Sunday, March 13, 2005
Chidambaram op-ed from the WSJ
In the immediate aftermath of the Indian budget, finance minister P.Chidambaram had written an op-ed in the Wall Street Journal selling the India story to American policy makers and investors. It should have been posted on here a lot earlier given that it's been several weeks since the budget. Better late than never, I figured.
The enshrining of democratic principles in a newly independent country might have involved some initial "fixed costs." But democracy is the only legitimate and stable foundation for a society. India, having paid those "fixed costs," now appears to be reaping the dividends. There are two aspects to the "emergence of India." First, there are signs of vigorous growth in manufacturing. High growth rates in exports have been extended beyond the now-familiar services story to skill-intensive sectors like automobiles and drugs. Manufacturing growth accelerated every month after May 2004 to reach double-digit levels in September and October. Merchandise export growth in the first 10 months of 2004-05 was 25.6%. For three quarters running, revenue growth in the corporate sector has been above 20% and net profit growth has been around 30%. Second, there is a pronounced pickup in investment. From 2001-02, the investment rate in India, low by East Asian standards, rose by 3.7 percentage points to 26.3% of GDP in 2003-04. There are signs of an investment boom in the high growth in production and imports of capital goods in late 2004.
The growth in the investment rate is excellent news, though keeping China's 40% investment rate in mind offers perspective. Chidambaram also addresses the fiscal situation and the creation of better incentives for firms, while hinting at the potential returns to investing in physical infrastructure in India.
The two big elements of the macroeconomic balance are the fiscal deficit and the balance of payments. We are committed to eliminating the federal revenue deficit -- the excess of current expenditure over current revenues -- by 2008-09, as mandated by our fiscal responsibility law. It is currently 2.7% of GDP. The federal fiscal deficit -- which is required to be reduced to 3% by 2008-09 -- is currently 4.3% of GDP. A special feature of the current year has been a change in intergovernmental fiscal devolution, between the federal and state governments. The Indian Constitution uses a neutral and expert Finance Commission, every five years, to govern this relationship. The latest Finance Commission report places a large burden upon federal finances, amounting to 260 billion rupees ($6 billion) or 0.75% of GDP in 2005-06. As a consequence, we have been constrained to press the "pause" button on fiscal consolidation for 2005-06 only.
We are steadily isolating barriers to competition and removing them. India once had a peak customs rate of 300%. In the recent budget, the peak rate has come down to 15%. Another element of this is heightened competition through foreign direct investment. India has limits on foreign ownership in a few sectors, and we have steadily made progress on raising these limits. India had earmarked certain items which only small firms are allowed to produce. We have steadily made progress on shortening this list. The budget this week removed 108 items from this list.
The enshrining of democratic principles in a newly independent country might have involved some initial "fixed costs." But democracy is the only legitimate and stable foundation for a society. India, having paid those "fixed costs," now appears to be reaping the dividends. There are two aspects to the "emergence of India." First, there are signs of vigorous growth in manufacturing. High growth rates in exports have been extended beyond the now-familiar services story to skill-intensive sectors like automobiles and drugs. Manufacturing growth accelerated every month after May 2004 to reach double-digit levels in September and October. Merchandise export growth in the first 10 months of 2004-05 was 25.6%. For three quarters running, revenue growth in the corporate sector has been above 20% and net profit growth has been around 30%. Second, there is a pronounced pickup in investment. From 2001-02, the investment rate in India, low by East Asian standards, rose by 3.7 percentage points to 26.3% of GDP in 2003-04. There are signs of an investment boom in the high growth in production and imports of capital goods in late 2004.
The growth in the investment rate is excellent news, though keeping China's 40% investment rate in mind offers perspective. Chidambaram also addresses the fiscal situation and the creation of better incentives for firms, while hinting at the potential returns to investing in physical infrastructure in India.
The two big elements of the macroeconomic balance are the fiscal deficit and the balance of payments. We are committed to eliminating the federal revenue deficit -- the excess of current expenditure over current revenues -- by 2008-09, as mandated by our fiscal responsibility law. It is currently 2.7% of GDP. The federal fiscal deficit -- which is required to be reduced to 3% by 2008-09 -- is currently 4.3% of GDP. A special feature of the current year has been a change in intergovernmental fiscal devolution, between the federal and state governments. The Indian Constitution uses a neutral and expert Finance Commission, every five years, to govern this relationship. The latest Finance Commission report places a large burden upon federal finances, amounting to 260 billion rupees ($6 billion) or 0.75% of GDP in 2005-06. As a consequence, we have been constrained to press the "pause" button on fiscal consolidation for 2005-06 only.
We are steadily isolating barriers to competition and removing them. India once had a peak customs rate of 300%. In the recent budget, the peak rate has come down to 15%. Another element of this is heightened competition through foreign direct investment. India has limits on foreign ownership in a few sectors, and we have steadily made progress on raising these limits. India had earmarked certain items which only small firms are allowed to produce. We have steadily made progress on shortening this list. The budget this week removed 108 items from this list.
