Excerpts of Finance Minister's speech at the Economic Editor's Conference

Growth performance and outlook for 2008-09

I now turn to the events that have so far marked 2008-09 and the prospects for the remainder of the year. 

The financial crisis that has enveloped the world since 2007 has become worse. Many developed countries are, officially, in recession. Among them are Germany, Japan, the United Kingdom and the Netherlands. Many more, including the United States and France, are expected to slip into a recession shortly. A recession is defined as two successive quarters of contraction of the GDP. I wish to emphasize that India is nowhere near a recession. The growth estimate for the first quarter of 2008-09 is 7.9 per cent and the second quarter will, undoubtedly, show high positive growth. Therefore, we must banish the thought of recession. I also urge the media not to use the word “recession” while describing the Indian economy. 

Nevertheless, we face a difficult situation. From time to time, both the Prime Minister and I have taken the country into confidence on the state of the economy. After the Cabinet reviewed the situation on October 8, 2008, Government made a statement in which we noted that: 

“liquidity conditions in India too have tightened in the last few weeks. Our authorities have responded to the situation. The Reserve Bank of India has taken steps to infuse more liquidity into the market.”

 Again, on October 20, 2008, the Prime Minister made a statement in Parliament in which he said: 

“India, like other developing countries, is experiencing the ripple effects of the financial crisis. However, we have taken a number of steps to minimize the impact.

“The Government is conscious of the fact that it is not enough to infuse liquidity. The liquidity must translate into expanded flow of credit to industry, trade and business. 

“Nevertheless, we must be prepared for a temporary slowdown in the Indian economy……… Our effort will be to minimize the negative effect of the financial crisis and, once the global situation stabilizes, to return to the growth trajectory of 9 per cent. I would urge Honourable Members and the people of India to continue to repose faith in the fundamentals of the Indian economy. 

“India has faced challenges in the past and has overcome them. We have the strength to overcome the current challenges too.“ 

The World Economic Outlook (WEO) of the IMF (October 2008) places the global output growth at 3.9 per cent in 2008 and 3.0 per cent in 2009. In India, we have already seen the impact of the crisis on the equity and foreign exchange markets. The money, debt and the credit markets have also been affected, albeit indirectly. However, the macroeconomic impact of the global financial turmoil has been muted due to the overall strength of domestic demand and the predominantly domestic nature of financing of investment. 

There is a silver lining in this crisis. While insulating ourselves, to the extent feasible, from the adverse changes in the global economic environment over the next few years, we have to seize the opportunity to review and revisit pending reforms. As and when required, we must introduce measures, particularly in the financial sector, to make our economy more competitive and the economic regulatory and oversight system more efficient, quick and responsive to global developments.

Challenges facing the economy

Let me now share our assessment of the economic developments in the current year.

After three years of plus 9 per cent growth in GDP, the current year has seen some moderation essentially due to external factors. Growth in the first quarter of 2008-09 has been estimated at 7.9 per cent.

There are two inter-related macroeconomic challenges that we face in maintaining high GDP growth on a sustained basis. These relate to capital inflows and inflation. High GDP growth attracts foreign capital looking for profitable investment opportunities. In a positive cycle this inflow will indeed find profitable investment opportunities that others have missed and lead to even higher growth. In recent years, especially in 2006-07 and in 2007-08, the capital inflows had spurted to an average of around 7 per cent of GDP, far in excess of the current account financing requirements, leading to large accumulation of reserves and a buildup of pressure on prices. 

In order to curb inflationary expectations, the RBI raised interest rates which had, to some extent, implications for the growth rate from the demand side as well as the supply side. While inflation has moderated, there is still some distance to go before we can say that the inflation rate has reached a tolerable level. Taking note of the downturn in the inflation rate, RBI has lowered the policy rate as well as the reserve requirements. RBI’s policy is now biased towards stimulating growth. 

We must remember that the current growth phase is primarily investment driven. There has been a significant increase in the growth rate of investment. Private consumption, for the first time, ranks below investment as a driver of growth. 

In terms of sectoral growth drivers, manufacturing, communications, trade, agriculture and construction have been the major contributors to the spurt in the growth rate. In the current year, there is likely to be moderation of growth in these sectors. The Index of Industrial Production data for April-September 2008 shows an overall growth of 4.9 per cent year-on-year basis compared to a growth of 9.5 per cent in April-September 2007. Deceleration in growth was significant in the manufacturing and electricity sectors, and somewhat moderate in the mining sector. 

There is still a lot to be done in the infrastructure sectors – both economic and social. More investment and quicker implementation of projects and programmes are required in roads, ports and airports, power, education, health and skill development. Increasing expenditure in the infrastructure sector is an important part of the countercyclical measures that are being contemplated to address the impact of the global slowdown. 

On the whole, the general outlook continues to be one of cautious optimism. In its review of macroeconomic policy for the first quarter of 2008-09, RBI indicated that the median forecast of professional agencies for GDP growth during 2008-09 was 7.9 per cent. In its mid-term review, barring domestic or external shocks, RBI has estimated GDP growth during 2008-09 to be between 7.5 and 8.0 per cent. In our view, we may expect a moderation in growth rate in the current year to a level between 7 and 8 per cent. India would still be the second fastest growing large economy in the world. 

Prices and inflation management

The weeks ending November 1, 2008 and November 8, 2008 have recorded a significant decline in inflation measured by the WPI. As on November 8, 2008, headline inflation was 8.90 per cent. The monthly de-seasonalized inflation rate has been negative during September and October, suggesting a continuing moderation in WPI inflation in the coming months. These figures indicate that the measures initiated to tackle inflation are bearing fruit.

On the fiscal side, Government has given up revenues to the extent of Rs.31,000 crore post Budget. This has to be viewed in the context of increased expenditure. While the total expenditure was placed at Rs.750,884 crore in the Budget documents, an additional expenditure of Rs.105,613 crore was approved in the First Supplementary Demands for Grants. 

 In addition to the fiscal measures, monetary instruments were used by the RBI for demand management. These included a gradual increase in the Repo rate to reach 9.0 per cent on August 30, 2008 and an increase in CRR, in steps, by 400 basis points to reach 9.0 per cent effective August 30, 2008. Since then, the direction of policy has changed. The Repo has been brought down to 7.5 per cent effective November 3, 2008 and the CRR has been reduced to 5.5 per cent effective November 8, 2008. 

If the rate of inflation continues to decline, the policy rates may also moderate and the bias in favour of growth may deepen. 

External Sector

India’s external sector continued to be robust and reflected the strengths of the economy in 2007-08. In the current fiscal, merchandise trade data is available for April-September 2008. Exports and imports have registered an impressive growth of 30.9 per cent and 38.6 per cent, respectively. Oil imports, however, grew faster (59.2 per cent) than non-oil imports (29.3 percent). There has, however, been a deceleration in the growth rate of exports in September 2008. India is diversifying its exports to various other countries. For example, during the first quarter of this financial year there has been an increase in the share of India’s exports to China, Singapore, Netherlands and Saudi Arabia. China remained the major source of imports followed by UAE, Saudi Arabia and USA in the first quarter of this year.

Preliminary BOP estimates released by the RBI for the first quarter of the current year (April – June 2008) point to a moderation in capital inflows and a widening of the trade and current account deficits on a quarter-on-quarter basis. The current account deficit was placed at US$ 10.7 billion primarily due to strong growth of imports (33.3 per cent) vis-à-vis exports (22.2 per cent). Net invisibles at US$ 20.9 billion could only partly offset the trade deficit of US$ 31.6 billion. Foreign direct investment (net) inflows remained buoyant at US $ 10.1 billion, while portfolio (net) flows were negative at US $ -4.2 billion in the first quarter of 2008-09.

India has evolved a liberal and transparent policy on foreign direct investment (FDI). Except for a small negative list, FDI is allowed mostly on the automatic route. A liberal investment regime is complemented by a tax regime that is moderate and stable. FDI equity inflows during April-September 2008 were US $ 17.21 billion, representing a growth of 137% over the previous year (US $ 7.25 billion). The sectors attracting the highest FDI equity inflows have been the services sector, construction activities including roads and highways, housing and real estate, and computer hardware and software. 

Fiscal Consolidation

Fiscal consolidation remains a priority of this Government. Although the Fiscal Responsibility and Budget Management Act, 2003 was passed in Parliament during the tenure of the NDA Government, it was only after the UPA Government took over that it was notified on July 2, 2004. Fiscal consolidation has been on course until the end of March, 2008. While buoyant tax revenues have helped, we have also maintained a strict watch over expenditure. However, there has been a deliberate and conscious shift in expenditure in favour of health, education and the social sector. This expenditure is classified as revenue expenditure. Besides, we have also provided for more expenditure in the current year as a counter cyclical measure. As a consequence, we may need one more year to achieve the FRBM target of eliminating the revenue deficit and containing the fiscal deficit to below 3 per cent of GDP. 

Social Sector Development and Inclusive Growth

Faster economic growth has also begun to get translated into more inclusive growth, both in terms of employment generation and poverty reduction. The 61st Round of the NSSO Survey estimated that 47 million additional work opportunities were created during 1999-2000 to 2004-05, at an annual average of 9.4 million as against an annual average of 4 million job opportunities during 1993-94 to 1999-2000. The proportion of persons below the poverty line declined from around 36 per cent of the population in 1993-94 to 28 per cent in 2004-05 as per the uniform recall period. Based on the mixed recall period, the number of persons below the poverty line declined from 26 per cent in 1999-2000 to 22 per cent in 2004-05.  

No estimates have been made after the 61st Round of the NSSO Survey. However, the annual GDP growth rate since 2004-05 has been significantly higher by an average of 3 per cent. Hence, on a parity of reasoning, it can be argued that the additional work opportunities created since 2004-05 would have been more every year and the proportion of persons below the poverty line would have declined further. I have no doubt that the next round of the NSSO Survey would vindicate these conclusions. 

In pursuance of the objective of inclusive growth, Government has been implementing eight flagship programmes supported by sizeable outlays. These include National Rural Employment Guarantee Scheme (NREGS), National Rural Health Mission (NRHM) and Sarva Shiksha Abhiyan(SSA), Mid-day Meal(MMS), Integrated Child Development Services(ICDS), Jawaharlal Nehru National Urban Renewal Mission(JNNURM), Rajiv Gandhi Drinking Water Mission and the Total Santation Campaign. Together, these flagship programmes aim to improve the livelihood of people as well as provide them with easy access to basic facilities like education, health, clean drinking water and sanitation. Besides, Bharat Nirman, which is an important programme to improve the quality of life and mainstreaming of the rural population, has received high priority.  

 The Government can legitimately take some credit for the initiative it has taken in the rapid expansion and universalization of the National Rural Employment Guarantee Programme. In 2007-08, 3.39 crore households were provided employment and 143.5 crore person-days were generated in 330 districts. In 2008-2009 (upto September 2008), 2.93 crore households have been provided employment and 109.30 crore person-days have been generated. The enhanced wage earnings have led to a strengthening of the livelihood resource base of the rural poor in India. This is also reflected in the increased demand for and consumption of wage goods. 

There are many other initiatives that have been taken by the UPA Government but, in view of the constraints of the time, I shall not dwell on them in my opening remarks. However, I would like to make special mention of the National Action Plan on Climate Change and the Skill Development Programme. 

It is our endeavour to continue to provide a stable and conducive investment climate, both for the domestic investor and the foreign investor, and to manage the economy in a manner that facilitates inclusive growth driven by enhanced investment and consumption. We believe that our policy of encouraging both the public sector and the private sector and fostering competition has stood us well. It is only an open economy that will bring gains in efficiency and productivity, reward innovation and enterprise, and ensure inclusive growth. I would like to conclude by saying that the five years of the UPA Government – including the current difficult year – will mark a phase of development that put India on a high growth path. It will also mark the starting point of a journey that, say 20 years from now, would have placed India as a middle-income nation that has been successful in eliminating abject poverty and providing a decent standard and quality of life for its people.”