It is pleasure to join you at the Peterson Institute of International Economics. This is a preeminent, nonpartisan think-tank that has made a mark in the area of international economic analysis. Your eclectic and pragmatic thinking has contributed to a better understanding of global economic developments and, more importantly, in evolving appropriate policy response. I am indeed happy to have this opportunity to share some thoughts with you. I would like to thank Mr Bergsten and the Director General CII for inviting me to speak before this distinguished audience.
2. India’s engagement with the world has increased considerably over the past two decades. This has been reflected not just in the economic arena but in various walks of life like art and culture, literature and including cuisine, the popularity of which can be gauged from the crowds that throng Indian restaurants in many parts of the world. However, though I would love to hold forth on Indian culture and cuisines, the focus of my address today is on economic issues, the short and the medium term prospects of India in a globalised world.
3. Let me start with the global prospects and challenges. There have been repeated economic crises since 2007. It is different from the earlier bouts in that it started in the advanced economies, spreading through the financial markets to the other parts of the world and has now turned into sovereign debt crises in some of these economies. Initially there were problems in the U.S. economy and in some specific countries like Iceland. These become more generalised, affecting several European countries, such as Greece, Ireland and Portugal and threatening many others in the EU zone. There are other nations that may not face the risk of immediate fallout but where stagnation is evident. Japan, for instance, grew at negative rates for the better part of 2011.
4. When a crisis occurs, each country has a tendency to treat the event as a special problem and administer appropriate policies; sometimes without regard to the consequences those actions may have in other parts of an increasingly globalised world. But the occurrence of repeated crisis should alert us to the possibility that there is perhaps something more structural also happening today.
5. I believe, and I am not alone in this, that there is a structural change ongoing in the world. The crises that we see all around are manifestations of this common structural change namely the rise of emerging economies all over the world, but especially in Asia. The huge resource of human capital in countries like China, India, Indonesia, the Philippines, Thailand, Malaysia, and other nations which earlier could not join the global work-force are now a part of the world, because of new technology. Whether a skilled person happens to be in New Delhi, Bangkok or Manila, by use of modern technology a person’s skill can be put to use in New York, London or Tokyo. It is this that is changing the world. To gain from this change, the advanced countries have to work harder in trading their skill and knowledge base with Asia and the emerging economies. Indeed, there remains enormous potential, but it has to be brought about by polices that help these economies to remain open to trade and doing what is sustainable in the long run, including shifting to higher savings and investments rates.
6. The rise of the emerging economies is evident. Roughly fifteen years ago emerging and developing economies accounted for 35.5 per cent of the total world output. They now account for almost 50 per cent of the total world output. Such a big shift in less than two decades has rarely been witnessed in the world. This rapid change has also been accompanied by a gradual shift in global economic power from the developed to the emerging and developing countries. Indeed, we are witnessing an emerging new world order, where there is a higher degree of interdependence among nations and, hopefully, there is also a more dynamic and equitable arrangement for global prosperity. I would go a step forward and like to suggest that such an arrangement for global policy making and governance is vital for the well-being and progress at this critical juncture in the history of our world.
7. Just as the rise of Europe and North America and, subsequently, Japan was a great human achievement, so is it going to be with the rise of Asia. Far from taking away anything from the rest of the world, the emergence of Asia and other emerging market economies brings a renewed momentum into the global economy. But this process is not going to be automatic. Individually and collectively we need to build on this momentum as we put together our thinking and policy response to address the current uncertainty in the global economy. While engineering a rapid and durable recovery in the developed world, we need to strengthen the new and potential growth drivers of the global economy.
Ladies and Gentlemen,
8. Let me now turn to the problem in Europe. The world economy is presently passing through turbulent times. The lingering after effects of the global financial crisis have of late become more pronounced. Over the past months, deep and widespread economic concerns with a complex mix of real and financial problems have surfaced in Europe. The incremental nature of the sovereign debt crisis in the Euro zone, with events including sovereign and bank rating downgrades and risk on-off strategies of international investors have led to significant rise in overall macroeconomic risks that threaten the stability of the global economy.
9. The high fiscal deficit and unsustainable public debt levels in advanced countries continue to limit the ability of policy makers to respond. Growth would continue to slow because the emphasis is on fiscal correction and lowering public debt. Greater emphasis on reducing public expenditure and raising taxes in euro zone economies would pull euro zone growth further down. There are other factors that seem to be dampening the underlying growth momentum in the euro area. They include moderate global demand growth, weak business and consumer confidence in the euro area as well as the process of balance sheet adjustment in the financial and non-financial sectors.
10. Given the depth of the crisis in Europe and heterogeneity of factors that have led to it, achieving a political consensus on its resolution seems particularly challenging. While measures, including the announcement by the European Central Bank to extend loans to banks up to three years have calmed markets for the time being, a decisive resolution to euro zone crisis will require greater coordination and policy consensus and has to be the immediate priority.
Ladies and Gentlemen,
11. I turn now to India. As the Indian economy gets increasingly integrated into the global economy, it too cannot escape developments abroad, notwithstanding its relative resilience. The unfolding of the euro zone crisis has already impacted the economy through lower growth, falling business sentiments, declining capital inflows and exchange rate and stock market volatility with attendant implications for investor confidence. Moreover, the slowdown in external demand has led to deceleration in the growth of exports in recent months leading to widening of the current account deficit.
12. India’s Gross Domestic Product (GDP) is estimated to have grown at just under 7 per cent in 2011-12. After the crisis impacted slowdown year of 2008-09, India succeeded in engineering a rapid recovery with GDP growth of 8.4 per cent per annum in 2009-10 and 2010-11. However, for the better part of this period, we have also been grappling with near double digit headline inflation and with high food and commodity prices. Along with adverse global economic developments and weak business sentiments, it hindered the consolidation of our growth recovery.
13. Our monetary and fiscal policy response during this period has been therefore geared towards taming domestic inflationary pressures. A tight monetary policy impacted investment and consumption growth through higher cost of credit. The fiscal policy had to absorb expanded outlays on subsidies and some duty reduction to moderate the pass-through of higher fuel prices to consumers, at a time when domestic inflation was already high. As a result, the year 2011-12 saw a moderation in GDP growth and deterioration in fiscal balance.
14. We are now at a juncture when it is inevitable to take some hard decisions. And this has been our approach, as I outlined in the proposals for the Union Budget 2012-13 recently. We have tried to address the short-term challenge of regaining the growth momentum while seeking to capitalise on the opportunities in an otherwise difficult global environment. We have focused on strengthening domestic growth drivers, encouraging private investment to regain its pre-2008 crisis growth momentum and addressing supply constraints in infrastructure and agriculture sector. The initiative on improving the employability and opportunities for livelihood has been further strengthened to create more inclusive outcomes in both rural and urban areas. A critical element of the strategy is to implement an ambitious but realistic fiscal consolidation road map, and leveraging technology to give effect to a quantum improvement in Government’s expenditure management.
15. The process of fiscal consolidation is expected to help in the moderation of inflationary pressures which in the coming months could help maintain a more supportive monetary policy stance for growth. After nearly three years, the monetary authority in India has reversed the policy rates for the first time in its annual policy statement for the fiscal year 2012-13. The growth outlook, which had weakened in these past months, should now improve. It should help in investment revival and contribute to strengthening of business sentiments.
16. While there can be no denying that, thanks to the pressures of coalition democracy, some reform measures had slowed down over the last year, but we have taken several steps in the past months to shore-up the short and medium term growth prospects. This includes a gradual liberalisation of capital market and encouraging capital inflows including through Foreign Institutional Investors, Foreign Direct Investment and in the area of External Commercial Borrowings, especially for infrastructure financing. The investment requirements for the infrastructure sector are very large, estimated at USD 1 trillion, for the period covering India’s Twelfth Five Year Plan (2012-17) and, of this nearly half has to come from the private sector. We have recently enabled a mechanism to enable access to the Indian debt markets through a mechanism of Infrastructure Debt Funds. These are regulated entities which envision sustained long term interest of the dedicated long horizon investing entities like pension and insurance funds. A major initiative on reforms of both direct and indirect tax regimes is on the policy agenda. The Government has also taken measures to improve the credit flows to activities like skill creations, training and education which help in strengthening the medium to long-term growth prospects of the country.
17. The Indian economy is, in some ways, better placed than many other nations to withstand this fresh round of global economic turmoil. India’s resilience results from the fact that the bulk of India’s GDP is domestic demand driven. India’s External Commercial Borrowings Policy has been successful in maintaining external debt at sustainable levels. India’s banking sector is robust and our regulatory architecture is mostly in place. There is unwavering commitment to reforms to further consolidate our economic strengths. The GDP growth in 2012-13 is expected to be 7.6 per cent, which in the normal course should rise by another percentage point in the fiscal 2013-14. The downside risks of sticky global commodity prices, especially fuel oil remains and could undermine the anticipated growth recovery.
18. We have shown in the recent past that we have the capacity to grow fast. At the same time, we are stepping up our efforts to create more inclusive outcomes for our developing society. Favourable demographics, resilient economic structure, high savings and investment rates with potential for further growth, stable democratic institutions and continued policy emphasis on improving social and physical infrastructure are factors that can help us in moving forward and even shouldering some of the global responsibilities. Indian enterprise has matured and shown that it has the capacity to compete with the best.
Ladies and Gentlemen,
19. One of the important attributes of modern India is that we are the world’s largest functioning democracy. Our democratic structures and a systems based on rule of law are fundamental to India’s existence, progress and our role and place on the international stage. The second major attribute is the success of our economic reforms in sustaining high growth. Initiated in 1991, these reforms have supported the creation of a nearly two trillion dollar economy, and made India the second fastest growing major economy in the world. Thirdly, India today is a predominantly young country. We have a window of opportunity to reap the benefits of a demographic dividend. It makes it necessary for us to prepare ourselves in terms of building the required infrastructure, physical as well as human capital. At the same time create opportunities for our people and our goods in the domestic and the global economies.
20. The strategic imperatives for India in the 21st century flow from these attributes. We are committed to ensuring that the international institutions that are responsible for peace, security and socio-economic development, in which we participate willingly and substantially, mirror democratic ethos. We have a constructive engagement with the Bretton Woods institutions, the International Monetary Fund and the World Bank, and our experience in using these financial institutions in our task of nation-building extends for over six decades. Similarly, in the area of international trade, India has been at the centre of the current round of multilateral negotiations under the mandate of the Doha Development Agenda to ensure that the World Trade Organization continues to be relevant in creating an equitable, rule-based international trading system. On climate change finance, India is playing a very active and supportive role. Today, as India participates as a partner in the G20, which has become the main forum for dealing with international economic issues, our experience has proved very relevant in putting forward our vision of the future orientation of these institutions. We desire to make the most of the opportunities that globalization has thrown up through a process of negotiated sustainable liberalization to benefit all, within and across nations.
21. Our strategic global partnership with the United States is truly transformational in nature. We are not only discussing issues such as strategic cooperation, counter-terrorism, defence, high technology, civil nuclear and space sector cooperation but also a broad range of development issues that directly and positively impact our citizens.
Ladies and Gentlemen,
22 I have touched upon some of the major strategic imperatives and directions for India in the short and the medium to long term. Within this broad framework are the initiatives that we have taken in the past several years, including our policy towards our immediate neighbours. In a century widely billed as “Asia’s Century”, India is moving steadily and surely to secure the imperatives of peace and development, of a shared destiny of mankind.
23. Let me conclude by emphasizing that in the context of the prevailing global scenario, it is imperative that we deliberate on policies that impart increased robustness to economic and strategic ties between the developed and the developing world and find ways to sustain the momentum towards a fuller recovery of the global economy. We need to recall the timely and coordinated action of the G-20 member countries that helped in steering the global economy out of the unprecedented economic slowdown, the worst since the Great Depression of the 1930s. We must have the sagacity to deal with the current turmoil with similar cooperation and a coordinated policy approach. I like to quote one of the architects of the post-world war economic recovery President Franklin D. Roosevelt who said that “Competition has been shown to be useful up to a certain point and no further, but cooperation, which is the thing we must strive for today, begins where competition leaves off”.