manufacturing, and more people move from rural areas to urban areas, the shift itself will add a couple of percentage points to India's growth.

Second, India will be the beneficiary of a "demographic dividend", given the age profile of our population. This demographic dividend itself will drive up growth and the savings rate, apart from making India one of the few countries without a labour constraint for many decades to come. Of course, this assumes that our macro-economic policies as well as our educational and training policies will be sufficiently employment friendly to absorb all the new entrants to our labour force.

Third, there is today a broad national consensus on economic policies, even if on a few issues we continue to have differences among various political parties. It is indeed quite remarkable that in the last sixteen years, the fiscal and economic policies have largely followed a similar consistent line. This signifies a broad national consensus on the direction our economy should take. I have often said that we should judge political parties not by what they say when they are in opposition but by what they do when in power. The stability in policies in the last 16 years is proof that economic policies are not as contentious as often made out to be. If there are differences, these are on the finer nuances of policy and the relative emphasis on public investment in social sector.

I am, of course, the first to admit that one should not be overawed by growth statistics. It is important to ensure that growth is equitable and inclusive. The accelerated growth we are seeing generates the resources needed for social spending without causing fiscal stress. It has been our endeavour in Government to ensure that growth creates more productive employment opportunities and reduces poverty. With these objectives in mind, our focus has been on sustaining higher rates of investment particularly in infrastructure - both urban and rural, and in social sectors, especially education and health care.

An important strength of the Indian economy today is that we no longer face any insurmountable external constraint on growth. The global environment, both political and economic, is largely benign from our point of view. There are, of course, issues and trends that cause concern but these are generally applicable to most countries. For example, we are all concerned with high energy prices and uncertainty in the oil-producing regions of the world. We are all equally concerned about terrorism and threats to global peace and stability. Finally, we are all equally concerned about global warming and climate change. We are also concerned about the growth of protectionism in major developed countries. But these are global challenges and merit a global response.

Our diplomacy and our economic growth have, however, helped us create an external economic and strategic environment that is today more supportive of our development goals than ever before. This is precisely why I say that our real challenges are at home. I believe many of the speakers who will be addressing you at this important Round Table will focus on all these domestic challenges we face.

Let me say that we are fully aware of the challenges at hand and it is our intention to deal with them as best as we can, within the constraints imposed by our polity. I do believe that there is widespread political consensus on many issues and we can move forward in many areas of policy. The steps we have taken to increase investment in infrastructure and in agriculture is one example of what is indeed doable. We have seen and expect to further see a massive increase in investment, both public and private, domestic and foreign, in our infrastructure. The institutional architecture for sustaining high levels of investment in infrastructure has been indeed put in place - public private partnerships, systematic bidding systems, viability gap funding and other financing mechanisms and standardized approval procedures. These are already fetching results and to some extent, the increased investment in infrastructure has been a driver of growth as well as demand. I foresee over the next few years, over US $ 300 billion being invested in infrastructure alone.

At the same time, both manufacturing and services sectors are showing a dynamism which is a cause of satisfaction. In the long run, it would be our endeavour to maintain and enhance our competitiveness in these sectors so that they continue to be major sources of growth and employment and also for productivity growth. Our policy stance would be determined by this broad objective. We are working to ease the supply constraints in the availability of skilled labour.

The growth of infrastructure, manufacturing and services sectors would also involve large flow of foreign direct investment. This year, for the first time, FDI inflows have exceeded FII inflows. This is a measure of growing global confidence in India's long term prospects. It is the intention of our Government to create and sustain an environment conducive to risk taking and long term investment in India. Over the past few years, our FDI regulations have also been made more liberal, transparent and investor friendly. A comprehensive review of the FDI policy was undertaken last year with a view to consolidate steps already taken and further rationalize policy in new areas. As a result, there are very few sectors which have any investment constraints. A liberal and transparent FDI policy for industrial, services and infrastructure sectors is now in place. I am sure my colleague, the minister for commerce and industries, will have more to say on this when he speaks to you.

I do recognize that there are still areas where we need to do more in the immediate future if we are to sustain our growth momentum. We need a further deepening and widening through a reform of our banking and financial system so that the underlying potential of savings and resources can be mobilized and deployed efficiently. We need to develop a long term debt market which will fulfill both the needs of long term savers and the massive investment needs of massive investment in infrastructure that we need. The labour markets too need to be made more efficient, although I often feel that this problem is overemphasized. Since 90% of India's labour force is in the so called unorganized sector and this sector is not constrained by any unwieldy laws. We also need to improve both the quality of governance at all levels and public service delivery mechanisms, particularly in the social sectors. We have generated adequate resources in the last three years for use in social sector without sacrificing fiscal prudence. However, we cannot spend our way to prosperity and having tangible outcomes is, therefore, as important as increasing outlays. This is the single biggest concern of our government today and we have to address this issue if we need greater returns on our social investments.

I am happy to report that the Indian economy has become much more open and is increasingly integrated with the global economy. This has its rewards and risks. As the world's largest democracy and as an open society and an open polity, we believe we must also be an open economy. However, this process has had to be calibrated and measured so that domestic enterprise and our working people are able to adjust to emerging realities. I find it surprising when I continue to hear complaints about our economy still being a relatively inward-looking economy.

Consider just one measure of openness - the share of external trade in national income. According to published official data, the share of trade in India's GDP compares favourably with a number of industrial and industrializing economies, including the United States and Japan. Moreover, India's approach to foreign trade has never been that of mercantilist. We have never been keen on accumulating a large trade surplus. Our exports have risen to finance higher imports and we continue to have a trade deficit with the rest of the world. In the last three years, we have taken more unilateral steps to integrate our economy with the evolving world economy. The peak rate of import duty, which was very high till only recently, has now been reduced to 10%, bringing it very close to ASEAN levels.

Further, we are keen that multilateral trade talks do succeed. We are firm believers in a rule based global trading system and hence, we welcome resumption of negotiations in the Doha Round at the WTO. A multilateral trade regime is in our strategic interests. As a relatively small trading nation, we benefit from global rules of the game. We are, therefore, committed to an early positive conclusion to the Doha Round. In order to break the impasse, developed countries must make meaningful offers to reduce the huge trade-distorting subsidies provided to their agricultural sector. Equally, it must be recognized that for us agriculture is not just a business but a way of life and a major source of livelihood. Markets are good for those and they serve those who are part of market systems but have no meaning for those who do not have the skills or resources to participate in market processes. We should therefore work towards an outcome which does not destabilize and cause distress to this large sections of our people living at the edges of subsistence. Our own economic policies demonstrate, however, that we are going to be contributors to the successful completion of Doha round.

At the same time, India has also undertaken region specific trade liberalisation. We have been engaged in crafting free trade agreements with many countries including ASEAN. I believe these should all be viewed as building blocks of a larger agenda of trade liberalisation. Regional and free trade agreements help us speed up trade liberalisation and move closer to meeting our multilateral commitments.

In our external relations, we are at a stage where our relations with our immediate and larger neighbourhood and with all major countries of the world, have improved significantly. The agreement with the US on civilian nuclear energy will open up immense possibilities for growth of nuclear energy in our country. We are moving forward on our dialogue with Pakistan and there certainly is a climate of reconciliation. With China too, we are trying seriously to resolve the border problem. Our government is hopeful that we can build a region of peace and friendship in South Asia and we will make sustained efforts to achieve this goal.

I invite you to participate in this adventure of enterprise and development that is now unfolding itself in our country. We are committed to maintaining the rhythm of the economy and sustain it on its development path. The global community has a stake in the success of India - in India's pursuit of development within the framework of a pluralistic democracy. If more than a billion people can see their lives improving, living in an open society and in an open economy, the world will be a better place to live in. India's success will renew humanity's faith in liberal democracy, in the rule of law, in free and open societies. The 21st century will be a safer century if these values that we stand for find greater global endorsement. I invite you to rediscover India, to have faith in us and to be our partners in progress."