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Statement Delivered by the Finance Minister at
Economic Editors’ Conference, 2006
7th November 2006
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 has 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 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 to 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 on
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.
Capital goods production in the domestic economy also increased by 19.9 per
cent in April-July, 2006-07.
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 and equity
of infrastructure projects, the demand for grants 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 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 assesses 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 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.
18. 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.
19. 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
20. 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 nonplan
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, Textiles have also
achieved more than 40 per cent of budgeted plan expenditure.
21. 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
22. 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 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.
23. 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 wellaccepted
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.
24. 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.
