1. I am happy to welcome all the
participants at this year’s Economic Editors’ Conference. This Conference has
evolved into an important forum for meaningful interface between various
departments of the Central government and the media. It offers us an opportunity to take stock of the economic
performance, assess the outlook and review the existing policies. I hope that
the next two days will witness reasoned deliberations and a rich exchange of
ideas.
2. The
United Progressive Alliance (UPA) Government has been in office for nearly 30
months. We can look back at this period with considerable satisfaction. Our
economic prospects have brightened.
Given the state of economic fundamentals, we are optimistic of the
outlook becoming brighter in the near and the medium term.
Growth
Performance and Prospects
3. The
Indian economy has continued to sustain its growth momentum with the first
quarter growth in the current year being a robust 8.9 per cent. While long term
growth during 1998-2004 averaged 5.9 per cent, the most recent three years
(2003-2006) witnessed an average growth of over 8 per cent. Inflation during
this period remained moderate and inflationary expectations were generally
contained. Average long-term inflation in the last decade was a moderate 4.9
per cent.
4. There
has been a virtuous and structural shift in the economy with services sector improving its
share in GDP from 41 per cent in 1990-91 to 54 per cent in 2005-06. The share
of agriculture in GDP declined from 32
per cent in 1990-91 to under 20 per cent in 2005-06.
5. There
have been signs of industrial resurgence. Industrial growth has been both
broad-based and generally balanced. In the last 29 months, from April 2004 to
August 2006, the average year-on-year growth in capital and consumer goods
segment of industry have been 51.39 per cent and 29.58 per cent respectively,
clearly demonstrating that growth has been driven by both investment and
consumption. Manufacturing sector
has continued to display buoyancy with annual growth averaging 9.6 per cent
since April 2004. This buoyancy has been further strengthened with growth
further accelerating to 11.8 per cent in April-August 2006.
6. Industrial
performance had a mixed but diversified bag of strengths – local resources,
skilled labour, technology and innovation. The policies of continued economic
liberalization pursued during the period since 1991 has had a powerful effect
on the industrial resurgence. It has not only changed the mindset of the
entrepreneurs, but also made them conscious of maintaining a competitive edge
in terms of prices, quality and consumer preferences. It has also improved
productivity of firms by providing access to technology, intermediate inputs
and capital goods.
7. There
are some concerns on the prices front. Overall inflation reached a peak of 5.5 per cent for week ending June 17,
2006. For the week ending October 21, 2006, it stood at 5.41 per cent. Prices
of 30 essential commodities like wheat, atta, pulses, sugar, potatoes, milk,
etc, were much higher during this period. Inflation in respect of the 30
commodities remained at 8.7 per cent in the week ending June 10 and June 17,
2006. However, inflation remained commodity-specific in nature and was largely
due to a reduced domestic availability and high international prices. Commodity
specific decisions have been taken by the Government to quell inflationary
expectations. For wheat and pulses, Government allowed imports at zero duty and
in case of edible oils, reduced duty by 10 percentage points on palm group of
oils. While inflation for these commodities continue to remain a cause of
concern, reduced domestic availability relative to demand and firm
international prices are constraining the efforts. Having regard to the global
situation, it is imperative that we manage the supply side of essential
commodities, especially of wheat, pulses and sugar. So far as procurement of
paddy/rice is concerned, we have achieved the target set for Kharif 2006. We
should achieve the targets for procurement of wheat and paddy/rice set for Rabi
2007. Public stocks of food grains must remain well above the norms for buffer
stocks and adequate quantities must be pumped into the public distribution
system as well as various programmes that include supply of food grains. The
management and distribution of essential commodities through the public system
will have a restraining effect on prices of commodities distributed by private
trade.
Balance of Payments
8. Preliminary BOP estimates released by the RBI for the first quarter of the
current year (April-June 2006-07) point to a continuation of the broad trends
observed in 2005-06. The current
account shows a deficit of US $ 6.1 billion primarily due to large growth of
merchandise imports vis-à-vis exports.
Net invisibles, despite recording a robust level of US$12.4 billion,
fell short of the trade deficit of US$18.5 billion, leading to the current account
deficit. The capital account, however,
had a surplus of US$12.5 billion during the period. The first quarter of the current year experienced foreign
currency reserves accretion of US$6.4 billion.
According to latest available estimates, the total stock of foreign
currency reserves as on October 27, 2006 was US$160.2 billion.
9. The exchange
rate of the rupee against the US dollar has displayed reasonable stability
during 2004-05 and 2005-06. After
depreciating during the first five months of the current financial year, the
rupee started strengthening against the US Dollar from the month of September,
2006. At the same time, however, rupee
has been weakening against the Euro and Pound Sterling, but strengthening
against Japanese Yen.
External Trade
10. India’s
merchandise exports have exhibited
sustained buoyancy since 2004-05. Exports recorded a growth of 26 per cent
during 2004-05 and 25 per cent during 2005-06 with exports reaching the $100
billion mark. According to provisional data released by DGCI&S, exports
recorded a growth of 23 per cent in US dollar terms during the period
April–September 2006. It is expected that exports would touch a level of US$126
billion by the end of this year which is nearly double the level of exports
achieved in 2003-04. India’s share in world merchandise exports which was 0.8
per cent in 2004 has increased to 0.9 per cent in 2005. Given the recent buoyancy in India’s
exports, India’s share of exports in the world merchandise exports is expected
to increase further. Import growth, according to DGCI&S’ provisional data
was 19 per cent in April—September 2006. Non-oil imports grew by 11 per cent.
The low growth in non-oil imports is mainly due to lower gold imports.
Infrastructure
11. Infrastructural problems continue to
plague the Indian economy and need to be sorted out for India to realize its
full potential. An investment of Rs.
14,50,000 crore or about $320 billion would be required in infrastructure
during Eleventh Plan (2007-12). These
investments are sought to be realized through a combination of public
investment, public-private-partnerships (PPP) and exclusive private
investments, wherever feasible. The
bulk of the savings for this investment will continue to come from domestic
savings, although foreign direct investment is also predicted to contribute a
small share. The Committee on
Infrastructure headed by the Prime Minister has estimated the investment
requirements as Rs.2,20,000 crore in the National Highways sector by 2012;
Rs.40,000 crore for Airports by 2010 and Rs.50,000 crore for the Ports sector
by 2012. Although there are
institutions like the IDFC and now IIFCL to cater to the long term debt needs
of infrastructure projects, the demand
is too large to be covered by such institutions alone. The need is to deepen the debt market in India
so that the risks are diversified and more capital is mopped up from the
market.
FRBM-
Performance
12. With the
enactment of FRBM Act and
notification of Rules thereunder, there are prescribed revenue and fiscal
deficit reduction targets, and an institutional and defined monitoring
mechanism. While there has been a renewed emphasis on public expenditure
outcomes, FRBM mandated fiscal consolidation is largely revenue driven. In my view, equal emphasis has to be placed
on revenue mobilization on the one hand and on containment of expenditure on
the other. So long as we are not able to eliminate wasteful expenditure, we
have to adopt a cautious attitude towards tax concessions and revenue
sacrifices. While sectoral policies aimed at giving a thrust to the sector
concerned are necessary and desirable, such policies should rely more on better
infrastructure, new technology and removing any structural constraints. The
magnet for new investment should be better infrastructure and not tax
concessions alone.
13. The tax system now is not only broad based,
it has lower rates and relies mainly on voluntary compliance. The tax-GDP
ratio of the Central Government has increased from 8.3 per cent in 1998-99
to 11.2 percent in 2006-07 (budgeted). Tax
collections have shown considerable buoyancy this fiscal. Until September
30, 2006, growth rate of revenues under each head of tax has been ahead of
the target. Central excise has recorded a growth rate of 6.74 per cent (against
a target of 6.49 per cent); customs 33.78 per cent (against 18.11 per cent);
service tax 64.89 per cent (against 43.52 per cent); income tax including
FBT, BCTT and STT 30.56 per cent (against 18.71 per cent); and corporation
tax 47.88 per cent (against 33.77 per cent). The Department of Revenue is
confident of achieving the budget estimates in respect of tax revenues.
14. I am particularly happy to note that the attitude
of assessees towards taxes seems to have undergone a remarkable change. Both
corporates and individuals seem to have imbibed the principle that ‘honesty
is the best policy’. There are still many who evade – or avoid – taxes, but
a large proportion is willing to pay the taxes that are due and lead a life
of dignity and peace. This attitudinal change, in my view, is the result of
moderate and stable tax rates. There is scope for further moderation; however,
this will depend upon greater tax compliance. The test is the secular rise
in the tax to GDP ratio. Coupled with moderate rates of tax, Government has
initiated a number of measures to make the tax collection machinery friendly
and helpful to the tax payers, especially small tax payers and individuals.
Social
Sector Programmes
15. In accordance
with the mandate of the National Common Minimum Programme, a number of new
initiatives/programmes have been undertaken by the UPA government in the social sectors. During 2006-07, enhanced outlays
have been provided for a number of these initiatives/programmes. Some of the
important programmes which have received focused attention are as follows.
Bharat
Nirman
16. An ambitious programme for creation of
rural infrastructure was launched in the form of Bharat Nirman during 2005-06. The programme has six components:
irrigation, rural water supply, rural roads, rural housing, rural electrification
and rural telephony. With the implementation of Bharat Nirman gathering
momentum, it has been decided to extend larger budgetary support to this
programme. Including the North East component, as against Rs. 12,160 crore
provided in 2005-06, the corresponding budgetary provision for the programme is
Rs. 18,696 crore for 2006-2007, an increase of 54 per cent.
The Flagship Programmes
17. The UPA
Government’s eight flagship programmes
have continued to receive priority attention. Outlays earmarked for these
programmes have been considerably enhanced. The programmes are Sarva Siksha
Abhiyan, Mid-day Meal Scheme, Rajiv Gandhi Drinking Water Mission, Total
Sanitation Campaign, National Rural Health Mission, Integrated Child
Development Services, National Rural Employment Guarantee Scheme and Jawaharlal
Nehru National Urban Renewal Mission.
16. Allocation
for education and health has been enhanced. For
2006-2007, the allocation for education has been enhanced by 31.5 per cent to
Rs. 24,115 crore and for health and family welfare by 22.0 per cent to Rs.
12,546 crore.
18. The total
allocation for the eight flagship programmes in 2005-2006 was Rs. 34,927
crore. In the current fiscal year, the
total allocation has been placed at Rs. 50,015 crore, representing an additionality
of Rs. 15,088 crore or 43.2 per cent.
Plan Expenditure
19. On the
expenditure side, we are concerned with both outlays and outcomes. At this point of time, I look at plan
expenditure as well as non-plan expenditure on capital account, because these
are investment oriented and stimulate economic growth. Plan expenditure in the
first half of the current year was at a satisfactory level of 39.9 per cent.
Non-plan expenditure on capital account stood at 21.6 per cent.
Department-wise, among the Ministries and Departments with large budgets, the
Ministries of Agriculture, Development of North Eastern Region, Rural
Development, Tribal Affairs and Railways have spent 50 per cent of the budgeted
amount for plan expenditure. Ministries of Human Resource Development, Science
and Technology, Statistics and Programme Implementation and Textiles have also
achieved more than 40 per cent of budgeted plan expenditure.
20. The challenge
is to convert these outlays into outcomes. This year the Ministry of Finance
proposes to work closely with the Planning Commission and the other Ministries
and Departments to ensure that the outcome budgets of the Ministries/Departments
are more precise and informative and accurately capture the deliverables that
were promised at the beginning of the year. Since the experiment of outcome
budgets is a new one, I am confident that the quality of the outcome budgets
will improve as we gain experience in this behalf.
The Challenges
21. In the course of several speeches made by
me in the recent past, I have identified the challenges ahead on the road
that we have taken. The foremost challenge is to sustain the momentum of growth
and maintain a rate of 8 per cent or more – and move towards the 11th
Plan target of 9 per cent – in the medium term. This requires a mix of right
policies, new initiatives and above all better governance. It also requires
finding the resources to finance such growth without compromising on financial
stability and fiscal prudence. Among the other challenges, the more important
are agriculture, energy and infrastructure. In a recent speech delivered by
me at Stanford University I have dealt with each of these subjects in some
detail, and I could make available copies of the speech to you.
22. I believe
that reforms in India since 1991 have changed the face of the Indian economy.
India is slowly but steadily beginning to be recognized as an economic superpower
of the future. Sustainability of the reforms process demands that all sections
of society stand to gain from it. Only
if the poorer sections of the society also perceive a visible change in their
quality of life, will the reform process continue in our vibrant democracy.
It is a well-accepted fact that economic reforms in India have resulted
in a sharp decline in the proportion of people below the poverty line. This
has resulted in a broadening of the ‘constituency’ base for reforms. In my
view, the successful evolution of India as a major economic power now rests
on the deepening of reforms on the institutional and governance fronts. It
is only with fundamental reforms that we can achieve our cherished goal of
balancing growth with equity.
23. We have miles to go before we rest. What is needed is not less but more of reforms.
Reforms to sustain growth at 8-10 per cent for at least two decades and to
provide a durable solution to the problems of poverty, unemployment, poor
health and education for the entire population. Our neighbours in East Asia have done it in the 70’s and 80’s of
the last century, and now is our turn. What
is required is a resolute pressing ahead with reforms with a fine balancing
of growth with equity.
Thank you.
(Release ID :21796)