Europe in the World

India's economy: current status and future challenges

15 June 2006


India’s Finance Minister Shri Palaniappan Chidambaran, delivering the first lecture in a series entitled ‘Asian Voices in Europe’, organised by the EPC together with the Sasakawa Peace Foundation (SPF), set his remarks in context by saying India was “an old civilisation of 5,000 years and a young nation, and this offers both challenges and problems”.

Politically, India is a democracy and an open society, committed to the rule of law, deriving its strength from its institutions. Economically, it has moved from post-colonial “home-grown socialism” to the post-1980s liberal economy, and growth now averages 8% per annum. “This long road of economic growth and prosperity taught us valuable lessons”, he said, adding that he was confident India could achieve high levels of prosperity.

The country has a complex social background: it is the birthplace of four world religions, its constitution recognises 18 languages, and it is home to a wide variety of languages, food, dress, social habits and customs, with all of this overlaid by its Caste system.

The Minister described India’s two defining moments: 1947, the year of independence; and 1981, the year it moved towards becoming an open liberal and competitive economy. Its current policy is geared to very high growth because, as the Minister explained, India is the only country where the working population will continue to grow for the next 30 years. Its policies must deal with this and produce revenues for desperately-needed investments in education, infrastructure, rural growth, sanitation and human resources.

“Growth is the best antidote to poverty,” he said, adding that high growth rates were essential if the country was to catch up with developed countries and keep pace with China.

Growth for all

“High growth has to be coupled with equity and social justice,” said Mr Chidambaran, so it has to provide the means for better sanitation, roads, electricity, schools and opportunities for people in the countryside. At the same time, India has to remain competitive and “master the forces of globalisation and liberalisation”.

The government’s target is to maintain India’s 8% growth rate, and the Minister insisted that it could hold its own in today’s fiercely-competitive world because of its excellent human resources.

The country’s savings now equal 27% of its GDP and investment is equal to 30% of GDP. While much of the investment comes from domestic resources, increased Foreign Direct Investment (FDI) is needed to bring capital and new technology into the country, give access to new markets, new management styles and good governance practices.

Working with the private and public sectors

The private sector now plays a lead role in telecommunications, power, road building and the construction of sea and air ports, while the government is continuing to invest in mining, petrol exploration, railways, air transport and agriculture, and to encourage public-private partnerships.

One important challenge for growth is to make agriculture “less monsoon dependant” by establishing irrigation systems to bring more land into cultivation. This will encourage a sustained annual growth of 4% in the sector.

The manufacturing sector is being improved through massive investments in infrastructure: 4.5 kilometres of roads are being built every day, and the government is planning to add between 10,000 and 12,000 megawatts of additional power annually over ten years. It is also improving its satellite telephone connections. The Minister forecast that when all this started to produce results, the overall annual economic growth rate could rise to 10%.

Mr Chidambaran said India was already a world leader in the services sector, thanks to its outstanding human resources. The next goal is to become a world hub in manufacturing, building on its current position as world leader in the production of goods, including automobiles and automobile parts, textiles and pharmaceuticals. Its export market has grown by 25% over the last three years.

No jobless growth for India

“Employment is our goal,” said the Minister. “We are not going for jobless growth.” India has to create eight million new jobs each year for young people in manufacturing and services, and these must be what the International Labour Organization has described as “decent jobs”. Small and medium-sized enterprises are being encouraged, as they are a good source of employment because of their flexibility and ability to adapt to changing markets.

Meeting the challenges

Despite this positive picture, Mr Chidambaran foresaw challenges ahead. He stressed that the government must not fall victim to complacency or make stupid mistakes, and said he had instigated procedures to ensure fiscal prudence and tight management control to avoid this.

The Minister also outlined possible outside shocks to the economy. The first is the high price of oil, at $69 a barrel, which is causing problems for developing countries, including India, that depend on imported oil. Oil-producing countries must accept that prices should remain within a specified ‘band’.

There is also a danger that the imbalance between very rich and very poor countries could wreck the entire global economy. For example, very high interest rates in the developed world could be disastrous for poor countries which are dependent on FDI.

However, Mr Chidambaran said he was confident that India could overcome any possible outside challenges. Its goal was to abolish poverty within the next 15 years and to raise India up to the level of a developed country. “This is the context in which we prepare ourselves to face the challenges of the future,” he said.

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Head of Europe in the World programme and Senior Fellow

Giovanni Grevi
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Senior Policy Analysts

Paul Ivan
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Amanda Paul
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Marco Giuli
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Ivano di Carlo
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