Prime Minister Manmohan Singh on Sunday sent out a strong message on the need for further economic reform, particularly in the financial sector, and welcomed investment through qualified institutional investors in Indian companies. Stating that the country has been able to withstand the economic downturn, he said a gradual phase-out of the stimulus measures would take place next year.
"In addition to FDI, we welcome portfolio investment in equity in Indian companies by qualified institutional investors," Singh said in his keynote address at the inauguration of the 25th India Economic Summit, organised jointly by the World Economic Forum and the Confederation of Indian Industry, in Delhi.
Singh's statement, which is being interpreted as a welcome for foreign institutional investors, came against the backdrop of fears in the international community that India would impose controls on capital inflows.
It is also significant because it was made just three days after the government announced that unlisted profitable state-owned companies with positive net worth would be tapping the stock market in addition to a further disinvestment in companies that have less than 10 per cent floating equity.
Singh said through the disinvestment policy the government hoped "to see faster progress in sale of a portion of government shareholding in the domestic market and issue of fresh equities in respect of the selected companies".
That the government was looking at strengthening the stock market became clear with the prime minister stating that there was need to improve futures markets for better price discovery and regulation. "We also need to remove institutional hurdles to facilitate better intermediation," he said.
Setting the broad agenda for reform, Singh emphasised the need to make the financial sector more competitive while ensuring an efficient regulatory and oversight system. "We need to develop long-term debt markets and deepen corporate bond markets," he said.
This in turn, would "require strong insurance and pension sub-sectors", adding that some of the reforms, especially in insurance, involve legislative changes.
Singh was referring to legislation pending in Parliament to raise the limit for foreign investment in insurance joint ventures, among other key changes in insurance laws, which has been facing political opposition for some years.
A bill is also pending to give the pension regulator statutory backing to formulate guidelines for the pension sector, a move that also attracted political opposition in the past.
Singh said the government would build political consensus to bring the required legislative changes.
Singh said the country hoped to achieve a growth rate of 7 per cent with a normal monsoon next year compared to around 6.5 per cent this year. "We resorted to a significant stimulus and we will take appropriate action next year to wind this down." The country's gross domestic product grew by an average of nearly 9 per cent in the five-year preceding the global financial crisis.
The country's medium-term objective was to achieve a growth rate of 9 per cent. "Taking into account the fact that our domestic saving rate is now as high as 35 per cent of GDP, this is eminently a feasible task," he added.
A return to the high growth path required a global revival and since demand there was likely to pick up slowly, the strategy would be to sustain a high growth on the strength of strong domestic demand. "We seek to achieve this through a large increase in investment in infrastructure," he said. It was important to ensure that the financial systems provided the finance needed for investment in infrastructure.
Although the prime minister did not mention the issue of fiscal consolidation - the fiscal deficit of 6.8 per cent of GDP this financial year is the highest in almost a decade - he said the government would need to expand expenditure in critical social sectors like health and education in order to achieve inclusive growth.
When World Economic Forum founder and executive chairman Klaus Schwab asked him what his primary concerns were, Singh listed education and health.
"It is my sincere hope that in the next couple of years, we can raise public sector involvement and investment in education to 6 per cent of GDP. Public sector involvement in health is raised from 1.2 per cent to 2 to 2.5 per cent."
