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India committed to integration with the global economy
-Shri P. Chidambaram,Finance Minister

Following is the text (page 2) of Keynote address made by the Finance Ministry Shri P. Chidambaram at the India Europe Investment Forum in London on 27th June 2007

McKinsey Global Institute, in its report released in May 2007 titled “The ‘Bird of Gold’: The Rise of India’s Consumer Market” states (p. 106-107): “India is on the verge of one of the great achievements in economic history. It has the potential to transform itself, within two generations, from the desperately poor nation of 1985, dependent on the vagaries of subsistence agriculture and the monsoon rains, into a nation with a diverse, services-led economy and the world’s second-largest middle class by 2025.”

Unlike its neighbours in East Asia, one of the characteristics of the Indian economy for many decades was its low investment rate. A higher growth rate, without a rise in the investment rate, is not possible, and is certainly not sustainable over the medium term. In recent years, we have received encouraging reports. The latest data on national accounts reveal that the investment to GDP ratio has increased year on year for the fifth successive year. At the end of 2006-07, the investment-GDP ratio is estimated at 35.1 per cent, up by 12 percentage points from the estimate of 22.9 per cent in 2001-02. We are naturally pleased with the increase. The Approach Paper to the Eleventh Five Year Plan (for the period 2007-12) envisaged an average investment of 35.1 per cent of GDP during the five year period, and we seem to be poised to make a splendid start and achieve a higher rate of investment. However, I must note that the investment rate continues to be low by the standards of some East Asian countries, especially China, but we are confident that we can sustain a high rate of investment in the medium term.

High growth generates its own momentum. With high growth comes high savings and investment, and these in turn reinforce growth itself. An annual growth rate of 3.9 per cent leads to a doubling of per capita income in a little more than 18 years. If the annual growth rate is 9 per cent, per capita income will double in a little more than 8 years. The magic of compounding coupled with accelerating growth makes a dramatic transformation possible. We are determined to nurture the signs of improvement in the investment climate to consolidate the growth process.

We are fully aware that provision of quality and efficient infrastructure services is essential to realise the full potential of the growth impulses surging through the economy. There exist strong, well-recognized linkages between infrastructure on the one hand and economic growth and poverty alleviation of the other. During the Eleventh Five Year Plan, we plan to make investments of over $320 billion in the infrastructure sector alone. We think this is possible through a combination of public investment, private investment and public-private partnerships.

India has also emerged as major destination for global portfolio equity flows since the late 1990s. On an average, India’s share was 24 per cent of total portfolio flows to all developing countries during 1999-2005. According to the IMF Coordinated Portfolio Investments database 2005, the major source of India’s portfolio investment stock was the US (33.4 per cent) followed by Mauritius (32.6 per cent), Luxembourg (9.3 per cent), the UK (8.6 per cent), Spain (3.2 per cent) and Singapore (2.8 per cent).

The long journey of India’s economic reform, which continues, is marked by gradualism. Indeed, it will continue to be so. But, I can assure you, there will be no reversals. There will be no U-turns or undesirable shocks. Reforms have moved the economy from a regime of controls to one marked by increasing openness and competition. The process has been carefully calibrated and we have succeeded in avoiding painful ruptures. This choice of gradualism was deliberate, given the complexity of the Indian democracy. Notwithstanding the gradual pace – and perhaps thanks to it – the reform process has evoked a very high degree of support from the people and a positive response from the economy. The robust growth over the last four years and the revival of investment constitute clear evidence that the policy responses are designed to facilitate and nurture high growth.

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