We met today with India’s Finance Minister, P. Chidambaram. In a frank and pragmatic address he made the following points and observations relating to the sustainability of India’s growth:

How do you see India’s FDI evolving ?

India had FDI of USD10billion in 2006, this is expected to rise to USD12.5billion for 2007. We believe this will rise to about USD25 billion in the next five-ten years. Another income source for the country that differentiates us from say, China, is that of the Indian diaspora, which is the largest in the world. Indians overseas remit annually about USD24 billion back to India. But regular FDI is expected to grow at about 9% annually.
What measures are in place to sustain this ?

We are well down the road of reforming as a nation. For example, our Government is now made up of academics and professionals, our Prime Minister is a world renowned economist and was educated at Cambridge (1st class honours degree) and Oxford (D. Phil. degree). As finance Minister I am a qualified lawyer and a Harvard graduate. Our Planning Commission is headed up by a Professor of economics, while our Minister of Science & Technology is also a lawyer and has been President of the Supreme Bar. Our Minister for Commerce has a degree in commerce. So government now has the right academic talent, we are more academics than politicians, and this helps in getting the intellect required to understand what needs to be done, where the problems are, and how to fix them. We have liberalised most industries in India, and most are available for foreigners to particpate in 100%. Other sectors, such as banking and insurance, will be liberalised by 2009, and our effective tax rate is 20%. So we have a lot to offer. Sustained growth is out key. We also enjoy high savings rates in excess of 30% of GDP and as long as this is maintained our fundamental growth will be sustainable. India is already the worlds 3rd largest economy having overtaken Japan recently.
Which areas of India are seeing the highest growth rates ?

Delhi and the Punjab lead, followed by Mumbai and the Western coast, and South East Indian around Chennai. The coastal cities are doing well. Our challenge is to get that growth into the rural areas. 65% of Indians live in rural villages and we need to empower them. We need to balance our increased economy and infrastructure development with the moral issue of providing basic services, such as fresh drinking water, sanitation, education, and medical care to the rural areas. If we can accomplish this we will overtake China by 2030 as the demographics of India’s young population, our huge labour force affect global development, and as China’s one child policy starts to bite into their aging population.

What about the disparity between the service industry and the manufacturing industry in India’s economy ?

Much is made of this, and we have had problems with the development and implementation of large manufacturing industries. But this is changing. Manufacturing will have grown by 11% in this quarter and a percentage of GDP. So we don’t see this as an issue actually. At present services account for 55% of GDP, Manufacturing 28% and Agriculture 17%. Agriculture is where the problems lie, not manufacturing, and we are pushing through reforms to assist this sector also.

Is Micro-credit a big tool for the rural population ?

Very much so and it is an untold tale of success actually. India has 2.5 million self-help schemes, largely run by women, and supported by NGO’s and banks. They have a recovery rate of between 97-99%, which is a fantastic achievement. This is also helping lift the rural population out of poverty and later, into productivity. It will take awhile but the rural population will be the continuing engine of India’s growth in 20 years time.

How important are developing countries in global growth ?

Actually 2006 was a watershed year. For the first time, 50% of gobal growth came from the developing nations. The US is still immensely powerful, but Asia is now the primary growth driver, lead by China and with India behind. This will not change. To succeed globally, international businesses must have China and India in their plans.
How does India compare with China in it’s economy ?

Apart from some similarites in demographics, there is a huge difference in the type of economies we have. India is actually far closer to the US model than the Chinese. China’s economy is dependent upon exports, whereas India is a consumer led economy. We have a massive middle class that can and does buy. We use exports to fund our imports, and have a healthy domestic market for product that is far stronger than China’s.

Minister, thank you for your time.

Note: IBM have just announced plans to invest USD6 billion in India by 2009, effectively tripling their existing investment of USD2 billion. Growth for IBM in India during 2006 was 38%, with a workforce of some 50,000 employees in India. 90% of that workforce is engaged in providing services external from India.

This entry was posted on Wednesday, March 14th, 2007 at 4:11 pm and is filed under India, Government, Regulatory Environment, China-India Events. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.