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July 19, 2002
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'Forecast not unrealistic. We can achieve 8% GDP growth'

Prodipto Ghosh, additional secretary to the prime ministerJuly 13 Prime Minister Atal Bihari Vajpayee unveiled an eight-point strategy aimed at attaining an annual 8 per cent economic growth during the Tenth Plan.

At a meeting of his Economic Advisory Council, Vajpayee said the growth strategy necessarily had to hinge on employment creation and speeding up economic reforms so that 'India becomes a clear-cut market economy.'

The prime minister's optimism evoked sharp reaction from various economists who felt that the figures aimed at are improbable, given the economic downturn, the border tension, the poor show of the manufacturing sector, an errant monsoon, the moribund stock markets and the general global meltdown.

However, Prodipto Ghosh, additional secretary to the prime minister, defended Vajpayee's confidence about the Indian economy in a frank tête-à-tête with Senior Editor Sheela Bhatt.

Is Prime Minister Vajpayee's vision of 8 per cent growth rate a realistic one?

It is not unrealistic. The math behind this growth rate has already been done. The approach paper to the Tenth Five-Year Plan was prepared on the basis of these calculations.

These computations are with respect to the prime minister's forecast. This includes some increase in our domestic savings, some improvement in our fiscal performance, a significant step-up in our FDI inflows, and removal of policy barriers. The prime minister's speech touched many of these aspects.

He talked about population and its relation with dependency ratio and savings ratio. We have to attain the population policy targets without employing the methods which have caused the problems in the past. In the 2001 census, there are clear evidences that the decadal growth ratio has fallen sharply. The population growth rate was 25 per cent in a previous decade, and it slipped sharply to 17 per cent. Population growth rates do not oscillate from year to year. So obviously something significant has happened on the ground.

But what about the fiscal position and the complex issue of subsidies?

About the fiscal situation, well, the prime minister was clear that we need to address the question of subsidies: especially those which are not going to the targetted population. He specifically talked about power and made a strong signal to ministries to address it.

On the question of foreign direct investment, there are two things: one, that there is a significant change in the FDI climate in India. But there are problems of infrastructure and some bureaucratic hurdles. We have the Govindarajan Committee to address the procedures and very serious changes are underway to address the procedural problems.

In India, something tremendous is happening in the road sector. Also, we have achieved fast growth in rural road sector. We are concentrating on roads, railways and power.

When everything was going well India managed a 6-6.5 per cent growth rate. Credit offtake is picking up at a slow pace, the IT sector is not very cheerful and the manufacturing sector is in a shambles. How then are we going to log 8 per cent GDP growth? Some critics find it laughable.

We are not talking about year-to-year fluctuations. When we are talking of 8 per cent GDP growth rate we are talking of 8 per cent trend rate of the growth rate. After a study of the last 50 years, we noticed that the trend rate has been gradually accelerating.

So while in the early fifties the trend rate was something like less than 3 per cent, the trend rate now is about 6 percent. Depending on various contingencies it fluctuates from year to year. It could be the monsoons, the oil price, external economic slowdown, or a combination of such factors.

We must understand that year-to-year there is very little control that we have. But with various policy measures we can make an impact on the trend rate. That's our approach. When we talk of policy reforms, it does not mean that the process will necessarily have an impact in the current year.

How are you going to accelerate the change in the trend rate?

Three things. Increase the rate of domestic savings. Boost FDI inflows. And improve the fiscal situation. All these three areas will be addressed by a slew of measures.

When talking about the fiscal situation, clearly subsidies are a major issue. We can't get rid of all the agriculture subsidy at once. We are doing it gradually. In the irrigation sector we have the central scheme where the states will get money provided they introduce the irrigation reforms. The release of money is linked to the completion of the project.

In case of fertilizer subsidy, as we all know, except the urea subsidy all other subsidies have gone. The big question is of urea subsidy, which is about Rs 140 billion to Rs 150 billion a year. That's a whole lot of money. The fact of the matter is that it is a political problem.

But there are several recommendations from the PMO (Prime Minister's Office) and from other ministries. A group of ministers is addressing the question of the termination of subsidy on nitrogenous fertilisers. That does not mean that if the group reach a decision today, the whole subsidy will go tomorrow. A trajectory will have to be put in place so that over a period of time, subsidy slowly comes down to zero. That is being done.

The point is we have to find a solution that will politically fly!

The feel good factor seems to be missing from the FDI issue…

We have reformed the FDI arena. Many more sectors have been opened up. The upper limit has gone in many sectors. The process of getting approval has seen a major transformation through the Foreign Investment Promotion Board.

You might have seen the study by IFC (International Finance Corporation, a financial arm of the World Bank) They have done an analysis on the issue, entitled 'The paradoxes: India versus China.'

In one of the slides, they asked, 'Are the FDI numbers right?' The answer was that nearly 50 per cent of China's FDI inflows in 1999-2000 was round-tripping, i.e. double-counting. This reduces China's net FDI inflows from $40 billions to $20 billion.

Something is very wrong in the Indian system of counting. Our official numbers are giving us up to $3 billion less every year. Citibank has invested $1 billion; Coke and Pepsi have recently invested $1.3 billion. Are they crazy? Are India's FDI numbers right?

After correcting the figures, IFC has come out with the new figures for India and China. They have used a methodology approved by the International Monetary Fund to calculate the FDI inflows. On the basis of this, FDI inflows for China show that they are 2 per cent of China's GDP, and - for India, about 1.7 per cent of India's GDP.

Not a huge difference, IFC claims. The current rate of inflow of FDI is highest ever. It is more than $4 billion, which is quite good. If foreigners were not feeling good about India, why would they invest here?

In that case, what is missing?

As the prime minister mentioned in his speech, in many respects we don't know ourselves. Over the past two decades, India has been the sixth-fastest growing economy in the world.

No major democracy, barring Japan in the 60s and the 70s, has at any time matched India's growth performance in this period. This is the statement made by Standard and Poor's in their study.

Arvind Virmani (Advisor in the Planning Commission) has done a study where he has shown that in the first two decades of the 21st century, India will be amongst the three fastest growing economies of the world.

China and Ireland would be the other two. Not Hong Kong, not Singapore, none of the Asian tigers. None of the countries, which are the favourites of neo-classical economists!

Our current performance is better than Hong Kong. Because of bad monsoons India got a 4 per cent growth rate in 2000.People said we are facing a recession. That is not the definition of a recession. When we get two consecutive quarters recording negative growth rate, then we term it as recession.

However, the point is that we have pitched our expectations so high. We label 4 per cent growth rate as recession. Still we claim that our performance is not that far behind our expectations either. All the service sectors have been growing at 8.5 per cent since the last two decades.

What about the banking sector and its huge non-performing assets?

The recent ordinance, where the banks can sell the pledged assets (against the loans), will help in a big way. Public sector banks were very cautious about lending because they are constantly under the microscopes of the Central Bureau of Investigation and the Central Vigilance Commission.

Even in genuine cases, they were not ready to take any risk. To eliminate this problem, an expert group has been set up in the Reserve Bank of India.

If there are any complaints, the group will check whether normal commercial practices were adhered to or not. If the RBI group finds the decisions normal, no case will be made out. If any deviation from the normal practices is detected, then a case will be made out.

This will give a lot of protection to public sector banks' managers. They will be assured that there will not be any witch-hunting or victimisation. We feel this will go a long away in ironing out a lot of kinks in the system and lead to a rise in commercial lending.

What about the manufacturing sector?

Whenever you ask manufacturers what the problem is they will say there is no demand. The demand is in relation to the capacity of the manufacturers. If there is a 5 to 6 per cent GDP growth rate, you can't say there is no demand.

The people's purchasing power is growing. Our savings rate is around 22 per cent, which means people are spending. If you still have the perception of the lack of demand, it means that your capacity is large. After liberalisation and in the post-licence raj era, a great deal of enthusiasm was seen in the manufacturing sector and great deal of investment was made in the consumer sector.

That capacity remains. This is a normal business cycle where a period of over-investment is followed by a shortage of demand. And in a normal growth pattern, the demand increases, and it will increase this time too.

Can we achieve our targets in a war-like situation?

We are taking a long-term view. We are liberalising further. The government took a very difficult decision to liberalise the print media. N K Singh (Planning Commission member) is looking at further liberalisation and Govindarajan (Secretary at the Department of Company Affairs) will suggest ideas on regulatory procedures.

Once all this is in place, we will see the impact. The approach paper of the 10th Five-Year Plan says that we will have to reach the FDI target of $7-8 billion per annum. We have achieved $4 billion target already. And probably, if computed by the IMF method, we might already be there! We are not talking of something like a pie in the sky.

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