Following is the text of the inaugural address of Finance Minister, Shri Pranab Mukherjee, delivered at the ECONOMIC EDITORS’ CONFERNECE here today.
“I welcome you all to this annual conference, which has now become an important discussion forum for the Government and the media on development and economic policy issues in India. This event offers an opportunity for us to share and explain the Government’s thinking, policies and the initiatives being taken to address the issues confronting us. At the same time, it offers an opportunity for the media, and through the media, the other stakeholders, to critically and constructively engage with the Government with a view to improve the scope and quality of public policy and intervention in the country.
2. Since this Conference is usually held towards the middle of the fiscal year, nearly six months after the presentation of Union Budget, it becomes an important event for stock taking and discussions on mid-course policy corrections, as well.
3. I understand that editors from across the country representing different vernacular languages and also English and Hindi are participating in this conference. I hope you will find the discussions over the next two days meaningful and productive.
4. We are at a stage in our development, particularly in view of the economy’s performance in the past five years, where the expectations of our people and that of our global collaborators and the foreign investors from us are high and rising. In the best of times these expectations would rest heavily on our shoulders. And these have not been the best of times. While the growing integration of the Indian economy with the rest of the world has created new opportunities, it has also brought new challenges. It has made the task of sustaining high growth more complex.
5. The developments over the last two years in the Indian economy, which otherwise was experiencing an unprecedented spurt in its growth rate bear this out. We had to confront three major challenges originating in our external sector. First, there was a surge in capital inflows, which peaked in the last quarter of 2007-08. Second, an inflationary explosion in global commodity prices, which began even before the first challenge had ebbed, and hit us with great force in the middle of 2008. There was barely any time to deal with this problem before the third challenge, the global financial meltdown and collapse of international trade, hit the world with severity.
6. The resulting economic slowdown and recession in major developed economies adversely impacted growth in all parts of the world. India was also impacted. It revealed critical gaps in international policy making and regulation, in risk management and international development cooperation. It also raised a number of questions on the process of international decision making and accountability that have a direct bearing on the global economic environment for the developing countries.
7. Despite these developments and given the severity of the global financial crisis, the growth in Gross Domestic Product of the Indian economy was a respectable 6.7 per cent in 2008-09, following three years of 9 per cent plus growth. Thus, notwithstanding the significant dip in 2008-09, over the last five years, the GDP growth has averaged 8.5 per cent per annum. We have succeeded in significantly raising the growth rate and sustaining the momentum of the economy to levels that are historically unprecedented.
8. Underpinning this performance are a number of factors that will serve as sources of strength for the years ahead. There was a significant increase in savings and investment rates, a steady expansion in domestic demand with growth in private investment becoming the prime driver of the growth spurt. The fiscal deficit came down from 4.5 per cent in 2003-04 to 2.7 per cent in 2007-08 and the revenue deficit declined from 3.6 per cent to 1.1 per cent. The buoyant growth of Government revenues facilitated fiscal consolidation as mandated in the FRBM Act and renewed the public capacity to address the chronic problems of unemployment and poverty that have plagued our country. The policy regime supported the industrial sector to gain momentum and it demonstrated the capacity to compete with the best in the international arena. Investors, domestic as well as international, showed confidence in the evolving policy framework and the fundamentals of the economy.
Ladies and Gentlemen:
9. On the domestic front, this year we have had sub-normal Southwest monsoons, which have obvious implications for agriculture growth and food prices. At the same time there have been widespread floods in some parts of the country. The wanton acts of terrorism in different parts of the country have kept the issue of personal security and loss of life and property in the limelight. It has resulted in a continuous drain on our resources and a distraction for our policy and programme implementation, particularly in the affected areas.
10. The recent months have witnessed some clear signs of a turnaround in the growth rate. In the first quarter (Q1) of 2009-10 the economy has recorded a growth rate of 6.1 against 5.8 per cent in the preceding two quarters of 2008-09. The industrial growth as captured by the Index of Industrial Production (IIP) has improved considerably in the months of June and July 2009, with growth increasing to 8.2 per cent and 7.2 per cent respectively, followed by 10.4 per cent in August 2009. More importantly, the Foreign Institutional Investors who had recorded net outflows in 2008-09, have returned to the Indian market in the last five months. There is no dearth of liquidity in the economy and inflation as yet is not a pressing area of concern.
11. Thus, it seems that the two worst quarters since the global financial meltdown in September 2008 are behind us. This performance reflects the basic resilience of the Indian economy. It also vindicates the timely policy measures taken by the Government to mitigate the adverse impact of the financial crisis on India.
12. After visible signs of pickup in industrial growth in the last few months, there are some indications that growth of core industries may have moderated in September 2009. Some uncertainties related to the revival of the global economy also remain. We cannot therefore afford to drop our guard.
Ladies and Gentlemen:
13. In my Budget speech to the Parliament in July 2009, I identified three challenges that we face today. The first challenge is to take the economy back to the high GDP growth of 8.5 to 9 per cent per annum and even beyond, at the earliest, and to ensure that it can be sustained for the next few decades. For us the growth of income is important in itself, but it is more important for the resources that it brings in. These resources provide us with the means to bridge the various critical gaps that remain in our development efforts, particularly with regard to the welfare of the vulnerable segments of our population.
14. The second challenge is to re-energize government and improve governance. The objective is to have institutions that provide basic public services, security and the rule of law at an international standard to all citizens efficiently, without any distinction and with complete accountability.
15. The third challenge is to deepen and broaden the agenda for inclusive development. To ensure that no individual, community or region is denied the opportunity to participate in and benefit from the development process. At the very basic level, the challenge is to enable food for all, education for all and health for all.
16. These challenges are all inter-related and they will have to be addressed simultaneously to realize the aspirations of our people and ensure that the benefits of growth reach the most vulnerable and marginalized segments of the population and among the different regions of the country in a reasonable span of time.
17. It is against this background and recent developments that I would now like to share my assessment of the impact and progress of some measures taken in the last few months. I would also like to identify a few of our major economic priorities in the coming months.
18. On the domestic front, the impact of the sub-normal Southwest monsoon is yet to be felt, though it is likely that we may fare better than the initial estimates of the decline in food production and agriculture GDP. The recent information on the non-farm credit off-take continues to be an area of concern. No doubt that credit off take has been impacted to some extent by the vagaries of nature, but now an all out effort is being made to ensure that credit off take to the employment generating sectors, especially agriculture, and micro and small enterprises picks up. Banks have been asked to take advantage of upcoming busy season and enhance credit flows.
19. To facilitate the financial inclusion, banks have been advised to rapidly scale up their efforts to reach banking to the inaccessible regions of the country through Banking Correspondents and other technological and IT measures.
Fiscal Prudence
20. While there are good reasons to believe that the immediate policy response to the global slowdown through a deliberate fiscal expansion, may have been effective in moderating the decline in GDP growth, there are some concerns on the medium term prospects of the economy. Indeed, there is some anxiety about the sustainability of fiscal correction achieved since the institution of FRBM Act.
21. For the present I maintain that the fiscal stimulus will have to continue, to allow its impact to fully run through the economy. It is, however, an imperative to come back to the path of fiscal prudence, as soon as the current economic circumstances permit us to do so. We cannot lose sight of the fact that much of our recent success in raising our growth trajectory has come about due to adherence to FRBM targets, both at the Central and State levels. Fiscal prudence is critical for maintaining a stable balance of payments, moderate interest rates and steady flow of external capital for corporate investment.
22. We are on track to achieve the targets on fiscal consolidation indicated in my medium term fiscal policy statement. The fiscal deficit is expected to come down from 6.8 per cent of GDP in 2009-10 (BE) to 5.5 per cent in 2010-11 and further to 4.0 in 2011-12. Correspondingly, the revenue deficit is expected to decline from 4.8 per cent of GDP in 2009-10 to 1.5 per cent in 2011-12. There are a number of factors that will make this possible:
(a) the Sixth Pay Commission arrears would have been paid out in 2009-10 with no further liability on this account in 2010-11;
(b) the increase in plan spending as a part of the implementation of the fiscal stimulus has been in the nature of front loading of the plan expenditure approved for the Eleventh Five Year Plan. With some effort we should be able to align it with our future requirements;
(c) much of the decline in business and corporate tax collections is cyclical and will tend to be reversed with growth picking-up from the second half of the current year; and
(d) the introduction of GST in 2010-11, which is also on track is expected to bring a sustained rise in indirect tax revenues.
Debt Management
23. Serious concerns were voiced on the implications of the Government’s borrowing programme, to fund the increased fiscal deficit in 2009-2010, on the cost and the availability of funds for private investment. I had clarified that these concerns were misplaced. Notwithstanding the increased borrowings in the current year over the last fiscal, the cost of borrowing has been significantly lower so far. Moreover, the government borrowings have been largely front loaded with nearly two-thirds of the borrowing requirement have been completed by end of September 2009, before the anticipated pickup in private credit demand. The RBI has taken several steps to improve liquidity in the market for supporting the public borrowings.
Disinvestment
24. My Budget Speech was criticized for not giving adequate details on the public disinvestment programme, even though it reiterated the Government’s stated policy on the issue. With the Government only about 40 days old when the Budget was presented, it was not in a position to share any details. There is a three to six months lead time in identifying and preparing the public companies for divestment. Moreover, we had to wait for an opportunate time to off-load the Government equity in the market.
25. We have made considerable progress in the last three months. In the recently concluded public offering of NHPC and OIL, it has been observed that the market capitalization of these companies, post-listing, has increased from Rs.18,280 crore and Rs.9,844 crore to Rs.37,702 crore and Rs.27,220 crore respectively, an increase of 106% and 177%. The market capitalization of residual share holding of Government has increased by 78% in NHPC and 121% in OIL, after accounting for the disinvestment of 5% equity of NHPC and 10% in OIL. Few other public sector undertakings have been identified for sale of small portions of Government shareholding in the domestic market and for issue of fresh equities to meet their fund requirements, if required. This is in keeping with the stated policy that Government equity should not fall below 51 per cent and it retains the management control of the company.
Reforms and policy initiatives
26. I have maintained that it is imperative for us to pursue reforms including in the financial sector, to make the economy more competitive and the economic regulatory and oversight system more efficient and ever sensitive to new developments. We have begun to address some of the issues in this context as you would have noted from the RBI’s quarterly policy review.
27. Given that much of the recent spurt in growth has come about due to the significant increase in the growth of private investment, it is important that we address issues that are holding back the revival of private investment in the economy. The efforts on fiscal consolidation and debt management and the mobilization of additional resources through disinvestment proceeds should help in this regard. We are also looking quite closely at steps to help curtail non-Plan expenditure, especially subsidies on fertilizer and petroleum products.
28. The scarcity of public resources underlines the importance of making effective use of resources. Special attention is being paid to expenditure management with an emphasis on not just quantum but quality of spending. On 29th October, 2009, various Ministries through their Financial Advisers have been asked to cut down non-Plan expenditure but ensure full and proper utilization of the Plan expenditure. Similar advice has also been given to the State Governments and UTs through their Finance Secretaries on 28th October, 2009. While both the Central and the State Governments need to focus on this, efforts are underway to push Public Private Partnership mechanism, in the short and medium term, to new areas of economic and social infrastructure including health and education.
29. Indeed, given the lags in the economy between specific actions and desired outcomes, it is important to initiate institutional reform measures in right earnest and set milestones for ourselves over the next five years. The release of the draft Direct Tax Code for discussion recently in one such step that we have taken.
30. As substantial resources, both public and private, are mobilized to fuel the growth of the economy and make it more inclusive in character, there is a legitimate concern that every bit of the public effort should count and yield better results. Efficiency of delivery has to increasingly become the focus of Government programmes. Indeed, there is an urgent need to strengthen the accountability mechanisms in the public domain and give them teeth. The implementation of the Right to Information Act at the Centre and in many States, the setting up of the National Authority to operationalise the Unique ID number, and launch of National Skill Development Corporation are some steps in the direction of improving governance with regard to delivery of public services. Steps are being taken to strengthen the project monitoring and evaluation system for public programmes and linking the performance and feedback with subsequent allocations of resources and continuation of programmes.
31. The objective of deepening and broadening the agenda for inclusive development is a major commitment of the Government. To ensure that no individual, community or region is denied the opportunity to participate in and benefit from the development process and that there is food for all, education for all and health for all, the Government has undertaken a paradigm shift for making the development process more inclusive. It involves creating entitlements backed by legal guarantee in those areas of the development process, where existing institutional arrangements and delivery mechanisms have so far been unsuccessful in breaking down the barriers to universal access to basic public goods and opportunities for livelihood. The Right-to-Education Act has come into existence. Food Security Act is under active consideration of the Government. We have already seen great success in programmes such as the NREGA that have been implemented as a part of this larger initiative. In the past months extensive review of the programme has been undertaken and changes introduced to make it more effective and flexible in meeting local concerns. However, there is still a long way to go and we need to further improve the momentum of our efforts.
32. For us, economic growth has to be an instrument for development and not an end in itself. It has to be not only inclusive but also equitable so as to sustain it over long period. In the last five years, we have moved steadfastly in that direction and I am sure that we will cover considerable ground in the next five years.”
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