Mr. Micklethwait,
Distinguished guests,
Ladies and gentlemen.
I am pleased to be here today to mark twenty years of Bloomberg’s presence in India. During that period, Bloomberg has provided intelligent commentary and incisive analysis of India’s economy. It has become an essential part of the finance landscape.
Apart from that, I am grateful for the valuable advice that we have received from Mr. Michael Bloomberg in the design of our Smart Cities programme. As Mayor of one of the world’s great cities, Mr. Bloomberg has personal insight into what makes a city tick. His ideas have enriched the design of our Smart Cities programme. Under this programme, we hope to create one hundred cities which will become role models for urban development throughout the country.
The world expects much from India, in terms of contributing to global growth. To the extent that time permits, I would like to place before you my thoughts on how India intends to meet the challenge.
I will touch upon three major areas. Firstly, I will discuss India’s economic growth. Secondly, I will outline some of the administrative and policy reforms that have created and will sustain that growth. Thirdly, I will elaborate on an aspect of economic development which is of particular importance to me, namely job creation.
Experts are unanimous that India is one of the world economy’s brightest spots. We have low inflation, a low balance of payments current account deficit, and a high rate of growth. This is the result of good policy, not good fortune. Let me elaborate:
• Between 2008 and 2009 crude oil prices fell steeply from a peak of 147 dollars per barrel to less than 50 dollars. This was a steeper fall than between 2014 and 2015. Yet in 2009-10, India’s fiscal deficit, its current account deficit and its inflation rate, all got substantially worse. And this slide was from a higher base figure for all three. But in 2015-16, all three have improved, from a lower base.
• Many other emerging economies also depend on imported oil. If oil prices were the driver of success, those countries would all be showing similar results. But they are not.
• We have not been lucky with global trade or growth. Both are low, and have not helped us in terms of export stimulus.
• We have not been lucky with monsoons or weather. 2015 and 2014 have both been drought years. Drought was compounded by unseasonal hail storms. Yet food grain production has remained much higher, and inflation much lower, than in the last comparable drought year, which was 2009-10.
For India to be at the top of global growth tables is an unusual situation. Obviously, there are some who find that difficult to digest and come up with imaginative and fanciful ideas to belittle that achievement. The fact is that India’s economic success is the hard-won result of prudence, sound policy and effective management. I will elaborate on some of our policies later, but for now let me emphasize just one; fiscal consolidation. We have met ambitious fiscal targets in each of the previous two fiscal years. We have reduced the deficit even while increasing capital expenditure. And the reduction has come despite an unprecedented steep cut in the Centre’s share of tax revenues, in the award of the fourteenth Finance Commission. For 2016-17, we have targeted a fiscal deficit of 3.5 per cent of GDP. This will be the second lowest level in the last 40 years.
Our growth rate is acknowledged as the highest among major economies. There are some who remain confused and have said that the growth rate does not ‘feel’ right. Perhaps I can be of some assistance to them in reducing the confusion, by stating facts in place of feelings.
Let us first look at credit. There has been a smart pick-up in credit growth after September 2015. Credit off-take between February 2015 and February 2016 increased by 11.5 per cent. The overall fund flow to the corporate sector through equity and borrowings of various kinds, domestic and foreign, has increased in the first three quarters of 2015-16 by over 30 per cent.
There are some very interesting figures on credit ratings. In 2013 and 2014, the number of firms whose credit rating was downgraded was much higher than those who were upgraded. That has now changed decisively. Upgrades are up and downgrades are down. In the first half of fiscal year 2015-16, for every company getting a downgrade, there were more than two companies which received upgrades, the best level in recent years.
Among firms with low levels of leverage, the situation is even better. Upgrades exceed downgrades by a huge margin. The number of upgrades is 6.8 times the number of downgrades for large firms with low leverage; for medium-sized firms the ratio is 3.9; and for small firms it is 6.3. These are exceptionally robust numbers.
The only segment showing an increase in downgrades is highly leveraged large firms. The Government and Reserve Bank have taken tough action to recover dues from large corporate defaulters. Perhaps the noise from this segment has influenced media perceptions.
Moving from credit to investment, net foreign direct investment in the third quarter of the current financial year was an all-time record. But to me, more interesting is the dramatic increase in certain important sectors. In the period from October 2014 to September 2015, FDI in fertilizer was 224 million dollars compared to just one million in the period October 2013 to September 2014; in sugar, it was 125 million dollars compared to just four million dollars; in agricultural machinery, it doubled to 57 million dollars from 28 million dollars. These are sectors that are closely connected with the rural economy. I am thrilled to see that foreign investment is flowing into them.
In the year to September 2015, FDI in construction activities showed 316 per cent growth. Computer software and hardware had 285 per cent growth. FDI in the automobile industry grew 71 per cent. This is concrete evidence that the Make in India policy is having effect in employment intensive sectors.
In a difficult global environment for exports, manufacturing output has fluctuated. However, several key sub-sectors of manufacturing are growing rapidly. Motor vehicle production, which is a strong indicator of consumer purchasing power and economic activity, has grown at 7.6 per cent. The employment-intensive wearing apparel sector has grown at 8.7 per cent. Manufacturing of furniture has grown by 57 per cent, suggesting a pick-up in sales of flats and houses.
Looking towards the future, let me turn to agriculture. In the past, the emphasis has been on agricultural output, rather than on farmers’ incomes. I have set the objective of doubling farmers’ income by 2022. I have laid this out as a challenge, but it is not merely a challenge. With a good strategy, well-designed programmes, adequate resources and good governance in implementation, this target is achievable. And, as a large share of our population depends on agriculture, a doubling of farmers’ incomes will have strong benefits for other sectors of the economy.
Let me outline our strategy.
• First, we have introduced a big focus on irrigation with a large increase in budgets. We are taking a holistic approach which combines irrigation with water conservation. The aim is ‘per drop, more crop’.
• Second, we are focusing on provision of quality seeds and on efficiency of nutrient use. The provision of soil health cards enables accurate selection of inputs according to the requirements of each field. These will lower costs of production and increase net income.
• Third, a large portion of the harvest is lost before it reaches the consumer. In perishables the loss occurs in transit. In non-perishables, it happens during storage. We are reducing post-harvest losses through big investments in warehousing infrastructure and cold chain. We have greatly increased the outlay for agricultural infrastructure.
• Fourth, we are promoting value addition through food processing. As an example, in response to a call from me, Coca Cola has recently started adding fruit juice to some of its aerated drinks.
• Fifth, we are creating a national agricultural market and removing distortions. A common electronic market platform is being introduced across 585 regulated wholesale markets. We want to ensure that a higher share of the final price goes to the farmer, with less going to middlemen. The introduction of FDI in marketing of domestic food products in this budget is with the same objective.
• Sixth, we have introduced the Pradhan Mantri Fasal Bima Yojana. It is a comprehensive nationwide crop insurance programme which offers farmers protection from risks beyond their control, at an affordable cost. This scheme will ensure that their incomes are protected in times of adverse weather.
• Seventh, we will increase income from ancillary activities. Partly this will be through poultry, honey bees, farm ponds and fisheries. We are also encouraging farmers to use uncultivated portions of their land, especially boundaries between fields, for growing timber and placing solar cells.
Through a combination of
• growth in production,
• more efficient input use,
• reduction in post-harvest losses,
• higher value addition,
• reduced marketing margins,
• risk mitigation
• and ancillary activities,
I am confident we will achieve the targeted doubling of farmers’ income. I am happy to note that Dr. M.S. Swaminathan, the doyen of Indian agriculture, seems to agree. He wrote to me after the budget expressing gratitude for the farmer-centric budget. He welcomed the income orientation given to farming. He went on to say, and I quote,
“On the whole, the budget has tried to be as pro-farmer as possible subject to the limitation of resources. Seeds have been sown for agricultural transformation and for attracting and retaining youth in farming. The dawn of a new era in farming is in sight.”
Let me now turn to some of the programmes and policies that underpin our growth. As I have said before, my goal is ‘Reform to Transform’: the aim of reform is to transform the lives of ordinary people. Let me start with administrative reforms and our focus on execution.
In a country like India, resources are scarce, while problems are abundant. An intelligent strategy is to optimize use of resources through efficiency in implementation. Mere announcement of policies, or so-called policies, achieves little. Even more than reformed policies, we need transformed execution. Let me illustrate. The National Food Security Act was passed in 2013 but remained without implementation in most states. In the Mahatma Gandhi National Rural Employment Guarantee Scheme, much of the expenditure was leaking out to touts, middlemen and the non-poor, though expenditure was recorded in the books.
We are now implementing the Food Security Act nationwide. We have drastically reduced leakages in the Employment Guarantee scheme and ensured that money reaches those for whom it is intended. We have focused on creating durable assets that benefit the population, rather than the touts. And instead of talking about the virtues of financial inclusion, we have actually completed the task and brought over 200 million people into the banking system.
Our record on implementation in general, and reduction in corruption in particular, is now well understood. So I will be brief. Coal, minerals and spectrum have been auctioned transparently raising large amounts. Managerial improvements have resulted in elimination of the power shortage, a record high in highway construction per day and record port through-put. We have launched a number of new programmes across various sectors. Many legacy issues have been solved. The number of stalled projects has declined. The long-closed Dabhol power plant is operational again thanks to our coordinated efforts, and is generating power, saving jobs and avoiding bad debts for the banks. Let me now turn to policy reforms. I have referred to the durable reduction in inflation since this Government took office. This is partly attributable to bold measures taken to strengthen monetary policy. Last year, we entered into a Monetary Framework Agreement with the Reserve Bank of India.
This year we have introduced in the Finance Bill, amendments to the Reserve Bank of India Act. Under these amendments, the RBI will have an inflation target and will set monetary policy through a Monetary Policy Committee. The committee will have no members from the Government. Through this reform, monetary policy will acquire an inflation focus and a level of institutional autonomy unprecedented in major emerging markets, and greater than several developed countries. Together with our adherence to the path of fiscal consolidation, this is a testimony to our strong commitment to macro-economic prudence and stability.
Another major policy reform is in the petroleum sector. Under the new Hydrocarbon Exploration Licensing Policy, there will be pricing and marketing freedom and a transparent revenue-sharing methodology. This will eliminate many layers of bureaucratic controls. For on-going projects which have not been developed, we have also given marketing and pricing freedom, subject to a transparent ceiling based on published import parity prices. For renewal of existing Production Sharing Contracts, we have introduced a transparent method involving a flat percentage increase in Government profit share. This removes discretion and uncertainty.
Parliament has passed the Real Estate Regulation Act which will go a long way in transforming the real estate market, protecting buyers and promoting honest and healthy practices. Along with the passing of this long pending bill, we have introduced tax incentives for developers and buyers of housing for the neo-middle class and the poor.
The UDAY scheme in the power sector has permanently changed the incentive structure for State Governments. Ambitious operational targets are backed by credible incentives to perform.
Under this scheme, in a phased manner, State Governments will have to take over losses of distribution companies and count them against their fiscal deficit targets. This imposes a hard budget constraint on the states. It creates a powerful incentive for states to manage the electricity sector efficiently. Already nine states accounting for over forty per cent of the total debt of distribution companies, have entered into Memoranda of Understanding with the Central Government. Another nine have agreed to do so.
You are probably aware of this government’s sweeping policy reforms in renewable energy. From an average of less than 1500 Megawatts of solar capacity addition per annum, we are moving up to 10,000 Megawatts per annum. When I announced a target of 175 Gigawatts of renewables, as a pillar of our climate change strategy, many were surprised and some were skeptical. Yet, this month the International Energy Agency has reported that a surge in renewables has already halted global growth in energy-related carbon emissions.
Parliament has recently passed a new law on inland waterways which will enable the rapid development of this efficient mode of transport. This will increase the number of navigable waterways from 5 to 106.
Foreign Direct Investment policy has been transformed by allowing investment in hitherto closed sectors like Railways and Defence, and enhancing investment limits in insurance and many other sectors. These reforms are already bearing fruit. Two new locomotive factories involving an investment of over 500 billion dollars are being built in Bihar, by GE and Alstom. In insurance, 9600 crore rupees, approximately 150 million dollars of FDI, in 12 companies, from leading global insurers has already been approved.
We have enhanced the limits for foreign investment in stock exchanges and allowed them to be listed. I am sure, you are aware, of the reforms we have undertaken to promote private equity venture capital, and an eco-system for start-ups. I note that this ‘new economy’ is the focus of your panel discussions.
Finally, let me turn to the major steps we have taken in the area of generating employment. This is one of my highest priorities. India is a capital scarce, labour abundant country. Yet, the corporate tax structure has favoured capital intensive production. Tax benefits like accelerated depreciation, and investment allowance have created an artificial bias against labour. Labour regulations have also tended to promote informal employment without social protection, rather than formal employment. We have taken two important steps to change this.
Firstly, if any firm subject to tax audit increases its work force, it will get a 30 per cent weighted tax deduction on the extra wage cost for three years. Earlier, such a benefit was available only to very few industrial employers and had so many restrictions that it was practically ineffective. It will now cover all sectors including services, for employees with a salary up to 25,000 rupees per month.
Secondly, the Government has taken the responsibility for paying pension contributions for three years for all new persons enrolling in the Employee Provident Fund. This will apply to those with wages up to 15,000 rupees per month. We expect lakhs of the unemployed, and the informally employed, to benefit from these steps.
In a reform to eliminate corruption in government recruitments, we have abolished interviews for lower and middle level positions. They will now be filled on the basis of transparent examination results.
You are aware that results of Government entrance examinations for engineering and medical colleges are being used by private colleges also. I am happy to announce one more measure to improve the labour market and benefit the unemployed. The Government and Public Sector Undertakings conduct a number of recruitment examinations. So far, the scores in these examinations have been retained by the Government. Hereafter, we will make available the results and the candidate information openly to all employers, wherever consent is given by the candidate. This will create a positive externality. It will provide a rich data base which can be used by private sector employers as a ready-made and objective sourcing and screening mechanism. It will reduce search costs in the labour market for both employers and employees. It will enable better matching of candidates from labour surplus areas with jobs in other regions.
You may be aware of the spectacular progress of the Pradhan Mantri Mudra Yojana. Over 31 million loans have been sanctioned to entrepreneurs for a total value of nearly 19 billion dollars this year. You will be pleased to know that 77 per cent of these entrepreneurs are women and 22 per cent of them are from the Scheduled Castes and Scheduled Tribes. Even if we assume conservatively that on average, each enterprise creates just one sustainable job, this initiative itself amounts to 31 million in new employment. The Stand-Up India scheme will also provide 250,000 entrepreneurship loans to women and Scheduled Castes and Scheduled Tribes.
My government’s measures on skill development are well known. In the Budget, we also announced two path-breaking reforms in the education sector, which I want to elaborate upon. Our aim is to empower higher educational institutions to help them attain the highest standards. To start with, we will provide an enabling regulatory architecture to ten public and ten private institutions, so that they emerge as world-class teaching and research institutions. Their regulatory framework will be separate from existing structures like the University Grants Commission and All India Council for Technical Education. They will have complete autonomy on academic, administrative and financial matters. We will provide additional resources for the next five years for the ten public universities. This will eventually allow ordinary Indians affordable access to world-class degree courses. This initiative is the beginning of a journey to restore the original mandate of higher education regulators.
They should be facilitators and guides, driven by norms of self-disclosure and transparency, instead of top-down command and control. Eventually, through regulatory reform, we aspire to world-class standards in all colleges and universities.
Another initiative is in school education. We have achieved much quantitative progress in access and pupil-teacher ratios. The foundation of today’s knowledge economy is the quality of its school leavers. We have now decided that the quality of learning outcomes will be the Government’s primary objective. Accordingly, we will allocate an increasing share of resources under the Sarva Shiksha Abhiyaan to quality. These funds will be used to promote local initiatives and innovations to improve learning outcomes. I am sure, all of you who are parents and all of you who are employers, will welcome these steps in higher and school education respectively.
In conclusion, Ladies and Gentlemen, we have initiated many steps. Many more lie ahead. Some have begun bearing fruit. What we have achieved so far, gives me the confidence that, with the support of the people, we can transform India.
I know it will be difficult.
But I am sure it is do-able.
And I am confident, it will be done.
Thank you.
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