Stanford, CA
October 24, 2006

Stanford University is one of few University campuses in the world that capture the spirit and the yearning of humankind. Its verdant surroundings symbolize our concern for the environment, the fauna and the flora, and may have been an early pointer to the emergence of the Green movement as an important political force. Its diversified faculty represents the ‘world citizens’, where the best minds belong not to any particular country but to the whole world. The international character of the student community acknowledges the plurality of the human race as well as the undoubted fact that talent is distributed throughout the world. The number of Nobel Laureates that walk on the grounds of this University (and you have added two more this year in Chemistry and Medicine and Physiology) testifies to the unending quest for knowledge and the ultimate truth that is the hallmark of a great institution of learning.

May I say how happy and privileged I am to accept your kind invitation and have the opportunity to speak to this distinguished audience? I am particularly grateful to the President of the University, Mr. John Hennessy for doing me the honour of presiding over this lecture. 

Ladies and gentlemen!

When I came to the west coast of the United States in 1992, I was the first Minister to visit this country representing the new government in India that had announced major economic reforms in the summer of 1991. I was received with a large degree of cordiality but also with a considerably larger degree of skepticism! Although there was a new Prime Minister, and more importantly a renowned economist as the new Finance Minister, a little research revealed that both of them had been part of the old establishment for nearly thirty years. The party in power was also the Congress party – and that was the party which had ruled India for forty of the forty four years since Independence and until 1991. While the government’s statements promised change – and the government’s policies had indeed heralded change -- it seemed that the driver of the change was the crisis faced by the economy and not the conviction that fundamental change was imperative to prevent an economic collapse. 

My audience asked me searching questions. I was asked to spell out a road map for the future with definite milestones. I was asked when certain things would happen. There was no hostility, there was perhaps even a measure of sympathy, but few were prepared to believe that India had charted a new course. Even after nine months in office, the new government was moving forward only tentatively, testing the waters at every policy step. There still remained controls on foreign exchange, a dual exchange rate, high tariffs, quantitative restrictions, severe limits on foreign direct investments, no entry to foreign institutional investors, controls on capital issues, administered prices, a huge fiscal deficit and many other aspects of the earlier dirigiste regime.

I had my share of difficulties too. I was then the Commerce Minister and, naturally, could speak with some authority only on India’s trade policy. Many subjects were outside the scope of my official brief – and sometimes the official brief itself was quite bare! Nevertheless, I believe I made a valiant effort to sell the idea of a new-born India to my audience and my interlocutors. At the end of the day, I suspect that many persons in the several meetings that I addressed left with the impression that I was selling dreams and not a carefully crafted policy. I suppose that is when I acquired the reputation of a dreamer. I still have that reputation, but it is a reputation that has stood me in good stead.

Before my visit to the United States came to a close, I had succeeded in persuading IBM and Coca Cola to return to India. It was a significant success and sent out important signals to the U.S. business community. 

A Virtual Revolution

I confess to being a dreamer. It is dreams that make a revolution. India has, in the last fifteen years, ushered in a revolution. For a billion plus people, it is most definitely a revolution. The Indian economy has, for the third year in succession, recorded a growth rate of more than eight per cent per annum. A very large part of the license and control regime has been dismantled. The space for the private sector has been enlarged in a dramatic way. Through negotiation and persuasion, the Indian people have come to accept that the public sector and the private sector must co-exist, compete against each other, and sometimes even cooperate or collaborate with each other. Government revenues have increased; consequently, government’s investments have also increased, especially in the social sector. The increasing needs of the infrastructure sector and the increasing demands of the social sector have put enormous pressure on government’s revenues; yet tariffs have been brought down, a state level VAT has been implemented, and it is the declared policy of the government that tax rates will remain moderate and stable. 

The literature on economic reforms sets great store by liberalization, privatization and globalization. Fifteen years ago, in India, these words had acquired an unsavory reputation. Liberalization was viewed as a capitalist tool to exploit and impoverish the masses; today, it is seen as the path that has brought in more investment, more competition and more choice to the consumers in a large number of industries, products and services. Privatization was viewed as a reckless ‘sale of the family silver’ that would enrich the already rich and enable them to capture the vast assets belonging to the people; India did not quite take the road of privatization (except for a brief period between 2001 and 2003), but the disinvestment of small portions of equity in public sector enterprises has helped unlock the true value of the enterprises as well as subject them to the discipline of the market. Globalization was viewed as an invitation to the corporations of the world to re-enact history and to take over the country (and its businesses) in the same way as the East India Company did in 1757; today, far from taking over India or Indian industry, globalization is seen as an opportunity for Indian companies to acquire businesses abroad and to extend their reach and dominance. 

How did this remarkable change happen in a period of fifteen years? Through this period, I know that we disappointed many who advocated ‘big bang’ reforms. Instead, we chose to do reforms in a calibrated way. It was always one measured step at a time, and at every step we were careful to ensure that the poor were not alienated or further impoverished. For example, we did not reject the need for the government to spend a large amount of money on programmes to alleviate poverty, and we continue to allocate large sums of money for meeting the basic needs of the people such as drinking water, sanitation, basic health care, primary education and rural roads. We also kept in mind the interests of our farmers: consequently, we continue to subsidize the cost of power, seeds and fertilizers, and we continue to procure through state agencies many farm products at prices that will be remunerative to the farmer. Another core concern has been inflation: the rate of inflation has been contained at a level below five per cent in order to bring relief to the common citizen. Given the context of the Indian economic situation, ‘big bang’ may have meant ‘sudden death’, if not in economic terms, certainly in political terms. Slow and steady reforms may have disappointed our critics, but they have won the race to get public support on the side of reforms. Besides, slow and steady reforms have proved to be more stable and durable. I can say with pride that not one reform measure taken in the last fifteen years has been reversed despite the fact that there have been six governments and five prime ministers during this period.

Current Economic Situation and Recent Policy Changes 

Ladies and Gentlemen!

Let me give you a brief report on the current economic situation and the recent policy initiatives of the UPA Government. The main objective of the current phase of reforms is to ensure high growth, while making such growth inclusive to reach the benefits of growth to the poor and marginalized sections of our people. Our aim is forge ahead not only with a high rate of economic growth, but also to ensure that the growth process generates more employment, is more equitable, socially just and humane. The Government aims to empower the people, especially the poor, with universal access to education and health, and facilitate their full participation in the growth process through gainful employment. Considering the size of the very poor – nearly 250 million -- a safety net has been put in place through the National Rural Employment Guarantee Act that will provide one job per family for 100 days in a year.

The Indian economy, on average, has grown at a rate of more than 8 per cent during the last three financial years, making it one of the fastest growing economies in the world. This has been accompanied by a benign rate of inflation. The BRICS report identifies India as the only economy that will be capable of maintaining growth rates above 5 per cent till the year 2050. India’s share of global GDP, in purchasing power parity (PPP) terms, at 5.9 per cent in 2005 is the fourth highest in the world. In terms of share in world exports, India accounts for 0.9 per cent, with the value of exports in US dollar terms placed at US $ 100 billion. However, the robust export growth in excess of 20 per cent, during the recent years, points to the fact that the there is still scope for scaling greater heights in the medium term. The poverty level, which was 36 per cent in 1993-94, had come down to about 22 per cent in 2004-05. 

India’s foreign exchange reserves are comfortable at US$ 166 billion, and are growing every quarter.

Import tariffs were reduced drastically over the years and at present the peak rate for non-agricultural products is 12.5 per cent. The government is committed to align custom duties to ASEAN levels by reducing duties on non-agricultural products with steeper reduction for capital goods and raw materials. 

The Indian capital market is deep and robust and allows for the latest market procedures and instruments. The commodity markets are also encouraged, and this is gradually leading to better price discovery.

A liberal policy regime for FDI with gradual opening up of additional sectors has made India comparable to other countries. Except for a small negative list, FDI approvals are now on the automatic route. Being a signatory of MIGA as well as a host of bilateral agreements, repatriation of profits and dividends has no restrictions. Our FDI policy has been both dynamic and interactive and has factored investor perceptions adequately. Safe investment, secured and guaranteed repatriation, and a comparable FDI policy make India one of the most favoured destinations for foreign capital.

India has tremendous comparative advantages in both outsourcing of supplies and as an export base. Exports have emerged as an integral part of our developmental policy. In chemicals, metals, drugs and pharmaceuticals, leather and leather products, textiles, automobiles and auto ancillaries, and industrial machinery and components, India has an edge in terms of resources, design skills and technology adaptation. In IT and IT-enabled services, Indian professionals have emerged as world leaders. We expect that Information Technology, which has already opened new horizons, will increasingly spread across core industries in India and improve the competitive strengths of these businesses. 

The services sector, contributing about 54 per cent of GDP, has become an important driver of growth. The country’s remarkable progress in developing information and communication technology (ICT) capabilities has resulted in India becoming a global leader in IT-enabled services. Given its young profile, India’s working age population can become its biggest source of global competitive advantage. There are many excellent institutions imparting academic and technical education, and the quality of India’s human resources is constantly being improved. However, in order to exploit this advantage to the fullest, it is essential to ensure access to basic needs. The thrust on social and human development, therefore, is an important plank of the next generation of policy reforms. Such efforts are being complemented by a steep jump in budgetary outlays for social sectors, along with dedicated initiatives for removing poverty and increasing employment.

Policy making, over the last fifteen years, has been under coalition governments at the Centre. Contrary to popular perceptions, India’s multi-party federal democracy has actually played a key role in the implementation of reforms. Intensive deliberations on reforms have imparted to economic policy-making the calibration and the social conscience required for guarding the interests of the vulnerable sections of society.

Irrespective of political differences, the central and state legislatures have worked together in advancing the reform agenda. The finest example is the introduction of the Value Added Tax (VAT) at the level of the States. Besides, introduction of fiscal responsibility legislations at the Centre and in all but five States, as well as definite progress on significant areas like electricity distribution, bear testimony to India’s success in carrying forward reforms through broad political consensus. 

India has everything that is needed for an ideal investment destination: a well diversified financial sector; rich raw material base; a vast reservoir of technical as well as unskilled labour; a huge domestic market that is expanding rapidly; an independent legal system that is unbiased and fair; and an incentive system that rewards innovation and enterprise. 

The Challenges 

There are, however, many challenges ahead on the road that we have taken. The foremost challenge is to sustain the momentum of growth and maintain a rate of eight per cent per annum in the medium term. This requires a mix of right policies, new initiatives and 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.

India’s GDP in 2005-06 was about US $750 billion. The savings rate was 29.1 per cent in 2004-05 and presumably higher the next year. The investment rate was 30.1 per cent in 2004-05 and presumably higher the following year. Obviously, there have also been productivity gains in these years that have not yet been fully assessed. Given the current state of the economy, to grow the GDP at 8 per cent or more requires very large resources for investment. It also requires further gains in productivity which is possible only if we can make more investments in education and healthcare. The obvious answer is to supplement domestic resources with more foreign capital. The current account deficit was only 0.4 per cent in 2004-05 and 1.3 per cent in 2005-06, and hence there is ample room to accommodate a larger flow of foreign investment without affecting fiscal stability.

On the question of mobilizing domestic resources, given our preference for moderate and stable tax rates, the challenge lies in enhancing domestic savings, especially savings for the long term. India’s banking system is one of the strongest and best-regulated in the world. The total outstanding credit at the end of September 2006 was US $ 370 billion, representing about one-half of the GDP. It is the other half of the GDP that requires financing from well-regulated institutions and sources. To lend more, banks need to raise more capital in order to comply with Basel II norms and other prudential regulations. Hence, the banking system alone cannot perform the task. The obvious answer is to promote long-term savings through well-regulated pension and insurance sectors.
Bank credit as a proportion of GDP is rising, but is still low by international standards. The reach of the banking system is also poor with 10 largest centres in the country accounting for about 80 per cent of bank deposits and advances. There is an urgent need to extend the outreach of the banking system to agriculture and SME (small and medium enterprises) through micro-finance institutions and SHGs (self help groups). The challenge of reforms is how to handle absence of credit history, inadequate collateral, and reconciliation of ‘affordability’ with ‘adequacy’.

Bills are before the Parliament for amending the banking laws as well as to put in place a statutory regulator for the pension sector. A bill is on the anvil to amend the insurance laws. The early passage of these bills will be important to garner the resources that are required to sustain high economic growth. 

Let me now briefly deal with the other more important challenges that I had identified earlier.

Firstly, agriculture. Agriculture is the biggest private sector economic activity in India. However, farm holdings are small, the extent of land under assured irrigation is limited, and farming is not regarded as a remunerative occupation by most farmers. Public investment in agriculture has been low. As a result, the benefits of the green revolution of the 1970s have ebbed, and we seemed to have reached a plateau in agricultural production. The output of wheat has stagnated at about 70 million tonnes and of paddy/rice at 90 million tonnes. The production of pulses, which are a staple in India, has also peaked at 14 million tonnes. Oilseeds output is at 27 million tonnes. There has not been a major technological breakthrough in seeds or the use of fertilizers in the last twenty or more years. The challenge is to increase public investment in agriculture, especially in irrigation; to enhance the productivity of farming, especially in paddy, wheat, pulses and oilseeds; to adapt genetic sciences to the needs of Indian agriculture; and to promote private investment, including investment by the corporate sector, in pre-farming and post-harvest activities in a manner that will not affect the sacred relationship between the tiller and the land. 

Second is the problem of infrastructure. The government attaches the highest priority to the development and expansion of physical infrastructure like roads, highways, ports, power, railways, water supply, sewage treatment and sanitation. An investment of about US $ 320 billion would be required in the infrastructure sector during the Eleventh Plan period (2007-2012). These investments would be achieved through a combination of public investment, public-private-partnerships (PPPs) and exclusive private investments. In order to enhance public investment in infrastructure, it is essential to create fiscal space by restricting public expenditure in current consumption. Furthermore, we have to levy and collect appropriate and reasonable user charges not only to attract private investment but also to ensure proper operation and maintenance of the assets that are created. Our experience shows that PPPs and competitive bidding for such projects can help in augmenting infrastructure. Our intention is to award PPP projects on the basis of transparent competitive bidding together with a standard concession agreement.

The third challenge is energy. No economy can grow at 8 per cent or more if the energy sector – including oil, coal and electricity – grows at a lower rate. Domestic production of oil has stagnated at around 33 million tonnes a year, while consumption has increased from 55 million tonnes in 1990-91 to 112 million tonnes in 2004-05. Coal production, which is the monopoly of the public sector with limited exceptions, is at 412 million tonnes. The electricity sector has grown at an average rate of 5.2 per cent since 2004-05. There are serious problems in the pricing and distribution of electricity, and the recovery of costs from large sections of consumers including farmers, households and small businesses. Obviously, the energy sector is acting as a constraint on a more rapid rate of growth, and no time can be lost in addressing these issues 

A more general problem that cuts across many sectors is the effective utilization of funds and the efficient delivery of services. I had said in the Budget speech for 2005-06 that outlays do not necessarily mean outcomes. The people of the country are concerned with outcomes. There is a need to improve the quality of implementation and find a way to measure outcomes in quantitative terms. Governments and other agencies that provide services must be held accountable to the intended beneficiaries of those services. 

An optimistic outlook

I believe that reforms in India since 1991 have changed the face of the Indian economy. India is beginning to be recognized as a potential economic superpower. Sustainability of the reforms process demands that all sections of society should gain, and should be seen to gain, from it. It is now a generally accepted fact that economic reforms in India have resulted in a sharp decline in the proportion of people below the poverty line. There is a broadening of the ‘constituency’ for reforms. In my view, the successful evolution of India as a major economic power now rests on the deepening of reforms on the policy, institutional and governance fronts. 

We have miles to go before we rest. What is needed is not less but more reforms. Our neighbours in East Asia have demonstrated that a home-grown model of development that marries sound economic principles to the objective conditions found in a country can bring growth and prosperity in about two decades. I believe that it is now India’s turn. What is required is a resolve to press ahead with reforms with a fine balancing of growth and equity. The so-called dichotomy between growth and equity is false. I do not know of any country that has achieved equity and empowerment of the people without sustaining growth over the medium term. To us, in India, growth is an imperative. So is equity. I hold the firm belief that we should aim to grow at a rapid rate. I also hold the firm belief that an open and democratic system will ensure that that growth is converted into inclusive and equitable growth. 

Thank you.