If we are serious about ending poverty, the place to start is to make food and fuel available at reasonable prices – FM
We bring you extracts from the brilliant speech of our FM delivered at the Lee Kuan Yew School of Public Policy in Singapore yesterday. This speech is but a sample of the erudition of our FM and is a must read for any student of economics. The Harvard class shows!
Let me recount, briefly, the steps that we have taken to sustain economic growth amidst growing uncertainty. At the start of the tenure of the present Government, we took a bold step and notified the Fiscal Responsibility and Budget Management Act, for short the FRBM Act. In retrospect, it is acknowledged that it was a wise and courageous decision. The FRBM Act requires the Government to reduce the fiscal deficit every year by 0.3 per cent of GDP and, eventually, to bring it to a level below 3 per cent by 2008-09. It also requires the Government to reduce the revenue deficit every year by 0.5 per cent of GDP and, eventually, to eliminate it by 2008-09. The Government inherited a fiscal deficit of 4.5 per cent in 2003-04. We are on course to bring down the fiscal deficit to 2.5 per cent in 2008-09. Likewise, the Government inherited a revenue deficit of 3.6 per cent in 2003-04. While we have been able to reduce the revenue deficit by 0.5 per cent a year – and that means that we have adhered to the path of correction – we are not able to eliminate the revenue deficit and it will be 1.0 per cent by the end of 2008-09. In order to eliminate the revenue deficit completely, we ought to have done better than a reduction of 0.5 per cent a year. That, however, has not been possible because much of our expenditure on education, health care, drinking water, sanitation, rural roads etc is classified as revenue expenditure. Nonetheless, our achievement is considered very satisfactory. On a lighter vein I may add that critics of the FRBM Act have expressed satisfaction that we have allowed ourselves a revenue deficit of 1 per cent and have not compressed unduly the revenue expenditure!
The second instrument to contain inflation as well as to stimulate job-creating growth is fiscal policy. In January 2004, the peak rate of customs duty was 25 per cent. Today, it is 10 per cent. In fact, the “collection rate” – that is the effective applied rate – for all goods is only 10 per cent. Excise duty, which is a duty on value addition in manufacture, has also been moderated to 14 per cent. In the cases of goods of mass consumption, the rates are even lower: many goods are at zero percent and many others are at 8 per cent. Service tax, which is a tax on value addition in services, is kept at 12 per cent, well below international benchmarks.
Let me give you two examples where fiscal policy has been used to advance the objectives of price stability and growth. We think that India can become a hub for small cars. Accordingly, excise duty on small cars has been slashed to 12 per cent and, when cars are exported, as in the case of all export goods, even that duty is refunded to the manufacturer. The second example would be the case of the food processing industry. Encouragement to this industry would mean that a large proportion of the agricultural produce – especially fruit and vegetables – will be processed; it would also mean that many thousands of jobs will be created. Hence, excise duty has been reduced to zero in the case of many processed and packaged food items or kept at a low rate of 8 per cent. Last week, we slashed the customs duties on edible oils in order to cushion the impact of very high FOB prices of palmolein, sunflower oil and other edible oils.
The battle against inflation is a continuous battle. The struggle to maintain a balance between growth and inflation is also a continuous struggle. As growth rates have moved upward, higher demand has put pressure on prices. Yet, we were able to contain wholesale price inflation at an average level of 4.1 per cent between 2001-02 and 2003-04 and, even as the growth rate of the economy accelerated in the last five years, we have been able to contain wholesale price inflation at 5.4 per cent between 2003-04 and 2006-07.
There is also another dimension to the problem of unemployment. This is unemployment among the very poor whose livelihood depends upon earning a daily wage through low skilled manual labour. The problem is acute when there is no seasonal demand for agricultural labour or when there is deficiency in rainfall. These workers have little or no skills that can help them find work outside agriculture. Hence, in order to provide a safety net for these workers and to assure each family at least Rs.8,000 (equivalent to US$200) per year, we have introduced the National Rural Employment Guarantee Scheme. It is a wage employment programme that guarantees work for 100 days in a year at a wage of Rs.80 per day. In 2007-08, 27 million families have been benefited and 965 million person-days of work have been generated. It has also arrested distress migration. More than anything else, the wage employment programme has brought a degree of security to the most vulnerable sections of the population, namely, the agricultural labourers.
Looking back, from the point of view of prices, it was a benign world in 2004 and earlier. Let me share with you some numbers which will give you an idea of the enormous burden that is put on developing economies as a result of a relentless rise in commodity and food prices. Crude oil, Dubai, cost US$34 per barrel in 2004. By April 2007, it was quoting at US$64 per barrel; in February 2008, it was at US$90 a barrel; and, as you are aware, in recent weeks it has on several days crossed US$110 a barrel. Urea is another commodity that is vital for agriculture. India imports significant quantities of urea. The price of urea was US$175 per metric tonne in 2004. By April 2007, it had increased to US$288 per MT and in January 2008 it was quoted at US$370 per MT. The prices of metals and minerals such as copper, iron ore, lead, nickel, tin and zinc have either doubled or tripled or, as in the case of iron ore, quadrupled between 2004 and February 2008.
Turbulence in the financial markets has added to the difficulties of sustaining high growth. As you are aware, it began with the sub-prime mortgage market crisis in the US. Some banks in Germany and the United Kingdom were also affected by the crisis and they were bailed out. There have been more bailouts in the U.S., the most recent being the case of Bear Stearns. There is a growing feeling among international experts that the US economy faces serious recessionary pressures. Indian banks, save one, did not have any exposure to the sub-prime mortgage market and hence did not suffer any first order consequences. However, as the crisis moved from one market to another, and when it entered the credit market, the consequences of the crisis are being felt in India too.
There are clear signs of a slowdown in the world economy. There are also signs of rising inflation in many countries of the world. Among the fast-growing economies, China’s inflation is estimated at 8.7 per cent; Russia’s at 12 per cent; and Vietnam’s at 15.7 per cent. When stories of a growth slowdown do the rounds, investors prefer to wait and watch. This has obvious negative effects on future growth. Global slowdown, rising inflation and subdued interest in investment make for a combination that can have only negative consequences for developing countries. Anticipating these consequences, we have taken steps to stimulate domestic demand in the Indian economy. We believe that the measures announced in the recent budget – including significant reductions in the personal income tax, expanding and deepening the corporate debt market, and large outlays of public expenditure on education, health, roads, irrigation etc – should encourage both domestic and foreign investors to continue to have faith in the India growth story. Gross capital formation (investment) has increased from 22.8 per cent of GDP in 2001-02 to 35.9 per cent of GDP in 2006-07. Broken down into sectors where investment has taken place, it is seen that investment in manufacturing grew at a phenomenal rate of 33.6 per cent per annum during the period 2002 to 2007. This confirms the boom witnessed in the manufacturing sector. It is our intention to keep the environment for investment helpful and friendly to investors so that the investment-led India growth story continues to unfold and grow over the next ten years and more.
As far as India is concerned, growth is not an end in itself. Growth is the means to achieve the objectives that we desire. Among these are free and compulsory education for children; improvement of nutrition, standard of living and public health; adequate infrastructure including roads and connectivity; and full employment and a living wage for all workers. High growth has enabled us to increase the tax to GDP ratio from 9.2 per cent in 2003-04 to 12.5 per cent in 2007-08. We have budgeted for tax revenues that will increase the ratio to 13.0 per cent in 2008-09. An increase of one-half per cent may appear small, but in real terms this will give us additional revenues of nearly US$25 billion. It is high growth in the last four years that has given us the capacity to provide large sums of money for health, education, drinking water, sanitation, roads and rural development. Therefore, it is imperative that we maintain high growth, raise more resources and acquire the capacity to spend more money on the provision of goods and services that will mitigate the hardship of millions of poor people and bring some cheer in their lives.
Under an umbrella programme called “Bharat Nirman” or “Building India”, we are implementing a four year business plan for building infrastructure in rural India. The plan comprises bringing an additional ten million hectares of land under assured irrigation; connecting all villages with a road; providing drinking water to all habitations; reaching electricity to all villages; giving telephone connectivity to all villages; and constructing six million additional houses for the poor. We will, by the end of 2008-09, substantially achieve the physical targets that have been set under Bharat Nirman. However, the programme would have to be continued beyond 2008-09 so that more houses are constructed for the poor and more villages and homes are provided with drinking water, electricity and telephone connectivity.
There is also the larger and more ambitious goal of improving infrastructure. Huge investments are required to be made in roads, railways, airports, seaports, power, telecommunications, mining, and oil and gas exploration. It is estimated that over US$500 billion will be required over a period of five years. The bulk of this investment ought to – and will – come from domestic sources, including Government. We cannot garner these resources unless there is high growth and unless Government and the private sector are able to realise and retain large sums of money that can be ploughed back as investment. In short, India has no option but to aim to grow at a high rate over the next 10-20 years.
I think I have made out a convincing case why high growth is an imperative. You will now, I am sure, better appreciate why we are deeply concerned about global developments that will affect our capacity to sustain high growth. I take pride in the fact that India has proved to be a model player on the global financial stage. India’s trade intensity – that is the value of merchandise imports and exports – is about 34 per cent of GDP. The exchange rate of the Rupee is determined by the market. India has a modest current account deficit. India’s regulators, especially in the financial markets, have proved to be conservative and wise. India, therefore, has made little or no contribution to the current turbulence in the financial markets. We are therefore doubly unhappy that we should be, along with other developing countries, the helpless victims of global uncertainty.
Who is responsible for the global uncertainty? The sub-prime mortgage market crisis that seems to have triggered the current turbulence is solely due to poor regulations and lax supervision. A senior policy maker told me that it was because “innovation was ahead of regulation!” That is an ingenious spin on regulatory failure. Once the crisis exploded in the face of regulators and governments, there was little choice but to rush to the aid of failing banks and financial institutions. If this had happened in developing countries, we would have been lectured on the virtues of bankruptcy. Since this is happening in developed countries, no one pauses to ask whether all the old arguments are not being made to stand on their head.
The rise in the price of crude oil is another example of greed overtaking the common good of the world. What is the justification to price crude oil at US$110 a barrel? Surely, it is nobody’s case that the cost of producing a barrel of crude oil is close to US$110. Equally, it can be nobody’s case that the risks of exploring and producing oil have risen so high that the price of crude oil should spiral from US$34 to US$110 in a matter of four years. The same could be said of food prices. While there is indeed some supply-demand mismatch, there is no case for raising the prices so high that many poor people cannot afford to buy food anymore. I wonder what has happened to the brave declaration of the Millennium Development Goals. I wonder what has happened to the inspiring slogan “Make Poverty History.” If we are serious about ending poverty, the place to start is to make food and fuel available at reasonable prices – prices at which people can consume adequate quantities of food and at which fuel becomes, not a constraint, but a driver of growth.
I have shared with you both the achievements and concerns of India. I am certain that a similar story can be told about many developing countries. The world must heed the voice of developing countries. In the development of these countries lies the key to putting an end to poverty and making the world a better and safer place for all of humanity.”