National Research Seminar on
Sectoral Developments and their Impact on Indian Economy
UGC / K.P.B. Hinduja College of Commerce / Kirti M.Doongusree
College of Arts,Science and Commerce
Speech by R.Kannan
22nd February 2014
I would like to thank the organisers
for inviting me and I have great pleasure in participating in the
National Conference on Indian Economy , sharing some thoughts on the future
options available for achieving a high economic growth going forward.
The topic taken for the two national
conference is very appropriate at this moment and I am happy to note that the deliberations in
the last two days covered all the important sectors in the economy and the
various issues relating to these important sectors and how they impact the
growth rate of the Indian Economy. I
learnt that lot of new perspectives had emerged from the deliberations so far
which will be useful for the economic policy
making in India.
The recent economic performance in
India caused many concerns among various stake holders and the general
sentiments toward new investments and growth moved towards a moderation. After holding steady for two years after the Economic crisis, the
growth in the Economy had shown signs of tapering and reached its decade low of 4.9% . Inflation in the
recent past had shown a secular rising trend and recently started receding. The lower economic growth in India was due to
developments in the Global economy as well as issues relating to Regulation,
Environment , increased competition
between political parties , increased social / Judicial activism and
sensational reporting by media. In 2008, the potential for economic growth was
at 10%. The conditions for higher economic growth were very favourable
including ; low interest rates, robust
capital markets, good corporate performance, consensus on national issues between political
parties . Due to recent developments and the fast rise in inflation, the
potential for economic growth is moderated to 8% now and there is a big gap
between potential and the actual performance.
By taking a concerted actions in
collaboration with various stake holder groups in the economy, it should be
possible to achieve 8% growth within a year. The solutions for accelerating the
economic growth are in place and what is required is cooperation of various
stake holder groups in achieving this target. In India , even today many of the
sectors are growing at more than 10% p.a. But before the economic slow down,
many more sectors in the economy were growing at more than 10%. By adopting and
implementing sector wise action plans the desired growth could be achieved.
Finance Sector. This is the sector
which acts as a catalyst to stimulate
the economic growth since all the segments of the economy depend on external
source of funding to pursue the growth objectives. Banking and Capital markets
play a major role in the development of an economy. In India the value of
Capital markets and bank credit are comparable but the number of IPO’s had seen
a decline. Bank finance continues to play a major role. The issue of NCD’s by
corporates is likely to rise and private
equity capital is available for investments in several sectors. The pension
sector had been opened to new players and growth in this sector will generate
long term funds which could be deployed in the infrastructure sectors
The issue of new licenses for banking
will result in higher growth and penetration of banking . Adopting of new
technologies including the mobile phone based technologies will help in meeting the objectives of
financial inclusion. Through these technologies , the availability of
credit could be increased in the rural
areas.
The share of FII’s in total market
capitalisation of the companies is at a high level. The behaviour of FII investors , despite
their investment is only through secondary markets, determine the stock market
and index performance. As and when FII’s increase the investments, the boom in
stock markets is witnessed and when there is a significant withdrawal, the
markets take a beating. Considering the growth potential of India and the future capital requirements in the economy
, continued flow of funds through this route
would enable corporates to meet a part of their requirement through this source
( through divestments and sale of shares through secondary market). Hence it is
necessary to keep the sentiments of this investor class favourable and action
plans could be drawn up to sustain the interest of this investor class through
favourable conditions for investment.
FDI. After the Economic Crisis, only a
few markets in the world continue to show a healthy growth. Despite India’s
growth decelerating , the growth achieved this financial year was still one of
the highest economic growth in the
world. There is an increased interest from investors from all over the world to be
associated with Indian market. Japanese companies are very bullish on India
especially after the stellar performance by companies like Maruti, Honda. Most of the companies from Japan had drawn up
plans to increase their presence in India. The companies from US, Europe and
Korea have also shown keen interest to
increase the investments in India. Last week, China expressed the desire to
take a share of 30% in future
infrastructure investments . The opening up of computer hardware industry for
manufacturing including chip manufacturing augurs well for increasing the
foreign investments in India. The creation of Industrial corridors will see
more foreign collaborations in India and in future, the FDI inflows are likely to show a good rise from
the present levels.
While addressing the economic growth
issues, the foreign exchange movements had become one of the main issues and
the robust risk management had become very important. The imported products had contributed to
higher inflation levels due to exchange depreciation. In the recent past, many
new initiatives were taken by government to control both fiscal and current
account deficit and there is a relief in the short term. For the long term,
solutions are available to ensure a good fiscal position for the country and by
strengthening the financial position, it should be possible to keep the
exchange rates at competitive levels . Since the oil imports are increasing ,
there is a need to keep the currency at the present levels.
The increased Inflation in India in
the last few years was due to both demand and supply factors and the supply
factors had a major influence on the way the inflation behaved. The latest
reported level of inflation had shown a favourable trend and we have to ensure
inflation remains within 5% levels going forward to keep the economy growing at
8% growth. The government has to continuously monitor the developments in the
economy and develop appropriate responses from time to time to ensure the
inflation remains at healthy levels.
Agriculture
sector in India continues to employ the maximum number of people in India today
and year on year, the share of agriculture in our GDP is showing a declining
trend. As per the predictions, in the next few years, agriculture will add the
maximum number of employees among all the sectors in India, despite its Share
in GDP will fall further , year on year basis.
The issues in agriculture include, the low productivity levels of crops
compared to best in the world, the wastages at the farm / during transportation
/ storage , the reduced interest in Agriculture as a profession. Considering
the recent developments, especially, the inflation fuelled by agri commodities
at the retail level, this sector will become attractive and more corporate and
individuals will look at this sector favourably to fulfil the growth ambitions.
There is an immediate need to increase the crop productivity without losing
much time . The reforms in distribution of agricultural commodities through
amending the APMC act would help the farmers to obtain remunerative price for
their produce and generate enough surplus to buy inputs at much higher prices (
without availing any subsidies )
and invest in new technology to
achieve the best productivity levels witnessed in other countries.
Services Sector. The loss of share of
agriculture in GDP is taken by Services sector. Indian IT sector helped to
create the India brand in the minds of investors from across the world and this
sector continues to grow at a fast rate
, creating lot of employment opportunities. The prediction going forward
for this sector is also very encouraging. This
sector’s contribution in GDP growth is very high , since value addition
in this sector is one of the highest among all the sectors in the economy. India has one of the large education systems in the world producing
large number of Engineers, Doctors and Graduates. Despite most of them are not
job ready, the companies which recruit them give a good training. The
government has drawn up a skill development plan with a target to train more
than 500 mn by 2020 in various sectors / skills, where the demand supply gap is
high and likely to become higher.
Government is taking steps to increase the enrolment ratio at higher education
level and various action plans were in place to develop skilled personnel.
The future projections for media
sector indicate that this sector would continue to grow at more than 10% and
the technological developments in this sector will lead to many changes in the
way we consume media offerings. The business models will undergo a major
change. The health , tourism, aviation , banking and financial services will
continue to grow at more than 10% going forward. The penetration of mobile
communication in rural areas is going to change the customer preferences in
rural areas and even in rural areas, the growth in services will be higher than
the growth in other sectors. This sector will continue to support the higher
economic growth going forward.
Manufacturing contribution to GDP is
India is very low and the government has set a target to take this to 25% of
GDP from the present level of 15%. This will happen through liberalisation of
more sectors and entry of several MNC’s in India to set up their manufacturing
operations. Achieving this target requires the basic condition of simplified
procedures to do business and moving up the rank in ease of doing business.
To achieve higher economic growth, the
continued investment in infrastructure is necessary. Despite savings level is very high in India,
not all savings is invested in financial assets . There is big demand supply gap
in financing infrastructure and from the present resources available within
India, it would not be possible to create an infrastructure which will support
an economic growth of 8% p.a. There is a need to create new sources of funding
and tap the foreign funds. Government has already created enabling conditions
to attract funds and increased the limits of foreign investors to invest in
various financial instruments. New instruments are being introduced to address
this need. But in the last few years, the attractiveness of this sector reduced
due to environmental concerns , profitability of projects and availability of
funds. Apart from Traditional funding sources like multi lateral financial
institutions and LOC, the scope for raising funds from Pension funds and Sovereign Wealth funds is being explored. By
increasing the investment in financial instruments from the domestic savings
through innovative financial instruments, the required funds could be raised.
The present issues constraining our
economic growth are short term. The solutions are available to achieve a higher
growth. The starting point could be revival of mining in India through creating
a mechanism to sort out the issues which
resulted in closing of many mines in India. Only through mining of Iron ore,
Coal and other resources, the industrial growth could be revived. This has to
be taken up on a priority basis and it is possible to bring solutions which is
acceptable to all the stake holders.
Government procedures. Over the years,
the procedures have become cumbersome, resulting in a huge delay in approval of
projects. The creation of CCI at Centre and project monitoring group has helped
to address the needs of projects having investments of above Rs.1000 cr.
Similar system is being introduced in states to fast track projects. There is
an immediate need to simplify the approval procedures and time bound targets
for various procedures to be declared by government and they have to stick to
this schedule for all the projects.
Capital is one of the major inputs to doing
business and since the main source of
funding in India today is bank funding, there is a need to reduce the interest
rates. This will help all segments
including government, corporates and individuals and increase the purchasing
power.
Land. After the recent high economic
growth , the land has become scarce in both urban and rural areas. The cost has
become prohibitive. There is a need to evolve policies, procedures by which
land is made available for businesses at affordable rates.
Increased co-operation between all the
stake holders. This is the need of the hour today. Part of the poor performance
was due to increased activism by all the stake holders without realising the
impact it has on the Economic Growth, Inflation, Interest rates and Unemployment.
All the stake holders need to work towards the common target of 8% Economic
growth.
Finally, it is very important for
every sector to contribute to the economic growth of the nation. Despite , the
potential for growth is different for different sectors, in India , there is
still a huge gap between the potential and actual growth. Many more sectors in
India can grow at more than 10% in the years to come. To achieve the desired
growth, sector wise , policies and systems are to be introduced and implemented
very effectively by the government and support of all the stake holders is
necessary. Let us all strive towards achieving this growth potential through
our initiatives and actions.
Thank you.
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