Economic Times of India June 12, 2009, 9:39AM EST

Indian Government Targets Return to 8% GDP Growth

Deputy Chairman of India's Planning Commission says foreign capital is flowing back into the country

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Montek Singh Ahluwalia, the deputy chairman of the Planning Commission, is backing Prime Minister Manmohan Singh's view that India will return to 8-9% growth in the medium term, since the country is on a strong wicket on many fronts. Once the global economy starts to recover, the return on capital will also be higher in an economy like India, which is poised to grow faster than its Western counterparts. And the entry of $5 billion into the country in the past two months is a clear sign of easing capital flow, he says in an interview with ET correspondents... Excerpts:

The Prime Minister mentioned that India will bounce back to 8-9% growth in the medium term even if developed economies do not recover... What are the conditions necessary to achieve this?

It is important to remember the supply-side constraints. A lot of people are concerned about the global economy. The impact of the global economy on us, primarily on the demand side, is less than would otherwise be the case. But as long as on the supply side, we are in a situation where productivity and domestic savings and the growth of capital and the growth of investment leading to the growth of capacity take place the way we want it, we should be able to grow at 8-9% as mentioned by the prime minister.

There the focus is on savings—whether we are investing enough, if there will be enough inflow of foreign investment and whether domestic capital will be able to achieve the productivity gains is what we have to look at. All known cases of high growth are not those where you just expand capital stock but also where you have high levels of productivity. On all these counts, India is in a very strong position. What has happened, though, is that the global economy will grow slowly, but over a medium term, we can overcome that problem.

In the context of India needing more foreign savings, do you think capital flows have already begun to ease? For example, if you look at the latest figures, there is FII inflow of more than $5 billion in the past two months?

It is quite clear that it has begun to ease. Last year, after the collapse of Lehman Brothers, there was a huge amount of uncertainty and a huge premium on liquidity. Global financial institutions were pulling back capital to reconstitute their own balance sheet. Now, there is some restoration of confidence that the system is not going to collapse. The news coming from the West is that perhaps, by the second half of the calendar year, the global economy will bottom out and start a gentle upswing.

No robust growth but there will be growth in 2010-11. This puts an end to fear and uncertainty. Once confidence is restored, global investors look for returns. Frankly, since the West will grow slower, the return on capital will be higher in economies which will grow faster, like India.

What are the key reforms that you would put on priority to drive investment-led growth in the next six months or one year?

It's not enough to talk about reforms that will have an impact in the next six months. Psychologically, you also have to look at the reform signal for the medium term; the actual impact of those decisions come only after two to three years. The signals you give today change investor expectations, and that's not necessarily to do with foreign investor expectations. Foreign investment is important but domestic investment is much larger. So what are those things?

Clear movement on infrastructure, which everyone regards as the major constraint in India's performance. It's a supply constraint in the two- or three-year horizon but it also addresses the demand constraint in the short term. Underlying that, there needs to be positive movement on social sector reforms because it is the progress on social sector and the promise it holds out for greater inclusion which create a social consensus for modernisation.

For example, we talk about setting up 30 universities. They won't start tomorrow and we will be lucky if they start operating in the next three years.