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.
Banking
Reforms
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.
Tax Policy
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.
Infrastructure
Investment
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.
Prospects
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!”
DSM/BY/GN