GOVERNMENT OF INDIA MINISTRY OF FINANCE

DEPARTMENT OF ECONOMIC AFFAIRS (ECONOMIC DIVISION)

OUTCOME DOCUMENT

DELHI ECONOMICS CONCLAVE 2013,

International Conference

on

“The Agenda for the Next Five Years”

Held at Hyatt Regency, New Delhi

December 11-12, 2013

MINISTRY OF FINANCE DEPARTMENT OF ECONOMIC AFFAIRS

“The Agenda for the Next Five Years” Venue: Hotel Hyatt Regency, Ring Road, New Delhi.

Plenary Day-1: December 11, 2013 (Wednesday)

09.00 – 10.00 AM Registration

10.00 – 10.45 AM Inaugural Session

Welcome Address : Dr. Arvind Mayaram,

Secretary, Economic Affairs, GoI

Inaugural Address : Shri P. Chidambaram,

Finance Minister, GoI

Vote of Thanks : Dr. H.A.C. Prasad,

Senior Economic Adviser, DEA, MOF

10.45 – 11.45 AM Opening Plenary Lecture Session -1

Chair: Dr. C. Rangarajan, Chairman, Economic Advisory Council to the

Prime Minister

Plenary Lecture: Dr. Raghuram G. Rajan, Governor RBI Topic: “Financial Sector Reforms”.

11.45 AM-12.00 Noon Tea

12.00 Noon – 1.15 PM Plenary Session – 1

Theme Global Economic Development – Past, present and lessons

for future

Chair: Dr. Montek Singh Ahluwalia, Deputy Chairman, Planning

Commission, GOI

Panelists: Prof. Nathan Nunn, Harvard University

Prof. Romain Wacziarg, UCLA Anderson School of Management

Dr. K.L Prasad, Adviser, DEA, MOF Dr. Arvinder Sachdeva , Adviser, DEA, MOF

1.15– 2.15 PM Lunch

2.15– 3.30 PM Plenary Session– 2

Theme: Trade, Finance and Reforms

Chair Dr. Bimal Jalan, former Governor, RBI

Panelists Prof. Shang-Jin Wei, Columbia Business School

Prof. Renato Baumann, IPEA, Brazil

Ms. Naina Lal Kidwai, Chairperson, FICCI & Group General

Manager and Country Head (India), HSBC Ltd

Mr. David Rasquinha, ED, EXIM Bank of India Mr. S.B. Nayar, CEO & MD, IFCI Dr. H.A.C. Prasad, Senior Economic Adviser, DEA, MOF

3.30 – 3.45 PM Tea

3.45 – 4.45 PM Plenary Session – 3

Theme: Agriculture, Food Security & Inclusiveness- Challenges

Chair: Ms. Arundhati Bhattacharya, Chairperson, SBI

Panelists: Prof. Ruth Kattumuri, London School of Economics

Mr. M. Narendra, Chairman & MD, IOB Dr. Ashok Gulati, Chairman, Commission for Agricultural Costs

and Prices

4.45 – 5.30 PM Plenary Lecture Session – 2

Chair Dr. Arvind Virmani, former India's representative to the IMF &

former Chief Economic Adviser, Ministry of Finance, GOI.

Plenary Lecture: Prof. Gita Gopinath, Harvard University

Topic: "India in the Global Economy"

7.30 PM onwards Cultural Event & Dinner (Ms. Sonal Mansingh & Troupe)

Theme: “Satyam Shivam Sundaram”

Plenary Day-2: December 12, 2013 (Thursday)

10.00 – 10.20 AM Opening Session Day 2

Welcome Address : Dr. H.A.C. Prasad,

Senior Economic Adviser, DEA, MOF

10.20 - 11.40 AM Plenary Session -4

Theme Industry & Services: Challenges

Chair: Mr. S. Gopalakrishnan, President, CII & Co-founder and Executive Vice Chairman, Infosys Ltd

Panelists: Prof. Andre Sapir, University of Brussels

Mr. Subroto Bagchi, Chairman, Mindtree Mr. M.S. Raghavan, Chairman, IDBI Bank Mr. G.S. Negi, Adviser, DEA, MOF

11.40 – 12.00 Noon Tea

12.00 Noon – 1.00 PM Closing Session

Theme: Infrastructure Financing and Corporate Governance:

Challenges

Welcome Address Shri Shaktikant Das, Additional Secretary, DEA, MOF

Keynote Address 1 Mr. Ashok Chawla, Chairman, CCI

Keynote Address 2 Mr. K. Venkatesh, Chief Executive & Managing Director, Larsen

& Toubro

Valedictory Address Mr. Oscar Fernandes, Minister of Road Transport & Highways,

GoI.

Round up and Dr. H.A.C. Prasad, Senior Economic Adviser, DEA, MOF,

Vote of Thanks

1.00 PM Lunch

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THE DELHI ECONOMICS CONCLAVE 2013 “The Agenda for the Next Five Years”

Executive Summary

The important points emerged out of deliberations in the Delhi Economics Conclave 2013, are the

follows;

Finance Minister

India, given its size, potential and population can be counted alongside China, the US and Euro

zone as an engine of global growth. The task before India is to reverse the unintended economic

consequences arising from the stimulus packages extended in response to the global crisis of 2008

and aim for faster, more inclusive and sustained growth over the next five years.

To achieve the above aim, the priorities are: fiscal consolidation, tackling inflation and financial

sector reforms.

To facilitate fiscal consolidation the revenue deficit requires attention and borrowings should

largely finance investment and not consumption.

As far as controlling inflation is concerned, the argument that it should be controlled by

suppressing farm gate prices or rural wages is specious as it ignores the needs of the poor. Given

that monetary policy is the only instrument available to tackle inflation and that it is largely

ineffective to contain food prices, the only way to reduce inflation is to increase supplies and to

radically transform the manner in which commodities and food articles are stored, transported,

distributed and sold, especially in urban markets. There is also a need to deal wisely with

harvesting and marketing and deal strictly with hoarding and profiteering.

Financial Sector reforms viz. submission of FSLRC Report, the new Companies Act, Passage of

the PFRDA Bill and making the Pension Regulator a statutory authority, etc. once fully

operationalized, will have profound implications for the financial sector. Financial sector reforms,

based on broad consensus, can be game changers. Some of the important reforms include GST,

the Direct Taxes Code, the Insurance Laws Amendment Bill and the Uniform Financial Code

recommended by the FSLRC.

Between 2004-05 and 2011-12, the average annual decline of the poverty ratio was 2.2 percentage

points every year, which is around three times higher than the rate of decline in the poverty ratio

during the period 1993-94 to 2004-05. The focus should remain on human development issues to

fulfill the goal of faster, more inclusive and sustained growth over the next five years.

Other Speakers

India and China are two major emerging economies. Chinese economy is fundamentally private

sector driven. State owned firms play a very minor role in most of the sectors. We can learn four

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important lessons from China. They are; a) Reform or die- A sense of urgency never dies, no

time to be complacent, b) Placing more faith in the market, c) Encourage infrastructure, both

hardware (highways, high speed trains) and software (anti-monopoly laws, land allocation by

auction to lessen corruption), and d) Promote regional experiments and competition e.g. four

economic zones in the 1980s, economic development zone in 1990s and 2000s)

Several positive trends have emerged in the Indian economy with pick-up in exports, reduction in

the current account and fiscal deficits and relative stability achieved in the exchange rate.

However there is no room for complacency and any slowdown in putting large stalled projects

back on track before elections or any additional fiscal slippage will amplify the large challenges

that a new Government will have to face.

Greatest priority over the medium term is to create jobs in the economy by developing and

facilitating competitive environment that will encourage efficiency and creativity. This job agenda

requires a disciplined focus on four issues viz., a) improving the quality of infrastructure

especially logistical support, and the power that industry and services need, b) education and

training for the jobs that will be created, c) better business regulation, i.e. regulation that is a

profit to the objective that is enforced, and d) a better, deeper financial system.

The Reserve Bank of India is working towards an improved financial system. The focus or the

five separate pillars of this are: a) clarifying and strengthening the monetary policy framework- a

task entrusted to the Dr. Urjit Patel Committee. An improved framework would help the market to

better appreciate RBI’s policy with inflation control remaining a priority, b) strengthening bank

structure through new entry, branch expansion, new varieties of banks, and moving foreign banks

into better regulated organizational forms. The primary aim to encourage foreign banks to

incorporate domestically is financial stability by reducing the risk of contagion stemming from

external forces, c) broadening and deepening financial markets, increase liquidity and resilience

so that they can help allocate and absorb the risk entailed in financing India’s growth. Liquid

markets will help banks offload risks viz. interest rate risks or exchange risk that they should not

bear, d) expanding access to finance for small and medium enterprises, for the unorganized sector,

the poor, the remote and undeserved areas of the country via technology, new business practices

and organizational forms; and e) improving the ability of the system to deal with corporate

distress and financial institution distress by strengthening real and financial institution

restructuring as well as debt recovery.

The two key indicators of domestic and external balances namely interest rate and exchange rate

are under stress in India as well as some other EMEs because of elevated levels of inflation and

large CAD. Policy options for better external environment include a) external environment is

largely exogenous and as such collective action in international fora needs to be coordinated

better so that policy spillover effect from advanced economies is minimized, b) exchange rate

surveillance needs far greater scrutiny as the problem of rebalancing of demand is as yet not

complete, c) progress on sustainable development and climate change is contingent upon

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delivering on funding promises and concerted action needed on creating a regulatory framework

for arresting volatility in cross border financial flows.

There are the deep-roots of economic development besides the traditional factors such as capital

accumulation, innovation and so on. In researching the fundamental question(s) of development

economics, greater importance is being attached to factors viz. institutions (including cultural

norms), and ways in which the deeper factors-history and geography- affect them. The main

issues are, a) the sources of wealth have a large component of intergenerational transmission i.e.

ancestry matters for per capita income growth. Long-term history is one of the important factors

for growth, b) however, there are different ways in which ancestry could matter and there is no

immutable law that determines the manner or extent to which the deep rooted factors influence

economic outcomes. There is much scope for variations, exceptions and contingencies -

randomness. Therefore we should not be pessimistic about the ability of policy to affect economic

outcomes in the context of this new research on the deep roots, and c) an outcome of such

research is to appreciate that attempts to address direct things via policy may be misleading. The

focus should be on how to get people to more easily imitate behaviours that lead to higher

economic outcomes. In other words, how can we reduce barriers to imitation? It may be difficult

to change peoples’ cultures, but it may not be so hard to reduce the extent to which culture affects

the outcome.

India’s share in global merchandise trade and services sector has grown. The increased share in

services has not only been driven by software exports but by other sectors also. Exports have

become more diversified. However, a careful look at the numbers reveal that the single largest

item in the export basket is refined petroleum product. The sustainability of such exports on the

face of price regime changes is open to question. There is a global shift in manufacturing

production from advanced countries to emerging economies. India is the 10th

largest

manufacturing country in the world. As per OECD report, the share of emerging economies like

China, Brazil, India, Korea have increased in recent years, while the share of developed countries

have decreased. In 2013, China overtook United States in industrial production. As per WTO

paper, with respect to gross manufacturing exports in 2009, there has been an increase in shares of

Services for India and EU countries. In exports, combined share of EU & USA account for

around 40 percent.

The criticality of trade finance is underlined by the fact that 80 to 90 percent of all trade requires

finance in some form whether it is risk, insurance and capital. Trade finance is favoured by banks

due to many desirable factors, and stepping up such finance is an important tool to boost trade.

To maintain the growth in trade, focus on exports is a must. Finance for exports has been

shrinking due to deleveraging and a shrinking European banking system and by Basel III norms,

though banks in Asia and US are stepping in, that may not be enough. Therefore, more needs to

be done in order to sustain the growth in exports, and the EXIM bank is working closely with the

Ministries of Finance, Commerce and External Affairs to devise new risk control products to

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shield exporters of political risk or payment risks while targeting specific countries. Studies show

that only one third of the 60 poorest countries benefit from trade finance as many are perceived to

be riskier than they actually are. There is a need to ensure flow of trade finance to such countries

especially when India is engaging in trade with many of them. As the importance of trade finance

increases, India needs a more vibrant banking system. A balance has to be achieved between

regulation and further reforms in capital markets that can support greater demand for trade

finance. Steps by the RBI to open up banking (that would increase the number of players and

increase availability of capital) are welcome.

Industrial policies and the global value chain system require change and more openness. In

addition to the trade policies, focus should also be given on efficient international and national

facilities to ensure smooth flow of trade.

The manufacturing sector is the engine of export growth and emphasis should be on policies that

strengthen the manufacturing sector, promotes R&D in that sector, allows SMEs to achieve scale

that allows export and rationalization of institutional procedures that helps to overcome the

expected challenges of Basel III. There is a need to develop corporate debt market and facilitate

infusion of foreign funds. On the demand side, there is a need for expansion of mutual funds,

better corporate governance, etc.

To boost exports, we need greater product diversification. We have been focusing on market

diversification and not much on product diversification. Many FTAs, RTAs have been negotiated;

we have to see if they are helping us and which are the ones actually needed.

There are disinvestment possibilities in services sector and privatization in many services

including some areas of railways.

There is a need to revisit sectoral policies to diminish PSE’s monopoly and dominance; Coal

sector needs major shakeup; there is a need to push the technology frontier by acquiring and

absorbing existing technology, promote and invest heavily on innovation & research and ensure

that fiscal consolidation does not lead to deceleration in gross capital formation. Low labour

content, continued dominance of Public sector enterprises, neglect of innovation, research and

investment in skill development and slow down of private sector gross capital formation are

some of the major reasons for poor competitiveness of the capital goods sector.

A strong agriculture sector is critical for food security and for inclusiveness. Growth in

agriculture is more effective than growth in other sectors. Research over the past 25 years has

revealed that one percentage of growth in agriculture is at least two to three times more effective

than the same growth coming from other sectors in reducing poverty.

China, in contrast to India, started off with agricultural reforms-liberalizing farm prices and

boosting farm incomes that in turn created demand for products manufactured by the town and

village enterprises. India started off with services and the reforms push to agriculture hasn’t been

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adequate. As a result India’s record at poverty reduction is not as good as China’s. However,

under current circumstances, Indian agriculture possesses the potential to grow at a rate of at least

5 percent per annum.

Investment is crucial to enhance productivity and create employment opportunities in agriculture

and the corporate sector here has a greater role to play. 18 percent credit to agriculture by banks

flows primarily in the form of crop credit and not for investment. Greater role of corporates in

agriculture is essential as robust industrial or services growth is directly correlated with

agricultural growth.

There is great potential for agricultural exports. Promotion of such exports requires incentivizing

private investment in agriculture that can be achieved by liberalizing agricultural markets that gets

prices right via abolishing movement restrictions, stock limits, export controls, etc. The emphasis

of public investment in agriculture should shift from subsidies towards R&D, irrigation, rural

roads, etc., that yield greater returns.

It is also crucial to modify institutional frameworks. Organized retail, freeing land lease markets,

etc., are desirable reforms.

The concept of inclusiveness goes beyond financial inclusion and should emphasize total

economic inclusion. It is crucial to improve access/ confer rights especially to the

underprivileged. Legislations viz. the Right to food are therefore essential.

Financial inclusion at present is a must for the prosperity of business in the future. With the recent

freeing of branch expansion, banks are on a massive expansion. In the current year, all public

sector banks are opening around 7000 branches- mostly in unbanked areas. Several facilities,

including digital banking & net banking facilities are being provided. However, more needs to be

done. Steps to make all accounts Aadhaar enabled, the DBT scheme, etc., contribute to bolstering

financial inclusion. Likewise, initiatives by banks for capacity building, credit counseling,

financial literacy, opening up of rural training institutes, support to self-help groups (SHGs) have

also been successful.

There is enough food but still food security is a challenge. Access and distribution of food

remains a major challenge. One in 8 people in the world today remain chronically undernourished

(FAO 2013). Food security is inherently interlinked with economic & environmental concerns.

climate change impacts availability, stability of access and utilisation of food. Volatility of food

prices increases the burden on the poor and slows progress. Wastage of food is also a major

challenge globally. Storage facility is inadequate in India. Increased investment in agriculture,

new technologies and good policies are key to ensure global food security. Analyses and

alternative approaches needed to mitigate food price volatility globally to support policy making

and develop new mechanisms to enhance transparency. There is also need to manage food

insecurity risks due to climate change.

Food security requires strong political will and administrative commitment nationally for efficient

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public distribution of nutritious food, better monitoring and evaluation, ensuring effective

implementation and regular reforms, enabling better implementation of schemes in rural areas,

improving storage facilities and reducing wastage, reducing food expenditure per household,

improving access to healthcare, reducing child mortality and enhancing human capital with

educational attainment and livelihoods.

Poverty in India declined without significant changes in distribution in rural areas and worsening

of distribution in urban areas. Poverty alleviation and employment generation programmes played

a crucial role in poverty reduction. Greater focus on quality of education and health is needed.

Women safety and transport for working women must be high priority.

The different social sector programmes showed varied performances in different places. While

some changes in programmes are needed, implementation and delivery related issues need greater

attention. In some cases, greater awareness generation is needed. Strengthening and empowering

the basic institutions like Gram Panchayats & Gram Sabhas are needed for promoting greater

inclusiveness and outcomes.

The thrust of the Competition Commission Act is basically to ensure a culture of competition and

good corporate behavior. It needs to be emphasized that the benefits of market and competition

can only percolate in an institutional framework of good corporate governance. Otherwise, private

barriers could well substitute the erstwhile government barriers to trade and prevent

improvements in social welfare. During the last four years or so, the Competition Commission of

India (CCI) has received over 400 matters alleging violations of Sections 3 and 4 of the Act

relating to anticompetitive agreements and abuse of dominance in sectors as diverse as stock

exchanges, travel, real estates, pharmaceuticals, mining and entertainment. Penalties have been

imposed wherever violation noticed. With regard to mergers and acquisitions, around 150

proposals have been decided so far.

The Government has tried to address some major impediments like lack of transparency and

accountability in procurement in order to ensure that PPP projects are procured and implemented

by observing principles of transparency, competitive bid process, affordability, and value for

money. But, the impact of these efforts on the ground level implementation is yet to show. While

there has been a lot of debate about the lack of a vibrant corporate debt market and constraints

faced by the banking sector in financing infrastructure requirements, it needs to be highlighted

that there has been an over reliance on debt. The infrastructure companies are highly leveraged

and the flow of equity in the infrastructure project funding has been very minimal. Experts have

started questioning the ‘Public-Private Partnership’ and are concerned at it becoming a ‘Public

only’ venture. The development finance model has to be characterized by good planning, strong

commitment of the parties, effective monitoring, regulation and enforcement by the Government.

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Proceedings of the Delhi Economics Conclave 2013 on “The Agenda for the Next Five Years” December 11-12, 2013

Plenary Day 1

(December 11, 2013)

Anchor: Ladies and gentlemen, a very good morning to everyone. I am Abhishek and I am Molishree. We extend a very warm welcome to all of you to this function which marks the fourth consecutive Delhi Economics Conclave over the last four years. On our previous endeavours, we have been honoured with the presence of eminent personalities in the field of economics like Prof. Amartya Sen, Prof. Nicholas Bloom, Prof. Avinash Dixit, Prof. Martin Feldstein, Prof. Sunil Khilnani, Prof. Richard Freeman, Prof. Arvind Panagariya, Prof. Michael Spence, Mr. Tharman Shanmugaratnam, Mr. Pravin Gordhan and many more. This year also, we are honoured to have the stalwarts from the field of economics and governance who have agreed to grace us with their presence in this international event.

On behalf of the Department of Economic Affairs, Ministry of Finance, we warmly welcome the Hon’ble Finance Minister Shri P. Chidambaram, Dr. C. Rangarajan, Chairman, Economic Advisory Council to the Prime Minister, Dr. Raghuram G. Rajan, Governor, Reserve Bank of India, Dr. Arvind Mayaram, Secretary, Department of Economic Affairs, Ministry of Finance, Dr. H.A.C. Prasad, Senior Economic Adviser, Ministry of Finance, representatives from media and friends. May we now request Dr. Arvind Mayaram, Secretary, Department of Economic Affairs to deliver the welcome address.

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Welcome address by Dr. Arvind Mayaram : Hon’ble Finance Minister, Dr. C. Rangarajan, Governor, Reserve Bank of India, distinguished guests, ladies and gentlemen. I take this opportunity of welcoming all of you to the Delhi Economics Conclave, an event which has attracted some of the best economic minds from around the world. This year too, we are privileged to have a very large number of luminaries who are here with us and who would speak to us today and tomorrow. This is the fourth in the series of the Conclaves which have been organized by the Department of Economic Affairs. I also take this opportunity of congratulating the Economic Division of the Department of Economic Affairs which has worked very hard in the last couple of months to make this event a success.

The greater integration of the Indian economy with the world economy has thrown open several challenges, the challenges that were perhaps never anticipated or thought of. The changing dynamics both globally and domestically lead us to begin to re-look at the manner in which we have predicted the economic development path in the last several years. To deal with this ever changing world and the manner in which the things will unfold, which is marked by unpredictability, one has to take short term measures like the measures that both the Government and the Reserve Bank of India have taken to deal with the impact of the possible QE withdrawal in the last couple of months as well as medium to long term measures in the form of structural reforms while keeping in mind the overall interest of the country. Despite the uncertainty question mark on growth numbers, inflation, current account deficit, it is clear that the determination of the Government in the last couple of months to bring India back to a fiscally responsible path has now been accepted all over the world. Ernst & Young in the nine capital confidence barometer for October 2013 has placed India as the most attractive investment destination ahead of China and Brazil. The report is based on a survey of 1600 senior executives across at least 70 countries. The findings of the survey highlight the long term confidence which is once again reiterated about India.

We have a long way to go and the next five years are going to be crucial in the manner in which the country shapes itself to deal with the challenges that are going to unfold before us in the global economy. We will need to increase new growth centers, urbanization is going to be a major challenge. We will need to create a large number of employment opportunities for a very young population; we will need to get a larger share in the world market in terms of our exports; we will have to become cost competitive; and we will need to continue to invest in infrastructure heavily to be able to move forward in the manner in which the Finance Minister has repeatedly said, to achieve

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our potential growth rate. These are difficult times and the challenges that we have are the ones which need to be faced. I am confident that we have seen the worst and it is behind us. We go forward with much greater confidence in our ability to deal with crisis and difficulty and therefore, today to inaugurate this event, we have the person who has led the Government’s effort to meet the economic challenge from the front, who has been the leader of the team in the Finance Ministry to inaugurate this and to share with us his vision of how the next five years would be for the country. I once again take this opportunity of welcoming all of you who have come here from far and wide to be part of this great event. Thank you very much.

Anchor: Thank you, Sir. May we now request the Hon’ble Finance Minister Shri P. Chidambaram to kindly deliver the Inaugural Address for the programme.

Inaugural address by Shri P. Chidambaram: Good morning to all of you. Shri Arvind Mayaram, Secretary, Economic Affairs, Dr. C. Rangarajan, Chairman of the Prime Minister’s Economic Advisory Council, Dr. Raghuram Rajan, Governor, Reserve Bank of India, Dr. HAC Prasad, ladies and gentlemen: I welcome you on behalf of the Economic Division of the Ministry of Finance, Government of India, to the Delhi Economics Conclave 2013. I am very happy to see amongst this distinguished gathering and on the list of speakers Prof. Nathan Nunn, Prof. Romain Wacziarg, Prof. Shang-Jin Wei, Prof. Renato Baumann, Prof. Ruth Kattumuri and Prof. Gita Gopinath and many others.

I may begin by congratulating the officers of the Economic Division, led by Dr. HAC Prasad, Senior Economic Adviser, for their untiring efforts to put together this conference. I compliment them for the choice of subjects and the choice of speakers. The conclave is about looking to the future. I recall the saying that all predictions are suspect, especially about the future. In this case, we have been asked to look ahead for the next five years. I can speak only in a guarded manner on the world economy or what it will be like in the next five years. There are incipient signs of recovery. But they are too tentative, too few and too scattered. The three engines of growth are the United States, the Eurozone and China.

I hope we can add India to this list, given India’s size, population and potential. Of these, China is the obvious champion, but for reasons that are domestic and political, it is possible that China may wish to moderate its growth rate. If the US economy achieves a growth rate of 3 percent or more, that could trigger a worldwide recovery. The Eurozone faces many challenges. Germany’s Finance Minister

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summed it up recently when he said that Europe, given its ageing and stable or declining population, cannot aspire to growth rates of more than 1 to 2 percent. That leaves India and I shall speak about India presently.

We may, therefore, conclude that global growth over the next five years is likely to be moderate. As far as India is concerned, I may recapitulate, briefly, the events of the last five years. We may start with September 2008. The beginning of the Great Recession impacted India like it did every other country. India’s response was traditional and strictly according to the text books. What stand out are the three stimulus measures. After declining to 6.7 percent in 2008-09, GDP growth revived in 2009-10 and 2010-11, but as Governor Rajan pointed out a few days ago “While the stimulus did help growth initially, it eventually led to an overheated economy, high inflation and wage growth, and consequently deficits widening to uncomfortable highs – the Current Account Deficit rising from 2.8 percent in 2010-11 to 4.8 percent in 2012-13 and the centre’s fiscal deficit rising from 2.5 percent in 2007-08 to 5.7 percent in 2011-12.”

The task before India is to reverse these unintended consequences and lay the ground for faster, more inclusive and sustained growth over the next five years. The agenda, therefore, will be obvious. At the top of the list is fiscal consolidation. There can be no compromise and I speak for the Government, there will be no compromise on the decision to walk on the path of fiscal prudence and contain the fiscal deficit, step by step, year by year, until we reach the goal of 3 percent of GDP in 2016-17.

As we progress towards greater fiscal consolidation, we must pay attention to the revenue deficit as well. Borrowing should largely finance investment and not consumption. Along the way, the current account deficit would also need close attention. India cannot finance a current account deficit of the order of US$ 88 billion as we did in 2012-13. Nor can India afford to pay for import of gold in the order of US$ 50 billion or more. Nor should India import coal when it has coal in abundance. Nor should India tie itself in policy knots and be forced to import goods and commodities that it has the capacity to manufacture or produce.

Next on the list is tackling inflation. It is common knowledge that the Government of the day will pay a price for high inflation, especially if inflation persists over a long period of time. The current high inflation – both measured by the CPI or the WPI – is driven by high food prices, especially prices of

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fruits, vegetables, meat, fish, eggs and milk. Sometimes, pulses and edible oils also witness sharp spikes in prices.

I would like to say a few words on farm gate prices and rural wages. The two UPA Governments have given higher prices for wheat, paddy, other cereals, cotton etc – more than any previous Government. I believe that was the right policy. I believe that farmers who grow these commodities are entitled to fair and remunerative prices so that they do not abandon farming and they continue to produce the food grains that are required by 1.3 billion people. Likewise, the UPA Governments have, through MGNREGA, influenced rural wages. I believe, that was also the right policy. The landless labourer or rural worker is entitled to a fair wage. The argument that inflation must be contained by suppressing farm gate prices or rural wages is in my respectful submission, a specious argument that ignores the needs of the poor and deserves to be rejected. It is widely accepted that while monetary policy is an instrument to contain inflation, it is a rather blunt instrument, although the only one available to the monetary authority. It is also widely accepted that monetary policy has little impact on food prices. How do we then contain inflation, especially inflation in food articles? The answer is to increase supplies and to radically transform the manner in which commodities and food articles are stored, transported, distributed and sold in the various markets, especially urban markets.

There is also a need to deal wisely with harvesting and marketing and deal strictly with hoarding and profiteering. Laws in this behalf at least as far as India is concerned, are entirely in the domain of the State Governments. Two laws stand out; one is the Agricultural Produce Markets Act and the other the Essential Commodities Act. The powers of notification and enforcement under these Acts are with the State Governments, yet State Governments are loathe to take action under these Acts. I think it is necessary to highlight the inaction of the State Governments in this behalf, even while accepting that the Central Government must do all it can, within its powers, to moderate inflation.

The next item on my list – and this will be the last one on which I shall speak today – is financial sector reforms. Financial sector reforms have been undertaken regularly over a long period. In the last six months, we have crossed several important milestones. These are; 1. The submission of the FSLRC report; 2. The Enactment of the new Companies Act, to replace a law of 1956 vintage; 3. Passage of the PFRDA Bill and making the Pensions Regulatory Authority as a statutory body; and 4. Placing commodities futures market regulation under the Ministry of Finance. I believe that when fully rolled out, these measures and these laws will have profound implications for the Indian financial sector. The impact of the Companies Act will be beyond the financial sector. The other three measures are directly related to financial sector regulatory and institutional changes. Measures of legislative and institutional reforms have been undertaken in the financial sector more regularly than in many other areas. Steps have been taken to improve the regulatory governance process. Discussions are underway on the non-legislative steps recommended by the FSLRC as well. The legislative parts need to be pursued after due consultation and taking everyone on board and charting, synchronizing and sequencing the actions required in implementing big institutional changes.

I believe that financial sector reforms can be game changers. We know what the new game changers can be. They include the Goods and Services Tax (GST), the Direct Taxes Code, the Insurance Laws Amendment Bill and the Uniform Financial Code recommended by the FSLRC. Each one of them requires the building of a broad consensus. My experience has been that consensus is built over several months of hard work and then consensus crumbles when it is hit by a seizure of political opportunism.

To conclude, I wish to reiterate that the primary goal of laying out an agenda for the future is faster, more inclusive and sustained growth. We must focus on human development issues. Let me

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remind everyone here that in absolute terms, the number of poor in India declined from 407 million in 2004-05 to 270 million in 2011-12. Between 2004-05 and 2011-12, the average annual decline of the poverty ratio was 2.2 percentage points every year, which is around three times higher than the rate of decline in the poverty ratio during the period 1993-94 to 2004-05. A faster, more inclusive and sustained growth must be the strategy that should guide us over the next five years.

Ladies and gentlemen, let me once again congratulate the organisers for bringing together a galaxy of academics and experts from different areas and different parts of the world to discuss on the theme of the conclave. I welcome them once again and I wish them a very pleasant stay in Delhi. I have great pleasure in formally inaugurating the Delhi Economics Conclave 2013. Thank you.

Anchor: Thank you Sir. Ladies and gentlemen, we welcome the presence of the hon’ble Minister of State for Finance Shri Jesudasu Selam amongst us. We would now like to request Dr. HAC Prasad to deliver the vote of thanks for the Inaugural Session.

Vote of Thanks by Dr. HAC Prasad: Distinguished people on the dais, dignitaries, ladies and gentlemen: It is a great honour and privilege to propose the vote of thanks today morning on the occasion of the fourth Delhi Economics Conclave. The Delhi Economics Conclave which started in 2010 has become a big event and has now got its own identity. It has been my privilege to be associated in the organization of this Conclave for all the four years. The theme of this year’s conference “the Agenda of the Next Five Years” was carefully selected as it was considered to be topical in the context of setting the economic agenda for the next Government. It is also important as we are completing five turbulent years since the global financial crisis of 2008 with many shocks and ups and downs for almost all the economies of the world. Now there is a semblance of calm and sign of the economies recovering and it is apt for economists, policy makers and all of us to think and discuss on what needs to be done to have shock resistant economies given what has happened in the past five years.

First and foremost, I would like to thank the Hon’ble Finance Minister who has set the right tone and tenor for the discussion by highlighting important agenda items and game changers. I thank you Sir for your enlightening words and also your support. My sincere thanks to Dr. Rangarajan, Chairman, Economic Advisory Council to the PM who has accepted to chair the next session.

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My sincere thanks also to Mr. J. Selam who has graced the occasion. Dr. Rajan, now Governor, Reserve Bank of India and our former Chief Economic Adviser who will be giving a lecture after this session initiated the work of this Delhi Economics Conclave. Thank you Sir. My sincere thanks to Dr. Arvind Mayaram, Secretary, DEA who has been fully supporting us and giving us enough liberty but always willing to help when needed. Sir, we have faced many hiccups but we were confident that we could bank upon you whenever there was a need. Thank you, Sir, for your unstinted support. I would be failing in my duty if I do not thank my colleague Dr. N.K. Sinha and his team in Economic Division which stood by me in the thick and thin of things in organizing this conclave. Our sincere thanks to all the officers of the DEA, all the sponsors, panelists, chairpersons, dignitaries, academicians, bankers, industrialists, media and all the invitees of this conclave. Thank you and welcome for the conclave.

Opening plenary Lecture Session – I (Financial Sector Reforms)

Anchor: Thank you Sir. Ladies and gentlemen, it is time to move on to our opening plenary lecture of the day. The opening plenary lecture would be on the topic of Financial Sector Reforms by Dr. Raghuram G. Rajan, Hon’ble. Governor, Reserve Bank of India. The Session would be chaired by Dr. C. Rangarajan, Chairman, Economic Advisory Council to the Prime Minister.

Mr. Chairman (Dr. C. Rangarajan): Dr. Raghuram Rajan and distinguished invitees, we are delighted to have this morning with us as the opening plenary speaker Dr. Raghuram Rajan. Prof. Jagdish Bhagwati could not be present for some reasons. We miss him very much. Dr. Raghuram Rajan needs no introduction to this audience. His academic contributions have been immense. As the Chief Economist of the International Monetary Fund, he had the opportunity to look at the financial problems at the global level. He had the foresight to predict some of the developments which actually happened in 2008 and later. He will speak to us today on financial sector reforms. Financial sector reforms have acquired a new connotation in the post 2008 crisis period. But looking back at India and what we have done in relation to the financial sector development, you will see that in the 70s and 80s in relation to the development of the financial sector, the focus was widening the spread of the banking system and the focus was also on what we call the directed credit. But by early 1990, it became obvious that while we have achieved some such sectors in terms of widening and deepening of the financial system, the system itself was under strain. When the liberalization process was introduced, it was recognized that

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the gains from liberalization in the real sector is possible only if there were reforms in the financial sector as well. At that time in early 1990s, the banking system for example, was under severe strain and the adequacy of capital in the banking system was a big question.

The financial sector reforms that were introduced in the early 1990s of which I was also a part, focused on several things by dismantling the administered structure of interest rates, by requiring the Government to go to the market and raise funds at market related rates of interest through auction, by introducing prudential norms which covered capital adequacy and income recognition norms and so on.

In fact, some of the phrases that are now common like non-performing assets were not in vogue prior to 1991 at least in this country. So, by introducing the prudential norms, by recapitalizing the public sector banks, by introducing an element of competition in the financial system through two means, by reducing the stake of the Government in the public sector banks and by opening up and by issuing new licenses for private banks after several decades, by improving the system of supervision and inspection, I think a whole lot of changes were introduced at that time and that was the beginning of the

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financial sector reforms in our country. It also was a traumatic experience for the banks to show losses in their balance sheets. Banks were telling their clients to have good balance sheets and when banks found at the time of the introduction of the financial sector reforms that their balance sheets were themselves under strain, it was not easy for the banks and the bank managements to reconcile themselves to that situation. But since then, many more reforms have been introduced; many more changes have been introduced as we went along. But these were the fundamental changes that were introduced in the 1990s and that is the beginning of the financial sector reforms.

In the post 2008 period, as I said, financial sector reforms have assumed a new connotation. There are questions which are being raised about what some people call the unbridled expansion of the financial sector and the banking system. Are there limits to be set on the expansion of the banking system? There is greater emphasis on regulation. How much of the emphasis on regulation is relevant in developing countries like India which are undergoing a transformation and which therefore, are encouraging the expansion of the financial system. These and many others interesting questions arise. It is extremely important that the financial sector plays a supporting role of the expansion of the growth of the economy. In the world of today, it is difficult to believe that without a strong financial system, the real sector can grow strongly. But what are the limits to it? Are there limits that must be set on the way in which the financial system should develop? At the same time, how do we take care of the developmental requirements? These and many more questions arise and whom can we have to answer these questions better than Dr. Raghuram Rajan. So, I present to you now Dr. Raghuram Rajan who will speak on financial sector reforms.

Dr. Raghuram G. Rajan: Thank you very much, Sir, Dr. Rangarajan, Hon’ble Minister Selam, ladies and gentlemen: We have come a fair distance from the turmoil of summer this year, growth seems to be stabilizing. We have had good news on the monsoon, agriculture has picked up and we are likely to have a strong kharif crop as well as the rabi crop. Exports are picking up once again quite strongly and a number of stalled projects have been cleared with the hope that they start adding to investment in the second half of the fiscal year. So, that is relatively good news on the growth front. I think, growth is stabilizing though it is too early to call a bottom at this point. We have also seen deficit come down from an alarming 4.8 per cent to 1.5 per cent for the year as a whole, I think, most analysts, the Government and the RBI predict a current account deficit below three per cent of GDP.

The fiscal deficit has certainly narrowed from the projections that were in place a year and a half ago from around 6.1 per cent to a realization of 4.9 per cent in the last fiscal year. This year, the Finance Minister has repeatedly said that he will not allow it to go beyond 4.8 percent.

Perhaps, as evidence of the stability as well as improved external conditions is that the rupee has also stabilized somewhat. I think, that is good news for the economy. Now economy is stabilizing, but there is no room for complacency. Some part of the reduction in the current account deficit comes from suppressing gold imports. This was necessary in the short run but it is not desirable over the medium term. Similarly, not all measures to reduce the fiscal deficit are of the highest quality. But perhaps most important is that I think we have to recognize the fact that we are faced with elections. A stable Government post elections cannot be taken for granted. I am hopeful that it is of high likelihood but it cannot be taken for granted. This implies that all parties have to work together today to ensure that any Government that emerges post-election has the time to come to terms with the challenges measuring the Indian economy. Otherwise, markets and rating agencies may not be willing to cut the new Government much slack. More generally it would be overly complacent and possibly dangerous for parties to postpone necessary legislations with the idea of passing these Bills post-elections. Post-election politics may become even more challenging whoever assumes power. Similarly, any slowdown

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in putting large stalled projects back on track before elections or any additional fiscal slippage will only amplify the large challenges that the new Government will have to face.

This Conclave however is about the medium term, not about the short term. Looking to the medium term, I would argue that the primary measure of success going forward should be the jobs that are created in the economy, jobs created not by giving Government subsidies or increasing Government employment or by giving protection to labour intensive industries or sectors but by developing and facilitating competitive environment that will encourage efficiency and creativity. This job agenda requires a disciplined focus on four issues. First, it is obvious and it has been said before by previous speakers Secretary Mayaram and Minister Chidambaram, we have to improve the quality of our infrastructure especially the logistical support and the power that industry and services need. We have important plans on the anvil today. One of the biggest infrastructure projects, in fact, the biggest in India’s history is the Delhi Mumbai Industrial Corridor, US$ 93 billion worth enormous project connecting Delhi and Mumbai, building many cities in between, high speed rail links and road links, this will be an enormous boost to industry and services. But we need to complete the project on time and within cost. The success of the New Delhi metro suggests that timeliness and cost control are not beyond our means. The second important part of the job’s agenda is education and training for the jobs that will be created. Our youth need higher degrees not just in computer science but also in design, in architecture, in civil engineering. They also need not just higher degrees but also vocational education. We need many more good plumbers, good electricians, good craftsman, good workmen and sometimes we need more of these than unemployable low skilled engineers. In fact, the whole business of teaching itself can be a source of employment, teaching our citizens can be a stepping stone to teaching the world especially given the fact that we now have wonderful communications technology which can link Indian job creators or Indian jobs to the rest of the world. India can be at the forefront of providing mass technology enabled education, with our professors providing appropriate human inputs to achieve the best of automation as well as customization for learning. Think about lectures being provided by world class professors and professors around India providing the additional hand holding. Some of them may be the world class professors providing lectures. But they also could provide the hand holding that results in the necessary customization that makes a 6000 or 10000 person course actually successful. Third is, we need better business regulation. This does not always mean less regulation but it means regulation that is a profit to the objective that is enforced. Entrepreneurs keep telling me horror stories about regulations that we sometimes encounter in India and we have done a lot to ameliorate, to

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improve the regulation. But there is still a certain degree to which we are behind the time. So, entrepreneurs tell me about boiler inspectors coming to their software outfits and asking to see the boiler. This of course, stems from the day where every factory had a boiler, but of course, we do not have those in many of the new enterprises that we have. Others look for in some States, there is still a rule that a pitcher of water should be placed on the factory work flow, a pitcher of water because in olden days you did not have water coolers. Today they have water coolers but the factory inspector can still look for the pitcher and hold you in violation if you do not have that pitcher. We need to revise and rethink our regulations and make them more appropriate for the time so that factories are not and software producers are not automatically in violation but meet the lower and more appropriate level of regulation that exists. Too often we have too much regulations in books and too little regulation in practice with the worst of the regulated finding unscrupulous ways around regulation while the honest are really held back. This is something that we need to tackle. Opening a business legitimately requires an enormous number of clearances and paper work as the World Bank has pointed out repeatedly. In the same way, as we made an enormous advance in individual tax filing by creating a Saral form, a one page form on which low income tax payers could complete their tax compliance could we have a saral one page disclosure of a business whereby by completing that one form, they could go to a single authority and get all the permissions needed to open a business legitimately rather than approach, at this point, 42 different places to open a new business legitimately. We need to relook business regulation.

Fourth and this is the point that I will focus on in the rest of my talk. We need a better, deeper financial system which will not only finance the needed credit for infrastructure expansion as well as the expansion of every producer ranging from the small kirana shop which could benefit from additional loans to increase working capital and inventories to the industrialist who needs loans to start new enterprises and new projects. But finance is not just about credit. It is equally important for households to be able to save safely with positive real return, to insure themselves against health emergencies or old age costs and to borrow at low cost to finance their own consumptions, that is, retail norms. They should also be able to make remittances cheaply and pay each other at very low cost. These are all essential aspects of the financial system. But also it is important that financial system should not require constant subsidies or be bailed out at the tax payer expense. So, in the rest of the talk, I want to focus on what we at the Reserve Bank are doing to try and improve the financial system. Of course, in all this, we are building on the work of giants. People like Dr. Rangarajan who made many of the initial steps in reforming us and what we want to do is, build on this. I would classify our measures as really focused on five separate pillars. The first is clarifying and strengthening the monetary policy framework. The bread and butter of the Central Bank, its monetary policy and we need to clarify and strengthen the framework. When I was appointed Central Bank Governor, the Prime Minister said that an important task would be to do once again what the Sukumoy Chakraborty Committee did in the 1980s in laying out an agenda for monetary policy for Central Bank. It is time we do that once again and this time we have entrusted a committee to start the process of outlining what we might want to do, the Dr. Urjit Patel Committee. Second element is to strengthen bank structure through new entry, branch expansion, new varieties of banks, and moving foreign banks into better regulated organizational forms. I will come back to this in a bit. Third, we need to broaden and deepen financial markets, increase the liquidity and resilience so that they can help allocate and absorb the risk entailed in financing India’s growth. We see financial markets are complementary to financial institutions not necessarily comparative. Fourth, we need to expand access to finance for small and medium enterprises, for the unorganized sector, the poor, the remote and undeserved areas of the country. We need to do this through technology, through new business practices, through new organizational forms. We need financial inclusion. It is both an imperative from the perspective of equitable growth but also in my view a very important part of

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growth itself. Five, we need to improve the system’s ability to deal with corporate distress and financial institution distress by strengthening real and financial institution restructuring as well as debt recovery. This is something that I will add a little bit more in terms of what we plan to do in fact next week.

Let me just go a little more in detail through these five measures. First on monetary policy is this. One of the problems we faced today which the Finance Minister alluded to is high inflation. We are seeing high levels of inflation, one of the highest amongst large countries in the world. Even though the growth is weaker than we would like it to be and much of the growth is concentrated in food, but not just food it is also in services. Our households are turning to gold because they find financial investments unattractive. At the same time, we have many industrial corporations complaining about high interest rates because they cannot pass through the higher costs into higher prices for their products. Just this morning, I met an esteemed banker who told me, when are you cutting rates. Now clearly, one segment of the population is worried about high rates. Equally, the household sector does not see those presumed high rates attractive enough to put their money into the banks in a large way and there is a dichotomy that is essentially due to inflation. There can be no stronger reason to bring inflation down than that. It is proving very costly to our economy in terms of saving, in terms of investment, we need to bring inflation down. We can spend a long time debating the sources of this inflation. But ultimately inflation comes from demand exceeding supply and it can be curtailed only by bringing both in balance. We need to reduce demand somewhat without having adverse effects on investment and supply. This is admittedly a balancing act which requires the Reserve Bank to act firmly so that the economy is dis-inflating even while recognizing that weak economy needs more time than one would normally allow for it to reach a comfortable level of inflation. There are disinflationary forces in place, the weak state of the economy is the source of disinflation. The recent stability of the rupee will help, the good kharif and rabi harvest this year will generate disinflationary forces which will again help us. Now we want to look at the data to see how these forces are playing out. So, when the banker asked me about interest rates, I said, our interest rate policy will be data dependent. No single data or point or number will determine our next move but our effort is firmly on controlling inflation. I think, the market understands what we are trying to do. But we definitely need a more carefully spelt out monetary policy framework than we currently have and what we are looking for is guidance from the Urjit Patel Committee Report which is likely to be submitted around the end of this month. Second, we have announced a number of steps in strengthening banking structures. We have announced measures to pre-bank branching. We also want

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to incentivize foreign banks to incorporate domestically. This is a move which has been planned for a long time. Since 2005 the RBI has put out documents suggesting that this would be a better organizational structure. The fundamental reason in getting a foreign bank into a wholly incorporated domestic subsidiary essentially gives a regulator a much better, easier way to regulate flows in and out of that structure. Therefore, situations like as for example, when Lehman Brothers went bust, it withdrew cash from all its branches around the world thereby leaving only the liabilities in its local operations. That kind of event will not happen if in fact the entity is domestically incorporated because at that point, it has no ability to send cash back to the parent without control. So, the primary aim to allow foreign banks to incorporate domestically, to encourage them to incorporate domestically is financial stability, to reduce the risk of contagion stemming from external forces which are beyond our control. This is necessary and important to ensure the stability of our banking system. It is one that many countries have embarked upon and should be seen as less controversial. It has been thought through a long time. Now we cannot force foreign banks. They have been here for a long time to incorporate in that structure because that would be in a sense retrospective regulation. What we can do is encourage them to do it and that is indeed what we are doing. Going forward, we also have to give our public sector banks which are a national asset, the means to improve their competitiveness. As you know the NPA problem is now largely focused in the public sector banks for a variety of reasons including the fact that they were more forthcoming in financing infrastructure. Many public sector banks have made enormous strides also in the last decade. For instance, the extent to which they have digitized their operation again something driven by Dr. Rangarajan is extremely praiseworthy. But because competition in the banking sector is likely to increase in the next few years, they cannot possibly afford to rest on their laurels. In the coming months, we will discuss with stakeholders in public sector banks what needs to be done to further improve their stability, their efficiency and their productivity so that they can compete in the Indian market place, provide good value to customers as they have been doing in the past and essentially flourish. Third, we need to enlist markets in the aid of financial institutions. People often see them as competitive. But liquid markets will help banks offload risk that they should not bear such as interest rate risks or exchange risk. They will also love banks to sell assets that they have no competitive advantage in holding such as long term loans in completed infrastructure projects which are better held by infrastructure funds, pension funds or insurance companies. We also need more equity in the system. India is under-capitalized in that sense and liquid market will help promoters raise equity which is solely needed to absorb the risk that otherwise banks end up absorbing. Rather than seeing market as inimical to the development of the banking sector, we intend to see them as complementary. In the coming weeks, we will roll out more measures. We have already rolled out some such as cash settled interest rate structures. But we will roll out more measures to improve the liquidity and the depth of the G-sec market. In particular we want to look at increasing liquidity across the spectrum of bonds that are traded not just for the ten year bond. We will then turn to money markets and corporate debt markets. We have already, in the money markets, introduced term recourse and we will do more of that to help develop markets in short term money across different maturities. We will also strengthen the corporate debt market. I think, the Companies Act that the Finance Minister talked about will be an important force in creating a bankruptcy code which is effective, which will help the creation and the issuance of lower rating corporate debt securities. We have introduced a variety of new products. We will continue introducing more and we will continue to work to improve liquidity in the derivatives market. When the exchange markets became unstable, we imposed restrictions on participation in these markets. We will remove these restrictions in a calibrated fashion as we become comfortable with the stability of the whole thing. Fourth, we have to reach everyone, however remote, however small, however poor with financial services, new financial services, as I said. Financial inclusion does not just mean credit for productive purposes. It means credit for a doctor to heel your child when you are a poor patient or credit to pay a lumpy school fees or college

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fees which you cannot afford because your salary comes over the year. It means the safe means of remunerated savings and easy remittances in payments, it means insurance and pensions, and it means financial literacy and consumer protection. We have made great strides in inclusion but we are still some distance from our goal. We have adopted a branch based strategy for inclusion. But it is clearly not enough. Too many poor people in so-called over branched urban areas still do not have access to banking services. We have many experiments underway to use technology including mobile phones. We have new products such as mobile wallet and new entities are acting as business correspondents to link up people to the formal financial system. But we need to push harder on all these much as with cell phones where we created a frugal Indian model. We need a frugal trustworthy and effective Indian model for financial inclusion. The Dr. Nachiket Mor Committee is helping us to think through possible models and I am hopeful when we outline recommendations based on their advice, our fine banks, NBFCs, IT companies and mobile companies will rise to the occasion. The key should be to encourage entities to compete to serve customers at the bottom of the pyramid. We should tolerate their making profit but not their profiteering. And we will enhance our efforts in consumer protection and consumer literacy accordingly.

And finally, and this is where I want to add to what we have been saying in the past. We have to deal better with distress. We have to ensure that the system recognizes financial distress early, take steps to resolve it and ensures fair recovery for lenders and investors. Across the world, the single most important lesson from financial distress is deal with it early, do not bury your head in the sand and wish that it goes away, wish that it will somehow disappear when growth comes back. Unless you deal with it, in fact, growth will be impaired. Now, we could wish for a more effective judicial process or a better bankruptcy system. Those are in the works. But, while we await that, we have to improve the functioning of what we have. Next week, we propose to put out a paper for discussion that will focus on putting real assets back to work in their best use. The key element is to deal with distress borrowers and there is a fair amount of distress though not alarming yet in the banking system. We need to deal with it before it becomes larger. The key elements will be (1) an early formation of a lender committee with time lines for reaching agreement on a plan for resolution of distress for the borrowers; (2) stronger incentives for lenders to agree collectively and quickly to a plan. This will involve better regulatory treatment of stressed assets if a resolution plan is formulated and agreed to, but accelerated provisioning if no agreement can be reached. Three, we will mandate an independent evaluation of large value restructurings with the focus from the evaluator of whether the plan is viable and whether there is a fair sharing of losses and possibly future upside between promoters and creditors. Fourth, for willful defaulters or a new category that we call uncooperative defaulters, future borrowing will become more expensive. By uncooperative defaulters, I mean, those who do not work with their lenders to achieve an efficient and equitable resolution of distressed assets. Fifth, we will allow more liberal regulatory treatment of asset sales and encourage a variety of new entities to come to purchase or refinance assets that are distressed.

Now let me emphasise again. The intention is to recognize problems early and to resolve them and this will give the economy its best chance of getting the credit it needs as it grows through the recovery. Through the measures that we will outline next week, the RBI intends to help promoters and banks deal effectively with the financial stress that has built up.

Let me conclude. I will depart from the usual conservatism of Central bankers to predict that the best of India is yet to come. We will be a healthier, better educated and richer nation, not just in absolute terms but even relative to other countries. Now this is not a jingoistic statement based on some perceived or purported Indian superiority but a sober recognition that we are still much poorer than other countries and catching up is always easier than drawing away from the pack. So, we will

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catch up; we will be richer both in absolute and relative terms. But we can achieve these outcomes only if we go about addressing the challenges we face methodically, with discipline and a sense of national purpose. In the coming years, I hope, that is exactly what we will do. Thank you.

Mr. Chairman: Friends, now we have listened to a very incisive analysis of the developments in India and the role the financial sector can play. Before I throw open the assembly for the discussions, let me make a few comments and then we have time for question answer session with Dr. Rajan. Obviously, the discussions in this conclave are all as a background of where we see India going in the next five years. It is true that India is passing through currently a phase of low economic growth. But this should not cloud the fact that over the eight year period beginning 2005-06, the average annual rate of the growth of the economy has been 8 per cent. Nor should we overlook the fundamental changes or the critical changes that have occurred in the Indian economy over the last two and a half decades. I believe the Indian economy has become more competitive. It has become more resilient and more efficient. But however, we need to look at the factors that have contributed to the slowdown in the growth rate for the last two and a half years, if we have to get back to the high growth path that we all have in mind. In fact, as the Finance Minister said that the recovery from the crisis of 2008 was swift and as late as 2010-11, the Indian economy was growing at 9.3 per cent. In fact, if we had anticipated that, we could have taken some more actions and perhaps brought the system under control a little earlier. But numbers were not available even at that time. I remember 2010-11 and the data coming at that particular time did not immediately point to the growth rate of 9.3 per cent in that year. But it is only later that we came to know that the rate of growth was 9.3 per cent.

Three sets of factors have contributed to the slowdown in the growth rate. There have been supply bottlenecks both on the agricultural as well as on the industrial side. There have been international price shocks and there have been a weakening of the investment sentiment or investment demand because a variety of what I would call both economic and non-economic factors. We need to address all of them. In a short run, I believe as the Finance Minister said, we need to address the three important issues of taming inflation, containing the current account deficit and fiscal consolidation. People do not sometimes realize how all these three things are inter-related. In fact, containing inflation will contribute to the improving of the balance of payment situation and also the fiscal consolidation. In fact, efforts at fiscal consolidation once again help not only to tame inflation but also to contain the current account deficits. We have taken action and we seem to be feeling the impact in terms of containing the current account deficit. Therefore, going ahead, we need to address this macro-economic concept and that will provide a basis for a sustained long term growth. It is in this context that I believe the role of the financial system comes in. Dr. Raghuram Rajan outlined five major pillars of this. On the monetary framework I have only to say one thing and that is, one issue that we need to address squarely is this. What is the role of monetary policy in the context of supply shocks? I think, a lot of people who seem to argue that since inflation particularly in the last few years have originated from supply shocks, monetary policy does not have a major role to play. But that I think is not the total answer to the problem. Certainly, we need to address the supply side; we need to improve the productivity of agriculture and other things. I also agree that we need to improve the marketing facilities and the marketing arrangements that we have in our country are quite archaic and that is why you find a big difference between the price what the consumer pays and what the producer or the farmer receives. We need to address all of them. At the same time, we need to contain the demand pressures and that is why, both monetary policy and fiscal policy have a role to play. In fact, if the food inflation is sustained over a long period of time, it gets generalized and it spreads to the other segments of economy also. Sometimes, people do not realize that the non-food manufacturing inflation in this country rose from 5 per cent somewhere during 2010 to something like 8.5 per cent during 2011. So

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that is a consequence of it and that is why both monetary policy and fiscal policy have a role to play in containing the demand pressures. I agree with Raghuram Rajan that we need to focus on the four or five things, improving the markets, improving the access to finance for a wide segment of the population. In fact, when people talk about financial inclusion, there are three dimensions to it. There is a need to spread or bring within the orbit of the organized financial system, vulnerable and low income groups. There is also the need to see that all segments of the economy whether it is agriculture or industry or services are adequately provided, this means, large scale, small scale and so on. There is also a regional dimension to it, namely, the financial inclusion must spread over all parts of the country. Therefore, there are social, sectoral and regional dimensions to the financial inclusion which we need to address.

As I said at the beginning, there is an increasing concern about the balance that we need to strike between regulation and development. In the wake of the 2008 crisis, even the Stiglitz Commission had remarked that much of the financial innovations that have been introduced in the recent period have been more to increase the profitability of the banking system rather than to improve the functioning or the efficiency of the financial system. There is some element of truth in it. But I do not entirely agree that almost all financial innovations that have been introduced have been unproductive. Financial innovations arise to meet the felt demand. We are living in a world of uncertainty. Prices are rising; interest rates are changing. Therefore, we need financial products which will provide a cover or hedge against these fluctuating factors in the economy. Derivative products have assumed a bad name in the recent period but the derivative products have also a role to play in the economy. Therefore, while recognizing excess in any area is to be discouraged, excessive leverage that has been seen in the financial system is bad. But we also need to understand that without financial innovations, other systems cannot improve and the real sector cannot benefit. We need to draw an appropriate lesson from the 2008 crisis. Too little intervention or too little regulation can lead to instability but too much of it can also lead or impede innovation which is necessary for growth. And policy makers have to strike an appropriate balance between regulation and innovation or development. The coming decade will be a crucial decade for India. It has been estimated that if only India grows at the rate of 8 to 9 per cent per annum, by 2025, India’s per capita GDP will grow from the current level of 1500 dollars per annum to 8000 to 10000 dollars per capita. Only then India will graduate to become a middle income country. That is why, growth is important. When we say growth is important, it does not mean that we can ignore considerations of equity or we can ignore the fact or we can ignore the impact of growth on the various segments of the society. It is no longer possible to work sequentially. It might have been possible in the 17th or 18th century or even 19th century Europe or England, that you grow first and then take care of equity later. That sequential process is just not possible. There is a greater awareness among the people now and, therefore, growth and equity must go hand in hand. But in a country like ours, growth is extremely important and, as I said, we need to transit from this level to the higher level. In this process, the financial sector must play its role. It is only an efficient financial system that will help, that will assist the economy to transit from a low income country to a middle income country.

Now let me throw it open for discussions or questions and answers and Dr. Rajan would be very happy to answer your questions. We may have about 15 minutes to take questions from the audience.

Question by participant: I am of the considered opinion that impetus has to be on manufacturing sector that with the robust industrial relations, labour laws which were postulated long back in 1978 to IR Bill and going an extra mile for differently abled people for our sustained growth. We would like to have the vision of the Government and RBI on this.

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Dr. Raghuram G. Rajan: I would say that perhaps the answer is manufacturing; perhaps the answer is somewhere else. I am not as certain as you are that the answer will be manufacturing, low skill manufacturing jobs. What I would focus on, the point I was trying to make is that we should have an agnostic view of where our successes will come from. If you took a view in 1985, would anybody have predicted that our strongest growing source of exports would be software and business processes. Given that, I would focus on creating and enabling infrastructure, providing the adequate education to our people, creating the necessary regulatory environment. That will allow whatever our entrepreneurs or self-employed whatever jobs they create to emerge. So, instead of saying it has to be manufacturing, one could well imagine a very strong tourist industry with good jobs being provided for moderately skilled people in restaurants, hotels and so on as guides. I would rather not determine which way we will but create a broad channel for growth.

Question by participant: Dr. Rajan, as you know, the investment in projects, Government projects have tremendous time over run and cost overrun. This has tremendous impact on the economy as a whole, look at the multiplier effect. If you perhaps do a study, you might find a couple of points in Indian economy, if we pay a lot of attention in delivery, making the processes smooth, making sure, there is no time over run. In today’s environment, time and cost overrun make societies uncompetitive. Secondly, take new projects. You must have a project. Now why do we have so much to wait? Why not do we have it on war-foot basis to create the projects which can improve the economy as such? My suggestion to you would be perhaps to take a study, the impact of the delays which happened in the society as a whole to the system processes. For example, you have so many Ministries to get clearance for power station like, Heavy Industry, Coal Ministry, Power Ministry and so on. You may like to look at these structural reforms where India becomes a delivery oriented country which will indirectly boost the economy to ten per cent.

Dr. Raghuram G. Rajan: I think we will be wasting more time. The time that you are talking about in doing a study, I think, it is clear that this is a problem. It is clear that we need to resolve it. I think, one of the difficulties is precisely what you pointed to, there are different jurisdictions, different entities with jurisdiction, some of them at the Central level, some of them at the State levels. One of the arguments of my talk was, we need to bring everybody together and say how do we minimize the delay in this process whether it be in permissions, whether it be land acquisition, whether it be in financing so that

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we can have much speedier project set up. The tendency across the world is more towards regulation. I think, two nuclear power plants have been initiated in the United States in the last 50 years because the process of going through that regulatory structure to get the permission is just horrendous. We are not necessarily outliers on this but we probably can do far better than we are doing and we should.

Mr. Chairman: Now let me supplement what Raghu said. We look at the broad macroeconomic parameters and find out the reasons for the slowdown in the growth rate. If you look at the investment rate of the economy in 2007-08 when we had 9.5 per cent rate of growth of the economy, the investment rate was 38 per cent, we all know with an incremental capital output ratio of 4:1 that gives you 9.5. But as late as 2011-12, the investment rate has fallen. But it has not fallen by as much as to give a growth rate of five to six. The investment rate as late as 2011-12 is 30 per cent of the GDP with the incremental capital output ratio of 4:1, we should have got 7.5 per cent but on the other hand, we got only five per cent. That only shows that even when investments have been made, there have been delay in completion of projects and there have not been complementary investments or there have been lack of critical inputs which have prevented the output from flowing out of investment. The point that I wish to make is that the slowdown in the growth rate is much stronger than the slowdown in the investment rate which essentially shows the kind of problems that you have faced. But one thing apart from what Raghu said about speeding up and so on and jumping over jurisdiction and so on or reconciling the different jurisdiction, is also one other thing that I must mention. In the more recent period, concerns about environment, concerns about land acquisition have become more urgent and have become more pressing. In fact, in the State of Tamil Nadu from which I come, there is a nuclear power plant on which several thousand crores have been spent and output has not yet flown or output is slowly coming out of it which clearly indicates the kind of concerns that have now come up. We need to resolve these issues apart from the other points that we made regarding administrative simplicity and improving and so on. We need to work out a compromise between the compulsions of growth and concerns of environment. We talk of the fact that we have the largest coal reserves in the country. But much of the coal reserves are in the dense forest areas. We must find out how far we will go in terms of environment and how far we will go in terms of growth. There are some basic fundamental issues which we need to resolve.

Dr. Raghuram G. Rajan: Just to add on that a bit, this is fundamentally an issue of trade-offs. Clearly there is no growth that you can create without some adverse impact on the environment. That is almost surely you have given. The question is how much are we willing to trade-off? Clearly environmental

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protection is important. We have seen countries that have grown without paying due attention to that and they are now seeing the difficulties of reversing the problem. So also, as Dr. Rangarajan mentioned in these forest areas, tribal populations are some of the least protected parts of our social sector. In that sense, we need to pay attention to that. But ultimately it becomes trade-offs. You cannot say that this has primacy over that because if this has primacy over that, either you will get none of this or none of that. We need to balance and that balancing is what my guess, all the dialogue and the arguments are open.

Question by participant: In increasing the growth of the rural economy, what will be the role of RRBs in the coming future?

Dr. Raghuram G. Rajan: I think, they will play a role. What we have to do is to enable them to take full advantage of all the new technologies and make it easier for them to attract human capital into the organizations. We need to provide a supporting role.

Question by participant: When lease is given, it takes time and only GSI and CMPDRI is available. Like Australia, we do not have centres which can do proper prospecting. When bidding and other things are coming, prospecting level has to be there. You have kindly mentioned that it can. These skills are also needed. The other question will be, import of gold for women. Can we not have houses which will secure them more. Government makes the houses and they buy in place of gold. They submit gold and take the house. This is only a suggestion. I want your comment.

Dr. Raghuram G. Rajan: On the first, I am not an expert, so I cannot comment on the mining. On the second, there are a variety of interesting solutions that people have suggested to the ‘gold’ problem. Typically, as you have said, there are a variety of ways to substitute for gold. But in many of these suggestions, basically the requirement is that gold be returned at some point. Yours is completely a substitute, give gold and hope that they want a house instead of gold. I do not know how many people you can persuade of that. But if you can, that is a reasonable scheme. Dr. Isher Ahluwalia is saying that she would not be persuaded. There are variety of schemes. The gold deposit schemes are something which are often cited. The problem with many of these schemes is that if they require an entity to give back gold, that entity has to hedge that gold otherwise they become exposed into an unlimited extent to the fluctuations in gold value. If that entity has to go out and hedge gold or buy gold to be able to give

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back gold, then we have not solved the primary problem which is the demand for gold. So, we have to look at this very carefully. Ultimately, the real substitute for gold is to create financial instruments which are more attractive than gold itself as a means of investment.

Question by participant: I have a small question related to financial sector reforms and financial inclusion particularly. In the financial sector reforms, plans for the next five years and in the financial inclusion particularly in the social sense, is there any likelihood of introduction of profit and loss sharing mode of banking in the next five years.

Dr. Raghuram G. Rajan: You are talking of forms of banking where basically instead of charging interest, one could have a loss sharing or profit sharing arrangement. This is something we are looking at. My sense is that there are elements of the non-bank finance companies which are already offering something like that. We can see how we can monitor that experiment carefully. The whole issue has to be that whatever structure we have has to be possible within the regulatory structure of the country. Let us see. To the extent that there is a demand for these kinds of instruments, we have to see what the best form of delivery is within the system and whether it poses regulatory issues within the banking system. But we are studying these issues. Again, to the extent, there is demand across the system for certain kinds of instrument, we should work to provide it in some way to that customer.

Mr. Chairman: There is no time left. I am bringing the session to a close because the next session has to start. Thank you very much.

Plenary Session I (Global Economic Development – Past, Present and Lessons for the Future)

Mr. Chairman (Dr. Montek Singh Ahluwalia): Well friends, let us get the show on the road so that we do not run into a time constraint. Let me just lay down the rules of the game. We have to end that we do not interrupt the rest of the conference. Prof. Nunn will start first and followed by Prof. Romain and each of them has asked for 15 minutes. So, I will ring the bell at the end of the 16th minute. Our other two speakers are based in Delhi, Dr. K.L. Prasad and Dr. Arvinder Sachdeva. They have asked for ten minutes each and for them I ring the bell at the end of the 10th minute. Then we will give some

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opportunity for questions to be asked. Now, it gives me great pleasure to invite Prof. Nathan Nunn of Harvard University to start the session with his presentation.

Prof. Nathan Nunn: Thank you very much. It is with great pleasure and honour that I am talking to you today about my research. The session is going to be a little bit different from what we heard so far. Romain and I are going to talk more about long run development and also in the long run, in looking back in economic history, what makes a successful society. So, if we think about successful societies in successful countries, there are certain behaviours that are undesirable for our functioning society. These include things like theft, violence, corruption, bribery, tax evasion, rent seeking etc. We can think of the lot of activities in a society we want to discourage. So, we take up how do we discourage these bad activities and encourage good activities where large regulation institutions of the things that initially come to mind. These are the facts people monitor or their costing benefits have engaged in these actions such as corruption and bribery. This is fine. But I think, it is well recognized in social psychology. There are other things that are important. If you think about our own decisions, a lot of the things that we do and a lot of the reasons that we do think is because we are intrinsically motivated. So, we think that doing a good job with our work, this is important, not because they pay necessarily it is just because we get enjoyment from setting goals, contribute into our team and engaging in this good behavior. So, less so in economics but in social psychology, it is well recognized that these roles can actually crowd out good behavior. The way to think is that as soon as you tell somebody that they have to do something, then you no longer intrinsically want to do this or if you punish them or pay them to do something, this might crowd out intrinsic motivation. So, more generally there is a question of, do good institutions create good culture or do good institutions crowd out intrinsic motivation and create bad culture? It is different intuition. One is the intuition of once you tell someone to do something, they are not going to do it. The other intuition if you have good institutions, you force people to engage in good behavior. Then this becomes a pattern and then they intrinsically get used to that and want to continue this behavior. So, the big question is if we look around the world and see successful societies, is it only because of institutions or how much of the role the culture plays and how do institutions attack culture. It is something like we are interested in, in researching and thinking about where in the world can we go and try and examine this. So, Trinidad is a place in Central Africa which is in the heart of democratic republic of Congo in which we can actually look at the impacts of formal institutions on culture. And look at the impacts over two, three, four hundred years which is pretty rare. This is a Bakuba kingdom which exists today. So, it is a very large kingdom, one of the most developed kingdoms in Africa. They need to

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think about the kingdom. It originally had inhabitants of what today is the Bakuba kingdom and the rest of the kingdom on the other side of river which you can see. Those inhabitants migrated from North and prior to the formation of the Bakuba Kingdom the inhabitants in this area were culturally identical.

Then what happened? Basically on the East side of the Kasai River there was an institutional entrepreneur, an outsider named Shiam who organized a number of stateless societies into one large kingdom which became Bakuba kingdom. He introduced the number of institutional innovations. So, one is having a court system of a judge and a jury, a bureaucracy with an upper mobility, political offices and division of powers in the executive, a constitution, a police force, military, taxation, public good provisions. These are the themes that we associate with the modern state and this really was an innovation at that time. Basically what we have here is that we have this natural experiment where on both sides of the River you have culturally identical people as 1600 Shiam enters here and implements the large and well developed kingdom with better institutions and better rules and regulations by enforcing good behavior, income was much higher in this year. The question is, if we look today, are these groups Bakuba culturally more likely to obey the rules and culturally better than the other group which is on this side. This is the Bakuba kingdom in 1947. This is actually on the cover of Life magazine in the USA. So, this is a very well known kingdom particularly in Anthropology. These are title holders; these are civil servants, the bureaucrats. The length of their feather actually indicates the status as well as their belt. So, how elaborate their belt was indicated their status. When they voted in different councils, they actually did by raising and lowering their belts. This summer we went to the capital of Bakuba kingdom to meet the members of the royal court. Here is the regent, here the prince and other members of the royal court and here are the title holders. This is the head of the military. They told that for every person he killed there is a feather in his head. This is the state of the Bakuba kingdom today. These are the boundaries of the Bakuba kingdom and this is the area we are looking at. What we did was, in the local capital city we went and sampled 1800 individuals and amongst them we chose 200 for which the home town was around the Bakuba kingdom. These are the villages around the Bakuba kingdom. What we were interested in was within the Bakuba kingdom, the individuals came from here, do they have the culture of obeying rules and regulations more so than individuals from outside the Bakuba kingdom. We might expect this because rules and regulations for two, three, four five hundred years were much better, institutions were much better so maybe the culture of obeying rules was inculcated amongst these individuals. So, how do you test this? If you really want to identify the culture is to look individual action in an environment where you are pretty sure that nobody can catch them or

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they are pretty sure that no one is looking. So, we devised this game. This game is called the random allocation game. We started with the dice three sides were black and three sides were white. We tell the individuals, they have the dice and they have the pile of money. So, it is 3100 Congolese sitting in front of them and it is equal to two day’s wages. It is a very lucrative game for them to be playing. We tell them that there are specific rules and regulations here. You have to divide this money in a very specific way. You take one bill and in your mind associate a colour either black or white with yourself and associate a colour with someone else and the other people could be a co-ethnic, non-co-ethnic, the Government or just a random citizen and we tell them to divide this money according to the roll of the dice. So, they rolled the dice and if in their mind the colour that comes up was associated with them in their mind, then that 100 Congolese Franc Bill is given to them and they do this 30 times. The trick is, we can see what in their mind they are associating with themselves and what colour they are associating with the other individuals. So, they can roll the dice 30 times and just pretend the colour they came up was always associated with them and they can keep all the money. This is, unless one is a mind reader, there is no way to catch them because they are associating the colour in their mind and then rolling the dice and allocating the money according to that. We want to see are the Bakuba who had this great institution historically more likely to obey the rules and less likely they cheat. So, for one individual roll, we do not know whether they are cheating but over many many repercussions and over many many people we can observe statistically whether they are cheat. Remember they divided 3000 Congolese Francs, the three sides are black, three sides are white. So on average they should give 1500 Congolese Francs to the other person. We can see actually how much they are giving on an average and this is over the sample of 221 individual. This is to know whether the other person is co-ethnic, the other person is of other tribe, the other person is the Government and the other person is randomly chosen citizen. Remember if they were doing it fairly, we should see they give 1500 Congolese francs. Everyone gives much less than this and they tell us that in this environment, there does seem to be some cheating. And the interesting thing from our perspective is, let us examine how the descendants of Bakuba differ from the descendants who are not Bakuba. So, Bakuba who actually have this history of having much more sophisticated institution actually cheat more. So, it is consistent with institutions forcing good behavior crowd out historically over this long period of time, crowd the intrinsic motivation not to cheat and to obey the rules of the game. So, we can look at all tribes in general and ask: Are Bakuba exceptional? So Bakuba is the only group in the area that has this well-developed kingdom and the rest are stateless or it is village level societies. We see that Bakuba are the ones that are very different.

The other thing is that there is an interesting comparison between the Bakuba and the Lulua. Remember they are culturally identical. They migrated down in the medieval period and although there was difference between Bakuba and the Lulua because Bakuba developed these elaborate institutions, and comparing the Bakuba and the Lulua, you can argue that this is a very good comparison. In the initial period they were identical. They are statistically different. What do they tell us? As per the recent example coming from the heart of Africa, you do find that formal institutions do crowd out intrinsic motivation or good institutions seem to lead bad culture. So, what is important for policy is to think about, while thinking of reforms or thinking of changes, everyone should keep the mind out and be cognizant of the fact that institutions and large policies can affect intrinsic motivation. We want to think about what changes, what reforms can be supportive of intrinsic motivation in our crowd out intrinsic motivation. So, there is a lot of other literature in social psychology showing this at the very micro level an experiment or within central schemes for teachers. What I have shown you is at the very macro level and over a long period of time. This does show up in the data. They can be affected by policy institutions environment. Thank you very much.

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Mr Chairman: Thank you very much Prof. Nunn. It was really quite fascinating. Actually you took less than the allotted time, for which congratulations also. The next speaker is Prof. Romain Wacziarg from UCLA Anderson School of Management.

Prof. Romain Wacziarg: Thank you. It is an honour to be here. I am also going to talk about the deep-roots of economic development which has been an area of increasing interest in academia recently when it comes to studying the causes of economic development and how to accelerate it. I should say that this is the subject of a full paper that I wrote with a co-author Colin. I am going to try to make four points in the 15 minutes or less that I have and those four points are summarized here. So, let me say them in case I do not have the time to finish. Increasingly the macro-economists who are interested in economic development and economic growth have focused on deeper factors besides the traditional factors that people have focused on such as capital accumulation, innovation and so on. We will spend a little time describing how this process evolved. The effect of these deep factors on current developments over any deep factors of history or geography is indirect. It is not being on a warm climate directly affects your productivity, but some geographic factors affect over the long run the type of productive structures that you adopted that you used to and therefore, affects current outcomes. Moreover, these behaviors, these norms, these cultural attitudes are transmitted from parents to kids through ancestral linkages.

The causes of development are transmitted from parents to children. They, in principle, could work either as direct effects, you could have a trait such as, for example, trait that makes you rich or you can think that differences in trait that are inherited from your parents can introduce barriers between populations. That is the interpretation I want to focus on more because it is more promising from the policy perspective to think that you can change a barrier that separates the population of a country from another than you can directly change a trait through policy or patience or something.

The last thing that I want to talk about a little bit is to talk about policies because when you talk about the deep roots of economic development, the natural conclusion is that it is pessimism, namely, you can change the history of a country or you can change its geography but the hope is there for development and I want to try in my fourth point to dispel this misconception because in particular these historical factors act mostly as barriers to the transmission of knowledge or productivity or innovation across population than there is a lot about reducing the barriers and working on the barriers directly. I think, this is what I would like to end on.

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So, when you think about the big question of development economics, I think it accounts for vast differences in economic development. That is the question we all focus on. Prof. Nunn for example, myself we spend our careers thinking about those fundamental question. If you compare the democratic republic of Congo and the Norway the difference in per capita income is 184. What can account for such a big difference, I think you might ask about business cycles. The outcomes we are interested in explaining development are here on the right side of the screen. Traditionally, if you think back Harrod and Domar and even Robert Solow, the traditionally economists have focused on, immediate factors like the accumulation of capital and human capital, labour and technological innovation over the adoption of technology. But increasingly over time, economists have got interested in looking at broader factors like policies and provide the right incentives. It was a very popular subject of discussion during the time period in the 1980s where the Washington consensus developed and more recently there has been focus placed on institutions which the previous speaker spoke about. With institutions I broadly mean just a political institution, it is also cultural norms and so on. Institutions in the sense of the rules of the game broadly construed and these institutions constrain policies that is not always possible to conduct whatever policy would be there. We need to work about the constraints that exists backwards from the institutions. Finally, and I think more recently in the last decade or so, people started to get more interested in this. Of course, these things have always been out there in some degree but it has become more prominent and how these institutions cultural norms are affected by deeper factors, your history, your geography. There are complicating factors to my schematic of economic development. There are complicating factors on which I am not going to spend much time on that. But I at least want to make you aware that I know that they exist. The first one is, you can have direct effects of these various things on development. They do not necessarily go indirectly through each other. The other is even more serious problem which is reverse cordiality where things can affect each other. Of course, you can change your deep history or your geography but pretty much everything else is in darkness. It can respond to outcomes. I am not going to worry about these blue and red ones. I am only going to look at the reduced relationship between geography and development. It is convenient for me and I do not have to worry about the complicating factors.

I will talk about two very big innovations the Neolithic revolution which is the agricultural revolution and the industrial revolution and the diffusion of both of these big innovations which jointly account for most of the variation in per capita income in the world. In other words, whether you have gone through these revolutions accounts for the bulk of the variation in per capita income. Here I have allowed myself to show regression and forgiveness to those who will not be happy with my using statistics in such a formal way. But what I have done here is to try to explain per capita income in 2005, have a sample of about 155 countries in the world and I have chosen four very simple factors which are the latitude of a country, the percentage of the land area of that country which is in tropics, whether the country is land locked and whether it is an island. With that, I can explain about 44 per cent of the variation in per capita income, just with these four simple factors. It is even worse when you look at this. It is worse because the conclusion from that is some sort of pessimism to see that is not necessarily the case. If you look at all the world, then you can explain two-thirds of the variation. What the interpretation of that and it has been the product of variety of scholarship arguing that the onset of the first big innovation was due to geography. Geographic factors also explain the diffusion of this innovation, in particular the land mass is of big advantage because it was horizontal so it was easy to have spread agricultural diffusion across the Eurasian land mass compared to the African land mass or the American land mass. These Eurasian advantages has propelled the Eurasians broadly speaking to the world technology frontier, at least from 1492 and arguably later. So, the effect of geography in this thesis is mostly indirect. It is not that being in the Tropics is per se bad and being in the Tropics is associated with not having a long history of exposure to set in agriculture. That is so being close to the

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Equator as associated with not having had a long history. So, the argument is that the impact of deep geography or historical geographic conditions operate today because of the way it was transmitted through generations.

Next thing I want to talk about is history and the history here is summarized by a former organization having had its stake between 00 and 1500 and having had agriculture for a long period of time. It does not really matter what you ascribe as your favourite explanations. These are my two favourites. They have come actually through a paper. These two factors are interesting because you can look at whether it is the history of location that matters or whether it is the history of population. Now for a country like India, it does not matter because the population has descended from the ancestral population of India. But for the country like the United States, it matters whether you consider the history of the population or the history of the location. The history of the population is the history of more or less Western Europeans and the history of the geographic location is more or less the history of the Anglo Indians, the two very different populations. What you find is that history matters much more when you adjust for ancestry and when you consider as a factor explaining development, the types of traits or historical factors, state antiquity, agriculture exposure that prevailed among the current inhabitants of the country rather than the geographic location which is a further indication that the effect of geography is most likely indirect. But here you see there is a simple correlation. The correlation between having had state history during this period of time and per capita income is .5. It is an enormous correlation between two variables whereas it is much lower when you do not correct for the fact that at least in the new world, new populations are not the same as the ancestral population. So, what is the interpretation of this? The one liner is that human ancestry really matters. The factors that are conducive to development are mostly transmitted on genealogical lines and there is no straight jacket of geography, if you like it. It is much more than something that is transmitted through lines of ancestry.

I am going to skip technological usage sophistication. But the same lesson applies there. If you try to think about the technological sophistication in the United States today, it is very highly correlated with the technological sophistication of the ancestors of the current inhabitants of the United States, if you go back 500 years or 1000 years even 2000 years. I am not going to talk about that. If you ask me, I will be happy to answer about that. There is a lot of persistence in technology and advantages obtained from the adoption of an old technological breakthrough can help with the onset and adoption of a new innovation. That is how we think agricultural advantages transmitted into advantages in terms of industry as well and persistence exists particularly across population rather than locations. That is important.

I am going to talk a little more about ancestry. There are different ways in which ancestry could matter. One you might think is because traits that are transmitted are directly relevant for the welfare for their behavior, their economic performance. You can take for example, fertility behavior, the first paper that I mentioned which is according to these authors transmitted and I do not espouse this view but transmitted not necessarily, transmitted biologically. There would be a gene for how many kids you have, that develop and spread very fast before the industrial revolution in Europe. Most of these direct effects are more of a cultural nature such as having the type of centralized organization of society that exists in agricultural settings as opposed to hunter gatherers. But the alternative way to look at this was like this. If you like a hypothesis advanced series of papers I wrote with my co-author that ancestry might act more as a barrier. It is not that there is anything specific about the population that makes them rich or poor. But it is a fact that by bad luck you happen to be far from the innovator. What I mean by far is not geographical far only but also culturally far. Then it might be a hard to adopt a behavior, the technology, the institution of this innovator and how that makes them richer. So, we thought we would

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look at this directly and we looked at the genealogical tree of human population. Here you have it on the slide. I know I am running out of time. So, I am not going to spend too much time on it. But basically about 70 to 100 thousand years ago, people split out of Africa and you see a first class splitting out, separating all the population that are outside Africa from those that remained in Africa. Then there were successive splits among Central Asians and some went to South Asia or East Asia and so on and so forth. The idea behind this is to use this genealogical tree if you like that is derived from actual genetic data to measure the cultural distance between populations, to measure the extent to which they are separated by differences in norms, values, culture and so on. It works extremely well. So, if you look at the distance from the United States which is what this graph does and it corrects for the distance, physical distance, it only looks at the genealogical distance. You do a very good job in explaining a lot for per capita income, in other words, economic performance in 2005. You can explain about 30 per cent of the variation with the typical change in genetic distance. If you look at this within Europe, you also find the same pattern within Europe. Here we are looking at the distance from Great Britain because we think Great Britain was the precursor of the Industrial Revolution and you can see that the diffusion here also follows genealogical lines in the sense that countries that were far from Britain in terms of their ancestry were also far from Britain in terms of their economic development. This of course is robust to a whole variety of tests, statistical tests and so on. The nice thing about the effects is that they do not have to be immutable. This shows the shot that could join the Industrial Revolution. So, think about the Industrial Revolution is occurring in the mid-19th century on an average or diffusing sufficiently at that point so that we can detect it. You can see the effect of ancestry is maximized around 1920 when some countries mainly those around Great Britain had adopted the Industrial Revolution pretty much nobody else had. Then over time and particularly during the period of globalization these barriers diminished little by little and you see the effect of ancestry goes down. One interpretation is that it is because of globalization, because the transmission technologies became easier. So, in conclusion, should we be pessimistic about the ability of policy to effect economic outcomes in the context of this new research on the deep roots? And the answer is no. First of all, these factors that I discussed exposure to agriculture, how soon you got the industrial revolution, how centralized your state was, what is your latitude and so on and so forth. What is very important is these are not a straight jacket. So, I cannot explain a hundred per cent of the variation, but I can do 60 per cent or 65 per cent. There is a lot of room for exception there. There have also been significant shifts in the technological frontier. You can think for example of the role that Japan played in East Asia in terms of the industrialization of that region which happened despite the fact that Japan was very far from England. Similarly, you can think about the technological frontier during the times of the agricultural revolution being there and having moved North Western Europe in terms of the industrial revolution. So, there is no immutable law that these things can change, but it takes a long time. There is also a lot of scope for just randomness and hopefully you will ask me about that. Another source of optimism and I will conclude with that, comes from the barrier effects. People often think about affecting direct things. How can I get my investment rate? How can I get my people to be more trusting or less violent or more tax compliant or less corrupt? May be this is misguided; may be we should focus on, how can we get our people to more easily imitate behaviours that abroad lead to higher economic outcomes. In other words, how can we reduce barriers to imitation? It is probably a tall order to change peoples’ cultures. But it may not be so hard to reduce the extent to which culture affects the outcome and it might be easier to reduce the barriers to increase the extent to which there is understanding that some behaviours are conducive to more wealth than others. Thank you.

Mr. Chairman: Thank you very much Romain and thank you also for adhering to the time schedule. Let me now invite the third speaker on my list. I think he is Dr. K.L. Prasad, Adviser, DEA in the Ministry of Finance.

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Dr. K L Prasad: Mr. Chairman, fellow panelists, ladies and gentlemen. After listening to poetry from two great academics, you would have to make do with some prose from a bureaucrat. So, the topic that we have for this session is Global Economic Development – Past, Present and Lessons for the Future. I would focus on India specific lessons. What is that India should learn from history? Some of it was elucidated by Romain just now and a very interesting presentation was given by Nathan. Now I will just go through the prose. Growth plus change is the essence of development. It has happened across history. In economics, growth comes from use of greater and greater factors of production, that is, capital deepening, use of more labour or finding new land and through productivity gains. These are the major drivers of growth. It has been historically recorded. I would not go into the details about the Industrial Revolution because Romain has already touched this. Basically there was a quest in history, there was a quest for natural resources in markets. So, you know that history of economic thought will tell you that there is something called Mercantilism which was there in a particular point of time. Ultimately the race for lands led to world wars. We have different path of development after the World War. We had the Brettonwood institutions at the time of World Bank, the United Nations and other organizations came into being. But even after the world war, till about 1970s the path of development was guided by certain macroeconomic arrangements which was different from the current ones. My focus will be, what is that that prevailed in the earlier development path of other countries, whether it is available today to us, if it is not available, then how we can adapt to new reality.

So, globalization got a fillip in 1970s with transport and information and communication revolutions. So, companies became global; markets became global because the transportation cost reduced. So, what happened was typically the law of one price in the global price is that a price in any nation will have to be between the import parity and export parity prices. So, the markets became global. There are some slight variations in the post war development path. The East Asian miracle happened. Some of this has a cultural dimension as well which Nathan has dealt with in great detail. Now in the present conjecture, we have great financial depth and innovation and that is driving the development path. If I look back at history whether there is a leaner path which we can follow, no. There are some commonalty, there are some differences. The commonalities are that institutions have to be developed if you have to do economic development. We have to foster competition. We have to adopt free trade with great openness. These are the things which are available in the literature. But I will focus on what is not available. We do not have luxury of having a fixed exchange rate because after the oil crisis in 70s, we do not have. When we are growing, we have sustainable development and climate change. We have to adapt; we will have to mitigate the risk. Then we have a new phenomenon that is global imbalance.

There are some countries which are running current account deficit. There are some countries which are current account surplus. The exchange rate does not adjust and the economies in which we have this kind of advantages, it is not better placed. Finally, the size matters. India is a large country. Whenever it approaches any obstacle, the given global supply is very limited, the prices do go up negating the advantages which other countries have. My fellow panelist Arvinder is a colleague of mine in the same Ministry. He will give you the analytical details of how development paths traverse across the century. Right now what I would like to focus is that the contribution to growth from major emerging markets. India and China together contribute 30 per cent of the global growth. We are two large economies. Of course, China does not have that much of consumer price inflation. But other emerging markets are faced with the problems of inflation, domestic demand is rising and we are in an age where trade has moved from multilateralism to bilateralism and factor endowments play a large role in determining what is the kind of current account deficit or current account surplus it will have,

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plus the exchange rate policy. Of course, the focus will be on that. We are a large economy and there are large unmet needs in a democratic polity, fiscal deficits are endemic.

One of the things which I said is that we do not have the luxury of cheap oil. After 2003 the crude prices have been above 40 dollars per barrel. But for the widening of the current account deficit in India as well as fiscal deficit owes to the problem of our import dependency on oil. Then we are faced with foreign exchange market which is volatile reflecting partly the fundamentals of economy. But one must remember that fundamentals do not play a very large role. It does provide a directional role but quantum cannot be determined by the fundamentals. For instance, the size of the total balance of payments, current account and capital account put together and the foreign exchange market turnover is large as we can see from the graph. The volatility in exchange rate, I would just try to plot the movement of volatility in the exchange rate in the recent period. It cannot be purely explained by fundamentals. So, we are faced with rapid adjustment to global factors. For instance, the most recent depreciation occurred due to a perception that there was an imminence of tapering by the US Federal Reserve of its asset purchases. These had its impact plus the fact that we may be having a current account deficit. If you see, I have just tried to plot the appreciation and depreciation of the various countries. India is unique in the sense that it had to face larger depreciation but it was not uncommon. Even countries with current account surplus had a problem. This is another graph which will depict the extent of depreciation which we face in recent months.

What are the issues for emerging economy? Global uncertainties have been increasing since 2008 and the business has become larger even for emerging market economy. Earlier, typically it was smaller. What has happened is that we were contributing to global growth and because of this adverse feedback loops, we have started also slowing down and this has the impact on the global growth process itself. Frequent flight of capital safety has made financing development more costly and disruptive. The financial market instruments are largely focused on short term returns. That is what is leading to volatility. Now, ten years back if somebody has said that building of foreign exchange reserves is good, we would have been told that you are not doing a correct thing. But I feel that you must have adequate level of research because you have to meet the contingencies arising from the global uncertainties. We have a large requirement for long term financing in terms of financing the infrastructure. Raghuram Rajan did speak about this in great detail. I would not go into that. What is important is that we need to focus on the two rate key indicators, interest rates and exchange rates. So, what is that we can do about

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that? We must take the uncertainty for granted. It is going to prevail for medium term. Therefore, the focus should be on how we adapt ourselves to shocks emanating from external sector. There is a need to ensure that the CAD is limited by durable sources of capital flows. Exchange rate surveillance needs to be done better by global institutions by appropriate financing of trade so that there is level playing field in external sector environment. Then the second thing is about the problem in sustainable development. The climate change agenda is still being discussed. We must stick to the common but differentiated responsibilities which we have been focusing on and we must get adequate financing by the original polluters before we can progress further on sustainable development. We need to do some global concerted action to prevent volatility through appropriate instruments including having a tax based on volatility. The second one is and I will conclude with this. In any development it is the domestic policy which matters. In fact, in Indian context, the net exporters have always a demand represented. We need to kick start the investment and investment is a function of this. But two things which could do is goods and services tax and DTC. We need to do institutions which are important. We must address through the elevated inflation, rapid supply response augmentation, we must announce a calibrated account of capital accounting opening. We can of course do this fire fighting when this volatility happens. We must address the twin deficit and then we need a tax policy which is more aligned and we should have our incentives of tax and subsidies better so that markets can function in a truly best way. I will stop with this. We were flooded with volatility and exchange rate and well-meaning suggestions. One of the options which the economy faces is that if first best is not available, we can always think in terms of second best.

Mr. Chairman: Thank you very much Dr. Prasad. The last speaker is Dr. Arvinder Sachdeva.

Shri Arvinder Sachdeva: My colleague Prasad has covered some of the things particularly the things like determinants of development, some other developments in the historical context as well as recent development. What I am going to focus on is how the growth evolved over time in the last 40 years or so. What has happened to the distribution of this growth and particularly also in the recent slowdown I will also talk about the per capita income, growth, poverty very briefly.

Mr. Deputy Chairman is here. So, talking about poverty becomes important. Growth rate of GDP the world as a whole, you can see in the first and the second period there is a difference in the sense that first period low and per capita low and middle income had growth rate which was higher by one per cent than the high income countries. In the second period, this went up to 3 per cent per annum and this has continued. Second period is 22 years and the first period is 20 years. Another observation if you can see from here is that China has grown by 4 percentage point more than India every year for the last 42 years. This has implications for China’s GDP and its share in the GDP. As you can see, the share of high income in 1970 was 87 per cent and it declined to 74 per cent and now one-fourth of the total GDP is being contributed by low and middle income country. Look at China. It has increased its share by more than ten times. Contribution to growth is another factor. The contribution to growth also of the developing countries has increased in the recent time and India and China have also contributed more in the recent time. China in particular, 17 per cent of the total growth in the world has come from China in this period of 1990-2012. In the recent slowdown the world’s growth rate in the period 2008-12 has been 1.7 per cent and high income growth rate was .6 per cent while low and middle income countries the growth rate was 5.5 per cent. As a result, the contribution to the growth is 27 per cent or roughly one-fourth from the high income country and about three fourth from the low and middle income countries put together. Now China has contributed more than 38 per cent to the total world GDP in the last five years and the total contribution is much higher than all the high income countries put together. If you look in absolute terms, in the last five years, between 2008 and 2012, the world added 3.5 trillion

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dollars of GDP and within that China contributed 1.3 trillion dollars of GDP and India contributed about .3 and developed countries contributed by .95.

Now despite high growth and significant contribution to the global GDP, China and India in particular have a long way to go in terms of catching up with the high income countries in terms of standard of living. Of course, there are various aspects of standard of living that one can talk about like health, education, sustainable issues etc. I will talk about primarily per capita income and poverty. Per capita income in terms of PPP constant US dollars 2005 has doubled. It has increased by 76 per cent for the world as a whole whereas China it has increased between 1980 and 2011 by 1300 per cent that means over 13 times. Now as far as distribution is concerned, we can see that high income countries had in 1980 roughly had 20 times more income than what India had and now it is about ten times or little less than ten times. Now poverty, in early 80s, the question of poverty in high income countries does not arise because the definition of poverty in US dollars is less than 1.25 in terms of purchasing parity. In early 80s, more than 50 per cent of the total world was of the people who were living below the poverty line in this part of the world that is the low and middle income countries. It has come down to about one-fifth. Look at China again. It has reduced poverty from about 70 per cent to about 10 per cent. India’s own estimates of poverty is as follows. I will focus more on Tendulkar Committee. Lakadawala Committee is an old one. Now the poverty estimates as per the Tendulkar Committee in 1993-94 to 2009, we had 45 per cent living below poverty line; in 2011-12 around 22 per cent living below poverty line. It was half in less than 20 years. What is important in particular is that poverty ratio declined from 37 per cent in 2004-05 to 22 per cent in 2011-12. That means it was seven years. The growth rate of GDP in these seven years was quite high of 8 per cent or above and we managed to reduce it by absolute number of people below poverty line by close to about 114 million people. That was also referred to by the Finance Minister in the morning. One of the controversies about the poverty line is this. Is poverty line too low or do they over estimate the decline in poverty? Poverty line in my view is consistent. They are constant in real terms, when expressed in monetary units. They are updated using appropriate deflators. What does this mean for anti-poverty programme or social programmes that we are talking? Perhaps it is quite possible that in the absence of these programmes, poverty could have been worse. Are these programmes being run efficiently? Probably we need to investigate further about it. That is another issue.

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Now I will come to some other issues for raising growth what we need to do is quite well known. I will recapitulate and give very briefly that we have to raise savings and investment that have declined in recent years. All of us know that our investment levels were close to 38 per cent in 2007-08 and now they are close to about 35 per cent. Increasing infrastructure spending is something that Deputy Chairman, Planning Commission has been focusing for a long time and all of us realize about it that it is an important issue which will help in raising the efficiency. There has to be a greater focus on quality education and health. This is something again where the Government has to play a big role. I will finish with that. Thank you.

Mr. Chairman: Thank you Arvinder. Now we have had four very very different presentations and we have about eight, nine minutes to go before we have to break for lunch. I am going to invite comments. My suggestion is that since the two Delhi based presenter are actually here and readily available to you and I prefer to have questions in the first instance addressed to our foreign guests. Let us do that in sequence. Who are the people who want to ask questions to Prof. Nunn? There are two. Let us give the lady the first choice and then the gentlemen and then those of you want to ask Romain, raise your hands and I will count that.

Question: I have a question regarding the viable use. You used the people’s tendency to cheat or not as a measure of institution of compliance. Now the thing is, this viable when used in a developing country, I think it gives a very accurate measure because in developing countries, cheating in monetary terms can very often be associated with survival. These people might cheat because they have ten children or something because people below poverty line are 29 per cent of the population or more. In other terms, they would not do it. So, the question here is, existence is not of a variable institutions or system. It is a question of social inclusion. The other viable is religion. Sometimes people who do good in the society not because they would do for money but because their religion encourages them to do so. I have a very good example and a recent one. I was in Bali and people there are also Hindu. There is also the caste system as in India. But the urban society and the rural society is quite different from the ones in India. The reason is not something different. The reason is uneven. I asked so many people.

Mr. Chairman: I think you have made your point.

Question: I am not sure whether cheating is a correct viable.

Prof. Nathan Nunn: You raised a number of questions. In some sense I do not blame them. This is the poorest region of the world, the poorest country of the world and were offering a lot of money. The interesting thing about Bakuba is that they are more prosperous. According to your logic, they are richer, they are farther from subsistence and if anything we would expect them to cheat less because of this. But actually it deepens the puzzle about Bakuba. In religion, we conducted many surveys with these group. Religion does not seem to be an explanatory factor. So, we have measures of religion. It does not correlate with cheating and so it does not seem to explain least in this context. That was a great point. If I had more time, I can talk about other factors that go into this.

Plenary Session II (Trade, Finance and Reforms)

Anchor: We would like to move on to the second session of today’s programme on the Plenary Session II on ‘Trade, Finance and Reforms’. Before commencing the session, we would like to welcome the distinguished guests. Now we request the Chair, Dr Bimal Jalan to take over the Session.

Mr. Chairman (Dr. Bimal Jalan): Thank you very much. I would not like to take over this particular session but just start the discussion and hopefully we will have some time for an interactive discussion.

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Let me start just by also complimenting the Ministry of Finance and it is a very nostalgic period for me because I was associated with the Ministry of Finance in different capacities including the Economic Division, Chief Economic Adviser etc. etc. But this is tremendously good initiative to have this dialogue on what you might say the primary issues and what they call the Agenda for the next five years. It is not about India per se but it is also the global economy; it is about the place of the Indian economy and so on. So, let me start by congratulating Dr. Prasad and his team for having taken this initiative and for having put together this agenda which is superb, which is excellent and which covers the main items. I am sure we will have a very very good discussion. Now today we are going to talk about this. We have already had a session on global economic development or global developments and I am sure certain parts of India’s position in the global economy would have been discussed. But today’s session Trade, Finance and Reforms is a huge topic and we have about an hour in this session to try and come to grips with some of the vital issues. So far as trade is concerned, we have had WTO.

So, I suppose we have six very distinguished speakers and they can give us a little bit of feedback on what they think of what WTO decided. So far as finance is concerned, post 2008, there has been a great deal of discussion and there is a general agreement about the way the banking system and we should not be over exuberant about our banking system. There should not be excessive proliferation, excessive exuberance and so on and so forth about finance. So, we have had a lot of post 2008 introspection, deliberations on where we are going and where we should be going. Then of course, is the reform which is here in terms of the global economy. That is a very major topic because we do not have any effective global system to devise solutions to what you might call global problems. You have US, you have Europe, you have Japan and you have emerging markets and emerging markets have different components. But, unlike 1944 when we were part of a depression and there was something which forced everybody to get together globally and decide on a set of actions to create set of institutions and so on to handle the problem. I do not think we are there. So, there is a lot to talk about and we are limited in time. I would not take much of your time. The speakers have already been introduced. What I would suggest is that we touch upon two or three issues which we think are of primary importance in the area of trade, finance and global reforms. It is not just India reforms but global rights. Am I right in thinking about it that we are talking about global reforms? So, we should touch upon one or two issues that we have six very distinguished speakers, highly distinguished speakers. I will call them in some way. But I would suggest that we have short interventions, may be six to seven minutes each because we do not have much time and then allow an opportunity if possible to

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have an interactive discussion with the audience also. I can see around in the audience so many people who have ground level experience, very great expertise and professional expertise, academic excellence. With these introductory words, may I start by requesting Prof. Shang-Jin Wei who was introduced?

Prof. Shang-Jin Wei: Dr. Jalan, Dr Prasad, distinguished guests, good afternoon. It is a great pleasure for me to be back to India and it is a great honour for me to participate in this Conclave. The theme of the programme is Agenda for India over the next five years. It just so happens that other countries a month ago, released its agenda for the next five to ten years. India’s neighbour China on November 15, the Government released a decision on certain issues concerning comprehensively deepening reforms. It is interesting to compare India and China because no long year, about five to six years ago, India gave a very good care to the Chinese leadership and the Chinese investment community and so on because of time of five to six years ago, it was very popular for the economists and other media in the West to project that India by now 2013 will overtake China in terms of the growth rate and will maintain its superiority in a relative growth rate for the remain of the decade. My own Institute is chasing to the national business that is, the Columbia Business Group that the professionals are from around the world find that business professionals those by and large predicting that starting from then to the next ten years, India will outgrow China consistently. Not many people point out various sectors that are supposed to be favourble to India ranging from demographic forces, democratic institutions and diplomatic issues starting point. All supposed to be favouring India over China.

Let us go through the agenda for the next five to ten years as announced by Chinese leaders. What is there in that agenda? In the Agenda we talk about various things. It is a strong focus on deepening market reforms. It is a view that previous 30 years, China has done quite a lot in terms of liberalizing output market, not compete substantially more liberal, more pro-market than perhaps many other countries at comparable level of the Government but certain markets were comparatively lagging behind in the new agenda with heavy emphasis on sector market liberalization including financing sector reforms, including reforms in labour areas such as relaxation of the family planning policy and including heavy discussion about reforming land acquisition and allocating our system. There is also a bit of discussion about further market liberalization specially in terms of injecting more competition in sectors currently dominated by same firms. Let me, as a sign note, correct some common misperceptions specially the US, a typical reader of Financial Times. Chinese economy is fundamentally private sector driven, not state owned driven. There are six million or so registered firms, state owned firms are about 3000; tiny sections of firms in minority of output produced by the corporate sector. There are hundred odd sectors and most of the sectors in China state owned firms play a very minor role. But there are few sectors, a small number of sectors in which state owned firms play a very prominent role. Banking sector happens to be one of these. That is the first picture one has to keep in mind. But the recent decision is going to introduce more number of competition in those small number of sectors in which state firms currently dominate. Why would Chinese do that? Are there potentially useful lessons for Indian neighbours or countries that can think about reform and development? I want to hear some observations from you. There are potentially many things one can talk about given the time limit.

I am going to very quickly talk about just four. One is this notion that you reform or you die. This is the expression that was there in 1990. We reform or we die. There is a sense of urgency that has never disappeared under the new leadership that came into power since March this year and it reinforced this view that it is not time to be complacent; plenty of things could happen that would cause the economy to collapse and could cause critical powers to collapse. The way out is to continue to reform. That is the bad one for what is the new decision of comprehensively deepening reform. The second observation is placing faith in the market. Some in the West characterize Chinese model. In fact, Chinese leaders should play more faith in the market. This is in fact the new Prime Minister said in his

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very first Press Conference after his appointment and some investment banking economists call that mostly the macro-economy can do and not a micro economics. Going back to think about some of the experience that China had in the years preparing and in the years before the session of the WTO. The session of the WTO formally took place in December 2001.

You look at discussions by think tanks by international relations or by even Government economists or academics before 2001, before the actual session. Many people were worried. Everyone was saying that the WTO session would benefit the Chinese textile industry, world leading sector at a time. But there were lot of worries, if you look at the report produced by the World Bank think tank and so on. The most commonly expressed worry before Chinese was that three sectors would be probably decimated after the session. They were agriculture, automobile and banking sectors. We can think about many weaknesses of each of these sectors that Chinese had which the high income countries were thinking about. But let us take agriculture. This work considered as a trade off but then the Prime Minister decided to gamble and even if it is trade off probably it is worthwhile. But the things worked out much better than as most of the talking heads anticipated. For example, their culture did not get wiped out. But many things the Chinese farmers used to do were not compared to the world market. There were many things that people thought much quickly and two things did not grow in the world market. Organic fruit is one thing. Apples, the Washington Street, thought was going to be one thing that US going to increase the export a lot. In fact, now China is one of the net exporters of apples because farmers find some way to grow organic food and be successful. Next is the automobiles. These are the four observations potentially to effect other countries that are thinking about reforms. Thank you very much.

Mr. Chairman: Prof. Renato Baumann.

Prof. Renato Baumann: Thank you Mr. Chairman. May I just start by thanking the organisers for inviting me to this very nice event and for my first 24 hours in India? May I present my points in taxonomic way and present bullets? I cannot compete with Chinese presentation. If you allow me, I will give six points in relation to finance and two other generic aspects which I think will comprise the agenda for the next five years. Starting with trade, I think the first topic in the agenda is to reinforce the World Trade Organization. Of course, we have to celebrate the achievements because we know right from 1930s the

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problems of lack of well behavioured and well intentioned sharing can cause in terms of international trade relations. The second point has to do may be a little less with India but more with my own country Brazil. Why I say less with India because the Central Bank Governor was quite explicit this morning when he was asked about export of manufactures. He said, we do not know about it whether this should be ranking high in the agenda. But the point is that there is an increasing pressure in multilateral negotiation in WTO scenario and elsewhere to change the logic of the negotiations in manufactured goods. The meaning of this is to provide emphasis in value added change. Why is this so warring for most developing countries? It is for the simple fact that we just do not belong. We do not participate in those changes. Smaller economies fan profit out from that but most of the medium to low income countries simply do not participate in that and the new logic in the WTO may be rather deadly for us. Third is to deal with the new scenario of multiplicity of bilateral and pluralateral preferential agreement, also the very impact that increasing the journalism kind might employ for multilateral trade.

Here I mean not only the regional integrity, integral economic association, the free trade agreement between Japan and European Union, the trans-specific partnership and so on and so forth. Big things are taking place among the big players and not everybody is participating there. At the same time, we have the quasi-existential grade in WTO. The fourth point I would raise is to increase the concerns in trade negotiations with regard to new dimensions like the environmental sustainability which is brand new for all of us. Fifth and the last point with regard to trade is this. I would emphasise that countries like ours India and Brazil should look for more concrete results standing from their belonging to country groups like IPSA and BRICS and by making efforts in order to identify an agenda that might lead to a more clear and significant convergence of interests so as to provide the means to jointly exploit the potential complementarities within each group. There is a whole work to be done in those realms. That was for trade.

In regard to finance, I have six points. First, to orient the use of big foreign exchange reserves held by developing economies in recent years so that they should benefit the donor countries and not so much to the actual savings of the advanced economies as we have seen. Second, to deal with the relative weakening of the West economy, enhanced increasing concerns with regard to pre-dominant role of the US dollar as a means of exchange and even more significantly as of reserve value. Third is to try and develop an orderly way for the unavoidable changes that will have to take place in the ultra easy

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monetary policies adopted by the US, the Euro area and Japan. Fourth is to identify mechanisms to avoid the capital flight from developing economies following these very changes in monetary policies in the West, in the Euro areas and Japan. Since fiscal policy is expected to tighten less in the advanced economies and to state broadly neutral in emerging markets and developing economies with low, real interest rates, the challenges there are very much so to avoid those capital flights. Fifth is to avoid the risk of a mismatch between the changes in monetary policies in the advanced economies and low economic recovery so as to avoid a need for an adjustment at the balance of commercial banks. Sixth is to find ways to discipline the shadow banking system which accounts now for half the size of the banking system assets. We are talking of an estimated 67 per cent US dollars in 2011 when 111 per cent of aggregate GDP in the world. So, something has to be done in that regard.

That is for trade and finance. If you allow me, I would add two additional specific points. One is institutional issue, to re-design the existing multilateral institutions or at least to adapt their operations. It is so because the overall ceiling is that markets are unevenly liberalized. Here is been uneven distribution of benefits. The developing economies have only limited voice in participation in the actual decisions. Hence coalitions like the joint activities of the BRICS as well as the common positions within the G-20 seem to be a large options for Brazil and India. Yet the actual result has to materialize. Last but not the least, I would call this dealing with expectations. A number of emerging economies in developing countries have dealt very successfully in reducing poverty. We have seen significant figures presented here this morning. My own country has moved with a quarter of this population from below to the poverty line, China the indicators are very stimulating. Now this imposes as a new agenda which is to identify means for dealing with the new and rising medium class demands which are increasingly present in developing economies that have been successful in reducing poverty. As someone has said we know how to deal with poor guys. We now have to learn how to deal with the medium class which is of totally different thing. Thank you very much.

Ms. Naina Lal Kidwai: I thought that I would focus on trade specifically with a view to the financing of trade. Let me at the outset say that wearing my FICCI industry hat, we were very relieved that the WTO process finally did not faulter. I think at the end of it, India’s role therein initially the scare of course but then to see the conclusion of the WTO is actually a huge victory for India which I think got somewhat lost in the press here because it was covered right through the election day. But it was a big win for India and a great win for the WTO process. Of course, a lot more work needing to happening for going forward. I thought I would just set out for you that what we see in terms of global trade finance and the increase therein between 2009 when it was at 10 trillion dollars to know which is at 18 trillion dollars is a huge expansion. I think it is important to identify another trend which is not so happy and that is availability of finance has actually gone down. It has gone down and going down because the European banking system is shrinking, some of that slack is being picked up by Asia, Asian Banks and the US. But is it going to be enough? What does that mean for world trade? That is broadly where I am coming from. Then when you begin to look at the microcosm of India and our desire to engage more with the world and trade therein and the availability of trade, what does that mean for us? Is our banking system at a substantial enough scale to take us forward to the levels we want to? I do not have the answers. But I thought that I would set the problems at least out there because we have to start thinking about this today if we want to build for the future, that is our tomorrow.

So, trade finance intermediation, you could say why is finance so important? Surely trade can happen and it will happen. But trade finance intermediation provides both risk mitigation, it provides cash flow, it provides liquidity to importers and exporters. It is a primary source of foreign exchange for a very significant proportion of SME in seeking to finance their imports. So, trade finance is actually very critical and there are studies that suggest that 80 to 90 per cent of all trade requires finance in some

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form whether it is risk, insurance and capital. So, the linkage is complete and hence we have to address both these issues together. Now the good news is that trade finance is actually something that banks quite like because it is characterized by low default risk, there is an absence of leverage by and large. The maturities are short term and the security provided by the underlying goods is financing the transaction. So, it is a good stuff. We need to be able to do more of it. Now if you look at the way trade has also been used when we had the problems in 2009 as the world had the problems in 2009 for it is a Lehman crisis, the G-20 stepped in and one of the solutions for the world was to actually to step up trade finance. So, it is actually a very important tool in the hands of Government and indeed as it happened in the world to step this up.

There was a commitment at that time from the G-20 to ensure provision of 250 billion dollars of additional trade finance. It is a tool which is also very positive. Then you begin to look at the whole area as to why are there gaps. There are studies which have shown and in fact, the WTO report on Expert Group on Trade Finance reveals that only a third of the 60 poorest countries in the world benefit regularly from services and trade finances. So, pre-emption of trade finance by the developed world is actually a very much a factor and a lot of this has to do with risk perception. Risk perception of the poor countries, developing countries has actually ensured that they continue to remain out of the system. So, we do need aid and assistance in making sure that from a geographical point of view, there are priorities accorded to Africa and Asia who are otherwise starved of trade finance. These are the very countries India is looking to trade with. So, if you begin to look at how we have to ensure that the risk perception of these countries, I am not saying that they are not necessarily risky themselves but the perception of risk is higher than the risk, it keeps banks and the banking system away from according the funding therein. You will see that those are the roles that EXIM Banks and other institutions have played historically in terms of mitigating some of that risk. So, essentially India has two issues, one is just pure availability of finance for trade both in the global context and in the Indian context. The other is the countries with which we will be trading more as we turn to much more South South trade, we will in fact begin to encounter some of these problems. These are the things we have to begin to look at as we go ahead. Then if we begin to explore what is happening in the financing world, so what is causing what I initially set out which is the shrinkage of the European banking system, the de-leveraging which has been brought about by the sovereign debt crisis in the Euro zone, this has clearly reduced an important source of supply of trade finance because many Euro zone banks including trade finance as such, removing this significant source of supply of trade finance. In fact, the extent of de-leveraging

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highlighted by the IMF which the European banks have seen, will see in terms of shrinking balance sheet by the end of 2013 will be 2.8 trillion dollars, going out of the system in Europe. So, it is a big number. The other side of it is the emerging Basal III regulatory framework. It is also being increasingly held responsible for the limitation on the expansion of global trade finance supply. This is going to be an ongoing shrinkage. Now if you look at India and in fact there I say that I have been shouting on the roof top that we have loaded our banking system for being very good which it has, well regulated and it has kept us out of trouble. But the challenge for us going forward is, is our system big enough, vast enough to support what we need both in terms of domestic infrastructure a trillion dollars as put out by the Planning Commission and also trade as India begins to enter this domain far more actively. What we, therefore, need to do is to build what we have in house in terms of strong basis as we have, a strong banking system but it needs to be far bigger and needs to be far more vibrant in order to address our ambition and vision for the future. The second aspect that relates to that then is, where is that funding come from? I think, we have the answer at least from the Reserve Bank of India’s policy to open up banking which means we will see more players and hopefully more capital. We also need to allow for our existing banks, 75 per cent of which are government owned to be able to go into the capital market on a much more opportunistic ways so that they can raise money the way our private sector banks do. Our private sector banks trade much better than do a government owned bank. They have far higher multiples. They are able to raise money very readily from the capital market and, therefore, the ability to raise this money on an opportunistic basis is very critical. As we look at the banking system and the Governor this morning also said, we cannot ignore the capital markets because they too go hand in hand. So, we also need a scaled up capital market particularly the debt market and he did mention this in some length and so I will only just endorse that. But we need to clearly have that moving in tandem. So, we have many challenges ahead of us. But the opportunity to make sure that trade is a very critical part of our growth is clearly there for us. We have to make sure that finance is not far behind. Thank you

Mr. Chairman: Thank you Madam Kidwai. It was a very excellent presentation. Now may I call on Mr. David Rasquinha?

Mr. David Rasquinha: Dr. Bimal Jalan, fellow dignitaries on the dais, ladies and gentlemen, in the interest of time, I am going to skip my main presentation and like a good banker, I am going to focus on numbers. I propose to throw a few numbers at us and then try and draw some conclusions from these numbers. To start with, we are talking of trade, finance and reforms. So, where do these two linked together? Where has India reached? India’s share to GDP ratio which was around eight per cent in years gone by is now 44 per cent in 2012, something like eight fold rise. If you look at our position in terms of global merchandise trade, we were standing at about 0.5 per cent donkey’s years back. We moved up to 1.6 per cent. 1.6 per cent is still small compared to China and others but it is still a three fold increase. If you look at this in terms of ordinal ranking, we were number 32 in 2000; we moved up to 29 in 2005; we are the 19th largest in 2012. This is for merchandise exports. If you look at services, the position is even more dramatically better. Our share was one per cent many years ago, it has gone up to 3.2 per cent in 2012. Again if you look at the rankings, we were number 25 in the world in the year 2000; we were number 7 in the year 2012. Now number 7 is a very creditable position because it puts up well ahead of a large number of economies that are far more developed. And contrary to population impression, this is not driven purely by software exports which get the glamour label but there are a lot of services underlying this in terms of technological services, legal services, architectural services and so on. What about geography? If you look at the direction of trade, here again, ten years ago Europe and North America, accounted for as much as 46 per cent of India’s export basket. Asia and Africa were around 49. What is the position today? It is dramatically different. Europe and North America are down to just 32 per cent of our exports whereas Asia and Africa have gone up to 61 per cent. Ms. Naina Lal Kidwai was

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just talking to us about the increasing focus on South South trade. As you can see, the number shows that this has already started and it is gaining momentum. Where, however, do we see the problem? That comes when you drill down into these numbers. Take a look at India’s export basket today. Your largest single item in the export basket is refined petroleum product accounting for almost 19 per cent of our exports. Now this is in some way a manufactured good, a reasonably high technology good but let us face this. This is an opportunistic export driven perhaps by the price regime in the country and how sustainable it is when the price regime changes, we need to see.

If you look at the WTO World Trade Report for 2013 which is just out, they pointed out that there is a range of factors which governs the growth in trade be it exports or imports from the point of view of EXIM Bank of India I will focus more on the exports. These are of course, factor endowment, natural resources, technology. But technology is the fastest change agent in building up a country’s export basket. Hand in hand with technology goes finance. Ms. Naina Lal Kidwai already mentioned about the importance of finance and in fact the ratio of 80 to 90 per cent is what is commonly believed to be the quantum of exports which requires financial intervention in one form or the other. Now this has been shrinking and the shrinkage has not been just in terms of amount but availability, in terms of the quantum of finance, in terms of tenure of finance, in terms of the pricing of the finance, in terms of the security required for that finances. And Basal III norms are going to make this more difficult. What was still now a non-fund exposure of the balance sheet is now effectively being treated as funded balance sheet exposure in terms of weightage, which means your leverage ratio is going to be impacted, your capital adequacy is going to be impacted, to the extent that this able funding ratio and the liquidity ratios have national discretion, there is some way out there. But I am afraid, trade finance is going to become not just more difficult but more expensive in the days gone by. This is not of course the intended consequence of Basal; it is one of the unintended consequences. Now Indian exports have shown a commendable rise but much more needs to be done. At EXIM we have been working very closely with the Government of India, the Ministries of Finance, Commerce and External Affairs to devise new risk control products where the exporter is freed to a large extent of the political risk or payment risk over his exports when he is targeting countries which might not otherwise be his first choice countries. These have been evolved in consultation with the Indian exporters and we are seeing a lot of traction. In fact, as the economies steadily recover globally the role of the EXIM Bank becomes critical because they are in the export area, the lender of last resort. Capital exports also by way of overseas investment offer a paradox. Many Indian companies which invest overseas are now faced with asset impairment on their balance sheets mainly because of richer valuations of earlier days and impairment

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of cash flows. At the same time, current valuation in the global economy also offers a very attractive opportunities and the point comes on the pricing of these particular areas. On a broader front, our research group has worked on a six digit level to look at the trade patterns of China, our neighbours in SAARC and other countries to identify where we can substitute export. If the overall cake is not increasing or the pie is not increasing as much, we can still increase our share of the pie hopefully by some of the market shares of other countries. So, we are looking at what can be the substitution effect and where can Indian exporters target their substitution efforts. Dr. Rajan in his address also referred to the need for growing the infrastructure and the institution. Now there are a number of institutional developments which have happened. In Madhya Pradesh, in 2010 we had the passage of the Act which provides for guaranteed delivery of service within a specified period of time failing which a financial compensation would be paid. That has spread to a number of other Indian States and it is steadily growing though Madhya Pradesh was the originator. The SME sector is the engine of growth here. The world over, if you look at Germany, the famous Mitterrand or the equivalent sectors in Italy and Korea and Japan are the engines of growth. In India however, the SME sector has faced constraints by artificial limits on asset sides, whereas if you look at the equivalent figures in China, they are much bigger. In India we are looking at an asset side of one to two million dollars in rupee equivalent. In China the corresponding figures of 32 million dollars. Effectively, our small scale sector is not being allowed to grow and achieve the scale which is necessary for building up exports. This can be done through clusters; this can be done through reform of labour laws and so on. But the key factor I would like to leave with you however is in terms of technology exports and the favourable terms of trade they generate. If you look at India’s manufacturing sector, it stands at just about 18 per cent of the GDP in 1985 and it is down to 13.5 per cent today. Corresponding in China, the number is 34 per cent of GDP. That translates also into exports. You will not be surprised when I tell you that our share of global manufacturing was just 1.8 per cent vis-à-vis China’s 14 per cent. And it is this manufacturing sector which is the engine of growth for export. In hitech exports also our share is just seven per cent of manufactured exports vis-à-vis 43 per cent for Malaysia, 26 per cent for China and Korea, 17 per cent for Mexico. The answer therefore lies in our manufacturing sector. This has to be built up, be it small scale, be it medium scale, be it large scale. It has to be built up through R&D and speedier procedure and we have to find ways through national institutions and intervention to overcome the problems which Basal III would pose. With that let me stop. Thank you very much.

Mr. Chairman: Now may I call on Mr. Nayar?

Shri S. B. Nayar: Mr. Jalan, other members of the panel, ladies and gentlemen: I would like to slightly deviate here because originally I was asked to speak projects. In any case, what MD, EXIM Bank has said manufacturing is very critical for trade. What I am going to say is typically about Indian economy. It may not be really applicable to outside environment. With my background in finance, recently of late, we have been facing some kind of problems in financing projects. The first problem is that bank’s projects are getting bigger and bigger and the banks are not of international size but the projects are getting of international size. We are finding it difficult to achieve financial closure. Also the number of banks participating in any project is getting larger and larger. Many of the promoters find that it takes almost a year to achieve financial closure. By the time you achieve financial closure, the cost has already gone up and there is no central referral fund for any project appraisal. Every bank is appraising itself. This results in about 20 to 25 per cent cost. When they come back to the projects, banks again have projects over run and this goes on and on. The second issue is of capital. I feel that as we go by, banks’ appetite for new projects will come down primarily because new projects do not get rated until the COD takes place. Until the COD takes place, banks have to earmark hundred per cent capital and banks will find it very difficult to earmark such capital because the capital itself is short and very costly. What is the answer for

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this? Who will finance new projects as we go on? Again, manufacturing is extremely important for trade development also. Perhaps we may need to bring back the DFI because you do not have any alternate markets; you do not have a deep bond market. I do not know whether it was a mistake to have given up on DFIs. Do we need to bring back the DFIs? If we need to bring back the DFIs, how do we go about it? I think this is a question that we must start thinking about.

Another issue on financing which I need to bring out here is this. Although it is not typically relevant to trade finance, yet as the projects are getting larger, the bank’s exposure also gets larger. The way we finance in India is, we normally finance for maximum of about ten to 12 years. If I finance any project for more than 12 years, then it leads to national liability and mismatch and others. Generally, the running policies for banks’ statutory auditors, the regulators also do not look at this with favour. So, generally the banks do not encourage us to finance beyond 12 years. So, what happens is any project may be a manufacturing project or a large project or even a hotel like this where the assets like this of 20-25 years, promoters are not allowed to be paid back over 25 years. With the result, repayment of any such project is almost at double the rate than it is warranted. Now if I am allowed to amortize these loans over a period of asset life, then the repayment may come down to 50 per cent. The recession goes down and there is enough surplus left in the hands of the promoters. The value of the project goes up and the country itself gets more surplus, investment surplus plus the recessioning possibilities also come down. Now you may very well ask why this is not happening now. The reason is that in India in the regulatory dispensation, the differentiation between restructuring and refinancing is not very clear. So, most of the boards, if you talk to them, if you take a proposal, they will say that this can be interpreted as restructuring, so why do we do it. You may do it 12 years and one shot payment. That forces a higher repayment. Therefore, in ten or 12 years, the cash flows of any project can fluctuate and the first fluctuation is an adverse fluctuation and it goes to the restructuring board. I feel that we shall have to completely change the way we approach the larger projects and this will benefit the country, the promoters and the banks. Thank you.

Mr. Chairman: Thank you Mr. Nayar. Now Dr. Prasad, do you want to add something or should we go to the audience?

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Dr. H.A.C. Prasad: Dr. Jalan, distinguished people on the dais, distinguished people among the audience, ladies and gentlemen: I have a few slides. Let me just highlight particularly the case of the exports and imports of goods and services, the agenda for the next five years. Just I want to highlight a few slides though I have many slides.

If you see, in the last five years before the 2008 financial crisis, the growth in India’s exports was up by 25.8 per cent, that is of merchandise, and of services it was up by 35.4 per cent. But after 2008 for five years, you will find it was just 12.8 per cent and about 8.3 per cent for goods and services respectively. In the first half of 2013-14, merchandise exports were up by 4.9 per cent while services was up by 3.4 per cent. My point is, exports have been high but is it high enough? Have they come to the potential which India has? For that, if you see the shares of India, you will find that it is still 1.6 per cent in terms of the merchandise exports, it was 0.5 per cent earlier. But China has 11.1 per cent share in the total world exports. In the case of services, the gap is less but still it is a small percentage. You compare the 1.6 per cent of India and 11.1 per cent of China. Is it not too small a percentage for India and the gap has become wider over the years? I do not want to numb you with all facts and figures here. But let me come to some issues. What should be our agenda? How to enhance our exports from 1.6 percent to at least some good respectable ball mark figure of, say, four percent. Can we achieve it? This is not impossible. China has done it. India has also done above 20 percent export growth and 29 percent or 31 percent some time in 2003-04 and 2007-08. It is not impossible. What is to be done? I am giving you some suggestions.

One is, we have been doing a lot of market diversification. But in terms of product diversification it is not that much. In the top 100 imports of the world, India has just about five to six items in the top and that for one or two big items like diamonds and jewels. You will find that in the top 100 items, it is the ‘E-s which is important. Electrical, electronics and the engineering items and some textile items are the ones in which we will have to focus in the next five years. Then coming to the question of FTAs, you have got so many FTAs today. In fact, there is a bowl of FTAs in the world as such and in India, we have also been having one FTA after the other. But what we have to see is whether these FTAs are actually helping India. Some of them have helped India. But what is needed is some sort of a reality check in the next five years. We have to see which are the FTAs which we actually need.

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Coming to the long term vision in the WTO and multilateral negotiations, I think, the Chairman of the Session did say about the WTO negotiations. You will find that we have been successful in Bali. That is a solace, but is not a big thing. But why had we to negotiate on food security and other things. You have to look at the past. In the past, when AOA negotiations happened, India and other developing nations could not get what they wanted with these advanced nations. We were not able to do that and that is why advanced nations continued with their farm subsidies, we were not able to give the subsidies. Similarly, in the case of ITA I, many items became ‘nil’ duties, but at that time, our semi-conductor sector has not developed, but the semi-conductor sector of the developed nations had developed. These are the things which have happened. But India has become wise after that. We have developed our skills in negotiating after that and these days we have been cautious. I think, the long term objective should be kept in mind while WTO negotiations are there.

Another aspect is enhancing export competitiveness. Whenever I speak about export competitiveness, people say that the exchange rate is important and because there is a deprecation in India, your exports have become high and because there is appreciation in China, the exports have fallen. So, you will find that even now people are telling the same thing. But I think, that is not exactly what is happening. India’s exports depend on world GDP and world exports. That is a fact and exchange rate is a smaller factor. It may not be that important a factor. What is important is volatility in the exchange rate which should be checked. That is the only important factor. Then, how do you enhance the competitiveness? You will have to look at other ways. You will see how many export documents we need. We need 9 export documents compared to 8 in China and 4 in the OECD nations. Similarly, the transaction cost is quite high. I think these are the things which we should look into to see that our competitiveness becomes high. If we see the micro-fundamentals of economy, the port issues are important. We have a working paper in which these small issues are mentioned. But actually they are the pin-pricks which actually hurt the exports. Customs issues need to be looked into.

Let me now just come to some of the agenda items for the services sector. We have done well in services sector, but not to the potential we have. I think, we can have a big jump in our services exports and how to do that for this. We may have to focus on some big ticket items. In the software sector, it was a game changer. Telecom was considered another sector but all of you know what the difficulties in the last few years. That is why, this sector had a beating. But we have many other sectors like engineering services, the tourism sector and health care sectors where we should focus upon. I think, some focus is needed on the services sector. Marketing India’s services sector is important. In fact, whenever we speak about services sector, it is only software sector that is important. Despite the fact that in many of the services we have developed well, people do not know about India’s capabilities. I think, maybe just as the ITPO has many exhibitions in a systematic way, in the services sector, we may have to have some such strategy or planning. About disinvestment, there is a possibility of disinvestment in the services sector. In fact, we have listed many of the services sector PSUs which can be disinvested. I think, the time has come when we should see whether disinvestments of these sectors can be done immediately. Not only the Government can add to its kitty, but also the services sector can develop because of the expertise we get with this privatization. I think, FDI and also privatization are important. Can we not do some sort of a privatization of some sectors, say the railways? This may be a controversial issue. People may say why? It has succeeded in some places, in some places it has not. So, we will have to look into these aspects.

Finally, we should see the market access issues for India, that is, the obstacles which are found in other nations. I do not want to go into sector specific issues. But let me conclude by saying that I have given you a selected bunch of issues for the next five years in the merchandise sector and also in the services sector which we should consider. Thank you ladies and gentlemen.

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Mr. Chairman: Thank you very much Dr. Prasad. You are the Chief Organizer of this meeting. Now it is about 3.30, the time for you to have some tea. But I just want to have your view on whether we can extend by ten minutes. Then I will give an opportunity to anybody, maybe two or three questions specifically to persons who have spoken. We have had excellent presentations. Time, unfortunately has been very short and I must apologize to our speakers for hurrying them a bit, not giving them enough time on issues which are of such vital importance. But two or three questions will be there by name to the speaker.

Question: China out-paced the growth of India. Is it because of the strategy that is directed towards its growth path? For instance, China, according to my understanding, started from top up growth and reforms, agriculture, then secondary and tertiary. In contrast, my understanding is that, India has started from the top to down, the tertiary sector, the secondary sector and then the primary sector is still far away from reforms that can have any credit. Just to illustrate the point, the total food grain production in India is 259 million tonnes in contrast to China’s almost 500 million tonnes or a little more than that. And tangent to this issue is that you enumerated three factors which were supposed to favour India in terms of growth, demography, democracy and differential starting point. I can understand two points which undoubtedly go in favour of India. But democracy is one thing which is mind boggling. My understanding is that we achieved whatever growth despite democracy, not in spite of democracy because there are large number of pulls and pressures under democracy and the degree of income has substantially reduced when we take the final decision.

Mr. Chairman: There will be one more statement or question.

Question: What lessons should we draw when you set for 2020 your infrastructure layout?

Shri K.L. Prasad: One of the points which you said about finance was foreign exchange assets of the developing nations can be more productively utilized. We have the presence of former Governor here. As long as dollar or euro is not a legal tender, how do we go about deploying it in a much better manner and what is being done because there are some rules which govern the deployment of financial assets?

Mr. Chairman: Now I think, we do not have enough time. Please forgive me for closing the questions at this point. I will ask Mr. Shang-Jin Wei first to say a few words. I am sure, you can talk more about it as very important issues have been raised and perhaps you can talk more about it at tea. Just say the salient points if possible.

Prof. Shang-Jin Wei: On the first one, sequencing of reforms, my view is different countries have different monetary constraints and, therefore, they very well need to follow different sequences. There is nothing particularly generalize about Chinese sequencing. In Chinese case in 1980s, starting with the reforms in the agriculture sector happened to be simultaneously approved for as the way to do reforms. But it did not stop there and it moved on to other reforms. I think, the most binding constraint for you is to work on this. In the case of Chinese, it was to have more faith in the market, introduce competition whenever you can. The reform was set by the way in the case of Chinese. It was one of the most difficult reforms, one can imagine. If you read the country’s history, the country started from economy heavily dominated by state owned firms. State owned firms collectively produced 97 per cent of industrial output to today producing of 20 per cent of GDP, which is a much lower level, almost comparable to the French level. What do you do when you lay off people? You have to create enough job opportunities elsewhere so that unemployment does not become a problem. The second question was about infrastructure build up. What is to make out of the China appears to have achieved its schedule ahead of the time. There are two factors. The most important factor is that 70 per cent of it was ahead of

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schedule and it was because of technological innovation. In early days, in 80s and 1990s, one of the binding constraints is that when you see a mountain, if you build around the mountain, the old technology is very costly and if you want to go through the mountain, digging a tunnel it is also very costly because nowadays the way to do is what is called tunnel boring machines which will be used by a very small number of countries and is super expensive. To dig tunnels in different mountains and places because the rock condition and soil condition and size required are different and hence you need different machines. Each machine is in multiple millions of dollars. Around 2003-04, some Chinese companies figured out how to make boring machines themselves and it made much cheaper boring machines and suddenly we had explosion of domestic made cheap boring machines. Whenever you see a mountain, just dig a tunnel, it is a no big deal. The second contributing factor is the financial crisis which gives the Government some incentive to roll out some programmes. President Obama used the term for this. You have a friend to build that road in the next 15 years. That is the second contributing factor.

Mr. Chairman: Thank you Prof. Shang-Jin Wei. Mr. Baumann.

Prof. Renato Baumann: I would say with due respect that this term is in the newspapers. The meaning of that is that you can play with the country and you have rules for that and overtime what have you done? We have put our reserves in US dollars in treasury bonds, the safest thing to move. So, it is a question of faith. Having said that, of course, the risk of US bonds departing from zero because right now there is an increasing perception that something is not that good as it used to be back in the 50s and 60s. So, China has been enforcing so to speak “the use of Yuan in trade relations. Country has been using alternative currencies in India reserves. In different countries that composed BRICS have been betting very strongly in pool of reserves in development bank, which means many of our countries are trying to find out alternative ways of using our wealth instead of putting all our eggs in the same basket, the US treasury bonds. That is what they meant by using the wealth in our favour less than sponsoring or financing someone else’s savings.

Mr. Chairman: Thank you very much. My apology is to all of you because we did not have enough time. The presentation was very rich in content but I am very sorry and my apologies to all the speakers also for not being able to give them more time than they were able to take, which was just a few minutes on extremely important subjects of reforms, finance and trade. Now that I have the floor, I will spare you the burden of listening to me about any of these issues. The only point I want to make is that the time has come for us that is, the global community to get another Bretton woods –II. What is happening in our system particularly in the financial field lacks any global come back. You remember, we have a big depression when you had the Bretton Woods-I to set up two financial institutions the World Bank and the IMF which were trying to respond to the problems of that time. You took certain views or rather we took as countries certain views on exchange rate management. You had fixed exchange rates. Then we got flexible exchange rates. Now you have flexible but managed but would never know where this was going. Whether the exchange rate reflects the fundamental facts of life across the world or they do not. For example, take euro and dollar and Yen, how it is moving, where it is moving, what is the global compact on that, we do not know. So, the only point that I want to make to you is that the biggest issue is not trade, it is not reforms, it is really the finance. I mentioned that after 2008 and the Basal-III there is some progress. But still if you were to ask me or ask all our experts here that what is the international convention in terms of the exchange rate management, I am sure that all of us would probably be looking blank because there is not one. So, I would leave this thought with this extremely distinguished audience as well as participants that can we have the Bretton Woods-II on certain international rules of the game in management of international finance? WTO is doing trade and we need international finance management and the World Bank and the IMF are out of date today. But we have to think about

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something. Do we need institutions? We need rules; we need global community; and we need a global compact. The world development committee, the interim committee, the IMF committee, the G-10, the G-20, the G-30, let me tell you that all have become ineffective. We have these meetings; we have get together; we have dinners together, but nothing happens. So, you need a very concrete global compact and a global consensus in having the Bretton Woods-II to decide on international rules of the game as it were in the financial sector.

Let me just leave it at that and I am sure you would have time to discuss some of these issues which were raised by our very distinguished panel. Thank you very much.

Plenary Session – III (Agriculture, Food Security & Inclusiveness – Challenges)

Anchor: Before commencing the session, we would like to welcome the distinguished guests. We now request the respected Chair Ms. Arundhati Bhattacharya to take over the session.

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Madam Chairperson (Ms. Arundhati Bhattacharya): Good afternoon everybody. First of all, the theme today is growth, agriculture, food security and inclusiveness – Challenges. I thought the topic itself was a challenge because of the number of things that have been encapsulated therein. In fact, we are talking about growth. We know the difficulties about growth and where we are and the problems that we have regarding growth versus inflation. Agriculture is one of the bright spots of the Indian economy right now. But having said that, it is an area that is beset with challenges. Next comes food security, again something that is very much in the news specially on account of the WTO negotiations. Of course, inclusiveness is something that we cannot do without. But we have a very distinguished panel over here, people who have come specially Prof. Kattumuri who has come all the way from London. I think, this is a great opportunity for us to share their insights into these matters.

So, the way I thought we could take this discussion forward, I would request Prof. Kattumuri first to give us some idea about the growth and what she envisages in this area and its impact on the other elements of this particular theme. We could then go on to Dr. Gulati and ask him to speak on agriculture. Mr. Prasad, I think, I will request him to speak a little on food security and round it all off by asking Mr. Narendra to talk on inclusiveness with may be a little bit of a slant on financial inclusion about which I think he has a great deal of knowledge. So, I think we will take it forward that way and subsequent to this, we will still try and have about 15 to 20 minutes of interactions with the audience. So, my request to the speakers would be to try and contain their address within 7 to 10 minutes each. That I think should leave enough time for us to interact after these things are over. With that, I call on Prof. Ruth.

Prof. Ruth Kattumuri: I would first like to thank the Department of Economic Affairs, Ministry of Finance for their invitation and the excellent organization of these deliberations on the agenda for the next five years. I also thank all of you who managed to last this long day of interesting deliberations. I will quickly run through an overview and then we will have sufficient time for discussion. There is enough food to feed the entire population of the world today. However, food security remains to be one of the major global challenges. If we look at some of the trends in the last few years, there have been big changes. Global hunger index is calculated as the proportion undernourished of the population, children underweight and child mortality divided by three. If we look at the Global hunger index since 1990, there have been some improvements, which are reflected in this graph. However, not much change has happened between 2001 and 2012 if you look at the difference here and the global hunger index. In India there is hardly any change reflected; it was 24 in 2001 and it is 23 in 2012. In India, one of the major issues is that there are big differences between States which is evident. If you look at the

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numbers between Punjab, which has a better index compared, to Madhya Pradesh, there are massive changes. One of the things I want to focus on is undernourishment. If we look at some global figures, the developed regions have managed to attain improvements in undernourishment. However, the proportion of under nourished people in the developing nations has overall decreased from 23 in 1992 to 15 in 2010-12. If you look at the South Asian region, we do not see much of a change. But if we look at South East Asia, there has been good improvement there.

In India, the achievement has been that the proportion of underweight children has reduced only by three per cent between 1998-99 and 2005-06, so it reduced from 43 to 40 which is not great. Let us look at where are we in the global food scenario. I believe that there is enough food in the world. The amount of food production is enough to feed the seven billion people in the world. However, we still have issues of undernourishment. There is little bit of a change between 2010 and 2012. But I also want to point out that we also have some other challenges such as overweight people in the world is going up from 1.15 billion in 2010 to 1.6 billion in 2012. Similarly obese people in the world has also gone up from 343 million to 528 million. However, there are improvements in the sense that number of people dying of hunger each day has gone down from 28,500 to 15,244. So, there is some progress and also there are reinvigorated efforts to half the proportion of people suffering from hunger by 2015 which looks like it is possible. I just want to quickly run through some of the challenges of food security which are, as I said, distribution of food remains a major challenge. One in eight people in the world today remain chronically undernourished. Also food security is inherently interlinked with economic and environment changes and recent awareness of climate changes. We are aware that climate change impacts availability, stability of access and utilization of food. There is also a sharp risk of world food supply in coming decades due to climate change. It undermines crop production and it drives up prices when the demand is also rising at the same time. Similarly, the agricultural output may drop by two per cent every decade versus without impact of climate change. Demand for food is also increasing about 14 per cent each decade. The risks are higher for tropical countries and the challenge of tropical countries is also that they have lower adaptive capacity and higher poverty rate. When we talk about food reserve, China and India hold half of the world’s reserves of wheat and rice. However, the challenge that India and China have is that each of these countries has to feed over a billion people and another challenge that India has is that it lacks adequate storage facilities.

I now want to quickly look at the food security risk index, global index where it shows very clearly that India has a high risk of food security due to climate issues. Then I want to mention two

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points, one is, the amount of food that is being wasted and also the household expenditure on food. If we look at food waste, we see that one-third of global food production is lost or wasted annually. Wastage is much higher in developed countries. If we look for example at the UK level, the equivalent of 24 meals a month are thrown out per household and that adds up to 4.2 million tonnes of food wasted in the country per year. What are some of the reasons for food wastage? These are things like shoppers buying more than their need, lack of clarity about storage and labeling and over estimating proportion. This wastage of food also has environmental impact because the foot print of wasted food in the world is equivalent to 3.3 billion tonnes of carbon dioxide per year. I then want to look at income. What I think is interesting is that if you look at the annual income spent on food versus malnutrition, it is not that when people spend more on food, nutrition levels are low because if you look at countries like India, malnutrition levels are high and they spend more household income on food. But if you take the case of UK, it is a very different figure. Household expenditure on food in India as percentage of total household income is also quite high. I think, this is an important issue that can be addressed in terms of evolving policies. I am going to quickly conclude here. If I can just refer to the FAO’s definition of food security, food security is set to exist when all people at all time have physical, social and economic access to sufficient, safe and nutritious food that meets their dietary needs and food preferences for an active and healthy life. That is an interesting definition. But I also believe that access to food of at least one full meal a day is the fundamental right of every individual in the world and ensuring food security is crucial for sustainable growth and inclusion. It is an important topic to deliberate in this agenda today. Therefore, I am not going to read through these conclusions that I have written here because you can read what is in the presentation. I do believe that India is currently going through what I call “work in progress”. I would not have said this five years ago. But I believe that it is an interesting phase where it is a “work in progress”. There are several improved systems and mechanisms that are in place which are helping enable this. I would also refer to the Department of Economic Affairs, the analysis and the work they do. I have run a few courses for senior staff and mid-career staff from the Indian Economic Service, and I am very impressed at the interesting work that they are doing right here and these are the people who are providing the analysis for governance and policy making. Obviously, these developments will take clearly at least five years and then we will see evidence of the work in progress actually enabling better development in India. I would stop here. Thank you

Madam Chairperson: Thanks Prof. Kattumuri. To supplement with, Kolar has one of the biggest tomato mandi in the country. Whenever you go on that road and pass through Kolar, you will find mounds of rotting tomatoes on both sides of road. Yet as you all know tomato is one of those products which is amenable to processing. You can have tomato powder; you can have tomato pulp; you can have tomato catch-up; you can have tomatoes in many forms. Yet we have not been able to go through the kind of processes that would enable to actually utilize this crop instead to seeing this going waste. So, definitely this is one area where a lot of work needs to be done and maybe many agencies need to come together including banks like us. So, thank you for pointing that out. Now Dr. Gulati, can we have your comments on the subject.

Dr. Ashok Gulati: Thank you Madam, fellow panelists and distinguished audience, what I am going to do is concentrate on Indian agriculture. Why agriculture is so critical for India, all of us know, large population bigger than China, we have to feed. So, thinking that we can be 40 per cent dependent on the rest of the world for food is impossible because the demand will be so large. So, we have to produce. Economic access to food, still of the total expenditure, an average household is spending about half on food, so you cannot get away from it. Inclusiveness where half of the working force is engaged, if we can get that right, that is the best form of inclusiveness. So all these topics what you were saying are embedded in the performance of agriculture. But what I am concerned with what I am going to really

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argue for is something different and that is in the growth process, it is the nature of the growth process which has huge implications on the poverty reduction. The last 25 years of research has revealed that one percentage of growth in agriculture is at least two to three times more effective than the same growth coming from other sectors in reducing poverty. In case of China, it was 3.5 per cent more effective; in case of Latin American countries including Brazil, it was 2.7 times effective. That is the research that is all given in the World Development Report of 2008, if you want to see that. That is what takes me to China and India. If you just image in the economy into three sectors, agriculture, manufacturing and services sector, China started off reforms with agriculture.

It fired the whole thing from the bottom. People know that they dismantled their commune system but very few know that they liberated their prices. The real price of food went up by 20 per cent or so. As a result between 1978- 1984, agriculture GDP in China was growing at 7.1 per cent per annum but farm incomes because of liberating of prices were growing at 14 per cent per annum. That created a huge demand for the manufactured products which were being produced by the town and village enterprises, which created a whole revolution in manufacturing and still they are not as great in the services sector. What have we done? If we look at what is our strongest sector that we can be proud of, we are starting from the services side; IT from the top, manufacturing is still limping and trying to stabilize and agriculture, did we hear any reform big measure package for agriculture? So, what we are living at is a trickledown effect on the poor. The net result of the two models was that the China was able to half its poverty from 30 per cent to 15 per cent in six years, 1978- 1984 and that created the political legitimacy for the entire reform process. We took 18 years to reduce our poverty by half from 45 to 22 as per Tendulkar poverty line. This is the story. In the last 15-20 years, we have been targeting at four per cent rate of growth. Our overall rate of growth is higher but agriculture growth is no way. We have not been able to get four per cent rate of growth in the last three plans. There was a plan before that when we did get that. That is a major challenge but that does not mean that within the Indian structure, some states are not getting four per cent rate of growth. There are a number of States, you will look up where agriculture GDP is growing at the rate of nine per cent, eight per cent or seven per cent. What is that they have done right and why can we not think about that? It is not that it cannot be achieved. Four per cent rate of growth is not unattainable. I feel given the current situation the potential of Indian agriculture is at least five per cent rate of growth. I just want to give you one flavor. Look at the milk story. In 1950-51 we were producing 17 million tonnes of milk; US was producing 53 million tonnes of milk. Today US is at 90 million tonnes and we are at 132. You project for ten years ahead. You look at food grain production; you look at exports. All these things are coming. Exports of Indian agriculture last

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year was 41 billion dollars against an import of 20 billion dollars. So you have a huge surplus. If you look at the percentage of agriculture exports to the global agri exports, it is much higher than the ratio of manufacturers. That means the revealed comparative advantage is greater in agriculture than in the manufacturing sector. So, there is a huge potential to go by that. What are the challenges? What is it that makes it work? I think, the first is the incentive structure that needs to be set right. Without that nothing will move. We have been following policies of very restrictive markets. Major export controls, movement restrictions, stocking limits, levy on the system. I think we have to clean sweep all this in one go. Unless we do that, there is no incentive for investments to come in that. Wherever we have done that, I think we have got some results. So, getting the markets right, getting the prices right is the first thing. It is a major challenge and we have been playing hide and seek with it for the last 20 years of reforms. We have not been able to stabilize on that account. That is what will give you investments. Today luckily investments in agriculture are going up. 75 per cent of the investments are coming from the private sector, and private sector will get incentivize when the markets are right, when they have the right to export when they are processing and all that. But the public sector investments which are 25 per cent of the game, if you look at the total public sector resources going into agriculture, 80 per cent of the resources go through subsidies, whether it is fertilizer subsidy or free power, free this or free that and only twenty per cent goes as investment. The marginal rates of return from public sector investment, R&D, rural road, irrigation are five to ten times higher than the same money if you spend on subsidies like fertilizers and all that. This is all documented and well researched papers published in international journals. But investments alone will not take you too far unless we change the institutional framework. What are these institutional frameworks? I think, in the morning, Hon’ble Minister was saying that we have APMC and ECAs, all these Acts which are very restrictive. But these are prerogatives of the State Governments. My submission would be one simple thing. At least in those States, Azadpur Mandi and Washi market in Mumbai these are the two biggest fruits and vegetable markets. Both are under the Governments of what is ruling in the Centre. If they can just deal it fruits and vegetables, the commissions and all that are so high that a farmer gets a much lesser price and the consumer is paying a much higher price. So, you can reform easily. Do not put the buck on the States. If you take a lead, if you reform, two, three major States where the biggest markets are, others will follow. Land lease markets are there. Your average land holding size is coming down drastically. Today it is 1.16 hectare that is your average holding size. Madam was talking about tomatoes, whether it is onions or tomatoes, the story is same. But we have also to get the organized retail. So, you have a situation where the processing and the organized retailers are ready to take off and scale up but the farming sentiment is fragmenting. So, how do you do business? The bottom is fragmenting, the top is consolidating. And that is where you need land lease markets to be completely freed so that a scale can be created which is commensurate to the scale that will be needed by the processors and organized retailers. There are countries which have done that, Indonesia or China or others have done that, we can do that too. I do not want to leave you with a pessimistic note. This is a beautiful transformation. I think this Government has to feel proud of anything it is this in agriculture. Ten years back the investment in agriculture, the gross capital formation in agriculture as a percentage of agriculture GDP was hovering around ten per cent. The capital output ratio, Arvind Virmani will bear me out, was 4:1. So, you could get only 2.5 per cent rate of growth and that is what you were getting broadly. But today it has gone to 20 per cent of agri GDP, you should be getting five per cent rate of growth in agriculture provided you clean up the mess in the markets. This is the path what I was saying over time the share of the private sector investment has increased much faster, which is a very good sign because the efficiency of that investment is much higher than the efficiency coming from public sector investments. I think, my next speaker is going to speak on food security. But to me, the Food Security Act particularly, I think we have to have a big debate on that issue whether we want to really go by physical distribution of grains. Today we are sitting on a talk. At least 30 million tonnes are excessive than what we need and then we are having food

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inflation which is more than ten per cent. Normal processes are when you have stocks and when you have inflation, unload all those stocks. And these are all excessive stocks after taking care of the needs of your food security. I think, this open ended procurement, huge accumulation of stock is not the best practice internationally. All researches have shown that you have to move towards conditional cash transfers. You will be easily saving 30 to 40 per cent of the resources and you can augment your support to the poor and do not disturb the market. Otherwise the efficiency losses from the market will be much more than the welfare gains that you are trying to do because fundamentally the design of the policy is somewhat defective. You are trying to achieve equity through price policy. I was told in my undergraduate economics, use income policy to achieve equity and let the price and trade policy do the efficiency and growth business, you will be much better off. I think I will stop here. Thank you.

Madam Chairperson: Thank you Dr. Gulati. That was a really good overview on the challenges facing agriculture. Regarding gross capital formation, I am totally at one with you and specially as we see more and more of the rural people migrating to the urban areas, the need for more and more capital formation in agriculture is very much necessary. Here we have also been telling the Government that in respect of the subsidies that are given, most of the subsidies are given for the crop loans which are for short term use. We have really been requesting that if some of it can come into the term loans which are used for creating for investment purposes, we believe that the capital in agriculture would be even more. What happens now is that the farmer because he has the interest subvention only on the cash credit, that is the amount that is being made available to him short term. If he tries to use this short term money for creation of investment or creation of sprinkler system, pump sets and irrigation facilities but that actually stresses him out because he needs much more time to repay those amounts. Therefore we do believe that this interest subvention policy which could be tweet in order to bring about a subvention element in the term loan thing, that we believe will definitely help much more capital formation than it is happening now. With that I think I will call upon Mr. Narendra first to deliver his comments and then go to Mr. Prasad.

Shri M. Narendra: Good afternoon to all the respected audience. Quite a lot of the aspects of the subjects has been already covered and of course, only from the point of view of inclusiveness, I believe inclusiveness is not only a financial inclusion, it should be a total economic inclusion.

Here the role is not only of the banks and financial institution, it is the role of, to that extent, of every citizen, of everybody, with the Government, private everybody needs to ensure that in the larger

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picture, there should be inclusiveness. What I mean to a larger picture means, even a corporate or any establishment or any institution needs to have inclusiveness in terms of its products, in terms of its reach, in terms of its human resources, in terms of its policies, in everything, they have to have an element of social responsibility, societal responsibility. They need to look at the customers as well as the society in particular. That is where, during the Companies Amendment Act, there is an element of corporate social responsibility. I would say that apart from as a philanthropy, as a donation, more than that a long term sustainability of corporate social responsibility with the individual institutions’ objective of their own goal along with a societal goal has to be ensured. It is in this connection that in Indian context also, we believe that it is a socialistic pattern of society. Since there is a large amount of haves and have-nots, those who are privileged and under-privileged, those who are having the access and those who are not having access, there is a need to ensure that along with the other rights, like Right to Education, Right to Information or Right to House, similarly there should be a Right to Food. It is in this connection, I think, the food security along with the growth has become a necessity. Of course, in the world over as well as in India growth is essence particularly after the 11th Five Year Plan when India has an average growth rate of 8 to 8.5 per cent, today at the current level of growth, it becomes very difficult for the Government sources only to ensure that there is an equality and there is a justice. So, there is a necessity that today we are used or we have become used to a higher level of growth and 8 or 8.5 per cent growth is a must. In fact, the aspirations of the people and their own level of standard of living and that may be the reason even the world over, so in that context, the long term plan to a still higher growth to ensure that, as rightly mentioned, even though the food production in India is good, how do you ensure that there is a good supply chain management; there is cold storage and also the diversification in terms of food processing or higher end products and also to ensure that how do you bring productivity in agriculture. These are the issues which are getting the momentum and just as the earlier speaker mentioned that the investment has gone in a big way. As rightly mentioned, even in the banks, we are thinking that more than 7 lakh crore of credit has gone to agriculture in the form of 18 per cent is the minimum credit that should go to agriculture out of that 13.5 is direct agriculture and the balance is indirect. What we find is, most of them are in the form of crop, credit for the crop but not on investment. So, there should be a diversification and we were debating at the IBA and other level and even the Reserve Bank has mentioned that productivity whether it has really resulted in higher productivity and there also whether we have been able to put into dry land or other types of barren land into productivity of agriculture. That is a debatable issue which needs to have a much more investment from various sources. In that context, the corporates also need to embrace agriculture. One more thing is, today if you have to have growth in the service or industry sector, there is a direct correlation to the growth in the agriculture and particularly in agriculture, the social infrastructure as well as to provide employment opportunities other than the seasonal employment in agriculture to ensure that they get fully engaged and how do you ensure that by education as well as by diversification they get into employment there only. Otherwise there is a question of migration to urban areas and there again in urban areas, quite a lot of pockets are again excluded. That results in Urban Renewal Mission and also capacity building as per the Jawaharlal Nehru Renewal Mission and the projects through which how do you do capacity building in terms of other infrastructural facilities, all that becomes a matter. So, that is where the fact that we have to ensure that there is a fair justice and we have to ensure that agriculture growth takes a higher importance. That is where currently when it has grown at 4.6, we feel that the overall growth would be better and that is where the more and more focus has been given by the banks also. Now this is in the context of agriculture and growth. I believe and of course, Mr. Prasad will be talking. I come from Tamil Nadu and the Tamil Poet expressed it most eloquently and most emphatically when he said: We will destroy the universe even if a single man is denied food. Similarly, the great Tamil Philosopher Saint, Valluvur put it more clearly when he said: When food is denied to those who ask for it, the shame is not on the one who asked but on the one who denied it. So, it means all of us are

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shameful if we cannot provide food to all people. In that context, food security becomes absolutely essential because in terms of accomplishment of the wealth for all the people who have done, the basic thing is hunger and we have to take care of that. That is the food security. It is multi-dimensional. According to the United Nations FAO, food security exists when all people at all times have physical and economic access to sufficient, safe and nutritious food to meet their dietary needs and food preferences on active and healthy life. That is on the food security. About inclusiveness, as Madam has said, out of six lakh habitation in the country, the banking outlets in the last three years, we have expanded substantially. Now 67,694 outlets were there as on March, 2010 through 33378 branches and 34,174 and other modes 142, that has become 2,68454, that is from the branches 40,837 and by BCs, 2,21,341 and other modes 6,276 and total 2,68,454. So, a massive work has been done and 70 per cent of the branches are opening in the rural areas and semi-urban areas. Out of that, 25 per cent are opened in unbanked areas. Recently the branch expansion has been freed and banks are on the massive expansion. This year, all public sector banks are opening around 7000 branches. They are all in mostly unbanked areas. That is the coverage. But we have a long way to go. In fact, the branches as a percentage to the rural branches from 22 per cent in 1969, it increased to 37 per cent in 2013. So, the country has so many branches. But only 35 per cent have formal accounts versus in other countries 41 per cent in developing economies as per the World Bank study and our country has 10.64 branches for every one lakh adults whereas Brazil has 46.15 branches and India has 8.9 ATMs compared to 119.63 in Brazil. So, imagine how much work has to be done by all the banks. That is where our own methodology of brick and mortar branch, banks are encouraging lot of BCs. How many BCs are appointed by the banks? As I mentioned, total BCs are 2,21,000 and in urban places, it is 27,143. Now we are all supposed to submit three year plan up to 2016 and it is definitely that by that time, all the six lakh habitants and six lakh villages will be covered. There are quite a lot of general banking facilities. Around five facilities are called to be given – remittance, account, credit and also insurance and other recurring deposit. These facilities are being provided. But the question is whether brick and mortar branch vis-à-vis the digital banking, so the DIP mobile banking or other facilities through the hand hold machine but again they are all to be covered on line. So, banks have to put in place. The problem is of telecom connectivity. In some of the places, the availability of network of connectivity itself becomes difficult whereas for the beneficiaries you have to give online information about his account. Apart from that, a massive work has been done under AADHAR. Now we are all in the process of covering various districts depending upon the lead bank to make all accounts AADHAR seeded. There are accounts which are already there which need to be Aadhar seeded. There are accounts of the beneficiaries under the Direct Benefit Transfer where around 32 schemes of the Central Government are going to have Direct Benefit Transfer. So, we need to ensure that all these accounts are Aadhar seeded. Similarly, the NPCI also gets it. You have one option to have direct transfer without the NPCI and another option is through NPCI. But both are same. More than that, how this money has been spent for the purpose for which it has been remitted. That data is also being monitored by the Department of Revenue and Expenditure. In a way, the information has to go back. So, the whole human resources of the bank are being engaged in capacity building. The other one is LPG subsidy. All the retail outlets of the petroleum companies, the details of the beneficiaries and ensure that they have the Aadhar seeded account to ensure the subsidy. I am sure that around Rs.4 lakh crore of subsidy is being remitted, at this juncture the Government is expecting quite a lot of saving. In fact, I saw the paper report in MGNREGA itself, for the fiscal deficit reduction, they are expecting around Rs.25,000 crore of money not being remitted. In the sense, it would have definitely resulted in those who are not beneficiaries or those who are fake beneficiaries, all will be excluded through this Direct Benefit Transfer. So, in the long run this DBT through the Aadhar enabled account has a very good opportunity. That may be the same with the fertilizer subsidy; that may be the same with food subsidy. There is also another area of making the oil subsidy or diesel prices in line with the market so that the subsidy part itself could be reduced. This financial inclusion started with Dr.

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Rangarajan Committee followed by RBI enabling it. Even the game changer is allowing the bank to engage business correspondents. Today we can engage business correspondent not only for opening the account but also in terms of recovery. Whether in urban areas or in rural areas, this has resulted in a very good process by which the same familiarized rural youth and it can also be a corporate. There are a lot of corporates who are engaged in that. So with that type of efforts people may say whether it is only a cost or it is only a benefit. The large number of people who do not have access to account, if you do not make them to assess to banking and other activities and particularly in economic inclusion, you will be missing a great opportunity of business in future. So, it is not as an obligation but it is an opportunity. The investment that we do, today in corporate credit or corporate area where we lose some time, have to have a hair cut when we have to have a settlement, against this investment is not at all nowhere related to that. So, all banks have taken this in an earnest way and we know that we have to go a long way. These are the opportunities in terms of that. It also leads to credit diversification. Of course, State Bank is a leader in financial inclusion. Whether in brick, mortar branches whether in terms of opening the basic savings account, it is high and also ensuring certain CSR activities. In IOB we do take that. For that we need an integrated approach, the village adoption programme or covering the villages and also to ensure that financial literacy and credit counseling is another area where people need to be made aware of the benefits of coming to the bank and getting the banking services. In regional languages, our regulator has taken 14 languages the benefits of these financial inclusion and they have also developed very innovative pamphlets or other communication. Similarly it is done by the banks. That will make people to coming out of the money lenders or other than the bank access, so that the ills of that how I could be avoided. Even in terms of the banking debt, if they are in difficulty how do you counsel them to come into the normal level of their family because we have stories where people definitely get depressed and even the husband may not like to look at his family or wife in terms of distress. At that time, how our financial literacy and credit counseling has played, there are enough success stories. Apart from that, the rural training institutes under the Ministry of Rural Development, banks have established and this again is a very success story where all have been credit linked and more than 80 per cent of those who are trained are getting credit linked. Another important success story is of self-help groups. Each bank sponsors every year a large number of self-help groups and the self-help group money which is given, out of that 90 per cent are women self-help groups and the repayment history has been very good. We need to have different types of products suited to that so that entrepreneur credit will have to be suitably molded and suitably oriented towards this type of covering small borrowers and you have to have machinery. Not only that, your own staff needs to be oriented to take care of the large number of small borrowers. Then of course there are other issues. The RBI has simplified the KYC and AML procedure and for a certain account up to certain level, these procedures are very simple. There is not much risk associated with this. However, there is a reputation risk. There should be supervision of the intermediaries. We must ensure that BCs who are the primary responsibility of the banks need to do their work well. With this, I say that the financial inclusion is only one area of inclusiveness and if all of us who have joined here, in our own endeavor if we do not encompass or embrace economic inclusion, your growth and your prosperity is also in doubt. I am sure, the subject is very relevant and let us all take the responsibility to ensure that our neighbours or people who are deprived are also in the mainstream of economic growth. Thank you.

Madam Chairperson: Thank you Mr. Narendra. Regarding inclusiveness there is a small experiment that we had done in school and I think it demonstrated very well what inclusiveness means. You take a small piece of cloth and have four people hold it firmly at the four corners and then take a stick and with the stick push the cloth up from the centre. What happens is, it forms a tent structure. But if you continue to hold the four corners firmly and continue to push the stick upward, what happens is that the fabric tears. So, basically the fabric of society tears when one portion goes up and the rest are kept down. And

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if the fabric of society tears, the ones who have to lose more are the haves, not the have-nots because the have-nots really do not have all that much to lose. Really speaking, inclusiveness is something that is more the requirement of the haves than the have-nots. Therefore, it is something that is topical and a very much required measure of any society for us to have a very stable society. With that, thank you Mr. Narendra for your comments on inclusiveness. Mr. Prasad, if you could make the concluding comments.

Dr. H.A.C. Prasad: Distinguished people on the dais, distinguished people in the audience, ladies and gentlemen, I do not want to take much time as I have spoken in the earlier session. I am not going to speak on food security as has been said because many people have spoken on that. But I am just going to highlight some of the performance of the social sector schemes of India particularly based on a sample study which we did, myself, Dr. Sinha and Mr. Riaz. We did a sample study and found some new things. I do not want to go too much into the schemes. Coming to the employment guarantee scheme, you will find that the employment has become higher because of this scheme, because unemployment under CDS since the inception of the scheme has fallen. There is no doubt about that. But the efficiency of the schemes needs to be seen. While the scheme has helped in many ways, some deficiencies could also be found in certain places. What we found is, while in most places in case of wage payments, banks have been successful, while the post offices did not succeed. So, possibly, in future if the banks are involved further into the scheme that may be a better idea. We should think about it. While the MGNREGA is panchayat centric, we found not much of participation by the panchayats in the scheme the manner in which it is mandated. That is what we found in many places that we visited. One more thing is that earlier community development was important. Big schemes helping the whole panchayat or the community was important in the first one or two years. But now possibly they have exhausted all that. So, now it is individual based schemes which have become important. Now an individual is getting money and he is benefitting. At some places we found that the farmer gets the money for working in his own farm. He is getting the wage for working in his own farm. Of course, the scheme does not disallow it. These are certain things which we have found in this scheme. In some places you will find that the market wage and the MGNREGA wage differs a lot. That is why, basically, female labour is available as their wages are less and male labour are not available. So big activities could not be done. These are the inadequacies. What is needed is, while the scheme as such is good and maybe it was good in the first few years when you are planning for the future, modifications are needed in the scheme.

The other scheme is the NRLM scheme. This was successful in some places like in some activities of pot making. We found in Udupi in one place, a pot maker was earning Rs.1 lakh per month with the help of this scheme. Some SHGs are working well in this scheme like tailors, beauty parlours, chappal-making and are benefitting, but in some activities it was not successful, particular in the case of dairy farming. You will find some sort of recycling activity of the cows taking place which and the marketing facility was not there. So, better marketing is needed. What I am saying is that the schemes are not bad but these need to be modified.

Coming to the NRHM scheme, we found that it was working well in some places. but it was not working to its full potential. I found beautiful buildings, I found beautiful hospitals and I found doctors were qualified but it was not working. Why? It was because the location of that PHC was not good. It was in the place where the doctors did not want to stay in the night. These are certain things. They did not have a residential facility; there was no transportation facility. I think, that is what needs to be done when the scheme is being implemented.

I just want to say a few words about the Sarva Shiksha Abhiyan which is quite popular. The Right to Education Act has said that within one kilometres of a radius, you should have a school. It was good in one way. But what I found is, just nearby, just even beyond one kilometer you will find the next school.

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Sometimes, some buildings are coming up nearby. We found that in some places, four classes should have been there but you will find in the same class, the first standard and the second standard students sitting together and only two teachers are there for four classes. The same thing could have been done better if this one kilometer radius was not there. Maybe, these things have to be modified. The schemes have been good and in some places they are not bad but what needs to be done is that some modifications should be there. When we are thinking about the social sector schemes in the next five years, we should look into this. Similarly is about the Mid Day Meal Scheme. I do not want to get into all that. The total sanitation scheme, is working so well in Mysore particularly in the Chief Minister’s constituency in a SC colony, it was excellent. Even the toilets had the modern techniques. Even the drainage system was very modern. I wondered how in a slum colony, it was working so well. So, it has been successful and it can work but again it depends upon some officers. Some officers work well and in some places they do not. I do not want to go beyond this because the time is also short. It is not the question of the scheme but it is the implementation. Just as in the case Government, somebody has said, maybe Alexander Pope has said “For forms of Government, let fools context, whatever is best administered is best”. So, I think, implementation is the most important thing. Thank you ladies and gentlemen.

Madam Chairperson: Thank you Mr. Prasad for that quick update and your impressions based on the surveys of the various schemes that help in inclusion and growth in the rural areas. I think, we have had very interesting comments on the food security from Ruth, on agriculture from Dr. Gulati, on inclusiveness and the financial inclusion piece from Mr. Narendra and now on the various schemes of the Government that help inclusion as well as growth in the rural areas. Do we have time for the questions?

Question: I congratulate Dr. Ruth on excellent presentation. You have hit the nail on the head. 14 per cent GDP, almost 60-65 per cent people depending on that. You are in a very august body. All these deliberations and all that are there. How could we not have been able to make it more productive? You have said about conditional cash transfer. Dr. Baumann is sitting here, the best example is in Brazil. Two of the Bank’s Chairman, already Madam has spoken and Mr. Narendra has been speaking for a long time. We have been interacting with Prof. Rangarajan. Now this is an initiative to make it more productive to get the surplus labour into more productive mode. Why can it not be a national mission? One more thing is about inclusion. I think, the latest report of the World Bank has come out says that individual inclusion and firms inclusion are equally important. Nobody has thought about it. All these SMEs and MFI are working in more and more business development activities. Otherwise, MFI community is also struggling to make it. I think, we have to come out in a more structured manner so that the tomato making into a business development activity, the banks should come out with a structured programme management.

Madam Chairperson: I think, you are quite right that there has to be much more collaboration across the space by all stakeholders. It is still a little patchy in the sense that the Government comes with schemes which some banks implement but not enough entrepreneurs come in; the market forces are not there. I think, Dr. Gulati, what you spoke about the eco-system surrounding agriculture not really having developed the way it should be, I think, that is one of the reasons why there is so much of productivity loss.

Dr. Ashok Gulati: Agriculture and the jobs of tomorrow is not farming. People have to get out of farming. It is building value chains. That means you have to have the logistics. Logistics will be there if you have roads first. So, the maximum impact of any investment in rural areas on poverty reduction is investment in rural roads. So, you build the logistics, set up the processing facilities.

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Question: Dr. Gulati, the way Madam referred about tomato and all this, do you not think that it is time to get rid of this Minimum Support Price for cereals, wheat and all these things?

Dr. Ashok Gulati: That is a good question. Remember, the MSP you will not need if you can get the markets right. If you have a system where for four years you block exports of wheat and rice, if you have a system where there is a levy of 75 per cent on rice millers, where are the markets left? Then, it is the Government, somebody in the Commission has to recommend to the Government that what the so-called right price is or somewhere near the right price should be. All the CACP will not be needed if you clean up the markets, much of it. That is what I feel. But we have recommended to the Government already. At present we are doing minimum support pricing for 24 commodities. You do not have the wherewithal to implement that. Last week I was in Andhra and before that in Gujarat, your MSP for groundnut – this year groundnut is a bumper crop – and the market prices are 15 to 20 per cent below MSP. There is no agency that can give you support. The same thing is in maize. You have the best ever production in maize, prices have collapsed. There is nobody to give support. I think, we need to get infrastructure in place; we need to have markets in place, then you do not need minimum support prices.

Question: Slowly and gradually, the coming generation is not interested in the occupation of farming. So, how do you see the future of this profession farming and how do you think that this can continue to be a lucrative profession in future?

Dr. Ashok Gulati: Many a time I see particularly in the agricultural scientists group when they hear that people are leaving farming, who will feed us, we will starve, the basic process of growth tells you that people have to move out of farming. That is where I was saying that they have to be engaged in processing and other logistics. We have too many people in farming. Half of our work force is still in farming. It should be reduced to 35 per cent. China is about 35-37 per cent. So, we need to get people out of farming. For that, you need to have skills to move out. That is where we need to invest in their education and skills so that they can get a higher wage rate somewhere else which is more skill based. Then the average holding size will start increasing in India because when people move out, holding size will increase. Otherwise, half an acre of land cannot give income to the whole family. So, people have to move out. At present, the non-farm income component which 20 years back used to be 25 per cent, today it is 50 per cent in rural areas. That transformation is taking place. But people have to quit farming. So, do not worry about that. There will be others like me who will go back.

Madam Chairperson: Thank you all of you for your very patient listening and for being a very participative audience. I wish we had a little more time because this is obviously a very interesting subject, something on which we can go on and on. Thank you very much and a very good evening to all of you.

Plenary Lecture Session II (India in the Global Economy)

Anchor: Ladies and gentlemen, we have approached the closing plenary session for today’s programme. The session is going to focus on the topic India in the Global Economy. The Session would be chaired by Dr. Arvind Virmani, former Chief Economic Adviser, Ministry of Finance, Government of India and the speaker would be Prof. Gita Gopinath from Harvard University. We welcome the distinguished guests. We request you, Sir, to kindly commence the session.

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Mr. Chairman (Dr. Arvind Virmani): It is a great pleasure, in fact, an honour to be chairing the session and to have a distinguished academic. Just as a practitioner, I just want to start by mentioning and to give you an idea of why I mean that. I am looking forward to the talk. I have been lucky. I have handled in the Government three major macro-economic crisis, 1991 BOP crisis, several minor crisis which came from Latin America and Asia, the 2007-08 global commodity boom and the 2008-09 global financial crisis when I was the Chief Economic Adviser and, of course, the latest kind of mini crisis which we are in the middle of, the growth collapse and the macro economic imbalances. I really am very happy to be here and to be listening to you. Thank you. Now, Prof. Gita Gopinath.

Prof. Gita Gopinath: Good evening everyone. I know it has been a long day. You have sat through many interesting sessions and I am sure, you are getting tired too. I shall try to be brief in my comments and I will be happy to take questions from the audience. The theme of this particular Conclave is the Agenda for the Next Five Years. And given my background as the international macro economist, I thought I would speak to India’s role in the global economy. Now India in the last 25 years has broken away from

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its past of being a closed insular economy to be engaging fully with the world economy both in trade and in international finance. So, alongside an impressive growth rate to the domestic economy, there has been even more in some sense, impressive growth of India’s engagement with the rest of the world. So, we look at for instance, the export sector. If you look at the share of exports to GDP, that grew from around 6 per cent in 1990 to 27 per cent in the most recent numbers. That tells you that exports have grown much faster than the GDP has over this period of time.

So, it is no longer the case that we can think that India is a closed economy. What really matters is domestic demand. When the exports make up 27 per cent of the GDP, what happens in world market matters to what happens to GDP in India. So, that is very connected with the world economy and to be very interested in what is going on in the world economy. There is clearly a lot more that needs to be done on the export side and that is one of the aspects that I will touch upon in terms of export growth. Now alongside engaging with the world economy and the trade side comes an opening up both trade and finances comes with some down size which come in the form of macro volatility. We saw that recently in the summer because of US pronouncements that they would roll back quantitative leasing, there was a sharper effect on the Indian rupee on the Indian current account and we ended up with a kind of unstable exchange rate and issues of current account sustainability. Today, in my brief talk on the Agenda for the next five years, I am going to hit on these three questions. Going forward on the next five years, what are the prominent issues that we need to deal with in ensuring continued export growth, in ensuring exchange rate stability and current account sustainability. All these three outcomes are highly inter-linked. It is not as if I can say do this for export growth and that for exchange rate stability. They are all inter-linked and all my five agenda items will speak on three policies.

Let us look at India’s exports. And this is my number one of the five items on my agenda that needs to be done and it is to increase export capacity. If you look at exports to GDP, like I said, it has been a substantial increase from about 7 per cent in 1990 to 27 per cent in current terms. But just like in the domestic economy, growth has been driven by the service sector even in terms of my engagement with the rest of the world, it is driven mainly by the service sector. So, for instance, if you look at portion of India’s exports, merchandise and goods exports, that has grown by a factor of three from 5.5 per cent to 15.4 per cent. If you look at service exports, that has grown by a factor of ten, from 1.6 per cent to 11.4 per cent. Now it is not surprising that your export sector is going to mirror the strengths and weaknesses of the domestic economy. So, in that case, export sector looks a lot what India’s GDP looks like which is mainly driven by services and less by manufacturing and industry. So, this is good. But if you look at India’s standing in the world in terms of its share in the world exports, we are still a very small player. In 1990, we were about .5 per cent of world’s exports and now we are at 1.6 per cent and we have grown by a factor of three. It is little better than what Indonesia has accomplished in that period of time. But if you compare it to China which has grown by a factor of almost ten, this is a much smaller increase. The question is, what should India be doing at this point in terms of growing exports? If you think of what the two variables that matter, one, what matters is overall demand for products that India produces. If there is an increase in world demand, India’s exports will grow. The second aspect is whether India is able to get a greater share of that world demand. We have been concerned that world demand has come down in recent times and there is a concern that there is a bit of a stagnation in the world economy and impact of that on Indian exports. I think that that is quite irrelevant. I think what happens to the overall world demand is what the economists would call second order in comparison to what India needs to do to get a bigger share of that export pie. So, we are still a small player in that market. I think what is going to happen is, what is the agenda for the next five years or for the next ten years has to be to grab a greater fraction of that export market that exist over there. There is lot of reasons to think why buyers might be looking away from China to other markets that can potentially

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supply their needs. So, as cost of production has gone up in China, it is becoming more and more expensive to rely on China.

International buyers are looking elsewhere to look at possible market sources. And one place that they should look at is India. But what is the problem with India that is in terms of capacity. Here I am talking about goods exports, not less about services. When I come to goods exports, for instance, what we saw most recently that the rupee weakened quite a bit and later August when it recovered, it was 61-62 to the dollar. Because of that there has been an export boom coming through not just services but merchandise too. What you are now seeing is that it is not as if the rupee were to depreciate by another ten per cent, we would start increasing our exports by large amount. Why? It is because there are serious capacity constraints. It is not as if you can start shifting demand and you can see that now you are a cheaper destination, can we buy a whole lot more from you. We hit capacity constraints; producers hit capacity constraints very quickly. So this is in terms of energy costs, this is in terms of transportation infrastructure. This is just not possible. These are invisible and you are not going to see it in any kind of measure because there is in some sense, prices are infinite for some level of demand. You will see that particular level of demand coming here. What does that mean? What does imply for in terms of domestic policy? That is something that I have been proponent of that would rejuvenate manufacturing. But I do not mean giving subsidies to manufacturing. But I mean unshackling the issues associated with manufacturing. More broadly industry’s share of value added has been stagnant at 25 per cent. About 70 per cent of employment in manufacturing is in unorganized low productivity sector and the share of micro and small enterprises in manufacturing employment is of large number, 84 per cent for India and if you compare that with China, that number is 25 per cent. So, our industrial sector, manufacturing sector functions in an inefficient scale; it functions with many shackles because of the policies that have been placed have never been reformed in these many decades. So, issues with labour laws, issues with land acquisition, issues with infrastructure, these have been particularly stifling for industry manufacturing, much less for services. I would say to leave aside concerns about overall global demand which people bring up all the time. What is going to happen for the global demand, I think, that is far less important than just increasing India’s export capacity because the demand exists.

Another measure that I would like to look at in the same way of increasing export capacities in terms of measures of either doing business in India, the World Bank comes out with these measures

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every year. The higher number means that you are worse off in that scale. India is ranked overall at 132 in 185 potential ranking. The higher the rank you are, the harder it is. If you look at the comparison between 2010 and 2013, the red positive signs are highlighted over there. It tells you that not only have we not undertaken reforms to move forward, we have in fact regressed to some extent. So, in terms of starting a business we looked like a worst destination; in terms of construction permits, things have gone worse; in terms of protecting the investors, we have the worst ranking and the worst ranking that we have had in the last three years has deteriorated the most in respect of foreign trade. What exactly this foreign trade measure is capturing? This foreign trade measure is capturing the administrative cost of moving your goods across the border. It is not the shipping cost; it is not the actual transportation, it is literally the paper work and the cost is associated with doing that, which has gone up. I am actually glad that the Doha round was successful and there was an agreement that was made to remove barriers to cross border trade. India should be in the front and centre in lowering these number. Maybe in the next five years, you will see that every year these numbers have a negative sign attached to it so that we are actually improving on these measures.

Agenda item 2 is to fix problems with metal imports. Here I am going to speak on two issues – one is to take the shine of gold. India has a curious situation and it is really quite unique that the current account deficit and the problem with the current account deficit was more about gold imports than any other kind of imports. So, the big numbers that we saw for the large current account deficits of over four per cent and close to five per cent was because of an increase in demand to gold import. I think a case can be made that you should report your current account deficit numbers with and without imports of gold because gold is not like any other import. It is in fact a saving instrument. You can even debate as to which side of the account that particular thing should lie on. Now it is perfectly fine. We have temporary policies in place. There are policies in place that put import tariffs on gold imports and the current account deficits are at very low level. The ideal policy should not be to use import tariffs. If it is indeed the case, then India is a destination for good jewelry manufacturing than gold is an important ingredient. But what we have seen with gold is that it is not so much about jewelry and consumption. It is about the investment vehicle and gold is an investment vehicle. The reason for that is because most people if you are putting the money in a bank account with the rate of inflation that exists, you are really not making any real savings. Those interest rates are negative. So, the suggestion by Dr. Rajan, the Governor of RBI is to have inflation index is a fantastic proposal to make sure that people feel less need to invest in gold. Besides gold is a very risky investment. It is not as if it is a safe investment. It is an extremely risky investment. So, even from a macro prudential perspective, it is good to move away from gold and the solution is to find other saving vehicles which are more productive than holding it in the form of gold. The second thing is to rejuvenate mining sector. In the past few years, owing to the deterioration in those measures in terms of either starting business, permits and property right, we have seen the collapse in mining. Mining growth and iron ore production has gone down because of which we have gone from some sectors remaining an exporter to importer. This is a problem which is a home grown problem. It has a home solution. It needs to be addressed and it is clearly quite clear what needs to be done. So, just to summarize, in terms of export side, the goal has to be to increase export capacity and to leave aside issues of aggregate world demand and to fix problems with metal imports.

Moving on to the third set of issues which is about exchange rate. We saw this in the end of 2008 which seemed like that floor was falling off when the rupee started sinking to 68 rupees to the dollar in a very short period of time. What had happened was the US Fed had made some announcement that they would start reducing the quantitative leasing policy because of which there was an expectation that eventually the interest rates would go up in the US and the small term portfolio investors move out of risky markets like India and move into safer places like US. This kind of outflow

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had a huge negative effect, had a concern about current account sustainability and the issues with the exchange rate. So, the question is how do we deal with this. I am going to deal with this in my next two points. The first thing is that we need to strengthen our macro fundamentals. The two macro fundamentals that I have in my mind is inflation and fiscal deficit. What about inflation? If you look at the Indian rupee in nominal terms, the nominal exchange rate has depreciated a lot since 1990. But if you look at it in real terms which is looking at relative cost of producing in India versus producing elsewhere, that thing has stayed pretty high and in fact this has been appreciated by some. When this particular correction in the rupee happened, several people pointed to the fact that this correction was overdue. There was high inflation in India. The rupee had in nominal terms appreciated for a little bit, so the correction was needed and the correction happened. Now in the case of India you can make a case why the rupee should appreciate on long run basis. It is because it is a growing economy and it is a productivity improvement and you should expect that the rupee would strengthen in the future. But in the meantime when you have high inflation, there is always a sense in which the exchange rate might be mis-aligned. That it might not be at its value where there has not been correction for inflation. You can look at the research on this. Whenever there is high inflation economy in the so-called over valued exchange rate, the corrections are always dramatic. So, containing inflation, bringing it down to the target level is an important thing to bring it down from high numbers specially for consumer price inflation of ten per cent and bringing it down creating expectations that inflation rate will stay low is an important piece of that. Inter-linked to that is the fiscal deficit. Fiscal deficit is an important ingredient of current account deficit, just by construction, it has to be that current account deficit equals the fiscal deficit plus the private sector deficit. That is how it is defined. When you have deterioration in fiscal deficit, it will show up as a deterioration in current account. So, on both these fronts, there has clearly been improvement. Everybody now agrees that consolidation is a top priority and it cannot be postponed and it has to be addressed head on. Dr. Rajan at the Reserve Bank of India has made it very clear that inflation is a top priority that bringing down inflation rates to target levels is one of the main priorities of the RBI. So, strengthening macro fundamentals, inflation and fiscal deficits as agenda item 3, needs to be addressed head on.

Agenda item 4 is to continue macro prudential regulations. Here the question that comes up often is that we know that next year is going to be tricky, even a few days from now when the US Federal Reserve meets and decides what to do with its monetary policy. And next year per sure there is the expectation that the US is going to be on the tightening cycle, that is, it is going to stop at the minimum having as much of a loose monetary policy as in the last several years. So the question is, what does an emerging market like India do in this situation? How do you deal with the problem like this which you know that it will have some effect on your domestic economy? So, the first possibility is the international monetary cooperation which is that somehow the US Fed Reserve and the other big central banks of the G20 meet and agree that we have got to do this in a way that has smooth effect on the market, that the financial effects are small. In my opinion, is this a viable strategy, I am going to say no. It is highly unlikely. As people say, as it has been said by George Washington, there is no such thing as permanent international alliances, only permanent national interest. So, the US Fed Reserve has a mandate for keeping unemployment low and inflation low and it is going to do exactly what it needs to be for its domestic economy. It is going to be less interested in the spillover effects on the other emerging market. What can India do, if there is a run on its current account? Capital controls is one thing. Every bit of research that we have on using short run capital controls is an intervention too which is highly ineffective. It hardly ever works. If you can permanently exclude some kinds of capital, on those things you can have an important effect. But temporary capital control effective people always find ways of getting around it. Now there is one organization which is the IMF which actually can play a role. It is the multilateral organization unlike the US Federal Reserve, the IMF’s job actually is to care about the

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global economy. It is to care about the balance of payments promise of countries. They are supposed to be the organization that steps in if there is a self-fulfilling crisis happening in a particular country. But the problem right now is that the IMF is a highly stigmatized institution. Even the suggestion that you might approach the IMF could actually worsen the things for the country, much more than helping the country. It means that IMF is a last resort. You go to the IMF only when things are absolutely hopeless. Now I would hope we could find well solution to this because IMF was set up precisely to help countries that are being subject to vagaries of finance but that is not how it functions at this point. So, what is the solution that is left on the table that is actually practicable is the macro prudential policy which means that every country decides what kind of financial regulation is needed to make sure that no bank is made to fail to deal with currency mismatches. Recently with the rupee having weakened, we have some large corporations who went out and borrowed in terms of dollar debt. Then there was hue and cry because with the rupee weakening the dollar debt in rupees goes up by lot. So there is a currency mismatch on the balance sheet. In my opinion that is the problem of the corporation. If you go outside and borrow in dollar terms and you do not have exchange rate exposure, it is not the really problem of the RBI or the Finance Ministry to solve your financial mismanagement. You really have to make it very clear that if you are going to borrow in dollar terms and you have a mismatch in terms of currency terms on your balance sheet, either you head it or you pay the cost for it. Similar is the case with the maturity mismatch which is borrowing in short term and investing in long term projects. That kind of a maturity mismatch is also something that you should regulate. We know a lot that when you see a very large levels of credit booms which is large expansion in domestic companies, in large capital inflows, then there is usually a good reason to investigate more closely where that capital flow is going. So, in terms of managing exchange rates, let us be very clear that there is no exchange rate movement that makes everybody happy. When exchange rate appreciates, it exposes complaints; when exchange rate depreciates, the foreign dollar borrower would complaint and importers of fuel complain. This is the classic problem as going back to the gold standard, exchange rate movements are inherently problematic. You just have to find the best way to make sure that ultimately people do the right hedging and what we can protect against is sharp fluctuations in exchange rates by having stronger domestic fundamentals mainly in the form of fiscal and inflation policy.

My last agenda for the next five years is probably the most important. I do not think we have lacked for agenda in India. Everybody knows what the problems are. Everybody knows what needs to be fixed; what are the issues, standard issues are infrastructure, fiscal deficit and inflation. Everybody knows what needs to be done. The problem is that we have had a very little implementation, very little actually fixing of these problems. For instance, if we look at the current Parliament, this is the 15th Parliament, if you exclude that had interrupted sessions, if you look at the number of bills passed in the Parliament, the most recent ones, it is definitely under achiever compared to any other Parliamentary session. That has to be one of the main agenda items of the next five years. So, just to conclude, in terms of the agenda of the next five years, in terms of India’s engagement with the global econmy, increase export capacity, fix problem with the metal imports, strengthen domestic macro fundamentals, inflation, fiscal deficit, continue macro prudential regulations and just do it. Thank you.

Mr. Chairman: Thank you Prof. Before I open the floor to questions. I just want to point out two aspects which perhaps were under emphasized. Obviously, there was no time to cover everything. One arises from the openness issue. I recently looked at and compared the import GDP ratio to find out what is the level of India’s openness and in the last year for which data is available, measured in terms of imports of goods and services, India is now more open than China in terms of imports, not in terms of exports of trade. That is quite amazing. But it has one implication which is that we know that agriculture is still closed, which means, the manufacturing and service sector are much more open than China. But

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we have this agriculture problem which also links up to the inflation issue. Our agricultural sector is too close. It is resulting in agricultural inflation. We are going our own separate way, increasing prices and pushing up inflation. That is one issue. It is the question of agricultural reform. The Chairman of the CACP talked about some of these issues. One of the issues is of getting out of these ad hoc policies on QRs and tariffs in agriculture and in having a stable regime. The second issue is about searches and sudden stops in capital flows. I just happened to have a paper published on that. But the reason for saying it is that from our experience, we had suggested, when I was CEA, a policy which is contrary to the normal way the countries behave. Countries allow capital flow when the going is good and then they worry about when it goes out. So, what I had done is to suggest a counter policy that is, to try and slow down inflows when they are coming in and to let the outflow go. In fact, you nip the problem in the bud and I had basically suggested two policies in this paper which is published. The first was a DEA working paper which you may be familiar with. I think it is still on the website. One of course, is on taxation. We were quite aware of the fact which the Professor has pointed out that just stopping flows is not the best way to do it. So, one was the policy of putting some kind of taxes on inflows and the second was to auction inflow of debt. Unfortunately, the debt option has been tried but in a very limited segment. The SEBI has tested this in terms of auctioning the right to bring in debt. Anyway, the whole issue of managing searches and sudden stops is an important issue and I think it will remain so for the future. Having said that, let me open up the floor to questions.

Question: I have followed each and every word that you uttered except the last slide which I honestly speaking, could not agree with. The reason being, it is popularly said that the Government is the best which governs the least. Now you are saying that the number of legislations or Bills passed in the current Lok Sabha is 151 compared to the average of preceding years at 300. So, one is the quality and the other is the quantity. Can we draw any inference that less the number of legislations passed, the better it will be, higher the number of legislations passed, higher the governance will be.

Mr. Chairman: I will take one more question. We will take two or three at a time but right now I will take two.

Question: It was an excellent presentation. I have got a clarification. In one part when you were discussing the contractual obligation, you mentioned that views on exporting and importing have really worsened. I would like to know whether it is based on any study. As far as I know, the customs facilitation and port facilitation has improved as per the indicators which have been published in many of the Government documents. What is the basis for telling that in two time periods it has really gone down? The second one is, when you said about exchange rate volatility, whether all the volatility attributed to fundamentals. Some correction is inevitable because you are inflating it at a faster rate may be it is because of fundamentals. But many of the periods in which we have observed volatility of high order that you what mentioned Rs.68 a dollar, that was not due to fundamentals. It is more due to perceptions of market. Is it not something which address to appropriate policy?

Prof. Gita Gopinath: I will respond very quickly. To the question of legislations passed and quality versus quantity, I am in agreement with you that this does not establish that more legislations is better than less legislation. But I do not think I need to make due research paper to conclude that the last three to four years has been one of the weakest in terms of implementing reforms. That is one matrix of it. But it does not take away the basic fact that we have had lack of just doing it.

To the question of trade and about the ease of doing business, this particular matrix comes from a study done by the World Bank. You are right that it is not in terms of the number of days it takes you to move things across borders. There has certainly been an improvement in that measure. But just in

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terms of the dollar cost of the fee that needs to be paid to undertake this particular transaction. I do not know the exact numbers but there has been a steep increase in the dollar cost of paying those fees. That is the number that I was referring to.

To the question of fundamentals versus spirit, the question why is the exchange rate movement is all about fundamentals or is it about rational investment behavior, I will agree with you that some part of it is coming from markets and adjusting to news and being uncertain about what exactly the fundamentals are. But what we do know is that the currencies that suffered most in terms of having the steepest drop in value were from economies that had highest current account deficit and the fundamentals looked weaker. So, you could make an argument that India is still exposed to the possibility of investors having rational fears in pulling money out of the economy. But we are much stronger with the current account deficit of 1.2 per cent than the current account deficit is close to five per cent or six per cent. So, fundamentals matter, irrational things happen at the margin but those things we cannot take care of. We can take care of fundamentals and that is what I was talking about.

Question: What you would suggest to reduce the demand for gold in India?

Question: Madam, you have been saying that you keep the macro fundamentals right and you can have the exchange rate stability. But with the growing inter-dependence of India on the rest of the world particularly in the growing financial integration of India with the world economy, it is the capital flows that are destabilizing the exchange rate of India although on many occasions our fundamentals are quite right. So, to what extent, only fundamentals can be relied upon to take care of the exchange rate when actually each and every happening and decision in the United States and the European Union is having a serious impact on India particularly in the context of the FIIs?

Question: It is more or less related to what Dr. Prasad said. I would like to make two observations. All emerging economies would have suffered due to this US rolling back. As you correctly stated India was the worst victim of that. To what extent the trajectory attacks on the Indian situation was responsible? The trajectory attacks on this particular vulnerability was one of the prime reasons for going to 68, 69. That is also an ascribed notion and investigations are going on. In percentage terms, if you look at that, all major emerging market economies have suffered. And they have rebound to their desired extent. Is there any correlation in that since everything is falling in place? Secondly, to the gold phenomena and the resultant regulatory reforms, I do not think there is too much of a euphoria. It is a short term measure. If from the current level of the fuel prices goes up to another 120 dollars plus, again we will have the same story.

Prof. Gita Gopinath: Just a quick response to the questions that have been raised. You raised the questions of gold and inflation. I think the main thing has to be that we have to reduce the demand for gold as a savings vehicle. It is extremely risky vehicle to invest. So, it is not exactly the safest thing to do. That would not mean curtailing inflation would mean that the real interest rates would go up and people would feel comfortable in leaving their money in safe accounts or inflation index bonds which is basically bonds which pay you in nominal terms an interest rate plus the rate of inflation which is one of the proposals of the RBI. It will also serve this purpose. So, the questions that have come up are about macro fundamentals versus things that are beyond the control of emerging markets because it is basically the US which is pushing uncertainty and volatility throughout the world. Let me just remind you what happened in 2008 following the Lehman collapse, India was one of the few countries that was not affected by that financial challenge. So, to claim that just because we are engaged with the rest of the world means that we are as object to financial turbulences as countries that have much less regulated market is simply not correct. We did much better in 2008 crisis in financial terms than any other country

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did. I disagree with that. It is always going to be the case that there will be some amount of turbulence that out of the control of policy makers in the very short run. But I am still the believer in domestic fundamentals in macro prudential regulation.

Mr. Chairman: I am told I have to conclude. So, I will conclude with a little story because at the IMF I had to address many of these issues as the Executive Director. One of the things we have pilloried for that we have a very closed capital account. While it turns out that all the studies of de facto opening show that our capital account is much more open than the de jure. Why is that? It is because most of the industries of capital control have a 0-1 system. In our own unique way, we never move from 0 to 1. We always move like .1, .05 and point. So, we never get to one. There just remains at zero. But actually there has been an opening and incidentally I have a paper which showed this in the short term. But more importantly the story which is to just conclude, which is, in the 2008 crisis, the Finance Minister and all of us were at the Bank Fund meeting in August and everything was calm, beautiful, had a nice time and we were on the plane. By the time we come back, the global financial crisis had hit. We were on the way back when it hit. I came back a bit later. I did not have the data then. But it is more interesting. I came back and look at the monetary data. Guess, what did it look like? It looked like a cliff like that. We had to manage this. It was an incredible thing; it was frightening. I hope everybody can see this cliff. That is what the monetary data looked like. We are definitely connected. We have to worry about what happens in the global economy. But that is part of the game and there are advantages and disadvantages, you have to learn to manage it. Thank you Dr. Gita. That was very interesting. Let us give her a big hand.

Anchor: Ladies and gentlemen, we thank you for gracing us with your presence and lively participation throughout the day for helping us to make the programme a success. Thank you very much.

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The Delhi Economics Conclave 2013 on “The Agenda for the Next Five Years” December 11-12, 2013

Plenary Day 2 (December 12, 2013)

Welcome address by Dr. HAC Prasad

Distinguished people on the dais, distinguished people in the audience, ladies and gentlemen. It is my pleasure to give the welcome address today, the 2nd day of the Fourth Delhi Economics Conclave. Yesterday, we had brain storming sessions from morning till evening and in the end of it, a cultural extravaganza. But today you will find that we have equally good sessions, starting with this and again in the valedictory we have keynotes by two eminent people and also the Minister of Road Transport & Highways, Shri Oscar Fernandes will also be coming.

Today we are going to the sector specific issues and some nuts and bolts issue when we go to infra financing and also corporate financing. But first, we have the Industry and Services sector session and we have the captains of industry along with academicians, a panel well thought out where we have a mix of both. I extend a warm welcome to the Chairman and the panelists of the Session and also to those who have gathered here on the 2nd and final day of this international conclave. I do not want to stand between you and this eminent panel. Let me stop here and once again welcome all of you.

Opening Session Day 2 (Industry and Services - Challenges)

Anchor: As we know, the first session would be on industry and services – the challenges. We would like to welcome the dignitaries and felicitate them. We take this opportunity to present a brief introduction of the distinguished speakers. Shri S. Gopalakrishnan is one of the founders of Infosys, Prof. Andre Sapir is the Senior Fellow at Brussels at University of Brussels and former Economic Adviser to the President of the European Commission, Shri Subroto Bagchi is the Chairman of Mindtree, Mr. M.S. Raghavan is the Chairman and Managing Director of the IDBI Bank, Mr. Gopal Singh Negi, Adviser in Department of Economic Affairs, Ministry of Finance, Government of India is incharge of industry and infrastructure sectors and also public finance issues. We now request the Chair to commence the session.

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Mr. Chairman (Shri S. Gopalkrishnan): Thank you and good morning to every one of you, distinguished guests, my fellow panelists, ladies and gentlemen. I welcome you to the second day of the Delhi Economics Conclave. The topic for today is Industry and Services Sector and the Challenges faced at this juncture and what it means for us, for the next five years. As you know, the GDP data for Q2 was released and we have seen a slight uptake in the pace of growth from 4.4 per cent in the previous quarter to 4.8 per cent in Q2. The interesting aspect of this is the divergent trends noticed in the industry and services sectors. I think, we will hear the panelists on this more. The other challenge facing corporate India is to continue to build up its competitiveness at a time when the global factors are still uncertain. In the past, Indian industry has used periods of slowdown to strengthen the systems and processes internally. But I would say that the space of internal restructuring is fast depleted and we need to look at new sources of growth for the future, new markets, new products, new services, innovation, creativity, new sources of growth. For the next five years the corporate India must look at this juncture on the shifting dynamics of the global industry. The China rebalancing story in the Asian hemisphere, which seems to have just begun, but will gather pace as policy makers initiate the shift more decisively. This could have strong repercussions on the Indian economy. China’s demand for world could increase, its impact on overseas market could taper and its growth would slow down. Indian industry would need to be agile to configure to these challenging conditions and build up our own manufacturing sector.

On the services side, it seems that the curtailment of Government expenditure has reduced the growth rate along with slow down in the trade and communication categories. Considering that the services sector has long been the driving force of the economy, this deceleration is indeed worrisome. On the other hand, as the industry side shows an uptrend with exports and also the retail sector in the rural areas are both showing uptrend, it is likely that the services sector will respond with a lack. Also India must move up in the ladder for export in services. IT has been a flag bearer of India’s services exports. For IT sector, for example, the openness of borders must be maintained and protectionism must be avoided. Diversification of geography is also essential if IT exports are to grow. Also India would need to ward other sectors for the global markets such as professional and business services, travel, tourism, transport logistics, education and health care. If you look at education and health care, these can be delivered from within our borders to the rest of the world. Leveraging technology could become an example for other developing nations to follow and we may envisage such exports for several billions

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of dollars from India. With this, we will start the panel. The format will be that I will request each of my fellow panelists to make brief opening remarks, maybe about 10 to 12 minutes. Each of the panelist is bringing different perspective. From a global perspective, from industry and services perspective, financial services perspective, youth, entrepreneurship, of course, more on IT sector, so you will get a broad perspective from each of the panelists in the opening remarks. Immediately following that, I will open the floor for Q and A. So, as you listen to the panelists, I recommend that you think of may be one question to ask so that we can make the session interactive and much more useful to you, the audience. Let me now request Prof. Andre Sapir from University of Brussels to make his opening remarks. He has a power point presentation.

Prof. Andre Sapir: Thank you very much Chair and thank you for the Ministry of Finance for the kind invitation to be here. Now I will try to address five points. I will first look at the global shift in manufacturing production from advance to an emerging country and see what is likely to be the trend in the next five years. Then I will argue that although manufacturing production is much declined in advanced economies, it does remain an important aspect of activity. I will then look at the boundary between manufacturing and services that has been blurring and will continue to do so. Then look up what is happening in the global value chains and then finish with some policy implications. Let me first start by stating the obvious which is that world manufacturing production will continue to grow but the share of advanced economies will continue to fall. Now this trend of the emerging countries growing so much faster in the production of industrial or manufacturing goods than in the advanced economies started well before the crisis. But there has been clearly an acceleration of this trend since the start of the crisis. What I show in this first graph is the growth of industrial production from June 2007 just before the crisis until June 2013. Now the bottom line there is the decline of industrial production in advanced technologies. As of June 2013, industrial production in the advanced economies was seven per cent lower in June 2013 than it was in June 2007. Now for developing Asia, on the other hand, the production was 65 per cent higher than it had been in June 2007 and China obviously accounting for very large chunk of this which was 100 per cent higher, was doubled when it was. So, there was totally diverging trend between industrial and emerging economies. Still in 2003, Japan, EU and the US accounted together for 67 per cent of the world manufacturing value added. By 2010 it was down to 51 per cent partly as a result of the trend that was there before the crisis but with the acceleration of those trends. Now we know that India is today the tenth largest manufacturer.

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If you look at this chart from the OECD that looks up manufacturing production and the share of top ten countries in the world manufacturing value added, you see that only the emerging countries China, Brazil, Korea, India have seen their share increase. All of the industrial countries US, Japan, Germany, Italy, France and the UK their share decreased. So, again, the total pie, the world manufacturing output is increasing but the distribution is changing extremely rapidly and you all remember that this year in 2013, China overtook the US in industrial production for the very first time. China is the largest country in terms of industrial production ahead of the United States.

Now in terms of exports, the combined share of the EU, Japan and the US is now somewhere around 40 per cent or share of world manufacturing production is 50 per cent in terms of value added; in terms of exports it is down to 40 per cent. The reason why this trend will continue is essentially that growth prospects in the emerging economies is far better for the next five years than in the advanced economies. A recent survey by the Price Waterhouse of 1258 CEOs in the manufacturing sector, asking them what is the most important country for growth prospects for your company, China was number one with 30 per cent of respondents; US was number 2 with 22 per cent; Brazil number 3 with 15 per cent; and Germany only fifth with 12 per cent. You can see in this graph that shows the growth rate of the low and medium income countries in dark blue and of the OECD countries at the bottom. You see up to 2011 how the growth differential has been increasing and certainly there has been some income catching up. That obviously means that production will continue to locate more and more in the emerging and developing countries. Now in the advanced economies in the US, in Europe and Japan, now the manufacturing sector accounts for less than 20 per cent of value added; for less than 15 per cent of employment. But clearly the manufacturing sector is not going to disappear. Clearly the manufacturing sector is not going to disappear in the advanced economies and nor is its importance decreasing. One way to look at this is to look at this chart and see if you are looking at business R&D expenditure, the manufacturing sector still accounts for the very biggest chunk. In the US, Japan, we have shares of well over 60 per cent. In Japan nearly 85 per cent of business R&D is in the manufacturing sector. So, productivity growth is still very much coming from certain in Europe, certain in Japan, a bit less in the US is still very much coming from the manufacturing sector. This being said and that is my third point, what we have seen in the past is going to continue in the future which is the boundary within the manufacturing sector and services is and will become blur as time goes on. The manufacturing sector now purchased a rise share of its inputs from the services sector. At the same time, the services content of manufacturing export is increasing very fast. In India as in the EU 35 per cent you can see in this graph, India and EU being next to one another on the left part of the graph, 35 per cent of the value of manufacturing export is in fact from services. It is much higher than it is in China where it is only about 25 per cent. But everywhere we see that the service content of manufacturing export is increasing very much. In fact, there is a very interesting paper that has just been published by the WTO where they look at the structure of world trade in terms of gross value and in terms of value added. If you look on the left graph, you see that this is total world trade including services. You see that the red part of the pie in dollar terms in gross value accounts for 65 per cent of world trade and services in green is only 23 per cent. If you look in value added terms, service is the biggest chunk already with 45 per cent. So, if you include the services that are incorporated into the manufacturing, then you see the services is already the biggest chunk of world trade ahead of manufacturing which is 35 per cent and the rest the primary products of 18 per cent. My fourth point is that when we discuss issues of manufacturing, issues of services, I think one should really stay away from the notion of sectors. Sectors are very convenient because this is the way business is organized. But I think, in economic terms, when you look at what is going on, I think it is much better to look at activities within services and within manufacturing. I just give you an example. For advanced economies, it is clear that we will retain activities in all of the sectors but within the sectors there are certain activities that we are losing. We are

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certainly losing all the low skill activities. But I think it is much too simplistic that some people used to argue that we are losing the low tech activities and we are only retaining the high tech sectors. I think that is totally wrong. We see that we are keeping so-called low tech sectors including textiles. But within that, we are only keeping certain segments, certain activities that are very high tech, that are very innovation incentive activities. Now what we see also today is that the regional or the global value change of the production network is dominating the way the production is being re-organized globally. Let me just come to the policy implications of the picture I have drawn and what I think are the likely future developments. I believe that there are huge global opportunities for countries with the right domestic policies. When I say countries, I mean all countries, both the advanced economies and the developing and emerging economies. So, we have a huge market growing up there and to be able to have market share in this market, what really matters is your own domestic policies. In the end, really it is the domestic framework conditions that were discussed yesterday, that will support activities irrespective of the sector. If one think of the policies industrial policies, I think one should stay away from any industrial that is targeted to certain sectors. One has to think more in terms of activities and in terms of creating the right framework for those activities to develop in whichever sector. So, it is clear that the global value change that all countries need to be involved into, they require greater internal and external openness. Trade policy needs to be more open; something that I missed yesterday in the discussion and I think that is true also in India very much, it is competition policy. We cannot only focus, we need to focus on trade policy and trade policy needs to be an open trade policy. But the internal market needs to be very vibrant. That is the responsibility of the competition policy. There is never too much competition policy; there is always too little. Global production network requires an efficient national and international infrastructure. So, yes indeed the agreement that was reached in Bali, small progress towards the conclusion of the Doha round, I think, is important in terms of trade facility. But trade facility also inside countries is important. Equally important obviously is the access to finance and finally the labour market and human capital policies. Let me stop here and we will get back to this in the discussion, I hope.

Mr. Chairman: Thank you very much Prof. Sapir. Let me request Mr. Negi to make his opening remarks.

Shri Gopal Singh Negi: Thank you Mr. Chairman. I am given brief to focus on the domestic issue. But I will prefer to start with the global over note. We have seen in the recent past, in the two, three decades, many industrial giants have come up, China, South Korea, Taiwan, all have made huge progress. But I will pick up my favourite South Korea. Why? If you go back to the South Korea history, you see in 1961 when Gen. Pak took over, when the South Korea and North Korea were divided, the entire natural resources were given to the North Korea and South Korea did not have any natural resources. So, Gen. Pak wanted to industrialise and to everybody’s surprise, the industry he started was steel. The two resources, the iron ore and the coking coal, South Korea did not have both of these resources. If you see the story of the steel in South Korea today, if you compare the per capita productivity with India, it is still seven to eight times higher than India, the best of our steel companies, the Tatas and the SAIL. It becomes even more fascinating the South Korea story, the way it did not stick to the steel, the way it moved fast to other sun rising sectors like semi conductors, electronics, auto sector and the way it has muscled its strength in the manufacturing sector and compare that to the country which is geographically of the same size, the same population Ghana, you remember that the President used to be one of the leading personalities in Nehru days. In 1961 he was toppled and the General took over and started industrialization, but under the Russian patronage. After fifty years, what do we see? Where is Ghana? As per the global scene, if Ghana has anything to show to the globe, that is their position in the top 24 football team. But compare it with South Korea. South Korea is also one of the top 24 football teams in the world scene. But look at the per capita. It is ten times that of Ghana and ten times that of

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India. So, the point I want to make is that the growth of industry is a very complex issue as we have been told by the academics, it is not only the history, it is not only the politics, it is not only the economy, the resources you have, several issues have a role in building the industrial scenario and in building the industrial strength.

I come back to the local issues. Before I start, you already know about this slide. This data is known to you. There is nothing new about it. But I just want to prove some points. Just see the structure. Within industry, the way we divide it into four segments – mining, manufacturing, electricity and construction. Just see the share. We know that industry is stagnant vis-à-vis services, vis-à-vis agriculture, services have moved up. But within industry also, there is a stagnancy. We have not been able to improve the share of manufacturing beyond 15 per cent and mining over time has come down. In the recent past, it has steeply fallen down. Construction has saved us and this is one area where we do not have any policy initiative. This is one area which we have neglected. It is only in the recent past that we have started thinking of it; it is only in the past few years that now we are thinking of building integrated town ships, building other construction activities. But I must say that construction is equally important from employment generation point of view as important as manufacturing. So, this is neglected. But today I will not focus on construction because time is too limited and I have to speak within ten minutes. So, I will present it more on which are the two critical issues for us in the next five years because when you talk of industry, five years is a very short period. If you want to increase your size and all, within five years, I think you can do only from the demand side, the supply side you have some limitations to scale up your capacity. Two areas I would like to focus is mainly are these. Before that, I would like to show you the last ten years period in this slide. After 2011-12, there was steep slide in mining and manufacturing. I will come to two areas within mining and within manufacturing. Mining we have seen, what are our major mines. Our major mines are iron ores, coal, we have some natural gas. These are the things I want to talk of. But the most crucial is the coal. We have been producing iron ore; we were producing above 200 million tonnes and now it has come down to 145 million tonnes mainly because of the High Court instructions and environment issues. But still we are not deficient in iron ores. So, that is not an issue but coal is a major issue. I will come to coal in the next sector.

Another issue I would like to discuss is manufacturing. Most of the sectors are doing manufacturing and it is not that bad. But one sector which has hit the structural bottlenecks is the capital goods sector. So,

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it is very critical. In 2011-12, its growth was minus 4 per cent; In 2012-13, the growth was minus six per cent and if we compare it before 2008-09, prior to the global melt down, in 2006-07 and 2007-08, we had a very robust growth in capital goods sector, 48 per cent and 23 per cent and that to covered industrial growth at plus 15 per cent in 2007-08 and the overall economic growth was nine per cent plus. This is very critical and crucial area. So, I will focus mainly on these areas. Within mining why coal is important and within manufacturing why capital goods sector has become so critical for us in the medium terms and in the next four, five years. Why should we talk of coal? Then we have to compare of other alternatives for energy within our country. We have crude. We already know that crude production is stagnant. We have natural gas and all our projections have belied us because at one stage, four, five years we were talking 18 mcm per month growth now it has come down to 20 or so. It is going down. I do not see any hope that in the near future we can improve the situation in petroleum and natural gas even if we struck some gold mine like we have windfall gain somewhere. I am talking of four, five years. Coal has become very crucial and the gap between our demand and production is increasing. Right now, roughly, this year we are targeting 600 million tonnes and our demand would be somewhere around 750 million tonnes. So, we have to match that gap of imports. You know the implications of imports for us. This year we have seen in the first financial years because of the CAD gap, the way we were hit through the exchange rates. So, this is very critical that we augment our coal production. Yesterday, some speakers were saying that there are so many bottlenecks in increasing our coal production. Yes, there are. Environmental issues are there; there are other issues. But look at the coal reserves. They are 299 billion tonnes which are proven, out of which 41 per cent is proven. If we can manage to mine 80 or 90 billion tonnes, that last for another 30 to 40 years because our annual demand is less than one billion tonnes. So, why do we bother? Why do we not concentrate in the areas where we have a least problem? Why don’t we focus only in regions where minimum structural issues are involved so that we augment our coal production? Why it is so important. Look at our targets in power sectors because power sector is hit by mainly because we do not have the adequate coal. We have successfully managed to cover our capacity addition that we have made of roughly more than 55 thousand megawatt. We have another 88,000 megawatt plan which excludes your non-conventional energy to be added during 12th Plan and the major chunk of that will depend on thermal sector and on thermal sector, it is mainly on coal and very little for natural gas. If we do not supply or if we do not have adequate domestic supply, we would not be able to generate adequate electricity also. So, this year, we have already seen that there are many power plants which do not have adequate supply and the way we are adding, thermal capacity addition that we are doing, we have successfully done around 20,000 megawatt last year. For this year also, we have equally ambitious plan. It is very easy now to add thermal capacity because of the technology and within three years you can raise a power plant. So, capacity addition within power sector is very easy but it is very difficult to match with the supply of the coal. Another issue is, why coal is very important. For services sector, trade and transport is one of our major segments of our services sector. And for railway freights, 50 per cent of its earning comes from coal. So, it is very crucial. I just wanted to say why capital goods sector is very crucial. Mr. Andre has already spoken and given you the global perspective. I just wanted to make two points from here. Why we need to concentrate on capital goods sector is this. Look at this slide. Here look at the fourth column. This is the medium and high technology share in our exports and look at the second column, the share of medium and high technology in our manufacturing. If you look at our share, we are at the bottom, 32 per cent. So, we are still on low technology. We have to move up the value chain. If we want to have a larger share in the world trade, manufacturing trade, there again the path is only through by upgrading our technology, by moving our manufacturing to a medium and high technology manufacturing. This slide also proves this. This is again a repetition. Basically, I want to make two points. The only way is, most of these manufacturing giants what they have done is, look at the limitation of domestic demand and mind you, we also have the similar limitation because of the per capita disposable income is very

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less. This year we have seen in auto sector. It has also hit the ceiling. Ultimately you have to look around, look for the export demand. To exports, you need to move up the value chain of manufacturing. These are the five sectors that have done in the past five years at the global scene, the highest growth rate and mind you, all these are dominated by Chinese and only in transport US is dominating. So, China is moving up along the value chain.

Why are our capital goods not that competitive? One reason is because the only competitive thing that we have in other sector is the labour cost. When we compare it, it is one dollar labour cost as compared to three dollars for Chinese and 37 dollars for South Korea, Germans 46 dollars. That advantage is not there for us in the capital goods sector. Our cost is high. Another thing is, our capital goods sector is over protected. This is dominated by public sector, the BHEL. BHEL could not capitalize on power sector augmentation. All capacity addition that we made, BHEL did not have the capacity to supply the machines. Ultimately, China grabbed this chance. Now it has augmented but it is too late. So, innovation in research is another area that Andre has already pointed out. This is a very crucial area and this is the most neglected area for us. Our expenditure is too less. If you compare the researches, we talk that we are highly qualified and highly skill persons. But when we compare it what is the number of researches we have per million, it is only 133 or 140. When we compare to South Korea, it is 6000 per million. Just look at the gap. One advantage South Korea has is that they have invested in their people; they have invested in R&D; they have invested in innovations. So, this is one of the weak points for us. Surprisingly for the past four, five years, in fact it started before 08-09, the private sector capital formation is going down. That is also one very critical issue. I do not know why. For that, private sector has to analyse, they have to augment their capital formation.

Finally, you already know many of these solutions. Because time is too short, I will only say about the coal sector. We are trying to augment the production but the steps that we are taking are not adequate. We have to take some bold steps. Why should we have Coal Nationalization Act? Why do we need the coal under the public sector? We have only Coal India Limited which produces 80 per cent. India is too huge and other ten per cent comes from the captive power plants and other ten per cent comes from other sectors like Singareni and others. Why are you sticking to the coal nationalization? Why do we not privatize? We have privatized iron ore. Yes, there were exploitation in iron ore. But I think we have to take some radical steps in coal sectors. Similarly, there are some other issues and I do not need to repeat them. We can discuss it when we interact. Thank you.

Mr. Chairman: Thank you Mr. Negi. I would request Mr. Raghavan.

Shri M S Raghavan: Distinguished co-panelists, ladies and gentlemen: Indian economy in the past decade has undergone significant structural changes. Back in 1950s and 1960s, agriculture used to contribute 52 per cent to the GDP, industry 12 and services 36 per cent. Now it has changed over the period and I has gone to 14 per cent for agriculture, 20 per cent for industry and 66 per cent for services. While agriculture has de-grown from 52 per cent, contribution has come down from 52 per cent to a mere 14 per cent, services has leap-frogged from 36 per cent to 66 per cent. This in the past two decades, the share of manufacturing sector has been stagnating around 20 per cent largely as a consequence of India’s ability to build and maintain competitiveness needed to meet the global challenges as well as to develop a larger domestic market through low cost production. This has resulted in a jobless growth situation as the pace of economic growth is badly creating any formal employment. The failure to absorb new entrants to the labour force also is attributable to a generally poor quality of education and training amongst the work force so that even where there is a demand for skilled labour, there is a shortage of supply. At the macro level, this constricts the growth of domestic demand as well resulting in a creation of vicious circle of over industrial performance. Apart from this, according to an

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estimate by National Manufacturing Competitive Council in its report on National Strategy for Manufacturing, industrial sector used to grow at 11.21 per cent to bring about 9 per cent growth in GDP. In the past two financial years, industrial sector growth has been significantly lower averaging at 1.9 per cent. Apart from that, there is macro economic stability, lack of competitiveness, inadequate infrastructure and lots of other things. As to the inadequate infrastructure, poor infrastructure has been identified as a major constraint in the growth of industrial sector, according to the Global Competitiveness Report 2013-14, India has ranked 60th out of 148 countries in the global competitiveness index. As far as infrastructure is concerned, India is ranked at 85th position when the highest population of respondent is 18.1 per cent in the survey carried out by GCR stating that inadequate supply of infrastructure is the major impediment in the growth of business in India.

The manufacturing sector is critically dependent on infrastructure facilities. A whooping four to five trillion crore has to be sunk in this sector in the future in the few years such that the infrastructure parity can be maintained. In addition to this, what is confronting in the high interest environment is that the elevated inflation level has prompted the RBI to maintain a hawkish monetary policy resulting in a higher interest rate regime, pushing up interest and borrowing cost. Along with timid demand, high interest rate has served to deter investors from undertaking fresh investments. Additionally the rupee depreciation has also resulted in higher overseas borrowing cost. However, I would also like to highlight the impact of high interest cost. It is relevant to assess as to what extent, high interest rates are affecting the economic growth. While monetary actions over the past two years may have contributed to the growth slowdown and unavoidable consequence, several other factors have played a significant role. Firstly, an enterprise as investment decision is generally driven by comparing the interest rate prevailing in the internal rate of return that is projected. As long as the interest rate is lower than the RR, the enterprise continues to undertake fresh investment. Thus, the real lending rates in India in recent years have generally been lower than the rates that were prevailing during the high growth phase before the global crisis and should not have a major significant impact on the investment decisions. One factor that is confronting us, as I told you is the inadequate infrastructure investment. Apart from this, there are lots of problems which are hindering the infrastructure development.

One is the land acquisition concerns, environmental concerns, labour related concerns and lots of legal hurdles etc. Having said that, let me focus a little bit on the financial constraints. The growth of financing the industrial infrastructure that has been a major focus as major financiers as the commercial banks

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which are inadequately fit to do so. Because of the very nature of industrial finance in the times of down trends, it is the industrial sector that gets affected and banks because of their inherent weaknesses during stress, banks reduce their exposure to the investment. Because of capital costs, because of Basel III norms being implemented in the years to come, the capital charge is going to increase tremendously. Because of the capital charges plus provisioning costs as well as the credit cost which has gone substantially during the time of stress the banks do shy away from increasing their exposure to industry. These lead to a risk cover behavior. Steps have to be taken to enhance the range of derivative products available for the banks to increase their exposure in such a way that the risk coverage goes out. Secondly, there is increasing reliance on corporate debt markets. Going forward, corporate debt markets are to play a vital role in financial intermediation than the normal banking channels. One of the policy measures that helped the East Asian countries was to tame the crisis was the development of corporate debt market. In India, it is more of a G-sec driven market. It is to shift from D-sec driven market to a corporate bank market. We have to necessarily widen and deepen the corporate market. Corporate debt market is very much under-developed. The investors’ base is a few of the banks and some insurance companies. Though some measures have been taken, there is a lot of space for policy intervention like from the supply side, allowance of greater regional participation, creation of credit risk mitigating measures, enabling development of wide array of financial instruments, infusion of foreign funds may result in hot money and destabilize the market in any case to an extent it is also required to deepen the market. From the demand side, favourable tax treatment to the bonds should help in addressing the concerns of the deepening of the market. Expansion of mutual fund industry is another thing. Mutual fund industry is a very big industry in India as if its potential is untapped. It has to be tapped to finance the industry and infrastructure in the days to come. Better corporate governance and accounting standards will also help in furthering the cause of deepening of the markets.

While at the end I would like to leave some thoughts in the minds of people to introspect. While there has been increase in infrastructure lending by banks, sustenance of this model is quite questionable because of ALM mismatches, because of the very nature of their liabilities and the assets which are ranging from 2.5 years on the liability side and on asset side it is 21 years. There are a few mismatches that banks are staring at. Then the capital requirement is another thing. Come Basel III, the capital requirements are going to be doubled and tripled. Third is the stress and credit cost. Because of this, the model of the commercial banks, funding the infrastructure development is going to be questionable in the days to come. The financial markets, has not yet grown fully. It will be years before the corporate bond market can take a part in the infrastructure development of the country. Hence the relevance of DFIs, Development Financial Institutions in today’s context can be thought of as a gap filler. We had the development financial institutions like IDBI serving the country for the 50 years and had been of immense help in shaping up the industrial infrastructure of the country. So, it is time to think whether the relevance of the DFI has come back in the present context. Institutions like the IDBI have served in this pace for over 50 years. India’s savings rate has been ranging from 30 to 37 per cent, at the best of time, it used to be 37 per cent and at the worst of times today, it is 30 per cent. The large portion, in the past two years we have seen, of this is being channelized to unproductive physical assets instead of financial assets which would have furthered the growth of the country to a very large extent. So, if the DFI’s status at some point of time is thought of, it can be like introducing innovative products and DFIs can play a role in devising attractive revenues to channelize the savings, tax free bonds etc., and they can once again take over the mantle of the developmental activities of the country in the days to come. This is one thought I want to tell you before I end. Thank you very much.

Mr. Chairman: Thank you Mr. Raghavan. Now I would request Mr. Subroto Bagchi to make his opening remarks.

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Shri Subroto Bagchi: Mr. Prasad, Chairman Kris Gopalkrishnan, fellow panelists, ladies and gentlemen: I am really honoured, I am honoured on behalf of all ordinary people who have gone on to build extraordinary institutions in the country. It is the first time that I am coming to New Delhi to speak to an audience like you. I accept this as an honour for the IT industry; it is an industry built by lower middle class people. Today we contribute to ten per cent of GDP for the country, 25 per cent of exports. We are one of the largest employers and we have built on the premise that who you know is not important as important is what you know. I also feel honoured because I come from a very ordinary background and a little bit about me and the kind of work that my organization does is very important to do contact setting. I am a Government servant’s child, not a Government servant of the Moti Bagh, Chanakyapuri variety but a Government servant from State. Till the age of 8, there was no water and no electricity in the house. I started my life also with the Government as a lower division clerk in Orissa and today I have gone on to co-found Mindtree which is a Rs.3000 crore company with a market cap of roughly about Rs.6000 crore. More importantly, we are a company that competes with the best in corporate India and global companies on corporate governance. The software that we build, today make 150 airlines take off and land safely in the world. This software that we make, help global insurance companies scrutinize and settle claims faster. But more importantly if you have an Aadhar card, that software was built by Mindtree. But I am not here to sell Mindtree. I am here crucially, significantly and centrally to sell that there are 500 more Mindtrees waiting to be born in tier II and tier III cities of India. I am here not as a representative of big business but as a first generation entrepreneur to argue their case for you. The question before us is, what does its first generation entrepreneur need in tier II and tier III cities of India? I think, first and foremost, statistics after statistics have been propounded about the need for infrastructure. But we need to understand the essence and meaning of infrastructure and it requires a conversation because we are Indians. Infrastructure comes at three levels. There is physical infrastructure, there is intellectual infrastructure and there is emotional infrastructure. Without physical infrastructure, it is difficult to build sustainable intellectual infrastructure. Without that, it is very difficult to build an emotional infrastructure. And then we need a digital strategy that will bring the physical, the intellectual and the emotional together.

But there is interesting concept around infrastructure. Infrastructure has to be created before it can be used, it is as simple as that. The second interesting thing about infrastructure is that it is not something which you can build once and use forever. Any civil construction, for example, to remain pristine requires 15 per cent of the original cost to be allocated year after year after year. That is the

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reason that many roads in India do not work after a flying start and many flyovers look really 20 years old after 18 months of construction.

The next important point about infrastructure is that infrastructure is best created by people who have a sense of legacy, infrastructure civilizationally if we look at it, whether we look at the Romans, we look at the Mughals, we look at the Dravidian kings, anywhere in the world, infrastructure is best created by people who do not have a dynastic view, who do not have a generational view but have a civilizational view. You build the best infrastructure when you care about the country 500 years, 1000 years from now. Now, what does infrastructure mean to the services sector? It means a very simple thing. If the nation arrives tired to the work place, how can we be productive, how can we be competitive in the world? So, if only we focus on taking our people, ordinary people, not the people like me and you and people in red beacon people for whom it does not matter, the people who hang on DTC buses, the people who struggle to get into the metro and of course the people who have to use more difficult modes of transport in other parts of India. We have to get this person at work in a safe and comfortable manner and we have to get this person back from work in a safe and comfortable manner. So, you need to really love the average worker of India and relate infrastructure to that individual. But on this point, I would like to ask ourselves who is this average worker of India? In discussing the average worker of India, we neglect 50 per cent of India, that is women. Just as 50 years back we talked about sending the girl child to school, the time has come to talk about sending the girl child to work. That requires a discussion about how we relate to the idea of Indian womanhood. Your and my daughter, your and my sister must feel safe to go to work; your and my daughter, your and my sister and spouses, of course, should feel comfortable riding public transportation. Why is this important? Why am I an IT person talking to you about this? It is because 50 per cent of engineering students today are women. At Mindtree 37 per cent of our entry level employees are women. There is a Sanskrit saying: Yatra pujyante naari, tatra ramante devata – Gods roam the land where women are revered. Now yesterday I was talking to Ruth Kattumuri who you listened to. While she was a student in India, she did not feel safe. She felt unwelcome hands coming her way. We need a massive mindset change before we talk about the services sector. And that massive mindset change has to happen at all levels. I do not know how many of you noticed. But after the Governor spoke yesterday, no woman asked a question or was allowed to ask a question. All the questions were raised by men. And one woman tried to get the attention of both Mr. Rangarajan and the current Governor and finally when she managed, she was told that there is no more time and that the discussion will take place in another forum. It shows that as leaders, we need a complete change in our mindset. Now having talked about the mindset change, about the 50 per cent of Indian population that must be taken to work, get feel safe to work and return to work, let me talk to you as a first generation entrepreneur and raise the issue of transparency in corruption. Scalable entrepreneurship needs freedom from institutional corruption. In India, there is no dearth of entrepreneurship; there is dearth of scale. We are obsessed with big business. But big business will not deliver the future India. It is the small business that must become a medium sized business. Big business loves corruption and many times gets away with it. I speak on behalf again for entrepreneurs in small and medium sized segment. Let me talk to you about what corruption does to these people. First and foremost, if you go to a place like Allahabad, if you go to a place like Cuddalore, if you go to a place like Rourkela, an entrepreneur is the easiest prey for all forms of exploitation. But corruption and lack of transparency is hurting India at different levels and we need to talk about that. Corruption today is denting the reputational capital of the country. What is reputational capital? We need to understand that reputation is a form of capital. There was a time when we thought that money is capital; there was a time when we thought machinery as capital; there was even a time when we talked about human resource as capital. But today the reputation is currency. It is a very interesting form of currency. You have to pre-load; you have to create a reputation before you can use it. Today reputational currency is

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being used to settle the dues internationally and once lost it is the most difficult form of capital to get back. Why am I giving you all this talk? I am sharing this with you because in the yo yo days of rupee when it was violently fluctuating between Rs.60 to Rs.66, I went to listen to one of the senior most policy makers of the country who blamed import of gold for the current difficult situation and also said that there was hope for India because the monsoon is predicted to be good which basically absolve the Government. At the same time, a customer of mine told me that the country must be respected before its currency can be respected. We need to actually really take this statement to heart and ask ourselves a hard question that beyond the rhetoric are we building a country that will be respected so that its currency will be respected.

I want to conclude by reiterating what the Governor said yesterday. He said that the conclave is about the mid-term. He said that the test of this economic conclave would be in job creation which must be the primary measure of success. I want to wish you well. I want to thank you for calling me here. And I want to assure you that as policy makers you fight the big war, we will make sure jobs are created. Next year, it is my sincere request to Mr. Prasad that we should get two entrepreneurs maybe from even more hinterland India than me and one of them should be a woman when we discuss the agenda for the next five years. With those words, thank you very much. It is a pleasure; it is a matter of privilege to be here with you. Thank you.

Mr. Chairman: Thank you Subroto, the voice of the common man. We have to open the floor for question answers. We have approximately 15 minutes. Before we start, please make the questions reach so that we allow more questions to happen. Please make your questions brief so that we have more interaction.

Question: I am from the rural area. I am dealing in the biomass. My question is to Mr. G.S. Negi. We imported 200 million tonnes of coal last year at the cost of Rs.80,000 crore. I being in the biomass sector, wasted last year 100 million tonnes of biomass in Punjab , in UP by burning in the fields. I am asking when you were telling, why we are not considering that I can create a massive rural employment in all the towns, in all the villages in the country, the biomass can easily replace, at least half I can replace in the next five years. We can produce hundred million tonnes of biomass to generate 80,000 crore. Had you given half to this country, we could have produced half the coal.

Shri G. S. Negi: You have raised a very valid point. But we have not imported 200 million tonnes. We have not touched that dangerous point yet. Our imports were 140 million tonnes last year. This year, it may be around the same. We are giving priority to non-conventional energy areas also. If you have seen our plan document, we have given 30,000 MW target for the 12th plan. But the problem is that the demand and supply mismatch in the medium term cannot be bridged just because of the biomass or just because of the non-conventional areas because this will take time. It is a slow rising areas. Ultimately, I hope, the way the trend is across the globe, it is moving towards more eco-friendly areas of energy. I am sure, one day we will have a larger share of biomass and other eco-friendly energy areas as compared to the coal. Right now, the priority is the coal because that seems to be the only area right now, only solution for our three, four years, the medium term plan.

Question: My issues are pertaining to the medium term targets. I have a very strong doubt on what kind of town we are talking about. Is there any boundary that we are talking about? Is it for five years or is it for one year? It is a very diplomatic way of saying medium term, long term or short term. Forget about the target whether they are medium term or short term, my issues are very contentious pertaining to the issues of current account deficit. The questions are targeted to getting some kind of answers from Shri Negi. When we are facing the problem of current account deficit, in the phase of huge problems of

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index of industrial production, now the Government has been thinking of implementing the changes in tax particularly for gasoline products. Why am I serious about this issue, if you look at the elasticity of demand consumption, elasticity of demand for gasoline as a product specially in the short term and medium term, it is very inelastic as compared to automobile products. If it is inelastic, then by any kind of increase in price for the particular product, hardly we will be able to minimize the expenditure by the people of the country. If we cannot minimize the expenditure for it, what kind of target we can do it? We cannot minimize the import for it also.

Shri G.S.Negi: You are asking the wrong forum but I will try to answer. CAD probably had been discussed yesterday also. Your question relates to, we have to import large crude and that is one of our major liabilities. We produce roughly about 30 per cent of our demand and the crude production is stagnant. There is no way that you can avoid. You have to import it. About medium term, I do not mean, five year’s experience because from the industrial point of view, we would not be able to make significant capacity addition in various sectors. That is one of the yardsticks. To reduce the consumption of diesel, that is what you meant. We should reduce consumption of diesel.

Mr. Chairman: Can I just add to that? What is important to note is that it is July and now, we have reduced the current account deficit through short term measures, reducing gold imports as well as increasing exports, we have reduced the current account deficit. I think, now it is 1.8 per cent. I think that the important point is, through concerted action, we are able to bring it lower and that is what is positive. I think the diesel question is a separate question.

Question: Felicitations to Delhi Economics Conclave. 1978 Cabinet Committee decides to set up three infrastructure companies and they are still existing. Later on, the Government re-decides to amalgamate them. My question, as a student of economics, why should such decisions are taken to set up such public sector company. Why again the action is not taken on the re-construction of the Government at that level. That was Cabinet committee. I am sorry, I cannot share the name of the companies. I cannot share the name of the person who issued that letter. There is, to us, students of economics, drastically lacking at the MOF.

Shri G. S. Negi: Well, I will not answer any particular company. In the macro context, I will answer your question. Why we have public sector companies, why we have public sector undertakings. It is mainly because if you see the industrial development in most of the countries, the industrial policy was mainly

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focused to protect certain sectors wherever there was some monopoly. Where, significant investment was required, we had all those companies. In the last slide I had pointed out that we need to re-look; we need bring down the dominance of public sector; sector-wise there is a serious need to look into. That is one issue. If you draw the comparison from China and Korea, yes they started with the dominance of the public sector. But the timing was also crucial in these countries. The right time, they withdrew from certain sectors. They allowed the private sector to dominate. I think the time has come for us also because some of our public sector undertakings are liabilities. So, we need to bring down their share; we need to let the private sector take the dominance. That is the macro answer. I would not answer about any particular entity.

Question: You had made a reference that there is a shift from the advanced to the low income country. The question is, is it because that these advanced economies are facing an aging phenomenon or is it because the low income countries have a cheap availability of labour?

Mr. Andre Sapir: I think, aging is not the dominant factor. The dominant factor is obviously the wage level. The policy that is clearly being pursued is one and especially in Europe we have very high labour cost, a big chunk of this high labour cost is associated with social services. And most European countries are very keen to have a very comprehensive social service. We have gone definitely in the direction of higher skill, highly labour cost and the policies, most of the policies almost un-explicitly and most of the tradable unskilled jobs are going to be off shore. Now there is a plenty of non-tradable, unskilled jobs that will remain. Now as far as those activities that are low skill intensive, those activities certainly are disappearing. The point that I wanted to make which is very clear is that it is not the same thing as off shoring the entire sector. That is why I used the example of textile sector which is typically being viewed as a low skill activity and I think that is not fully true. This high segment of unskilled labour and those have been entirely off shored and there is nothing left in Europe except in some of the new members but for the rest, the industry has moved to much high scale. I think, the main factor is labour cost and not aging.

Question: I am from the Centre for WTO studies. My question is to Prof. Andre Sapir and Mr. Subroto Bagchi. We talked about the employment yesterday also and today also.

If we consider India’s experience of services sector, it is completely different as compared to the other countries. The contribution to employment of the services sector is very less as compared to other

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developed and developing countries. Why is it so in India and what is the way forward because it is easy to say that we have to increase the employment? How should we increase the employment considering that a significant portion of 65 per cent is coming from services sector?

Prof. Andre Sapir: I am not really well equipped to answer the question about India. All I can say that I have some knowledge of India. I am married to an Indian and I have been coming to India for 36 years. So, I have some experience. I think, there is, as has been discussed with Mr. Bagchi, he is right, there is an issue in this country that I can observe of the small and medium scale enterprise. That is why, I put the emphasis on competition policy. This is something that is lacking in India. The fact that you have opened up to trade and quite significantly is a very important boost to competition within the country. But given the size of country, trade is not enough. In a small open economy when you are open to trade, that has a tremendous impact on competition. In a large economy like India it is totally insufficient. I think, you really need a much more vibrant competition policy and I would agree that large scale enterprises are stifling some of the growth of the small and medium scale. This is where most of the employment is and can be created. So, all the policies that promote the growth of small and medium scale enterprises, those are all policies that will promote employment.

Question: My first question to Prof. Andre. India has entered into a special demographic profile where the working age group is large in the coming few years. Would India be able to tap this demographic dividend? This calls for creation of more and more job opportunities, investment in infrastructure. Till now the creation of job opportunities, this demand it has been catered to by the service sector. If I would be right if I say like service sector is largely getting saturated and the time has come that Indian economy should concentrate on strengthening the manufacturing sector, address to the loopholes of infrastructure in the manufacturing sector and strengthen the rural infrastructure especially.

Prof Andre Sapir: I like the expression that you used the demographic dividend. I think it is a good expression. I think in earlier decades one was looking at developing countries including India as having a demographic burden. But I think India has been able to surpass that. Now the fact that it has a young population which is a tremendous asset. The real question is how indeed to transform this asset into really fully productive asset for the country. That goes back to the discussion that we had before, the opportunities but also the education. I think, India has at some level well class education but at some other level, much below par. So, India is a very dualistic economy in many ways including in educational system. You have really in this country the best education for a very very narrow amount of people and they get this world class education but I think the average level of education is still very insufficient to transform this huge asset that you have into really a productive asset.

Question: I have two quick questions. One is for Mr. Raghavan. You mentioned about this service vis-à-vis investment rate. Even 30 per cent is not compared to other emerging markets. It is fairly good. But the problem we still tend to get for that, we are not finding way to invest in a more professional manner. Can you please explain on that because the big corporates are going for other greener pastures than investing in India? The second question is more importantly that Mr. Negi mentioned as well as Mr. Bagchi. What about the non-formation of the capital market that you mentioned? The serious question, it has been going round that a lack of research initiative despite lot of industry is getting into billionaire clouds every year. Why is it not happening?

Shri M.S. Raghavan: As per the present statistics, we have at the worst of times 30 per cent savings and best of time, 37 per cent savings when India was having nine per cent GDP growth. This 30 per cent or 37 per cent investment even though it is happening, it is much better than most of the other countries. What is not happening is, most of the things, the investments are happening in physical assets rather

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than in financial assets. We do not have a conducive policy atmosphere to channelize this to the financial assets whereupon it will be used for productive purposes to enhance the growth of the GDP. In addition to this what exactly happens is the high inflation rate that was prevailing in the country made one to believe or not without any rhyme or reason that investment in gold is much more yielding than in a financial assets because the return people were getting or are getting, the net return adjusted to the inflation had been negative even today. This is one point. Because of this, RBI has come out with inflation indexed bonds and various other initiatives. But these initiatives are too few. My intention is that these initiatives should be furthered in such a way that these investments which go into physical assets can be channelized into financial assets such that will be used for productive purposes.

Question: The question is to Mr. Subroto Bagchi. I would like to congratulate you for flagging the issue of women safety. In this context, I just want to say that the Karnataka Government, I understand taking positive steps in allowing women to work in night shift in IT sector. In my mind, I was not very sure that this is a very good step in the sense that what are they doing as far as safety is concerned. If you do want to introduce, let women work in the night shift like the textile sector would also want apart from the IT sector, the supplementary efforts that the State Governments wil have to make is how to ensure the safety during the night time as also for the BPO workers, a majority of them are women and they travel at different hours, whereas we feel that labour rigidities are going to be overcome by allowing the women to work in the night, the safety issues are not being addressed at the same time.

Shri Subroto Bagchi: I have two daughters. They have grown up both in this country and they live overseas and work overseas now. They travel at 10 or 12 or sometimes 2.00 a.m. in the night. They are safe we do not lose sleep. We have to make India like that. We cannot keep our daughters in house, in prison, chained and then say that there is a liability for security. If the girls are safe, you will be safe, I will be safe, industry will be safe, the gold in the custody of the Government will also be safe.

Chairman: With that, we come to the end of this interesting panel. The point was made about investment in technology upgradation, R&D is very important. Another thing was about the cost of infrastructure or lack of infrastructure, logistics, how it has been handled. On the services side, points were made about financial services, deepening the financial markets, etc. Lastly, simplify the thing and creating an environment where all people can work men and women safety which will increase the productivity and the growth of the economy. Thank you very much.

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Closing Session (Infrastructure Financing and Corporate Governance – Challenges)

Anchor: Ladies and gentlemen, we have approached the closing plenary session for the Delhi Economics Conclave 2013. The Session is going to focus on the topic of Infrastructure Financing and Corporate Governance: Challenges. The Session would commence with the welcome address by Shri Shakti Kanta Das, Special Secretary, Department of Economic Affairs. This would be followed by two keynote addresses by Dr. Ashok Chawla, Chairman, Competition Commission of India and Shri K. Venkatesh, Chief Executive and Managing Director, Larsen and Toubro. This would be followed by the valedictory address from the Hon’ble Minister of Road Transport and Highways Shri Oscar Fernandes. We now request Shri Shakti Kanta Das to kindly deliver the welcome address for the programme.

Shri Shakti Kanta Das: Hon’ble Minister for Road Transport and Highways, Shri Ashok Chawla, Chairman, Competition Commission of India, Shri K. Venkatesh, Chief Executive & Managing Director, Larsen and Toubro, and my colleague from the Department of Economic Affairs Shri HAC Prasad. Hon’ble Minister of Road Transport and Highways Shri Oscar Fernandes who has been able to find the time, we are extremely delighted to have you, Sir with us. I take this opportunity to once again welcome you. Under the leadership of the Minister, a number of challenges in the road transport sector which is one of the key infrastructure sectors in the country, a number of challenges have been addressed. As all of you would know, in large number of PPP projects, there were difficulties; there were difficulties in reaching financial close; there were difficulties in getting various permissions, completing the land acquisitions, getting the environment permission.

There was also the bigger difficulties that many of the bids had been finalized when the economy was doing well. So, therefore, the kind of premium which had been quoted by various private sector promoters and PPP partners became unsustainable when the economy did not keep up that kind of growth. Now those challenges have been addressed by the Government in the road transport and highways sector. So, we are extremely delighted to have the Minister who I am sure, will share his experiences as a part of the valedictory address which will be of great value to all of us. I am also delighted to welcome Shri Ashok Chawla, a very known person to all of us. He has been Secretary, Department of Economic Affairs, the Finance Secretary for a considerable period of time. As you know,

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he is the Chairman of the Competition Commission of India. So, for this particular theme, I think, he brings in experience in infrastructure financing, he also brings in experience related to corporate governance considering his present position which he is occupying, welcome Sir. I am extremely happy to also welcome Shri K. Venkatesh, Chief Executive and Managing Director of L&T, a company which has participated and implemented a large number of infrastructure projects. I have had an occasion and an opportunity of interacting with him on various earlier occasions and I found him very practical and with lot of excellent ideas for the infrastructure sector in our country. I welcome you Mr. Venkatesh and welcome all of you once again.

The theme of this session, the valedictory session is very interesting because we are addressing twin issues of infrastructure financing and governance, the challenges faced by the country in these two areas. As you know infrastructure projects unlike other manufacturing and other kind of projects impact a large cross section of people. So, therefore, in this context, the way the infrastructure projects are financed, the way infrastructure projects and companies are governed, they become very important and of immense value and of immense importance to the wider cross section of the public. With regard to finance, the cost of financing is very important because eventually the user fee is paid by members of the public or whoever is the user. So, therefore, the cost of financing, the user fee all these aspects are inter-related and, therefore, financing of infrastructure projects becomes extremely important. Governance issues are also extremely important because there are contractual obligations in any PPP project or in any infrastructure project where private sector participation is there. Governance issues are also very important because ultimately at the end of the day the delivery of the service has to be as per the contract conditions and has to be of a certain high quality because that is the whole intention of bringing in private sector investment and private sector participation into infrastructure because it is expected that they will bring in higher levels of efficiency and ensure better quality standards.

It would be important to mention that the financing of infrastructure projects will have to be low cost, that has to be long term sources of financing, long term funding because the lending which is done by the banks typically put the banks beyond a point it will put the banks faced with problems of asset liability mismatch. Therefore, we need long term instrument of financing, we need deck out mechanisms of financing, the infrastructure debt fund which has been conceptualized and announced by the Government is one such modality of going ahead with deck out financing mechanisms. There is

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also a challenge in taping the savings and the funds available with International Sovereign Wealth funds, pension funds and various other retirement funds typically which are in long term nature.

Coming to governance, I think in the infrastructure sector, the challenges are basically about three or four major areas. The first is to design the project in a manner where there is a fair and objective risk allocation between the project authority, the investor, the PPP partner and the public. The design of the regulatory mechanism, the regulatory authority is also equally important. It has to be fair, transparent and it has to be equitable. It cannot be one way relationship between the regulator and the various other stakeholders. The competitive processes associated with selection of a private sector promoter also has to be very transparent and fair so that the premium that eventually the public will pay in the form of slightly higher user fee is justified by the kind of quality of service that this fair competition would bring in. Finally, the reporting and audit systems of all these infrastructure projects are also very important. The reporting systems in infrastructure projects will have to be different because the accountability is to a large cross section of the public, as I mentioned earlier and the audit mechanisms also will have to be there. We have, of course, in most of the projects, this is a big challenge where to draw the line between the public domain and the private domain. While at the same time, it is important that audit should go into issues that impact the interest of the public, at the same time, it should not traverse into areas that fall entirely in the private sector domain. So, where to draw the line and do the audit is also a very huge question which needs to be answered.

There are also issues at times relating to what some people call it regulatory overreach. There are two perceptions about it. I would not like to support either of the perceptions. I think I would like to leave it to the Hon’ble Minister and the distinguished panelists if they have time to comment on these areas. There has to be regulation because ultimately a facility is being given to a private sector promoter to implement in the interest of the public. So, the interest of the public, the interest of public finances will have to be safeguarded, the contractual obligations will have to be enforced. At the same time, there should not be overreach or intro-safeness. So, these are the kind of challenges that we have and I am sure, we will benefit out of the wisdom of the Hon’ble Minister for Road Transport and Highways and the distinguished panelists. So, with these words, I once again welcome the Hon’ble Minister and the distinguished panelists and all of you to this valedictory session. Thank you.

Anchor: Thank you, Sir, for the welcome address. We would now like to invite the distinguished speakers to deliver the keynote addresses for the session. May we now request Mr. Ashok Chawla, Chairman, Competition Commission of India to kindly deliver the keynote address?

Shri Ashok Chawla: Hon’ble Minister, Road Transport and Highways Shri Oscar Fernandes, Additional Secretary, Shri Shakti Kant, Shri Venkatesh, Shri Prasad, distinguished ladies and gentlemen: I am indeed thankful to the Department of Economic Affairs for inviting me to be one of the speakers at the closing session of the conclave. Indeed, it is a privilege to address such an eminent gathering of thinkers, academicians and policy makers. I am equally pleased to see that the seed which was planted, I think, about four years ago by the then Chief Economic Adviser Kaushik Basu has sprouted into full blown mature event which is part of the annual calendar of economic thinkers and policy makers as part of the Delhi Conclave. I remember, I think it was 2010 when he mooted the idea of such an event, bringing together various interested stakeholders and people from the Government, no doubt. We supported the idea. I was not quite sure honestly, what shape, what form it would take. But I am very glad that this is now a well-established institutionalized and accepted as one of the more relevant conferences held in Delhi around this time of the year. My congratulations therefore, to the entire team which is carrying forward the spirit of 2010.

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The theme of this session, as was mentioned, is infrastructure financing and corporate governance. I have no doubt Shri Venkatesh who would know more than anybody else where the shoe pinches, will cover the entire bandwidth of infrastructure financing. We have the good fortune of the Minister of Road Transport and Highways who, no doubt, will cover the public policy part and the vision in relation to infrastructure particularly the very crucial part of highways and roads. I will, therefore, confine myself to corporate governance, more specifically to corporate behavior in a market economy with a fair degree of competition.

Let me begin by saying that the dominant intellectual tradition of development economics which until recently highlighted the role of State intervention through the establishment of protectionist barriers and monopolies at the expense of market is now passing. An increasing reconciliation between development economics and competition economics, if I may use that word for want of a better term, is taking place. This change as the instrument of development was under-scored by no less than the Hon’ble Prime Minister of India at the recent BRICS International Competition Conference in Delhi. He said and I quote: “Growth, development and poverty reduction are the most important challenges that our Government face. To meet these challenges, Governments look for a sound architecture of policy in which the beneficial effects of markets can be maximized by action to prevent market failure. The development of a sound competition policy is an essential element of such an architecture. Anti-competitive behavior deprives markets of their ability to deliver efficient results and hurts the poor most of all.” The centrality of regulatory institution in this new development paradigm is the corner stone of modern public economics. It emphasizes the public interest theory of regulation and based on the assumption that Governments are capable of correcting the market failures through regulation. Even though the Chicago critic of the public interest regulatory theory places heavy reliance on private ordering in courts to correct the failure of the market process, a more nuanced position is generally accepted globally and more so in the emerging market economies.

The quality of institutions in general has a strong bearing on competitiveness and growth. It influences investment decisions and plays a key role in the ways in which societies design mechanism to distribute the benefits and bear the cost of development strategies in policies. Stressing the importance of institutions Ekmoglu and James Robinson in their highly acclaimed book Why Nations Fail, argue that the key differentiator between countries and institutions is institutions. Nations thrive when they develop inclusive political and economic institutions and they fail when these institutions become

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extractive and concentrate power and opportunity in the hands of only a few. They write and I quote: “Inclusive economic institutions that enforce property rights, create a level playing field and encourage investments in new technologies and skills are more conducive to economic growth than extractive economic institutions that are structured to extract resources from the many by the few.” A well implemented competition law, ladies and gentlemen, is one such inclusive economic institution essential for corporate governance.

Competition law is a fundamental part of the ground rules of any market economy. There are three basic elements aimed to combat, one, anti-competitive agreements; two, anti-competitive merger and three, abuse of market power. The objective of most competition laws is to protect competition as a process, thus enhancing efficiency in economic activity and promoting consumer welfare. However, competition law is usually not concerned with wider economic and social objectives such as poverty reduction. That said, the fact remains that anti-competitive business activities affect the poor of society relatively more severely. The reason is not far to seek. It is the poor who bear the heaviest burden of anti-competitive behavior such as price fixing. Standard micro economic perspective of the effect of competition on consumers is straight-forward. Competition drives markets towards the equilibrium of supply and demand, eliminates inefficiency and eventually results in prices that are equal to the most efficient firms marginal cost. If a market is less than perfectly competitive, to begin with, then greater competition should bring about lower prices, higher output, better quality and possibly more innovation. These results are generally to be expected in all markets, not just in essential goods and services markets and they benefit all consumers including impoverished ones.

The original competition law in India was the Monopolies and Restrictive Trade Practices Act of 1969. This was based on the command and control of economic architecture of those days. It was a direct instrument for moderating the growth, if not curbing the growth of big business. It also had no provision for regulation of mergers and acquisitions. Indeed that was not necessary because the control was exercised ex ante through the route of industrial licensing and such like Government approvals. The new Competition Act which is being enforced from May 2009 is based on the post liberalization philosophy of promoting competition rather than curbing monopoly. The law is – I think this is important ownership neutral and applies to all types of enterprises. It has provisions for imposing penalties. It also has a statutory provision for breaking up enterprises if considered necessary.

During the last four years or so, the Competition Commission of India has received over 400 matters alleging violations of section 3 and 4 of the Act relating to anti-competitive agreement and abuse of dominance in sectors as diverse as stock exchanges, travel, real estate, pharmaceuticals, mining, entertainment and so on. Penalties have been imposed where warranted. With regard to mergers and acquisitions, around 150 proposals have been decided so far. Ladies and gentlemen, the thrust of the law is basically to ensure a culture of competition and good corporate behavior. It need hardly be emphasized that the benefits of market and competition can only percolate in an institutional framework of good corporate governance. Otherwise, private barriers could well substitute the erstwhile Government barriers to trade and prevent improvements in social welfare. Good corporate governance is critical for instance and only by way of one example, in the public procurement market. The liberalization of procurement markets through the elimination of needless and unfair restrictions on the competing suppliers results in good value for money. This can augment Government’s ability to invest relatively more in social and physical infrastructure. Let us not minimize the fiscal importance of this. Public procurement accounts for as much as 25 to 30 per cent of GDP in India. Major departments like Defence, Railways, Power, Telecom and aviation spend about 50 per cent of their budgets on procurement. Let me turn briefly to the role of physical infrastructure and growth. Many of these critical infrastructure input sectors are under producing due to lack of competition resulting in shortages which

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compromise the competitiveness of the Indian industry. Infrastructure sectors where competition has thrived due to the competitiveness of the down-stream sectors dependent on them have flourished. The worst hit infrastructure sector and I will not, as I mentioned, talk of the road and highways sector because we will hear much more of that from the Minister, but the worst hit infrastructure sector due to lack of competition is the power sector where capacity shortages have caused constraints to economic growth. The control of the infrastructure that is the electricity wires by a dominant firm gives rise to access issues to the generating companies which are potentially competitive. Managing such infrastructure in an openly accessible manner permits a wide range of down-stream producers of private, public and non-market goods to flourish. Wheeling charges and cross subsidy surcharges act as a deterrent for open access. It is indeed difficult to convince a monopolist, difficult from the public policy point of view, to share his asset in distribution as he enjoys the dual role of network operator and of a supplier assigned to the distribution licensing. This conflict of interest requires to be removed by separating carriage from content.

Ladies and gentlemen, let me conclude by saying that competition law can promote business dynamism and ensure that competitive pressures between firms make them achieve productive efficiencies. It is only then that competitive capitalism can be harnessed and become the engine of India’s structural change and growth. Corporate governance and the attendant compliance programmes are in a way the supply side response to ensure that this is truly achieved and growth impulses strengthened in the process. Thank you ladies and gentlemen.

Anchor: Thank you Sir, for the enlightening address on such an important issue. It is a pleasure to listen to a well-defined elaboration coming from the expert of the field. We may now request Shri K. Venkatesh, Chief Executive and Managing Director, Larsen and Toubro to deliver the second keynote address on this issue.

Shri K. Venkatesh: Good afternoon, Hon’ble Minister for Road Transport and Highways and distinguished members on the dais. First of all, I should thank the Delhi Economics Conclave for inviting L&T and my privilege to honour that invitation. In a lighter vain, I should also thank them for promoting me because I am the Chief Executive and the Managing Director of L&T, IDPL. IDPL is the infrastructure subsidiary of the L&T. Of course, L&T owns 97 per cent. We handle more than Rs.45,000 crore of investments committed across sectors which is roads, bridges, airports, ports, urban transit which is the

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metro, water and effluent treatment and other new sectors such as transmission lines as well as logistics. I will begin on a very optimistic note and with some history. I think all of us or most of us in the audience were very privileged to have grown up in the 1970s and 1980s and we benefited from the infrastructure created by the planning and the process that went on during the 1950s and the 1960s. We had clean water; we had relatively less congested roads; we attended good schools even coming from very very middle class families and we I think, led a very very stress free life which enabled us to become what we are. The challenge now is for us to leave behind an infrastructure which brings back that quality. That is the first point. The second point is, we have gone a long way in the past ten years in fulfilling that objective. You must only look back and then assess what are the gaps, what are the learning and where do we go from here? What have we built? I think we have established our presence in building modern highways. Anyone who travels around the country today as compared to what he did ten years ago, would see the substantial improvement. We have built modern ports albeit connectivity is still a challenge. We are a little behind on railways. But with the dedicated freight corridor concept and the industrial corridor concept should get there in about, my estimate, seven to ten years. We have built modern airports and learnt the art of building modern airports on time. I am focusing only on the physical infrastructure because social infrastructure is a whole different subject. We have done all this and I can go on. We have done all this despite all the challenges of a democracy and despite all the challenges of being a welfare state, not in the traditional sense but in a sense that we do try and see how we can address the welfare challenges because of the diversity in the population that our country has. This is the good part, therefore, I think, we should not be carried away by the challenges that we face today because of the fact that we are today victim to a completely different set of circumstances. I think and I would urge everyone to look at the learnings of the past ten years, make sure we consolidate those learnings and then move forward. Coming to the second or the third aspect, I would like to draw upon the previous panel who also spoke on infrastructure, strangely enough and they spoke about infrastructure as a catalyst to (a) increase in the share of manufacturing and services in GDP; (b) increase in the contribution to GDP and create employment; (c) you have to create a head of demand and their lies the challenge of financing; (d) there has to be quality, it has to last long and I would add, it has to be safe. Because the moment you create large infrastructure particularly stuff like roads and railways and airports, when the volumes grow and the speeds grow, safety is a big challenge, and of course, operations and maintenance. How do you finance such a complex set of objectives with a set of users and then bring on the table the concept of rapid development and that is how public, private partnerships emerge. So, there is public which, the Hon’ble Speaker before me explained the aspects of corporate governance, corporate behavior, pricing, monopoly and infrastructure projects tend to be monopolistic by nature because they all address a captive audience. Therefore, all those aspects have to be taken into account. There is private, which is there because they have to earn a return on the equity that they invest. They have to make sure that the projects get completed on time within the precincts of all the environmental and other objectives that are there and also make sure that they repay the banks for the loans that they borrow and the interest picks every day. Finally, of course, how do the two work together? That I think, ladies and gentlemen, is the biggest learning that we need to enhance over the past three years.

Now coming specifically to the presentation, we have a very lofty objective. When we began the planning exercise for the 12th Five Year Plan, we said we need a trillion dollars to improve our infrastructure over the next five years. That was when the rupee was around 45. I am not going to get into conversion and the difficulties of that. Then we said, fifty per cent of that has to come from the private sector, that is, 500 billion. Without getting into the semantics of whether it is 500 or 400 or whatever, I am taking a very simple 70 per cent achievement of that target, given all the challenges we are facing today and what we have been through in the past two and a half years. So, let us bring it

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down to 350 billion. The 30 per cent equity that needs to be contributed and 70 per cent borrowing that needs to be acquired, the equity would be around 100 billion which is 30 per cent of 350 billion. If you add up the market cap which has varied between 2009 and 2013, it must have gone up over the past few days and come down in the past two days. It would be in the region of between 11 to 15 billion dollars. Take 20 billion dollars if you want to adjust by sectors, companies and so on. We have to raise five times the current market cap on the equity side alone and then you have the challenge of borrowings, that in the midst of a massive restructuring that needs to be done and the renegotiation that needs to be done on the projects that are stalled or have not taken off for a variety of reasons. This task is indeed extremely daunting. So, I need you to focus on this ladies and gentlemen, and then figure out how speed is of the essence; how partnership is of the essence; how involvement of bankers, private sector entrepreneur developers and the Government need to address this day in and day out 24x7, if we have to address the points number 1, 2 that I spoke to you above (a) leaving a quality infrastructure behind for the next and the next generation; (b) to make sure that the catalyst that it has to act upon to improve manufacturing and services, it achieves that objective. What are the solutions? In the next five, seven minutes, I will try and put some thoughts on the table and let us see where to go from there. We have been trying, L&T is just an example. Every entrepreneur, developer who moved into the private sector space in the infrastructure industry and I am calling it an industry, set up a holding company and I am responsible for that holding company, willy nilly they realize that they cannot keep pumping in capital year in and year out on project after project and of course, projects have run into some trouble or the other given the current environment, from an economic standpoint, from a political standpoint, from a governance standpoints and from various other points of view.

Green field risks are very high. We went around the world trying to source partners who would find the infrastructure story in India interesting and become our partner on the basis of our commitment to that partner that we would comply with the highest degree of governance and value systems that they aspire if they want to become a partner in our country. What were the key concerns? The India story, green field risks which is execution, financing and governance, company governance, GOI regulatory uncertainty, tax uncertainty, interest rate uncertainty, high dispute resolution timeframe, preference to brown field assets which have overcome green field risks and revenue streams have been established and preference for structured transactions with guaranteed down-size, 12 to 14 per cent equity RR and

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higher dilution of target RR is not achieved. These are all facts, gentlemen. We have been on the road for one and a half years and I am sure, all my colleague developers also have been on the road. I must confess to you that we have not met with too much of success and the Forex volatility. I am reminded of the eminent speaker in the previous panel who said that the country has to be respected first and thereafter the currency. I think, gentlemen, we have to really think how to bring that respect up. Just to give you a broad framework of the equity RR, we thought that sovereign wealth funds which are run by the governments of various developed countries who have a vast amount of capital at their disposal would be cheaper to source from. However, the kind of risks that they load because of country project specific risks, takes their expectation from about 10 to 12 per cent which we had in our mind when we started sourcing this capital to about 16 to 18. These are facts. And Indian PE Fund, all Indian PE infrastructure funds are more or less withdrawn from the green field kind of investments. They are now focusing on the down-stream supply chain of equipment, construction contract and so on. They do not want to finance the development projects. If they have to finance at the developmental stage, their expectation is 20 to 25 per cent which no infrastructure project can afford because the toll fee or the user fee cannot afford this kind of an expectation of return on capital. The foreign PE Fund is virtually 18 to 22 per cent and it is virtually not in existence as of today. Secondly, execution challenges remain a large deterrent for overseas investors. I will not spend time on this because it has been debated widely and is known widely. However there are some of the recommended solutions. Please do not put projects on the table unless hundred percent upfront and all approvals are there because it is exciting to start a project and it is extremely frustrating and damaging to our reputation when we have to stop and then look around for approvals and so on because it creates a long term challenge for investor climate; it creates a very long challenge for the bankers to lend to the project and unfortunately long term financing, by and large, thus far has still been in the major domain of the bankers who have other problems of their own now.

We have to look at inflation linked cost over run in the event of a delay in starting the project. I am not saying that after you have started the project, inflation is the developers’ responsibility, traffic is the developers’ responsibility. But if the project has been bid and won, it takes longer than what is contractually anticipated to start, during that period, any impact of inflation and any impact of a reduction in the economic parameters have to be seen and compensated appropriately keeping the larger public interest in mind. Otherwise, going back to the bankers is virtually impossible because they have their own tightness today to be able to lend in an uncertain environment. As you proceed with the project, there are multiple demands that come on to the project. There are changes of scope; there are alterations in aspects and there are public demands which you have to honour because we are a vibrant democracy and we are proud of it. We have to find financial solutions to speed up the process of accommodating these changes of scope and to make sure that the target returns based on which the investor came in or the bankers lent to the project is not affected. That has to be free, transparent and competitive. Of course, a very fast track dispute resolution mechanism should be there. The challenges of financing today are the restructuring burden on the banks, the sectoral exposure limits, the group exposure limits, asset liability mismatch and the interest rates. You have to think a little differently in the phase in which we are today. We have to permit mergers of SPV, by creating certain silos of cash flow so that bankers’ interests are protected. We have to have a separate dispensation of credit enhancement other than IIFCL because they are today perhaps the only credible agency offering credit enhancement, and credit enhancement is always on the back of some collateral. It is a very delicate balancing exercise, and only credit enhancement can go the next step to get the bonds into the infrastructure space. Of course, in our opinion, you need longer concession periods with lower tariffs which will facilitate longer term borrowing and therefore, de-risk the ups and downs of economic downturn in a much better manner. It will also go a long way in addressing the willingness to pay issues because the moment you

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have moved from the complete public financing of infrastructure to a private format, honouring a contract and paying for what you use is a concept that is beginning to set in into the economy but there are several local challenges that need to be addressed. Deepening the bond market, Mr. Raghavan spoke about it in the earlier panel. I would strongly urge the re-introduction of tax benefits and to keep it constant for at least 15-20 years till the massive build up of infrastructure is completed. We introduced 10, 23G, we withdrew it; we introduce 80M, we withdrew it. We brought in minimum alternative tax even on projects which are making losses. The movement you do all these changes frequently, what really happens is you cannot really prepare financial models and these uncertainties keep creating a challenge and thereby the country moves up. Of course, give it the priority sector and termination payments. These are some of the other recommendations which I am sure would be in the public domain in one form or the other.

I now move to another very important aspect where a lot of work is being done, I understand, but nevertheless, I would take a couple of minutes for your indulgence. Equity capital needs to be churned if developers like L&T or GMR or GVK have earmarked Rs.4000 to Rs. 5000 crore as equity investment in infrastructure project, they need to churn that equity otherwise they cannot just put in money because there is no source, either they get in partners or they have to move their equity into the market which in turn allows them to raise more equity. Therefore, the concept of business trust which is eminently working in Bangkok, in Singapore etc. should be there. I will just quickly run through this. Therefore, amendments in tax, company law, FDI restrictions, exchange control regulations, securitization loss and isofacet injection. We can talk a lot on this subject but this is something that needs to be done. Thank you very much and hope to interact with you on a separate forum.

Anchor: We thank you Sir, for this interesting deliberation on this important issue. We now request the Hon’ble Minister of Road Transport and Highways Shri Oscar Fernandes to deliver the valedictory address for the programme.

Shri Oscar Fernandes: I wish I could have had the benefit of Mr. Venkatesh’s deliberations here. But the only problem is I have to be in the Parliament at 2.00 p.m. The House is resuming at 2.00 and I have a Calling Attention Motion. I have no option but to run to the House, so I beg your indulgence.

I am very happy that all experts are here discussing a very important issue concerning the country. I am happy that Ashok Chawlaji is here with all his experience, Shakti Kantji, our Additional Secretary, Prasadji an old friend of mine, Venkateshji, I have been wanting to meet Venkateshji and I am happy that we are on the same platform here, we will be discussing some other time. The unprecedented investment in infrastructure sector during the recent years has projected India as one of the fastest growing economies in the world. Simultaneous, fast pace urbanization has further put pressure on our economy of upgrading the quality of infrastructure to international levels. We have indeed made great strides to match this need across all major sub sectors of power, roads, telecommunications, urban infrastructure etc. Yet, over the past year or two, infrastructure has reached a critical point of entanglement. The investors’ sentiment in 2013-14 appears to be in complete contrast to the situation which prevailed as a previous three to four years. Between 09-10 and 11-12, the markets were well disposed of towards infrastructure projects especially in highway sector. But the situation has tightened up in the past two years. To stimulate growth there is an urgent need to step up infrastructure investment as well as to improve the productivity and quality of infrastructure spending, remove procedural bottlenecks and improve governance. Indian economy has slowed down since 2011-12 and the prospects do not seem to be better during the year 2013-14. But amidst this scenario of economic down-turn, inflation and other uncertainties etc., are still the most potent option for revival of the economy is investment, in creation of better all-round infrastructure. Provision of better

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infrastructural facilities such as highways, electrification, irrigation, drinking water, sanitation, housing etc., would enable mainstreaming of a vast majority of our population and helping them to positively contribute to domestic growth through their entrepreneurial activities. The public private partnership in road sector have completed 7700 kilometres of roads. When the economy was growing and the banks were funding the projects liberally many of the contractors turned concessionaires have bid for PPP projects very aggressively. Under the current scenario of economic down-turn, however the private sector’s interest in the infrastructure has been badly hit because of the non-availability of equity in the market, over-stressed balance sheet of the developers besides the other implementation aspects relating to delays in land acquisition and regulatory clearances. Land has been a major issue as far as road sector is concerned. Many of these projects have consequently come under stress due to actual traffic being much less than projected.

We have to seriously think of various options to tide over the present crisis like situation and to ensure that the country remains on track of rapid infrastructure development. Government has taken several steps including enhancement in single group or over limits, permission to issue guarantee favouring other lending institutions in respect of infrastructure projects, asset classification benefits under restructuring guidelines and permission to extend finance for funding promoters equity subject to certain conditions. In order to encourage lending by banks to the infrastructure sector, banks are permitted to finance SPVs, registered under the Companies Act set up for financing infrastructure projects after ensuring that these loans, investments are not used for financing the budget of State Governments. RBI has allowed the debts due to the lenders in case of PPP projects to be considered as secured to the extent assured by the project authority in terms of the concession agreement subject to certain conditions.

Recognising the constraint in incremental financing by banks to the infrastructure, the banks have been permitted to enter into take out financing arrangements. The guidelines on external commercial borrowings have also been relaxed to boost infrastructure financing especially for projects in roads and power sector. Taking a close look at the recent situation in road sector, we feel the need of allowing the infrastructure developers to rejig their portfolios. A number of private equity funds and institutional investors who are averse to taking construction risk have shown interest in pursuing the completed projects having assured revenue seats. Similarly, a large number of corporate measures who are in the construction sector have shown interest in taking over the projects which are languishing due

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to lack of equity whether smaller concessions. It would be prudent to substitute the promoter and change the management of the project when it is showing cess rather than waiting for it to become a non-performing asset. Large scale sickness in the sector would hurt the development of the road sector apart from hurting the balance sheet of the financial institutions. This would also affect the rating of the country and would drive away private equity fund from the infrastructure sector. Moreover, infrastructure projects, the project developer and investors who own the projects outsource on construction and subsequent operation and maintenance part to specialized agencies. This kind of specialization has taken place in the Indian road sector. We should also encourage this. While permitting substitution of the concessionaire this disinvestment of equity we can ensure that the new promoters are as strong if not stronger than the existing concessionaire to fulfil the obligations of the concession agreement. We can think on the issue as to why we should not allow to this investment of equity. On the regulatory front, I would like to inform this august gathering that the Government of India has taken several steps in simplifying the fast tracking regulatory compliance. I can quote the example of environmental clearances for the national highway projects which is no more a major concern now. We continue to strive for better inter-ministerial coordination and to provide all assistance to project developers on regulatory fund. Ensuring effective corporate governance also is a crucial tool in ensuring transparent and responsible working of corporates. Corporate governance deals with the entire network of formal and informal relationship with the management of the company and the company’s stakeholders including employees, customers, creditors, local community and society in general. In this era of globalization, the corporate is something more than a legal device for profit making. It needs to function as a collective enterprise in partnership with society. We understand that poor corporate governance not only impacts profit but also research and development. There is a need to develop a well routed programme by making changes in strengthening the responsibilities of various functioning bodies in the organization and improving quality of financial management. Efficient corporate governance can move mistrust between different stakeholders, reduce legal hassles and improve output of the corporates. The issue is particularly important since it is central to financial and economic development. We have a challenge before us to convert non-performing assets into infrastructure sector by performing assets by a more responsive and a pro-active administration. Project appraisal techniques and lack of accountability and post disbursal supervision are issues to be addressed. The financial institutions should share the investors’ concern while appraising a project submitted by a concessionaire. The Government has tried to address some major impediments like lack of transparency and accountability in procurement in order to ensure that PPP projects are procured and implemented by observing principles of transparency and competitive bid process, affordability and value for money. But the impact of these efforts on the ground level implementation is yet to show. While there has been a lot of debate around the lack of vibrant corporate debt market and concerns faced by the banking sector in financing infrastructure requirements, it needs to be highlighted that there has been an over reliance on debt. The infrastructure companies are highly leveraged and the flow of equity in the infrastructure projects funding has been very minimal. Experts have started questioning the public, private partnership and are concerned at becoming a public only venture. This is the situation being discussed by all of us. We feel that we should encourage the private sector still to take responsibilities and whatever the Government can do to see that things move smoothly, Government is willing to shoulder this responsibility. Lack of equity investment in the projects means that the developer has little skin in the game and the motivation for the success of the venture is that much limited. For India to return to the higher growth trajectory, infrastructure problems need to be sorted out with utmost priority. There is a need to make infrastructure projects commercially viable, improve the market sentiments through continuance of performance and effective governance on the part of the Government with regard to implementation of projects. Let us begin to contribute our might in right earnest. All stakeholders in this area have diligently worked out improving their productivity and

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efficiency. As regards financing, I would like to say that there is no dearth of finance for infrastructure development and especially for commercially viable projects. However, simultaneously it is important that the banks in general and the public sector banks in particular shift information based project appraisal system so as to ensure that the precious funds are not stuck in unproductive projects. Some other issues like creating a mechanism for recovery of the cost through appropriate pricing regime, simplification of the project clearance by a centralized authority etc., need to be worked upon on a priority basis. In nutshell the development finance model has to be characterized by good planning, strong commitment of the parties, effective monitoring and regulation and enforcement by the Government. Let us all strive to meet the expectations of our people. Thank you very much. Jai Hind.

Anchor: We express our sincere gratitude to the Hon’ble Minister for the valedictory address. We now request Dr. HAC Prasad to kindly deliver the vote of thanks to the programme.

Dr. HAC Prasad: Well, ladies and gentlemen, I know this vote of thanks is always a monotonous task and people want to get up and go quickly and look at their watches. So, I request you to kindly be seated because this is one occasion when we have to thank those who deserved to be thanked. With this request, let me start. The Minister had to go because of the urgency in the Parliament. Distinguished people on the dais, distinguished people in the audience, ladies and gentlemen, I will just give the vote of thanks. I thought of giving a round up, but the time is too late now because the lunch is waiting. My special thanks to the Minister who could make it to this session despite his busy schedule and parliamentary work. I would also like to thank Shri Ashok Chawla under whom I did work and it was actually a pleasure working under him. He is known to be a calm and cool person and is known to deliver the best. He has energized the Competition Commission of India after assuming office. Our sincere thanks to you, Sir. Our sincere thanks to Shri Ventakesh who has also been a keynote speaker of this session. My sincere thanks to Shri Shakti Kanta Das, Special Secretary, DEA who has given the welcome address today. Our sincere thanks to the Finance Minister, though I have thanked him in the earlier session also and to Dr. Arvind Mayaram, Secretary and the other people in the Administration.

I have to thank all the panelists, the chairpersons both who have come from India and outside India and who have given us some enlightening thoughts. Many economists have also come here. My sincere thanks for setting the agenda for the next five years which I hope would be useful for the Government which comes next. In fact, we thought of this topic by looking at what agenda the next

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Government should have and also we saw the last five turbulent years when we faced all the difficulties and we thought that this is time to set the agenda. I think, we have got many useful points which can help in setting the agenda for the next five years. My sincere thanks to all the sponsors, the State Bank of India, EXIM Bank of India, IDBI Bank, Indian Overseas Bank and the IFCI who have partnered this event in many ways. Ladies and gentlemen, please give them a big hand. They are the sponsors.

Our thanks to all the dignitaries, academicians, researchers, bankers, Government policy makers, scholars, corporates, students who have come in large numbers. I think they have made useful interventions also. I would like to thank Hotel Hyatt Regency and the event manager who helped in managing and organizing this event. I would like to thank the officers of administration and finance in DEA and Department of Expenditure particularly Ms. Sudha Krishnan, JS (Pers) for facilitating this conclave at many stages. Our thanks to the media as they deserve special thanks for the media coverage they have given and also Mr. Malik Additional DG who has managed the things well. Please give the media a big hand, ladies and gentlemen. Our thanks to the protocol officer Mr. Pradhan and his team who ensured that our guests were not inconvenienced and also helped in many ways.

I will be failing in my duty if I do not thank the main pillar of this conclave Dr. N.K. Sinha who has stood in the thick and thin of things with me and helped in making all things work well. I felt assured that nothing could go wrong when he was there. Then I had a good able team, Mr. Satish, Mr. Agam, Mr. Aftab, Ms. Jyoti, Mr. Riaz, Mr. Salam, Ms. Shweta, my office staff, the office staff of Dr. Sinha, Mr. Sathish and the whole Economic Division was behind us. Our thanks to all of them and all the Advisers and Officers of Economic Division. I think special thanks goes to our anchors Mr. Abhishek, Ms. Molishree, Ms. Shweta Satya who have made this show run smoothly. Please give them a big hand ladies and gentlemen.

Any thanks would be too small to the foot soldiers like the staff in the Coordination Unit of Economic Division and the Multi-Tasking Staff of Economic Division who worked tirelessly behind the scenes. Please give them a big hand, ladies and gentlemen. My sincere thanks to all the participants, all of you who have come in large numbers and also listening to me patiently. Thank you one and all.

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