Private sector banks will be forced to cut

Finance Minister P Chidambaram today said private sector banks will be forced to cut lending rates sooner than later due to competition from public sector counterparts.

"Public sector banks have reduced their prime lending rates by 75 basis points and extended it to all kinds of loans, like home loans and personal loans. Private sector banks at a meeting with Finance Secretary had said they will also follow the suit. But they have not," Chidambaram told a press conference organised by Delhi Pradesh Congress Committee.

It may be recalled that in response to the measures taken by the Reserve Bank to ease liquidity situation, PSU banks slashed their prime lending rates by 75 basis points, but the private sector banks are yet to make a move in this regard.

The Finance Minister added, "They have their own reasons. I am not commenting on those reasons, but I have no doubt in my mind that competition from public sector banks will force private sector banks to reduce their lending rates sooner than later...it will happen sooner than later."

Taking a dig at BJP ahead of the Assembly elections in Delhi on November 29, he criticised their proposal during the NDA rule to bring down government equity in public sector banks from 51 per cent to 33 per cent. He wondered as to what would have happened had that proposal been implemented.

While maintaining that "our banks are 100 per cent safe", the Finance Minister said, "Even though flow of foreign capital into India has slowed down, it will eventually reverse and rupee will find its true level as India remains the most attractive investment destination."

Shut the ... Govt to Assocham

Taking strong exception to industry chamber Assocham's forecast that a quarter of people in certain key sectors will lose jobs in the next ten days, government on Friday said the economy is poised for the other way.

"The Deputy Chairman of the Planning Commission and my colleague Jairam Ramesh (Minister of State for Commerce) have taken serious exceptions to an Assocham report... The pace of job creation may slow down but that doesn't mean that jobs are being destroyed," Finance Minister P Chidambaram told reporters here.

The Minister further said another industry chamber FICCI too had contradicted the Assocham study, which had said that in the next ten days or so about 25 to 30 percent employees are likely to lose jobs in seven sectors including aviation, information technology, steel, financial services, real estate, cement and construction.

Chidambaram further said that 7 percent growth rate, the lowest projection made by experts, would "create more job than was done in entire NDA regime, when the growth was only 5.8 percent. Why this question was not raised when the economy was growing at 5.3 percent?"

Replying to questions on the recent report on slowing of the US economy, the Minister said, "when the world output slows down, the growth in developed countries slows down... it will have an indirect impact on India."

However, he added, "the India economy is domestic consumption and investment driven economy. Exports will play a significant role but not as much as they do in China."

Pointing out that at the moment it was difficult to estimate the impact of global economic slowdown on exports, Chidambaram said in April-August 2008-09 it grew by 35.1 percent though September showed a slight dip.

"We will see as we go along... but we are not happy that any country's economy should contract. We want all countries' economies to grow," the Minister said adding India was not happy with slowing down in the US economy. "But it is there... that's a reality," he said.

With regard to the inflation rate, which has come down to below 11 percent after four months, the Minister said, "let us hope the measures that we have taken will have an impact."

The annual rate of inflation has come down to 10.68 percent for the week ending October 18.

Replying questions on India's stand on G-20 meeting on global economy, Chidambaram said, "it is being formulated and hopefully we will be able to give some details in the next few days."

Finance Minister earlier in the week held a meeting of experts, including RBI Governor D Subbarao, SEBI Chairman C B Bhave and former RBI Governors C Rangarajan and Bimal Jalan among others, to formulate the views on global financial crisis that India would take at the G-20 meeting called by US President George Bush in Washington on November 15.

Growth will fall, but no job cuts - PC

The Indian economy would grow at 7 percent despite the global economic meltdown but this would not mean a reduction in existing job levels, Finance P Chidambaram said Friday.

"The RBI (Reserve Bank of India) estimates that growth (in fiscal 2008-09) would be at 7 percent. I think it would be at 7.5 percent but definitely would not be lower than 7 percent," Chidambaram told reporters here.

"Growth at 9 percent (as was originally anticipated) would signal rapid creation of jobs. Growth at a lower rate does not imply a destructive employment situation," the finance minister maintained.

"It is for this reason that I disagree with a (industry lobby) Assocham (Associated Chambers of Commerce and Industry) study (saying that Indian corporates would cut jobs by 25 percent due to the global financial crisis)," Chidambaram said.

"The pace of creating jobs might slow down, but even at 7 percent, jobs will be created," he added.

Responding to a question on the impact of the crisis on India's exports, Chidambaram said he couldn't "elaborate" on this.

Asked what India would bring to the table at the G-20 meeting US President George Bush has called in Washington next month to deal with the financial crisis, the finance minister replied: "We are formulating our response."

Insurance bill coming soon

Free from the clutches of the Left parties, Finance Minister P Chidambaram on Wednesday said the government would try to speed up reforms that could see passage of bills, including the insurance legislation.

"We will try to take the reform process forward... The insurance bill is one of many bills which is pending," he told reporters here after inaugurating the Sriram General Insurance scheme in Rajasthan.

He said the government, which won the trust vote in Parliament yesterday, would "reach out to other parties... try to build on the majority that we have demonstrated... and pass these bills."

The government scored a comfortable victory in the confidence vote by garnering the support of 275 lawmakers against the 271 needed to stay in power.

"I am confident that we can secure a comfortable majority for many of these bills if we talk to the other parties and that is what I intend to do," Chidambaram said, while adding that the insurance bill as a very important bill and it was necessary to find ways by which these bills can be taken forward.

The insurance bill would enable the government to raise FDI in insurance sector from 26 per cent to 49 per cent, he said.

The Left parties, which withdrew support to the UPA early this month over the civil nuclear deal with the US, were fiercely opposed to raising FDI cap in insurance sector as also allowing foreign investment in multi-brand retail.

"Yesterday, Prime Minister Manmohan Singh wanted to make a point (on reforms) in his reply after the debate on trust vote, but he had to table it due to the uproar in Lok Sabha," the Finance Minister said.

Others bills that are due for passage relate to Ministry of Finance, Ministry of Labour, Women and Child Development, and Social Sector, he added.

Alluding to the hurdles to reforms put up by the Left, Chidambaram told Parliament yesterday that "there are some people in the country who do not want India to catch up with China...They do not want India to be ahead of China."

Someone just covered their shorts ;-)

Finance Minister P Chidambaram has sought to suggest that the Employees' Provident Fund Organisation (EPFO) may invest funds in high yielding instruments in order to provide better returns to its over four crore subscribers.

When asked whether there is a case for increasing the EPF rate in view of the rising inflation, he said that the government cannot increase the interest rates on Special Deposit Schemes (SDS), where the bulk of the EPF funds are parked.

"SDS gets eight percent returns. You cannot touch that eight per cent, because that applies to very many instruments also. So, it cannot be looked at in isolation," he said.

The EPFO, however, he added, was welcome to take money and invest it elsewhere, if they can get better returns.

"We have told them (EPFO) two-three years ago that you can withdraw SDS money and invest it elsewhere," he said.

Finance Minister's statement comes after some members of the Central Board of Trustees of EPFO has raised the demand for increasing interest rate on provident fund from 8.5 percent to 12 percent in view of the rising inflation.

EPFO board had earlier rejected the proposal to invest five per cent of its funds in the stock market following opposition from trade unions.

The board at the recent meeting of the trustees on July 5 deferred the decision on revising the interest rates.

With inflation inching towards 12 percent mark, 8.5 percent interest rate fetches negative real returns.

Chidambaram - sorry, I am clueless

The government on Friday conceded that it could do little to tame inflation that has already breached the 8 per cent mark on the back of a persistent rise in global commodity prices.

"There is yet no sign of a decline in the inflation rate. We do not know if we have peaked yet," Finance Minister P Chidambaram said, after latest price data showed the provisional rate of inflation for the week ended May 17 stood at 8.1 per cent, up from 7.8 per cent a week earlier.

The minister’s comments contrast his earlier stance a couple of weeks of ago when he said that the inflation rate could already be tapering off.

Worse, actual estimates that follow with a time lag have been turning out to be much higher, and going by the trend so far, the inflation rate might have already crossed 9 per cent.

The spike in prices not only squeezes people’s real incomes, but for million of middle class Indians it points to increased financial hardship as a rising inflation rate forces interest rates to move up and add to the repayment burden on their housing and other consumer loans.

The inflation numbers overshadowed news that the Indian economy grew faster than the government’s own forecast for the fiscal year ended March 2008. Latest government statistics on national income showed the gross domestic product grew 9 per cent — compared with an earlier forecast of 8.7 per cent — helped by robust growth in agriculture.

The GDP numbers, however, pointed to a sharper slowdown in manufacturing that has been hemmed by hardening interest rates.

Chidambaram described the price situation as worrisome and attributed a part of it to persistent rise in global crude prices, which are hovering over $130 a barrel.

Pressure is mounting on the government to revise retail prices of petrol, diesel and LPG, currently sold at highly subsidized rates — a practice threatening to bankrupt state-owned oil firms. The government is debating how to protect oil firms, while minimising the impact of any price rise on consumers.

The impact of any hike in retail fuel prices will have impact going beyond the inflation rate. "Higher oil prices look set to weaken growth by squeezing profits, widening trade deficit and reducing consumer purchasing power as a result of higher inflation," said Sonal Varma, analyst at Lehman Brothers.

via HT

One class of citizens can remain happy - Farmers

Finance Minister P. Chidambaram on Wednesday asked three state-run banks in West Bengal to expedite the process of cancelling farm loans.

His directions came during a video conference with the officials of the United Bank of India, Allahabad Bank and UCO Bank. He asked them to finalise the list of farmers eligible for loan waiver by June 20.

More than 40 million farmers across the country are expected to benefit from the scheme for which the central government has set aside over Rs.700 billion.

According to a UCO Bank official who attended the video conference, Chidambaram asked the banks to complete the whole process soon so that new loans could be given to those farmers from July 1.

We will control inflation - PC

Liberalisation of imports, banning exports and a cut in excise and customs duties are some of the many steps initiated by the UPA government to control inflation in the country, Finance Minister P Chidambaram said here Sunday.

He said rising inflation, linked to the global price of crude oil, was a cause for concern. "An unprecedented situation is now being witnessed on the price front," he said.

The government is fully resolved to control price rise and suggestions were welcome to inject more measures to keep prices on hold, he said, addressing Congress party workers at the PCC office here on his one-day visit to Puducherry.

He said the economy had grown by nine per cent, which had been "out of bounds" for the erstwhile BJP-led NDA government, and added that several anti-poverty measures initiated by the government had come as a boon to the rural poor.

He said that introduction of the National Rural Employees Guarantee Act was a "sacrosanct step" which could never be disturbed for next two decades or so.

Chidambaram said that the government`s target to disburse Rs 2.80 lakh crore under farm loans this year would be exceeded and the coverage would be around Rs three lakh crore.

He said waiver of farm loans to benefit 71,680 farmers would be done by this month end as announced earlier. As far as Puducherry was concerned, around 30,800 farmers would benefit from the loan waiver scheme.

No, not cutting rates

With inflation again creeping up to worrisome levels, Finance Minister P Chidambaram Saturday virtually ruled out any government intervention to ease interest rates.

Chidambaram, who hoped for cheaper credit at least on housing one week ago, changed his tone Saturday saying the Reserve Bank of India (RBI) would determine rate policies.

Speaking at the India Today Conclave, the minister said: 'We are not insulated from international commodity or crude prices.

'Interest rate policies are determined by the RBI. The main purpose of interest rates is to contain inflation. Please remember India is not entirely insulated from rising commodity prices.'

He said crude oil prices were USD 37 a barrel in 2004 and moved up to USD 67 in April 2007, USD 93 this February and now to USD 110. Similarly, he added, palm oil moved up from USD 471 a tonne to USD 710, USD 1,777 and USD 2,270 during the period.

'So long as there is a threat of inflation, we have to trust the RBI to use interest rates in order to contain inflation and to dampen inflationary expectations,' Chidambaram said.

His comment came in the backdrop of India's wholesale price index-based inflation rate rising to a nine-month high of 5.11 percent for the week ended March 1, above the central bank's 5 percent threshold.

Speaking in Lok Sabha Friday, Chidambaram said: 'Inflation is on the rise. It is a matter that causes worry to any government.'

He admitted that there was a slowdown in the Indian economy, but added that he was optimistic of gross domestic product (GDP) growth reaching 8.8 percent during the current fiscal.

'The idea is to maintain the same batting average. Adam Gilchrist is here,' Chidambaram said, referring to the presence of the former Australian cricketer in the audience. 'The question is how to make it happen.'

'Industry will continue to grow at a clipping pace,' the Finance Minister said.

Chidambaram speaks...

Is Good ... for the markets

Not banning Participatory Notes

Capping money coming through PN

SEBI is doing a good job

Moderate capital inflow

Interest of the investors

No need to be alarmed

Market moved from 18K to 19K in 4 days .. (hmm, you made enough money right ?)

Consultation paper, with or without some modifcations, become a rule on 25th October

PE ratios are lower than in China (what he means, let me cover, you guys can buy again and take it to China levels)

FIIs are buying!! Where ?? Let them buy some of my stock!!

BREAKING - Chidambaram Update on SEBI recommendations

FM will "comment" on SEBI recommendations at 10.30 AM IST

What the heck ? Wants a circuit down and then wants to comment on it ?

IMPORTANT - SEBI recommendations on P-Notes issuance

Objective
This paper sets out the proposed policy measures on Offshore Derivative Instruments (Participatory Notes).

Background
With a view to monitoring the investment by FIIs through Offshore Derivative Instruments (ODIs) such as Participatory Notes (PNs), Equity Linked Notes, Capped Return Notes, Participating Return Notes etc., SEBI had prescribed reporting of issuance / renewal / cancellation / redemption of the ODIs on a monthly basis since October 2001. The figures submitted by the FIIs on a month to month basis showed an increasing trend.

In the latter half of 2003, a Technical Committee of SEBI Regulated Entities was constituted by the HLCCFM to examine the issues pertaining to P-Notes more closely. The Committee, comprising representatives of RBI, IRDA, SEBI and NSE met in October, 2003 and extensively discussed the issues like:

* Whether PNs should be allowed to be issued at all,

* Whether restrictive use of PNs is possible,

* Monitoring of compliance

* Phasing out of PNs that are non-compliant with new restrictions, etc.

The Committee, having examined the concerns raised by the participants, felt that while these issues and concerns would have to be addressed in the interest of the market, the measures taken should be practical, pragmatic, non-disruptive and enforceable without great difficulty. Recognizing that it may be difficult to enforce a complete ban on PNs, the Committee made certain recommendations which included issuance of PNs only to regulated entities subject to KYC requirements. The same was implemented through suitable amendment to FII regulations.

However, the year on year increase in ODIs, the anonymity that the ODI provides to the investors and the copious inflows into the country from foreign investors has been engaging the attention of the Government and the regulators such as the Reserve Bank of India and SEBI. This has been a topic for discussion in many fora such as HLCC and various committees set up by the Government/ regulators.

Current Scenario:
Currently 34 FIIs / Sub-accounts issue ODIs. This number was 14 in March 2004. The notional value of PNs outstanding which was at Rs.31,875 crores (20% of AUC [1]) in March 2004 has grown to Rs.3,53,484 crores (51.6% of AUC) by August 2007. The value of outstanding ODIs with underlying as derivatives currently stands at Rs1,17,071 crores, which is approximately 30% of total PNs outstanding. The notional value of outstanding PNs, excluding derivatives as underlying as a percentage of AUC is 34.5% at the end of August 2007.

Proposed Measures:
Following consultation with the Government, the following measures are proposed to be implemented urgently:

1) FIIs and their sub-accounts shall not issue/renew ODIs with underlying as derivatives with immediate effect. They are required to wind up the current position over 18 months, during which period SEBI will review the position from time to time.

2) Further issuance of ODIs by the sub-accounts of FIIs will be discontinued with immediate effect. They will be required to wind up the current position over 18 months, during which period SEBI will review the position from time to time.

3) The FIIs who are currently issuing ODIs with notional value of PNs outstanding (excluding derivatives) as a percentage of their AUC in India of less than 40% shall be allowed to issue further ODIs only at the incremental rate of 5% of their AUC in India.

4) Those FIIs with notional value of PNs outstanding (excluding derivatives) as a percentage of their AUC in India of more than 40% shall issue PNs only against cancellation / redemption / closing out of the existing PNs of at least equivalent amount.

Long positions will get chopped tomorrow

Chidambaram - things will cool down soon

Finance Minister P Chidambaram on Friday attributed the recent surge in stock markets to speculators and hoped "things will cool down soon" - a prediction reflected in the plummeting Sensex.

"To some extent speculators are taking advantage of the rise in the Sensex... Things will cool down," he said on the sidelines of a summit here.

The 30-share BSE index today fell by 395.03 points to 18,419.04, against the record high level of 18,814.07 reached in yesterday's trading.

Chidambaram, who had cautioned retail investors from entering the market when it crossed 18,000 points, said: "Sensex is an index of 30 stocks (and) as such it is a number. We don't invest our future in Sensex."

"Steep rise in Sensex sometimes surprises me, sometimes worries me. I do not think fundamentals change so rapidly day-to-day. Our assessment tells us Sensex is driven by copious inflow of funds," he said.

The market had lost heavily in August on concerns about the credit crisis in the US. The Sensex, which was trading at 14,000 level in July and gained up to 15,794 on July 24, fell back to 13,989 points on August 21.

It has since appreciated smartly and in fact galloped from 16,000 points to 17,000 in just six sessions last month and covered the next 1,000 point journey in eight trading days.

Chidambaram - Outlook positive

"There are of course some risks. Many of them arebeyond our control and, hence, we are compelled to take precautionary measures",says P. Chidambaram

Following is the text of the address of Finance Minister, Shri P. Chidambaram on India: Economic Growth and Outlook delivered at the Peterson Institute for International Economics in Washington, United States:-

1. “I am grateful for the invitation to deliver a talk at the Peterson Institute for International Economics. I understand that one of the objects of the Institute is to promote informed dialogue on international issues. The world is still divided in many ways – developed versus developing, North versus South, and rich versus poor. It is necessary to bridge this divide, and dialogue can do so. Dialogue can promote better appreciation of the issues; dialogue can also anticipate emerging trends.



2. Let me share with you our recent experience in managing the Indian economy and the outlook for the medium term. The India story is now rather well known, but some aspects bear repetition. In the most recent four year period – 2003-04 to 2006-07 – India’s GDP has grown at an average rate of 8.6% a year. In particular, 2006-07 was a splendid year turning out a growth rate of 9.4%. All the indicators are positive. Gross Domestic Capital Formation (GDFC) – that is investment – in relation to GDP is estimated at a little over 35%. Inflation measured by the wholesale price index (WPI) is 3.3%. Foreign exchange reserves stand at over US$230bn. All sectors of the economy are contributing to the growth rate, although we are not entirely satisfied with the performance of the agriculture sector.



3. It is now three years and four months since the present Government assumed office. The Government has brought greater stability and clarity to the policy environment. In many cases, the policy is backed by law or regulation. In key sectors, Government has ceded authority to independent regulatory bodies.



4. Government has also remained steadfast on the path of fiscal prudence and discipline. Within weeks of assuming office and before presenting the first budget, we notified the Fiscal Responsibility and Budget Management Act (the FRBM Act). Despite pressure on resources, we have complied with the obligations under the Act. The fiscal deficit for the current year has been budgeted at 3.3 per cent and the revenue deficit at 1.5 per cent, and we believe we are on course to achieve the targets set by the FRBM Act.



5. What are the factors that are driving economic growth in India?



6. Firstly, it is domestic consumption. The annual growth in real consumption expenditure over the past four years has been, on average, 6.3%. With easy liquidity conditions spurring demand for personal loans, and adequate capacity in the manufacturing sector, there has been a consumption boom.



7. Secondly, rise of investment. The consumption boom that started at the beginning of this decade has triggered an investment boom. Real investment has grown at a robust rate since 2002-03, averaging 17% a year in the past four years. During this period, the contribution of investment to growth has exceeded the contribution of final consumption expenditure. The current investment rate, as a proportion of GDP, is 35.1%, and it is expected to increase in the medium term.



8. Thirdly, increase in employment. The rate of growth in the labour force that was 1.60% in the previous period of six years accelerated to 2.54 per cent during the period 1999-00 to 2004-05. Thankfully, the rate of growth of employment too accelerated from 1.57% in the first period to 2.48% in the second period. We have, therefore, more persons employed and contributing to the national output. Paradoxically, we also have, in absolute number, more persons unemployed.



9. Fourthly, increase in productivity of both capital and labour. Rodrick and Subramanian, in an IMF working paper of 2004, pointed out that India seems to have large amount of productivity growth from relatively modest reforms. A more recent paper by Barry Bosworth, Susan Collins and Arvind Virmani (2006) has confirmed this. They have concluded that output per worker grew at 1.3% annually during 1960-80 and total factor productivity (TFP) was barely above zero. In contrast, growth in output per worker nearly tripled to 3.8% during 1980-2004, while TFP increased tenfold to 2%.



10. The outlook for the medium term is extremely positive. We believe it is possible to sustain the factors that are driving economic growth and consolidate the gains.



11. There are, of course, some risks. Many of them are beyond our control and, hence, we are compelled to take precautionary measures that will minimise the adverse effects of these risks. The two annual monsoons are always uncertain factors. By and large, the monsoons determine the area under cultivation and the output of food grains and other food articles. As a precautionary measure, we had to import some quantities of wheat last year and again this year. The price of crude oil is an enormous external risk. Since these outrageous prices cannot be fully passed through to the consumers in India, the burden falls largely on the domestic budget and constrains our capacity for investment. The depreciation of the value of the dollar vis-a-vis the rupee has thrown up an unexpected downside risk: it has challenged our exports and our tax revenues, and we may find ourselves in a situation where we need to provide for the consequences of an appreciating currency.



12. Ladies and Gentlemen! Let me not give you the impression that our work is done. Far from the work being completed, the road ahead is long and difficult. Governing India is, at the best of times, a complex task. During a period of high growth, the task does not become easier, as one may be wont to think. While sustaining high growth is one kind of challenge, the more difficult challenge is spreading the benefits of growth and making it more inclusive.



13. Despite a marked reduction in poverty, about 26% of the population of India lives in extreme poverty. A larger proportion of the population is affected because of the inadequacy or absence of many public goods and services such as clean drinking water, sanitation, schools, basic healthcare, electricity and roads. Democracy – especially a vibrant and noisy one – offers many seemingly attractive alternative models for the elimination of poverty. We know that many of those have not worked in the past and we shall not repeat those mistakes. We believe that growth is the best antidote to poverty, provided that the growth is broad based and inclusive.



14. Our government believes that in a developing country growth is an imperative and nothing should be done to affect the process of growth. At the same time, our government believes that it is the duty of the government to provide a measure of economic and social security to the very poor who are, at present, beyond the pale of the market economy. We have, therefore, adopted an ambitious social and economic agenda that extends to matters such as guaranteed wage employment, affirmative action in education, death and disability insurance, health insurance, old age pension, scholarships and education loans, empowerment of women and right to information.



15. I am aware of the oft-repeated criticism that the growth process has benefited only a small section of the people and, therefore, we must change course. I reject that criticism. It is based on a superficial and ill-informed view of the transformation that is taking place in India. More people are discovering that there are opportunities at the bottom of the pyramid and more people at the bottom of the pyramid are demanding their share of the economic opportunities thrown up by the growth process. For instance, in the last three years, banks have more than doubled the amount advanced as farm loans: the volume has increased from Rs844bn in 2003-04 to Rs2050bn in 2006-07. Who gets these loans? It is farmers who have an average land holding of one hectare, and every year over 5mn new borrowers have been added to the portfolio of banks and given farm loans. In 2006-07, 8.35mn new farmers were brought under the bank credit system.



16. Take another example. India runs the largest programme of micro credit – a fact that is not widely known. At the end of March 2007, 2.6mn self help groups – nearly all of them ‘women only’ groups – were credit-linked to the banks. Beginning with consumption credit, an overwhelming majority among them has graduated to production credit. These groups borrow amounts up to Rs200,000 for purposes such as land development, rearing cattle or sheep, poultry, garment making, food processing, manufacture of toys and retail shops. The amount of credit advanced to SHGs at the end of March 2007 was Rs180bn.



17. More than anything else, it is growth that has allowed the Government to increase public expenditure in sectors such as health and education. In 2003-04, the Central government’s budget had allocated Rs70bn for the health sector and Rs70bn for the education sector. In 2007-08, those allocations had grown manifold to Rs143bn for health and Rs286bn for education.



18. However, outlays do not mean outcomes, and this is our prime concern. There is not yet in place a mechanism that will ensure that the deliverables are indeed delivered or that the public goods and services are of acceptable quality and have reached the intended beneficiaries. Some of the problems are due to poor design of the programme. Besides, there is still too much dependence on the government machinery and an unwillingness to experiment with alternative models like food stamps or school vouchers. There is also, regrettably, a considerable degree of waste and pilferage.



19. Our best chance lies in encouraging more openness and more competition. An open society and an open polity will eventually embrace an open economy. A revolutionary change has been wrought in the sectors where monopolies were dismantled and the sector was thrown open to competition. Two examples would suffice: one, telecommunications and the other, aviation. Not too long ago, a customer had to register for a landline telephone and wait for many years to be given one. She would have to “book” a long distance call and hope that she could get through within a few hours. And she would have to pay exorbitant rates depending on the “distance” between the caller and the called person. Mobility was a dream; the telephone itself was a nightmare. Mobile telephony is growing at over 5mn new connections every month, and in August this year 7 million new connections were added .



20. The air transport sector has witnessed a similar revolution. The entry of private airlines has democratised flying. Many second and third tier towns are now connected by air. Domestic passenger traffic has grown, on average, by 30.5% a year over the last two years. Two green field airports are being built. Two metro airports are being modernised and upgraded, and before that task is over, plans are being drawn up for a second airport in these two metros. Two more metro airports and 35 non-metro airports have been taken up for modernisation and expansion.



21. Competition is driving growth in many other sectors: steel, textiles, pharmaceuticals, automobiles, home appliances, packaged food, computer hardware and software, banking and insurance. It is axiomatic that more openness and more competition will benefit the sectors that remain closed or restricted as a matter of policy, and that is the direction in which we would like to move.



22. The competition is not among domestic players alone. India’s manufacturing and services sectors face increasing competition from overseas manufacturers and service providers. Many foreign companies have entered the Indian market through imports or local production. Far from being overawed or vanquished, Indian business has boldly ventured into other countries and has opened offices abroad, acquired factories and established new facilities. Foreign direct investment has become a two way street. In 2006-07, while foreign direct investment flows into India were US$19.5bn, the outflow of capital amounted to US$11.9bn.



23. On August 15, 2007, India turned 60. It is, compared to the United States or many other countries, a young nation. It is also a young nation in another sense. One-third of the population is below the age of 15 years. India is the only large country in the world where the size of the working age population will grow – and will exceed the number of dependent children and old persons -- until 2025, the year up to which projections of population have been made, and perhaps even beyond till 2045. The size of the work force will grow, incomes will grow, savings will grow and investments will also grow. The challenge is to seize the opportunity and turn India into an economic powerhouse.



24. We are happy that the world is taking note of India and other emerging economies. If the developed countries of the world are serious in their intention to achieve the Millennium Development Goals, they must realize that the goals will not be achieved until they are achieved in India and China. We recognize that as we take our place in the world we have to assume our share of responsibility, consistent with our need and capacity, to make the world a better and safer place.



25. In the past – and now too – India has accepted responsibilities. For example, though we are an energy deficient country, we have accepted the principle of common and differentiated responsibilities in the area of climate change. At Heiligendamm, the Prime Minister of India made an important statement when he offered that India’s per capita CHG emissions would never be allowed to exceed the per capita CHG emissions of developed countries. That statement has been strongly endorsed by Chancellor Angela Merkel. That statement opens the way to find a just and fair agreement on the complex issues concerning climate change.



26. In the area of non-proliferation, though we are not a signatory to the NPT, we have put substance over form and maintained an impeccable record of non-proliferation. The India-United States agreement on civil nuclear cooperation is premised on that record.



27. On the economic front, we acknowledge that we share responsibility for ensuring the stability of the global economy. We have maintained fiscal prudence and discipline. We have taken precautionary measures to avoid high-risk financial transactions. We have contained inflation and will always be on alert. We have in place necessary regulations to ensure that capital flows – inward and outward – are orderly.



28. Much of what has been accomplished – or adopted – in India is not unique to India. Many other countries have done the same and, in this behalf, I can cite the cases of Argentina, Brazil, China, Egypt, Mexico and South Africa. As I said at the beginning of my speech, the world is still divided in many ways. A new division (or is it rivalry?) appears to be on the horizon – between the G 7 countries and the fast growing, emerging economies. Just as we are willing to share responsibility with the developed countries, the G 7 countries must also share responsibility with the emerging economies. That, indeed, would be the most wise and prudent course to make the world a better and safer place.”

10% Growth in 2008-09

Finance Minister P Chidambaram on Tuesday said it is possible for the country to achieve a 10 per cent economic growth in the next financial year.

"Achieving a 10 per cent growth in 2007-08 is tough, but it is possible in 2008-09. That will be a fitting finale for the UPA government's five-year tenure," Chidambaram said while addressing the India Policy Forum here.

The country's GDP grew 9.4 per cent in 2006-07 and as per the Economic Advisory Council to the Prime Minister, it is poised to achieve a 9 per cent economic growth in the current fiscal.

The Reserve Bank of India (RBI), however, in its Annual Policy statement has projected GDP growth rate of 8.5 per cent for 2007-08.

Chidambaram said it would be possible to push up the economic growth by improving the performance of agriculture, which is stagnant for the last nine years.

Commenting on the comparisons which economists make between India and China, Chidambaram said the country's 9 per cent GDP growth rate compares well with 10-10.5 per cent growth rate of China.

He said the country's growth rate vis-a-vis China was not bad in view of the fact that it had to adhere to democratic norms and generate consensus, evolve laws and endure criticism before moving forward.

Chidambaram - London Business School

Following is the text of the address made by the Finance Minister, Shri P. Chidambaram at the London Business School today:

"I thank you for the invitation to address the faculty and students of the London Business School. Nestled amidst colleges and universities that date back many centuries, you are one of the younger schools in Britain. You were founded only in 1965, yet your school has carved out a special position for itself. No frequent business traveler would consider his itinerary or his education complete until he pays a visit to your school. I suppose it helps that you are a business school in a world that is increasingly driven by the desire to create wealth. I suppose it also helps that you are situated in London, the undisputed financial capital of the world.

I can say with confidence that if each one of you does a diligent search you will find that you have an India connection - a great grandfather who was in His or Her Majesty's service in India or an aunt who had taught in a mission school or worked in a mission hospital in a remote Indian town or a family member who had adorned the bench of a High Court in India or a cricketer cousin who has just returned after waging battle with Rahul Dravid & Co.

Those connections are memorable and we value them. However, the new connections that are being forged between the United Kingdom and India are more significant and will have an enduring impact on the lives a billion Indians.

I am not a remarkable storyteller, but I have a remarkable story to tell. I accepted your invitation in order to share with you the India growth story, especially the story of the challenge of building infrastructure for the future. As long as the Indian economy was growing at a miserable rate of 3.5 per cent or a sedate pace of 5.5 per cent, the infrastructure in India was not regarded as a major problem. We could live with low speed trains and two lane roads; we could rely, grudgingly, on land telephone lines; we could do with a single airline, a single telephone service provider and a single automobile company making a single model of a car. The infrastructure was inefficient but not inadequate; it was creaking but not cracking.

A high growth rate has changed all that. Since India embarked upon economic reforms and liberalization in 1991, we have witnessed a secular rise in the annual rate of growth. The average rate of growth in the four years beginning 2003-04 has been 8.6 percent; in the last two financial years the growth rates have been 9.0 per cent and 9.4 per cent. The robust growth rate has exposed the grave inadequacies in the infrastructure sectors. It is now widely acknowledged that the state of the infrastructure is a drag on the economy, perhaps by as much as 1 to 2 per cent a year.

The growth rate of GDP that we have recorded is not an accident. It is the result of well-designed and well-articulated policies. We remain firmly committed to fiscal prudence. Our tax rates are moderate and stable. We actively promote investment in the private and public sectors. We encourage both domestic and foreign investment. And above all, we value our engagement with the countries of the world and we are determined to reap the benefits of an open and competitive economy. We take pride in the fact that we are the fastest growing free market democracy. According to a report by Goldman Sachs, among Brazil, Russia, India and China, India will record the fastest rate of growth over the next 30 to 50 years.

The challenge before India is how to sustain the high rate of growth.

If there is one economic factor that will determine success or failure in this behalf, it is infrastructure.

It is now widely acknowledged that there exist strong linkages between infrastructure on the one hand and economic growth and poverty alleviation on the other. Not only will good quality infrastructure give a fillip to economic growth, robust economic growth will, in turn, make investment in infrastructure projects more attractive and rewarding.

According to some perceptive commentators, India is strong on institutional infrastructure but weak on physical infrastructure. In my view, this is indeed the position and, I may add, India fares poorly on social infrastructure as well. To illustrate, we have done a splendid job of putting in place constitutional and legal institutions such as an elected Parliament, an independent judiciary, a strong supreme audit organization, regulatory authorities with vast powers for various sectors, a free and vocal media, and many other bodies that characterize a vibrant civil society. Where we have not succeeded to the same extent is in building world class roads and railways, airports and seaports, and power and telecommunication systems. We have also not succeeded in ensuring adequate and good quality services in education, health care, water supply and sanitation.

Rural infrastructure is poor and requires to be built. The need is more investment. Urban infrastructure was built many years ago, but it is crumbling. The need here is more investment and better governance.

The challenge of infrastructure is huge; the requirement of funds is humungous. It has been estimated that during the Eleventh five year plan period (2007 to 2012), we would need to invest over US$320 billion in the infrastructure alone. This number includes US$130 billion for power, US$ 66 billion for railways, US$49 billion for national highways, US$11 billion for seaports and US$ 9 billion for civil aviation. The Committee on Infrastructure Financing that submitted its report in May 2007 has already advised that the target for infrastructure investment should be revised from US$ 320 billion to US$384 billion at 2005-06 prices, which is equivalent to US$ 475 billion at current prices. I can say with confidence that no country than India needs and no country than India can absorb so much funds for the infrastructure sector.

The Approach Paper to the Eleventh Five Year plan states that: "....the total resources required to correct the infrastructure deficit exceed the capacity of the public sector. The strategy for infrastructure development must therefore encourage public private partnerships wherever possible. However the PPP strategy must be based on principles which ensure that PPPs are seen to be in the public interest in the sense of achieving additional supply at reasonable cost. PPPs must serve to put private resources into public projects and not the other way around."

We have identified the key issues in infrastructure development. They are: (i) the legal and regulatory framework; (ii) affordability of service; (iii) quality of service; and (iv) the financing mechanism.

The last issue - financing - is perhaps the one that interests you most and, therefore, let me dwell on that for a minute.

How does India hope to obtain this level of investment? As I said earlier, we intend to find the resources through public investment, private investment and public private partnerships. Savings and investment, as proportions of GDP, have been on the rise during the last five years. In 2005-06, the savings ratio estimated at 32.4 per cent and the investment ratio was estimated at 33.8 per cent. While we do not yet have the ratios for 2006-07, we have an estimate of Gross Domestic Capital Formation (GDCF) in that year. The number stands at 35.1 per cent, which is an increase of 1.3 percentage points over the previous year. By inference, therefore, it is possible to conclude that the savings and investment ratios for 2006-07 ought to have increased by about 1.3 percentage points. We believe that at the end of 2006-07 the investment to GDP ratio stood at 35 per cent. By any measure, that is an impressive number. Our endeavour will be to channelize a significant proportion of that investment into the infrastructure sector.

Gross Capital Formation in Infrastructure (GCFI) in 2006-07 was estimated at 4.6 per cent of GDP. Our endeavour will be to raise that proportion to at least 8 per cent. Given an economy of the size of US$1 trillion - and which is growing -- an 8 per cent GCFI will yield a minimum of US$80 billion a year and, over a five year period, it would be possible to find a minimum of US$400 billion for the infrastructure sector.

Within India, a large part of the resources will be found through the budgets of the Central and State governments. Tax revenues are buoyant and it is possible to make larger allocations. Governments can also borrow within the limits imposed by the fiscal responsibility laws. We have taken measures to broaden and deepen the debt market, and this will result in greater diversification of risk and would ensure that the quantum of finances increases substantially. Large amounts of money are parked in insurance and pension funds, and these could be used for infrastructure financing of long tenor.

There is help from other sources too. Multilateral institutions continue to support our efforts. Between 1986 and 2006, the Asian Development Bank has funded the transport sector to the tune of US$4.96 billion, the energy sector to the extent of US$4.25 billion and the urban infrastructure sector in a sum of US$1.76 billion. Over the last five years, the World Bank has committed US$4.7 billion to the transport sector, US$1.38 to the urban water sector and US$0.5 billion to the energy sector.

Recently, Citigroup and Blackstone have joined hands with two Indian companies, IDFC and IIFCL, to launch jointly a US$5 billion India Infrastructure Initiative. US$2 billion will be made available for equity investment and US$3 billion in the form of long term debt to fund infrastructure projects in India.

Bilateral support is also forthcoming. The Delhi-Mumbai and Delhi-Kolkata dedicated freight corridors that will be built by the Indian railways has received strong technological and financial support from the Government of Japan.

Arithmetic, however, will not automatically translate into achievement. My purpose in giving these numbers is to demonstrate that finding the finances for the infrastructure sector is well within the realm of possibility.

The real challenge lies beyond the resources: we need to look for innovative mechanisms and instruments to channelise the funds into the infrastructure projects. We have taken several initiatives in this behalf. We offer viability gap funding for projects that would otherwise be considered not commercially viable and hence not bankable. It will be in the nature of a capital subsidy. In order to promote public private partnerships, we have an exclusive mechanism to appraise the proposals, invite bids from prospective developers, make the public contribution in the form of grant or loan or tax incentives, and assist in taking the project to financial closure. We have established the India Infrastructure Finance Company to raise low cost resources and lend or co-lend to infrastructure projects, especially projects that have a long gestation period and need long term financing. We have also persuaded the Reserve Bank of India to lend US$5 billion from the foreign exchange reserves to the IIFCL to enable IIFCL to on-lend to infrastructure projects for their capital expenditure. These and other innovative measures under consideration will ensure the flow of funds to the infrastructure sector.

I believe I have given you a flavour of our ambitious plans. Success will depend upon the ability to clear the roadblocks and implement the projects without time or cost overruns. Large projects face issues concerning land acquisition and rehabilitation and resettlement of displaced families. Some projects may have an adverse impact on the environment and their design may need to be modified. Above all, we need to build capacity in the implementing agencies to be able to resolve the problems that they may encounter and push towards successful completion of the projects. I marvel at what China has accomplished in the last two decades in the infrastructure sector and wonder if there are any lessons that India can learn from China!

Ladies and Gentlemen! A country that aspires to have an economy that will be the third or the second largest in the world must have world class infrastructure. The drumbeats of infrastructure are getting louder in India and the rumble is felt and heard all over the country. The desire for world class infrastructure is not driven by government alone; increasingly it is demand-driven and community-driven. I am confident that within the next ten years we will succeed in putting in place infrastructure in India that is equal to the best in the world."

Chidambaram - Easing inflation may cap interest rates

Finance Minister P.Chidambaram said on 27 June that central bank policy tightening and currency strength had helped to moderate inflation and more rate rises may not be needed if the trend continues.

“So far central bank actions have moderated inflation. The rupee rise has also helped moderate inflation to some extent,” Chidambaram told reporters on the sidelines of a conference in London.

“If inflation is contained at current levels and shows a decline, there is no reason why interest rates should go up.”

Last week, data showed India’s wholesale inflation fell to its lowest level in 14 months at 4.28% in the 12 months to 9 June. The signs of slowing price growth came finally after five interest rate rises in the past year to 7.75%.

The central bank has also largely kept out of the rupee’s way as the currency has surged to nine-year highs versus the dollar, rising about 9% so far this year.
India’s economy, the third largest in Asia, grew 9.4% in the fiscal year ending March, its highest rate in 18 years and second only to China among major economies.

Chidambaram said the intention for this year was to keep inflation at 4.0 to 4.5%. He earlier told the conference that inflation remained a concern for the economy but policies aimed to tackle this issue should not dampen growth.

“We have to strike a balance between growth and inflation. The politically tolerant level of inflation in India is 4-4.5% and we are aiming to keep it at that level,” he said, noting that factors such as oil prices would be key.

“But we will be alert and take fiscal as well as monetary steps (to curb inflation)”.
Chidambaram said it was hoped gross domestic product growth would be “close to 9%” in the current fiscal year, with an annual growth rate of 10% growth achievable by 2010.

He acknowledged that rupee appreciation was a headache for Indian exporters, but he said the rise was due to huge capital inflows into the country and no immediate steps were planned to curb the currency’s strength.

“We don’t believe in imposing capital controls on inflows. We will keep an eye on the rupee but our policy is a well regulated market determining the exchange rate,” he said. “The rupee will find its level, if it hurts any sector unduly, we will help that sector in other ways.”

Chidambaram forecast that foreign direct investment would exceed the $16.1 billion received in the 2006/2007 fiscal year.

One of the sectors that has experienced booming price growth has been real estate and most major Indian cities have seen property prices double in the past two years.

Foreign property funds have been flocking into India ever since rules on inward investment in the construction sector were relaxed.

Many analysts believe a property price correction of 10-40% is due in the short term. The last time a property bubble burst in India, prices fell as much afive interest rate r ises in the past year to 7.75%.

Aim is to dampen realty, housing demand: FM

Terming 13.6% industrial growth in April as a good start for the year, Finance Minister P Chidambaram today said the government did not intend to curb demand except in overheated sectors such as housing and real estate.

"The intention is to constrain demand in those sectors where there are signs of what you call overheating. An example of which could be real estate and housing," Chidambaram said.

The country's industrial production rose 13.6% in April this year from 9.9% in the same month last year. While manufacturing recorded a robust 15.1% growth, mining grew by 3.4%.

On the impact of RBI's measures to tighten money supply in these sectors, he said these steps work with a time lag and it might take time to have their impact on the intended sectors.

In other sectors, however, there is no intention to reduce demand, Chidambaram said.

The government is also worried of a slowdown in some sectors such as textiles in view of the strengthening of rupee against the dollar.

The speech Chidambaram will not make

Ten years ago I promised to reduce Indian tax rates to Asean levels, and thus become part of the Asian economic miracle. I am happy to announce that I am cutting the peak import duty to 8%, the targeted Asean level. Some people are inconveniently reminding me that I had also indicated 10 years ago that I would reduce direct taxes to the Asean level, which is now around 25%.

I cannot do this overnight for revenue reasons, but will target this rate over the next five years. For starters, I considered reducing the peak income and corporate tax rate to 30% inclusive of surcharge. But the latest Times of India poll suggests that citizens hate taxes but like cesses. So I propose to abolish income and corporate tax, and instead impose a social services cess of 30% in lieu thereof. I hope this will help us win the Uttar Pradesh election.

Our effective corporate tax rate is only 17% because of a myriad exemptions. The most unwarranted exemption is for software companies, which are not infant industries but prize athletes. I propose to levy a Minimum Alternative Cess (replacing the Minimum Alternative Tax) of 15% on all companies other than those covered by the law on Special Economic Zones. The new Minimum Alternative Cess will also apply to units in SEZs unless they export at least 85% of their output.

Our policies have yielded record GDP growth of 9.2%. I hope you agree that the entire credit for this goes to Sonia Gandhi. The economic boom has boosted tax receipts, and I am happy to announce that I have met the FRBM target of reducing the fiscal deficit to 3% two years ahead of schedule. Having said that, let me confess what serious economists have long know — that, rather like Enron, we have been hiding part of the debt in off-budget items (oil bonds, debts of the FCI).

Borrowings of the Food Corporation for political purposes like the public distribution system are logically part of the government’s own deficit, and so are subsidies to oil consumers financed by forcing oil companies to run at a loss.

Inclusive of these items, the fiscal deficit is higher by more than 1% of GDP. In the interests of transparency and accountability I propose henceforth to include these off-budget items in the official fiscal deficit, and get this consolidated figure down to 3% by 2009.

The Fringe Benefit Tax has attracted criticism because of its complexity. I know this is a bad tax, but I hate admitting that I am wrong. So I propose to give companies the choice of paying an additional 2% corporate tax in lieu of the fringe benefit Tax. Some of my Marxist colleagues want me to re-impose capital gains tax on shares.

This would be a bad idea, since prudence requires that people should churn their portfolios (constantly selling some assets and buying fresh ones), and a capital gains tax will tax such prudence. It will also place Indians at a tax disadvantage compared with foreign institutional investors.

A better way of promoting egalitarianism without affecting growth is to levy estate duty at 5% on all properties of deceased persons in excess of Rs 20 lakh. This will encourage people to save and invest in their lifetime, while ensuring that they pay their dues to society (rather than undeserving heirs) after entering the next world. It also helps that dead people do not vote.

The biggest tax anomaly is that services account for 55% of GDP but only a small fraction of taxes. I am widening the service tax net to include several categories including lawyers, so nobody can accuse me of trying to keep myself out of the service tax net.

I am also raising the level of service tax to 16%, and moving most excise duties to 16%. I hope this will lay the foundation for moving in the next four years to an all-India Goods and Services Tax levied mainly at 16%. As part of that transformation, I propose to abolish the Central Sales Tax in one go, and compensate states in full for this loss.

We spend vast sums on unproductive subsidies, of which two-thirds non-merit subsidies benefiting mainly well-off people. The fertiliser subsidy has induced farmers to use nitrogen rather than phosphorus and potassium, thus ruining the soil. Free power encourages overpumping and the drying up of drinking-water wells and shallow tubewells of small farmers. I cannot control power subsidies given by state governments. But I propose to abolish subsidies on food, fertilisers and employment programmes, and instead give a cash grant of Rs 5,000 to every family with a BPL card or Job card. That will be a more rational subsidy regime, and will also reach those most in need.

Little is known of the outcome of vast sums spent on various programmes, and I cannot trust any ministry to honestly assess its own shortcomings. So I propose to hire independent evaluators to track the actual outcome of programmes. This will give us an accurate picture of which programmes deserve to be overhauled or abandoned, and which expanded.