We are reproducing a significant speech made by Finance Minister P. Chidambaram to the chambers of commerce recently in New Delhi. In the speech, he made a significant point about his unhappiness with the growth of the food processing industry. Chidambaram said: "Key sectors driving this growth in the Tenth Plan were chemicals, machinery and equipment, transport and auto parts, basic metals, non-metallic mineral products, particularly cement, beverages and tobacco products, and apparel. Relative to these sectors, textiles, leather, wood products, food processing and metal products in the manufacturing sector and the mining and electricity sectors performed poorly."

The speech, which has been circulated by the Press Information Bureau, gives you a fair idea about the government's thinking on the manufacturing and infrastructure sector as well as the perennially touchy issue of import duties. The Finance Minister said:

"We have reason to feel a sense of satisfaction when we look at the performance of the Indian economy - our macroeconomic fundamentals continue to be strong and there are reasons to believe that robust economic growth will continue. According to the revised estimates of the Central Statistical Organisation, real GDP growth accelerated from 7.5% in 2004-05 to 8.4% in 2005-06, with the services sector continuing to be the major driver of economic activity. An industrial growth rate of 8.7% was propelled by 9% growth in manufacturing activity, more than offsetting the deceleration in 'mining and quarrying'. The manufacturing sector accounted for over 90% of the industrial sector growth.

Industrial growth in the first four years of the Tenth Plan (2002-2006) averaged 7.3%. Key sectors driving this growth in the Tenth Plan were chemicals, machinery and equipment, transport and auto parts, basic metals, non-metallic mineral products, particularly cement, beverages and tobacco products, and apparel. Relative to these sectors, textiles, leather, wood products, food processing and metal products in the manufacturing sector and the mining and electricity sectors performed poorly.

Capital goods, generally taken as an investment indicator in the economy, consistently performed better than the overall average growth. The average growth posted by this sector since June 2002 has been around 14%.

Consumer goods, both durables and non-durables, also remained buoyant and grew at around 12% in the last two years. Good performance in these two segments - capital goods and consumer goods - suggests that consumption-led growth was generally balanced by strong investment-led sources of growth.

Manufactured Output Top Exports: Nearly 40% of the manufactured output continued to be exported indicating that buoyant global demand and improved competitiveness of Indian manufacturing have had their fair share in manufacturing growth.

We can be proud of the fact that Indian companies are registering their global presence through acquisitions and higher outward foreign direct investment. This will bring them the advantages of greater domain knowledge, economies of scale in marketing and best business practice knowledge, further enhancing the productivity of Indian business.

Indian business has recorded high growth despite constraints of infrastructure, labour rigidities, oil price increases, exchange rate changes and hardening of interest rates.

In the National Common Minimum Programme, we have promised to take all necessary steps to revive industrial growth and put it on a robust footing, and give Indian industry support to become productive and competitive, through a range of policies, including deregulation and incentives to boost private investment.

As stated in the NCMP, FDI will continue to be actively sought, particularly in areas of infrastructure, high technology and exports, and where local assets and employment are created on a significant scale.

Recognising that taxes and duties should be non-distortionary and internationally competitive, we have attempted significant tax reforms. With the introduction of VAT, the internal tax system is moving in the right direction, namely, that of a unified national market. Excise duty rates have also moved towards a median rate for most of the manufacturing products. In direct taxes, principles of moderate rates, improved compliance and a wider base have generally guided the structure and rates. Externally, there has been a gradual and calibrated reduction in duties with a view to reducing the incidence of taxes, removing the anomalies in the duty structure and providing limited protection to industry.

There is unanimity about the need for concerted efforts for infrastructure development, particularly in the area of power. RBI's Annual Policy Statement for the Year 2006-07 points out that sustaining the growth of manufacturing, which is the key driver of industrial recovery, would depend critically on bridging the large gaps in physical infrastructure.

Infrastructure Gap Costs India 1.5-2% GDP Growth: This has also been emphasised in the Planning Commission's draft Approach Paper to the Eleventh Five Year Plan. It is estimated that the infrastructure gap is costing India between 1.5% and 2% of GDP growth every year. Preliminary exercises made while preparing the Approach Paper suggest that investment in infrastructure will need to increase from 4.6% of GDP to between 7% and 8% in the Eleventh Plan period.

It has been estimated that India has a potential to absorb US$150 billion of investment in the next few years in the infrastructure sector. Funds of this magnitude cannot be found from budgetary resources alone. One has to reach out to the private sector, and private savings, and to the other mechanisms available in the market today to raise funds. Public-Private Partnership (PPP) in infrastructure development needs to be actively promoted. Both the Centre and the states have taken a number of initiatives in the last two years of the Tenth Plan to promote infrastructure development through PPP.

A Committee on Infrastructure, which was constituted under the chairmanship of the Prime Minister to define an agenda for action in this area, has identified an ambitious programme for infrastructure development that will cover the entire Eleventh Plan period. Other initiatives taken by the government on the infrastructure front include extension of tax concessions, which have been in place for over a decade now, notwithstanding the need to stick to the respective sunset clauses. A 'viability gap funding' scheme for encouraging PPP in infrastructure was conceived and operationalised in 2004-05. Another step is the setting up of the India Infrastructure Finance Corporation.

FDI Irritants Removed: As regards FDI, there are hardly any irritants on the policy front or in terms of major sectors that may need to be further opened up. Most of the sectors have been placed under the automatic route, except for a small negative list.

With fiscal reforms and budget consolidation, mandating a gradual reduction in fiscal deficit, government's pre-emption of resources is also expected to decline, reducing to that extent the crowding out of private investment.

One of the concerns on industrial growth has been a relatively slower growth of employment in this sector. Most of the labour intensive segments of the industry, except apparel, recorded lower growth rates. The Eleventh Plan's draft Approach Paper states that labour intensive mass manufacturing based on relatively lower skill levels provides an opportunity to expand employment in the industrial sector.

While employment growth has been relatively slow, skilled manpower is in short supply. The draft Eleventh Plan Approach Paper observes there are clear signs of an emerging shortage of the high quality skills needed in the knowledge intensive industries. There must be a major effort to expand the capacity of our higher education institutions while also improving quality.

While there has been a moderate acceleration in industrial growth in the last two years, it is still below both the targeted double-digit growth for the sector as well as the potential. According to Planning Commission's draft Approach Paper, over the Tenth Plan period (2002-03 to 2006-07), the rate of growth of manufacturing was 8%. To achieve a GDP growth of between 8% and 9% during the Eleventh Plan, the target industry growth rate should be 10% and manufacturing growth rate should be around 12%.

The recent performance of the Indian economy has been impressive, but we cannot afford to be complacent and risk overlooking factors that can potentially stall the growth momentum.