Manmohan Singh pledges to create an environment conducive to private enterprise so as to secure prosperity for all Indians

Angus Madison, a Cambridge historian, has estimated that in 1700 India and China each had a share of world income of about 23%, about the same as Europe’s. By 1950, Europe’s had increased to around 30%, China’s had fallen to around 5%, and India’s had collapsed to just 3.8%. This secular decline is now beginning to be reversed. Rapid growth – witnessed first in China 25 years ago and more recently in India – suggests that both countries are on the way to reclaiming their rightful places in the world economy.

Accelerating growth

India’s economy grew relatively slowly between 1950 and 1980, at just 3.5% a year on average – an improvement over the previous half century but well below expectations and targets. Performance improved considerably between 1980 and 2000, when growth increased to around 5.8% a year. It has accelerated further to an average of 7% a year over the past three years. Most observers agree that India can now grow by 8% a year and perhaps even more on a sustainable basis.

With population growth slowing to around 1.5%, we can expect per capita income growth of more than 6.5%. Rapid growth combined with redistribution will rid our country of chronic poverty and also provide productive employment for our growing labour force. This will not make us a rich country in 10 or even 15 years. It will, however, put us well on the way to becoming a middle-income industrial economy in the next 15 years. And even though our per capita income may be only at middle-income levels, the absolute size of the Indian economy will make us a much more significant world player. This is especially so because our strategy for achieving rapid growth involves making our economy more open, with a rising share of trade to gross domestic product (GDP or national income).

We recognize that our objective of growing sustainably at 8% or more every year will not occur without a great effort on our part. We will need to increase investment, upgrade technology, modernize the economy and develop high-quality infrastructure. For growth to be inclusive, we must pay special attention to the rural areas. We must also ensure adequate access to education and health services for the people.

Private enterprise

The reforms implemented over the past 15 years have laid the foundation for rapid growth. Industrial policy, which in the past imposed too many restrictions on the private sector, has been completely restructured. India has a long tradition of private enterprise and the market-friendly environment created by recent reforms has stimulated vibrant growth. The economy is now much more open to foreign trade. Import licensing has become a thing of the past and our import tariffs, too, have been slashed. The government proposes to continue reducing them until we reach the levels prevailing in East Asia.

The economy is also open to foreign direct investment (FDI), which is now freely allowed up to 100% of equity in most sectors. We are particularly keen to attract FDI to upgrade technology and modernize our industry and infrastructure. The response thus far is satisfying. India was recently ranked as the second most important FDI destination after China. However FDI levels in China are much higher and we hope to narrow the gap in the years ahead.

India’s high-quality technology and management, familiarity with English, long-established commercial and legal institutions, well-run and transparently-regulated financial and banking sector and our established legal system, all augur well for our competitiveness in today’s globalized world.

Financial markets

One of our strengths has been a commitment to prudent fiscal and balance of payments policies. We recognize that there is some correction required in government finances. The Fiscal Responsibility and Budget Management Act commits the government to fiscal discipline.

We have a well-run banking sector that conforms to global prudential norms. Our rapidly-expanding and modern financial sector is a credible backbone of a growing economy. We also boast a stockmarket that is efficient, modern and well-regulated. The efficiency and transparency of our stockmarket is key to its successful operation and growth. We need to develop strong and deep debt markets and to strengthen institutional support for long-term finance. Foreign investors have appreciated the strength and vibrancy of our financial and banking sector as well as the transparency of our legal system.

I believe that India’s domestic savings rate will rise steeply over the coming years because, unlike many other countries, the proportion of those of working age in the population will increase sharply. We need to put in place financial institutions that will bring together savers and investors in a more efficient manner, with innovative financial products. This is where I see expansion for the financial services industry.

We have opened the industry to foreign investment, but I recognize that more needs to be done.

Global competitors

The first fruits of economic reforms are already evident. Software development and information technology-enabled services are new sectors where we are highly competitive and have achieved international recognition. India has also emerged as a competitive supplier in several sub-sectors of traditional manufacturing, such as pharmaceuticals, textiles, auto components, and biotechnology. These successes have promoted a broad-based change in mindset, especially in the younger generation of entrepreneurs and professionals. Young Indians are ready to compete globally, to test their skills and sell their wares on the world market. They look to government primarily to create an enabling environment. We are committed to more reforms, especially aimed at bolstering the competitiveness of manufacturing.

The most important area where the government can help India’s entrepreneurs is by addressing infrastructure deficiencies. There is no doubt that India has large gaps in physical infrastructure compared with our competitors in East Asia and even Southeast Asia. We need to bridge the gap in electricity generation, roads, railways, telecommunications, ports, airports, and urban mass transport if our potential is to be realized.

The investment required to close the infrastructure gap is huge – current estimates suggest that we will have to spend $250 billion on infrastructure over the next five years, far more than the public purse can afford. We propose to supplement public resources by using public-private partnerships (PPPs) as much as possible, and we are evolving strategies that will enable us to do so. The extent of private participation that is feasible will obviously vary from sector to sector. We are working on a policy framework that will allow the fullest possible exploitation of PPPs. Critical elements will be a regulatory structure that provides a balance between protecting consumers’ interests and assuring investors that they can earn fair returns provided they deliver, and that ensures a transparent process.

Poor farmers

Agriculture will need special attention in the year ahead. Economic growth is normally associated with a reduction in the share of agriculture in GDP. This has happened in India, where it is now a little over 20%. However, 60% of our population still depends on farming as their principal source of income. Agriculture grew at an average annual rate of around 3.6% between 1980 and 1996 but growth then slowed to around 2%. We intend to double this, requiring a new thrust towards agricultural policy. This will include special efforts to support the diversification of agriculture beyond the production of food grains towards a diversified sector that will be a basis for agri-processing. This calls for extensive modernization, greater skills and knowledge and the development of logistics and supply chains to link agricultural and food processing in rural areas to urban and export markets.

Along with these efforts we must invest in rural infrastructure, including irrigation, roads, electrification and telecommunications. We have recently launched Bharat Nirman, an ambitious programme for creating such infrastructure. The challenge that faces India today is to sustain an inclusive growth process, while integrating itself with the world economy. We need a regional and international environment that enables us to attain and sustain high growth rates.

We must move to a new stage of development. We must integrate into the evolving world economy. A dynamic and developed India will be an engine of growth for the region and the world. A prosperous and stable India will contribute to global peace and security and strengthen the cause of democracy.

I assure you that our government is committed to doing all that we must to modernize and to expand India’s infrastructure to make it world-class in the next five to seven years. I stand committed to ensuring that our processes of governance are as transparent as possible, that they are friendly to businesses and enterprise, that they are as respectful as they should be to all those who are active in wealth creation. I invite you to come to experience the new India that we are building and to invest in our future so that we can all live in a better world.

CV Manmohan Singh

Manmohan Singh has been prime minister of India since May 2004.