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Spread risks, don't concentrate them by investing in India, Montek cautions world

Planning Commission member Montek Singh Ahluwalia today said a growth rate of seven per cent could be reasonably expected in the next three years as a consequence of the policy framework for the infrastructure sector being liberalised and consequent higher flow of private foreign direct investment.

Speaking at the India Economic Summit in New Delhi, Dr Ahluwalia outlined the rationale for India following cautious policy with regard to permitting its companies and banks to borrow abroad and going slow on short-term flows.

He said the crucial parameter on which the Balance of Payments deficit will hinge will be enhanced flows of FDI.

A crucial question was raised whether India was positioning itself to take advantage of East Asian crisis by adopting policies and postures to divert foreign flows to itself. The answer was that while steps were being taken to stabilise fiscal and monetary policies and discipline, there was no critical reason as to why these flows will come to the country in a big way.

Dr Ahluwalia said the East Asian crisis had affected India, but only in a normal way. The Indian rupee, which depreciated in its wake, had now adjusted itself. Growth was also not affected in any substantial manner and the National Council of Applied Economic Research's projection of a 5.7 per cent growth in the current year was an indicator that while growth was slow it was not a collapse.

He said all forecasts suggest that the East Asian crisis will bottom out. In some countries like Thailand and South Korea, growth had considerably slowed down and was negative. As India's exports were diversified and not concentrated to East Asian countries, exports would not be dramatically affected.

The United States was doing well and would be able to absorb exports but it was important that its growth rate was maintained and this will depend much on what will happen in Europe. The main reason for the East Asian crisis was a very open capital account which ensured easy flow of money but a fragile financial structure. This was combined with its exchange rate policies .

Dr Ahluwalia said India had realised the importance of a strong financial sector much before the East Asian crisis. A committee for banking sector reforms was appointed in 1991 and prudential norms for non-performing assets were tightened. Net NPAs, that is net of provisioning which were 16.2 per cent in 1992-93, were now 8.2 per cent in 1997-98.

Even though these were high they should go down three to four percentage points more. The government has appointed a second committee to review the NPA norms. The international banking norms will be much tighter and the committee is expected to submit its report by April this year.

India has capital controls even though it is planned to progressively deregulate. These corporates have been denied permission to freely borrow abroad and India's short term debt was deliberately kept low.

Besides, India has followed a fixed exchange rate policy. A problem in export growth will be difficulty in availability of finance. Dr Ahluwalia said the international community would be well advised to spread risks than concentrate them by investing in India.

To attract larger foreign flows, India was of the view that excessive openness with too much fragility of some sectors was something to be cautious about. If substantial flows of FDI can be ensured then Balance of Payments management would not be an obstacle.

Export growth is not a constraint on national income growth as was the case with East Asian countries because exports do not constitute large percentage of GDP.

The government is aware that a key determinant will be investment especially public investment. A major focus is opening up the infrastructure which will attract large investments from the private sector.

Policies in power and telecommunications were being liberalised to attract more private sector investments. This will insure a higher growth rate.

UNI

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