Pranab Mukherjee’s Address at Seventh Annual India Investment Forum in New York
Following is the text of the Speech of Finance Minister, Shri Pranab Mukherjee at the Seventh Annual India Investment Forum in New York:
“I am delighted to be here for the 7th Annual India Investment Forum in this city which is the financial capital of the world and address this impressive gathering, of top ranking India focused investors, business leaders from corporate India, representatives from the government institutions and senior executives and fund managers. I congratulate the organizers for their efforts and hope that they will continue to build on it in the years ahead.
The financial crisis that led to an unprecedented economic slowdown has compelled us to rethink some of the basic principles of economics and finance, the functioning of financial markets and the global economy.
Leaders of the G20 countries have come together to discuss and decide on issues relating to global financial instability and the resulting economic slowdown. They are finding ways to ensure better regulation of markets, strengthening the monitoring and response mechanisms to global developments and promoting growth in a sustainable manner. This is a big change. Indeed, we are all witness to an emerging new world order where there is a higher degree of interdependence amongst nations and, hopefully, there is also a more dynamic and equitable arrangement for global prosperity.
While it is my intention to hear from you on your concerns about investing in our country and your analysis of global prospects and that of the Indian economy, let me begin by sharing a brief overview of the recent developments in our economy and the current outlook for growth.
Overview of the Economy
Ladies and Gentlemen,
Over the last two decades, India’s economy has evolved rapidly. The contribution of the services sector has increased to around 55 per cent of the country’s Gross Domestic Product (GDP). India’s external trade i.e. merchandise exports plus imports, as a proportion of GDP has more than doubled from less than 19 per cent in 1997-98 to close to 40 per cent in 2008-09. The country’s financial integration with the world has been as rapid as its trade globalisation, if not more. As a broad measure of globalisation, the ratio of total external transactions (gross current account flows plus gross capital flows) to GDP have more than doubled from around 47 per cent to nearly 120 per cent in the same period.
The significant increase in the inflow of foreign capital that this period witnessed was important not so much for bridging the domestic savings-investment gap but for facilitating the financial intermediation of resources to meet the growing needs for long term and risk capital as well as technology for the Indian industry.
Since 2003-04, the Indian economy has witnessed a step-up in its GDP trend growth rate. This has essentially come about due to a significant improvement in our domestic investment and savings rates. The investment rate increased from about 25 per cent in 2002-03 to around 38 per cent in 2007-08 before declining to 35 per cent in 2008-09 due to the slowdown induced by the global financial crisis. During the same period, the savings rate increased from around 26 per cent to around 36.5 percent in 2007-08 before falling to 32.5 percent.
The period saw a significant spurt in the investment growth rate, in particular in private fixed investment and a supportive growth in private consumption. The result was domestic aggregate demand led GDP growth that averaged close to 9 per cent in the four year period from 2004-05 to 2007-08. This period also saw the setting-up and the implementation of prudent fiscal rules under the Fiscal Responsibility and Budget Management Act (FRBMA) 2003, which while releasing more resources for private investment gave a boost to the domestic capital market and business sentiments.
The global financial crisis and the resulting slowdown across the developed and the developing countries also impacted India. Our GDP growth declined by 2.5 percentage points to 6.7 per cent in 2008-09, followed by a growth of 7.4 per cent in 2009-10. A timely broad-based counter-cyclical policy package, comprising a substantial fiscal expansion along with liberal monetary policy support, proved effective in arresting the economic slowdown and putting the economy on a fast recovery path. The quarterly estimate of GDP for 2010-11, released at the end of August 2010, places the growth in real GDP at 8.8 per cent in the first quarter of the current fiscal. The recovery is broad based with growth in all sectors.
The challenge now is to quickly revert to the high GDP growth path of an average of 9 per cent plus and even find the means to cross the 'double digit growth barrier' in the coming year or two. Our objective is to harness this growth to make the development process more inclusive, strengthen food security, improve education opportunities and health facilities both in rural and urban areas. At the same time we are looking to address the weaknesses in our systems, structures and institutions at different levels of governance, making the public delivery mechanisms more robust and transparent, and sharply focus on the role of Government as an enabler.
Measures to Improve Investment Environment
Ladies and Gentlemen,
Let me now share with you some of the policy measures that we have taken up in the recent months to improve our investment environment.
After successfully managing the effects of the global slowdown, we have moved on to strengthen the domestic macroeconomic environment. The policy focus in the past few months has been on effecting a calibrated withdrawal of the stimulus imparted to the economy and a determined attempt to move towards the preferred path of fiscal consolidation over the coming years. There has been a renewed effort to tackle the growing burden of fertilizer and petroleum subsidies. We are seeking to make growth more broad-based and ensure that supply-demand imbalances are better managed.
Foreign Direct Investment
Foreign Direct Investment (FDI) flows have been quite robust in the last two years despite the general decline in global capital flows. India received FDI equity inflows of US$ 25.8 billion in 2009-10 and US$ 27.3 billion during 2008-09. The net portfolio flows from the foreign Institutional Investors (FIIs) surged in the year 2009-10 to a record US$ 30.25 billion after showing a net outflow of US $ 9.8 Billion in 2008-09 during the global crisis. These figures speak for themselves as to the strong measure of confidence reposed by the global investing community in the India growth story, particularly in the general global context of gradual and in certain instances an uncertain recovery.
On our part, a number of steps have been taken to simplify the FDI regime to make it easily comprehensible to foreign investors. Since early last year, for the first time, both ownership and control have been recognised as central to the FDI policy, and methodology for calculation of indirect foreign investment in Indian companies has been clearly defined. A consistent policy on downstream investment has also been formulated. Another major initiative has been the complete liberalization of pricing and payment of technology transfer fee, trademark, brand name and royalty payments. These payments can now be made under the automatic route.
As a further step, in order 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. The last review has been released at the end of September 2010. This has been done with the specific intent of enhancing clarity and predictability of our FDI policy to foreign investors. Government have also started stakeholder consultations on opening up sectors such as multi-brand retail and defence production to greater inflow of FDI.
The regulatory and supervisory framework of the securities market in India has been progressively strengthened through various legislative and administrative measures, and is now consistent with the best international practices. India’s risk management systems are dynamic and have kept pace with the demands of the financial sector. The country presents exciting opportunities for global investors. The recovery of the benchmark market indices for India over the last two years has been quite rapid and remarkable and supports this assessment. There is also the added attraction, in the form of implementation of the Government's disinvestment programme, for retail investors and other market participants to share in the growth and prosperity of the Central Public Sector Undertakings.
Finally, in tune with the Indian policy of liberalisation, in September 2010, the Government increased the current limit of Fll investment in Government Securities and corporate bonds by US $ 5 billion each, raising the cap to US $ 10 billion and US $ 20 billion respectively. The incremental limit of US $ 5 billion could be invested in securities with residual maturity of over five years. All these factors contribute to making India an attractive investment destination.
Financial Sector Reforms
Ladies and Gentlemen,
One of the major fallouts of the global crisis has been the conscious attempts by all Governments to take a critical look at the architecture and operative components of their financial systems with an eye on ensuring financial stability. There is no one-size-fits-all approach in this and while the broad principles can be agreed upon, the exact nature of reforms have to be very specific.
We in India have decided to setup an apex-level Financial Stability and Development Council (FSDC), with a view to strengthen and institutionalise the mechanism for maintaining financial stability. Without prejudice to the autonomy of regulators, this Council would undertake macro prudential supervision of the economy, including the functioning of large financial conglomerates, and address inter-regulatory coordination issues. It will also focus on financial literacy and financial inclusion. We hope to institutionalize these arrangements very soon. We have also decided to set-up a Financial Sector Legislative Reforms Commission (FSLRC) to rewrite and clean up the financial sector laws and bring them in line with the requirements of the sector.
As a part of our International engagement and in an effort to address our own concerns on the flows of funds and also address concerns which our investors could have as a result of their compliance requirements, India has been engaged in the exercise of becoming a part of the Financial Action Task Force ( FATF). In June 2010, the FATF Plenary adopted the Mutual Evaluation Report on India and admitted India as 34th Country Member of FATF. This will help India and its investors in securing a more transparent and stable financial system by ensuring that financial institutions are not vulnerable to infiltration or abuse by organized crime groups. The FATF process will also help us in co-ordination of anti money laundering/countering financing of terror (AML/CFT) efforts at the international level.
The banking system channelizes resources from those who save to those who invest, and to transfer risk from those who can’t afford it to those who are willing and able to bear it. This sector has come into sharper focus after the global crisis .The fact that India has not gone through any financial turbulence, as a result of the earlier phase of financial deregulation is not only remarkable, but a testimony to our consistent view that reforms in global standards have to be adapted to local conditions. However, the cost of banking intermediaries in India is higher and bank penetration is limited to only a few customer segments and geographies.
The Reserve Bank of India (RBI) is considering giving some additional banking licenses to private sector players, with a view to further diversify the Indian banking scenario and environment. While cross-border banking, in the post crisis period, has to be encouraged, future reforms in this area have to be guided by progress on adequate mechanisms and systems to prevent the possibility of sudden external contagion creating systemic risks for the domestic financial system.
Ladies and Gentlemen,
A very important part of the investment environment is the tax policy. Complex laws and procedures complete with exemptions and incentives can leave potential investors with a hazy picture and also be a deterrent to decision making.The Government is committed to improve the efficiency and equity of the tax system, by eliminating distortions in the tax structure, introducing moderate levels of taxation, expanding the taxable base, promoting efficiency and equity while enhancing revenues and simplifying the language of the taxation provisions. The new Direct Taxes Code (DTC) has been unveiled with these objectives and is expected to come into effect shortly. Efforts are also underway to reform the indirect tax regime by introducing a country wide Goods and Services Tax (GST),based on a consensus between the different stakeholders. These measures will create for India a modern and more efficient tax system in near future.
The fast growth of the economy in recent years has placed an increasing stress on physical infrastructure, such as electricity, railways, roads, ports, airports, irrigation, urban and rural water supply and sanitation, all of which suffer from a substantial capacity deficit. During the XI Plan period (2007-08 to 2011-12), our Government targeted a sharp increase of infrastructure spending from around 4-5 per cent of GDP to 9 per cent of GDP in the terminal year of the Plan period. In financial terms, this represented a doubling of real infrastructure spending. I am happy to note that the actual financial spend in the first three years of the Plan period has remained largely on course and we have witnessed robust resource flows into infrastructure. The aspiration for the next Plan period (2012-2017) is even more ambitious with the projected spending likely to double once again to around US$ 1 trillion.
In order to sustain the high growth in infrastructure spending, it is essential to source more and more funds from the private sector. Accordingly, our Government has laid great emphasis on Public Private Partnerships (PPPs) which combine the efficiency and technological prowess of the private sector, with the public welfare orientation of Government. Nearly 30 per cent of the total spending on infrastructure sector, during the first 3 years of the XI Plan period, has come from private sources. As we go into the next Plan period, we expect this proportion to go up to nearly 50 per cent.
The PPP route for investment in Indian infrastructure represents a commercially attractive opportunity for foreign investors. First, nearly all the infrastructure sectors allow Foreign Direct Investment (FDI) to come in through the automatic route, to the extent of 100 per cent of the investment. Secondly, India has evolved a stable and transparent regulatory regime which promises a level playing field between public and private agencies, with regard to entry norms, conditionalities and dispute resolution. Regulators now exist in many sectors such as electricity, telecommunications, ports, airports, petroleum & natural gas, with a regulator for the coal sector on the anvil. Standardised and sophisticated contract documents in the form of concession agreements, procurement guidelines and bidding documents are being used for different sectors of infrastructure, ensuring a healthy balance between the interests of the public and private sectors. Finally, we have established unique and innovative financing instruments such as a scheme to support Viability Gap Funding (VGF) for PPP projects and specialised institutions for extending long term debt assistance to infrastructure projects, so as to effectively meet the financing challenge. The other real sector issues like land, environment and resettlement and rehabilitation (R&R) are under continuous scrutiny and examination, with a view to de-risking both greenfield and brownfield project development.
The extent of foreign participation – both through debt and equity – in the financing of India’s infrastructure has been of the order of around 8-10 per cent in the recent past. I expect, going forward, a much greater degree of involvement of foreign investors in this sector. I look forward to your views on how we can make our investment environment more viable and attractive in key infrastructure sectors.
Ladies and Gentlemen,
There are several factors that have emerged from the performance of the economy in the last 12 to 18 months, which, combined with an analysis of performance over the last couple of years, augur well for the Indian economy. There are some deep changes that have taken place in India, which suggest that the economy’s fundamentals are strong. First, the rates of savings and investment have reached levels that even ten years ago would have been dismissed as a pipedream for India. On this important dimension, India is now completely a part of the world’s fast-growing economies. Since these indicators are some of the strongest correlates of growth and do not fluctuate wildly, they speak well for India’s medium-term growth prospects. It also has to be kept in mind that, as the demographic dividend begins to pay off in India, with the working age-group population rising disproportionately over the next two decades, the savings rate is likely to rise further.
Second, the arrival of India’s corporations in the global market place and informal indicators of the sophisticated corporate culture that many of these companies exhibit also lend to the optimistic prognosis for the economy in the medium to long run.
In the short term it is reasonable to expect that the economy will go back to the robust growth path of around 9 per cent average that it was on before the global crisis slowed it down in 2008. To begin with, there has been a revival in investment and private consumption demand, though the recovery is yet to attain the pre-2008 momentum. Secondly, Indian exports have recorded impressive growth since November December 2009. The favourable capital market conditions with improvement in capital flows and business sentiments are very encouraging. Finally, the manufacturing sector has been showing a buoyancy reminiscent of the pre-slowdown years. There is also a substantial pick-up in corporate earnings and profit margins.
Today, as I stand before you, I represent a nation which is determined and dedicated to march ahead on the path of growth and progress. We are ready to shoulder our share of responsibilities for strengthening global financial stability and growth. We have faith and full confidence in ourselves and we have the political will to sustain our economic momentum.
India presents an opportunity for investment that you cannot afford to miss!”