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Mr. Bertrand Collomb, Mr. Jamshyd Godrej, Ms Colette Mathur, ladies and gentlemen; a very good evening to you all!
I have always been fascinated by Europe. While the US represents the modern world that embodies the marvels of human achievement and Asia is gradually transforming itself into a global player, Europe has always represented the perfect blend of the old and the new.
What better testimony can I offer than this remarkable city of Paris! This unique combination of history and creativity can be seen everywhere in this city. On the one hand you have fascinating monuments like the Arc de Triomphe and the Notre Dame, while on the other hand you have buildings with contemporary architecture. And the two seem to merge harmoniously together making Paris the city that values tradition but is in step with changing times.
Similarly, democracy in India is a myriad of countless opinions, values and cultures coming together. It is said that during the elections, the states in the US can be divided into red and blue states, representing their alignment to their political thinking. Well, in India that is not possible. Every state in India is in fact a rainbow, where the political views are so different that having a single party that is truly reflective of the national thinking is close to impossible. That is why political parties in India had put forth stability as the key issue in the recent elections. The 600 million Indian electorate has now realised that regional differences have to be put aside if the reform process is to continue. A hung parliament would have led to indecisiveness since the focus of the elected government would have been to please all the elected members so as to not break the winning coalition. In fact, in such a situation, it would have been impossible to pass a legislation of any significance - a perfect recipe for inaction. Worse, a hung parliament might have led to a re-election within a short period of time - an additional burden that India cannot afford at this juncture. The winning party, the Congress led United Progressive Alliance (UPA) coming into power with a majority is a very positive sign. The election outcome gives the Prime Minister, Dr Manmohan Singh, (who is also a co-president emeritus of the EuroIndia Centre), a renewed and strengthened mandate to run the country. A number of Indians believed that whichever party came into power it was important that the win was decisive as that was the only way to take the country forward.
The history of Indian democracy is an achievement because very few thought that it was possible. Some had opined that giving India independence would be a mistake. Yet others had predicted that if the British left, "India will fall back quite rapidly through the centuries into the barbarism and privations of the middle ages." After India gained its independence in 1947, elections in India were described as the 'biggest gamble in history'. Obituaries have been written for Indian democracy. It has been said, time and again, that a poor, diverse and divided country cannot sustain the practice of a reasonably free and fair election. Thankfully, those dire predictions have not come true.
Behind every successful nationalist movement in the Western world has been a certain unifying factor - glue holding the members of the nation together. This combined with a shared language, shared religious faith, a shared territory, a common enemy and sometimes all the above, made it easy for national movements to gain momentum in the West. By contrast, India does not have the privilege of a single language or religious faith. Its constitution does not discriminate between people on the basis of faith; nor crucially, did the nationalist movement that lay behind it. India's secularism is one of the reasons for the country's success as a democracy.
For a great period of time, outsiders have always looked upon India as a quaint and poor country that may have already seen its best days and was slowly withering away. All this changed in 1991 when India finally unlocked its doors to economic reforms and allowed itself to be a part of the global team. Post 1991, the Indian growth story has been noteworthy. For the past five years India's GDP has posted an average growth rate of 8.9%. Even today, despite the global slowdown, India's GDP stands at an above average 6.7% for FY09 and is still the second fastest growing economy in the world after China.
Foreign Institutional investors (FIIs) have also shown confidence towards India. A large part of the downturn in the equity markets was due to offloading of Indian stocks by FIIs to meet their redemption pressures. FIIs were net sellers throughout 2008, pulling out € 9 billion, which was in sharp contrast to CY 2007, wherein FIIs were net buyers to the tune of € 13 billion. Now FIIs have once again turned into net buyers. This trend began changing in March 2009, but Indian markets received a significant boost during the election period. The positive FII trend has continued so far and year to date, FII net inflows stand at over € 3 billion. The following Monday after the elections results were declared, the markets were forced to close after hitting the upper circuit, reflecting the initial euphoria. This optimism is expected to continue in the run up to the Budget in July 2009. Interestingly, Foreign Direct Investments (FDI), which is a better measure for long-term investments have continued to repose their faith in India with FDI inflows during FY09 amounting to over € 21 billion compared to € 19 billion in the previous year.
The clear mandate given by the citizens entails a great responsibility and obligation for the new government towards the country. To get the house in order would be too harsh, but the new government has to continue with the reform process and implement polices that it had promised and there would be little room for excuses. Policy slips can push back the economy quite far. The new government is focused on the task in hand and has appointed cabinet ministers that are able and competent. This indicates a new constructive and professional approach, driven primarily by the Prime Minister, especially in the fields of commerce and industry, finance, education, environment and infrastructure.
Even the President of India, Mrs Pratibha Patil in her address to the Parliament has reiterated that the government's priority must be to focus on economic reforms with inclusive growth. This augers well for corporate India. Although we have witnessed a slowdown in some key sectors such as exports, small and medium scale enterprises, manufacturing and IT to some extent, I believe that the turnaround for corporate India and the economy has already started. We will see its positive effects before the end of this year. Nevertheless, it is imperative that the government continues to foster an investment friendly climate. Therefore, polices that support investment must be devised and implemented.
One of the key challenges for the administration is to reduce the fiscal deficit that has increased to 6.2% of the GDP for FY09 as compared to an earlier estimate of 2.5%. It is true that due to the global slowdown every country is running historically high deficits - the US is at 10% of GDP. No doubt these are exceptional times where there is a need to run deficits and is not an overriding concern as of now. In the medium term, however, there is a need gradually reduce the fiscal deficit. There is a need for fiscal prudence and the government must avoid spending on subsidies that do not reach the intended beneficiaries. Too large a government borrowing programme also creates problems, as it can crowd out funds available for the private sector.
One way to boost revenues of the government is to revive disinvestment in well-performing public sector undertakings. Besides disinvestment will create a favourable impact on the equity market. Additionally, the infusion of shareholder's money will introduce a higher degree of accountability. There are a number of profit making enterprises in which the government has more than 85% holdings. It is estimated that disinvestment, if properly implemented, can help the government generate an additional 2% of GDP. The Budget will have to focus on raising additional resources, as the tax collections have been less buoyant than targeted. Furthermore, there are a lot of expectations from the Budget that reforms will be initiated on several fronts to give a clear and positive signal to the market.
One of the core issues for the long-term growth of the Indian economy is infrastructure. This is an issue that has caused much angst and frustration within India. The country's infrastructure requirement is estimated at over € 380 billion. This huge funding requirement can only be met through public private partnerships (PPPs). In fact, India's 11th Five Year Plan (2007-2012) had envisaged a strong public-private component and therefore the new government must ensure that PPPs are strengthened by creating a framework for centre-state coordination, financial closure and viability gap funding. The central focus must be on an implementation strategy. For instance, most of the policies are in place but there is a lack of a distinct implementation methodology.
Most of the other problems of infrastructure in India are due to delays in land acquisition. Official government estimates show that 70% of 190 delayed infrastructure projects have been stalled on account of problems over land acquisition, especially the compensation to be paid to landowners. One is hopeful that the new government will be able to reintroduce the Land Acquisition and Rehabilitation and Resettlement Bills in Parliament. The government needs to ensure that the projects are fast-tracked. India also needs a to deepen its corporate bond market, which will help in raising long-term funds for infrastructure.
One is also optimistic to see the revival of other pending bills in Parliament pertaining to insurance and pension reforms. If these bills are passed, FDI in insurance companies can increase to 49% and will provide the much-needed capital as well as ensure that more people are able to insure themselves. The pension bill, pending in parliament for over 5 years will provide statutory backing to the pension regulator.
India needs massive reforms in education and skill development. The demand for education is very high but this system is mired with bottlenecks throughout - right from primary education to higher education. Fortunately, solutions are being sought to this problem too. The new government is looking to increase its expenditure on education from the current 3% of the GDP to at least 6% of the GDP. But more needs to be done. One way forward is to allow reforms in education by relaxing FDI norms so that foreign universities can set up shop in India giving thousands of students' access to better-quality education. In the long run, if India wants to sustain its growth, focus on education must be a priority.
One distressing aspect of India's GDP numbers for FY09 was the sharp drop in agriculture growth. Agriculture growth dropped from 4.9% of GDP in FY08 to 1.6% in FY09. Agriculture contributes just 18% to our GDP but directly employs 60 out of every 100 people in India. Furthermore, many of India's 147.9 million rural households still depend on agriculture directly or indirectly for their livelihoods. One must bear in mind that rural India was not affected by the global financial crisis and was able to sustain some degree of momentum. Indian companies, in fact are increasingly tapping the rural markets. As the Indian economy is taking some time to recover, the rural and semi-urban market have remained key focus areas for sectors such as the automotive, FMCG and telecom. The government needs to focus on polices that strengthen programmes such as the National Rural Employment Guarantee Scheme and also on rural infrastructure.
India, unlike China, is a domestic driven economy and does not rely excessively on exports. This is one of the main reasons why the Indian economy was able to sustain itself despite a significant fall in exports. Exports have fallen for the eighth consecutive month up to May 2009, showing an annual dip of 30% due to economic recession and a falling demand in advanced economies. India, however, has sufficient domestic demand for the economy to grow.
India and Europe have always followed a close bilateral relationship. In 2007, India accounted for 2.4% of European Union (EU) exports and 1.8% of EU imports. The EU was also India's largest trading partner in 2007. This trade relationship will only continue to prosper in the future as it is estimated that the trade between India and the EU is set to exceed € 71 billion by 2010 and € 161 billion by 2015. Last year too saw an unprecedented Indian investment in the EU. Indian FDI in the EU soared from nil in 2004 to € 2.4 billion in 2008. It is of course important that trade continues to flow and there should be a refrain from protectionist policies. The ongoing negotiations between India and the EU regarding the Free Trade Agreement (FTA) that includes trade of goods and services, cross-border investments, intellectual property rights, competition policy and regulatory transparency among others augers well for both parties and will improve the EU-India investment relations. So clearly, there is ample scope to expand the role of the EuroIndia Centre as a facilitator and thereby further strengthen relationships.
One such sector that has benefited from the close ties between India and the EU is the emergence of trade in the services sector. Since the 1990s, the rapidly expanding services sector has been contributing more to economic growth than any other sector. The sector contributes nearly 71% of GDP for EU and nearly 64% of GDP for India. Approximately 57% of EU jobs are in the services sector alone. In India, services provide employment to 29% of the total workforce.
This rapid growth of the services sector in India is not limited just to the domestic markets. India has emerged as a major services exporter, particularly in the area of IT and IT-enabled services. ITeS/BPO exports grew by over 16% with revenues of € 36 billion in FY09. If India maintains its current share of the global offshore IT-ITeS market, the IT-ITeS exports from India will exceed € 46 billion by FY10 and € 66 billion by FY12. Although for IT/BPO exports, the US and UK continue to be the largest markets, India is yet to make any significant presence in the vast European market. The positive news is that India's share to Europe has been increasing steadily with a CAGR of more than 51% over the past five years.
I would like to conclude with the hope that the relationship between India and the EU continues to flourish. The financial crisis has shown on how dependent we are with each other in which no country can survive as an island. Now, more so than ever, where there is a paradigm shift in the global financial and economic landscape that is fraught with uncertainty, can we reaffirm our strong and growing relationship.
Finally, in line with the EuroIndia Centre's strategy, with a bit of effort and commitment from all of us here, I am confident, the winds will blow our way and help us realise our "FLY A KITE" mission (which stands for Foster Links Yielding Assets in Knowledge, Investments, Tourism and Excellence.) And where better can we find to "fly a kite" than on this beautiful, Parisian night?
Thank you.
*EuroIndia's 3-year strategy: "FLY A KITE " - Foster Links Yielding Assets in Knowledge, Investments, Tourism and Excellence.
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