MOVING THE ELEPHANT

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Manmohan Singh became Prime Minister of India in May 2004 after the Congress Party regained control of the government. He helped start India down the road to economic reform as Finance Minister in the early 1990s during a previous Congress Party administration. FORTUNE’s report spoke with him during his visit to the U.S. in September.

What does this year look like in terms of GDP growth?

The last two fiscal years we’ve had a growth rate of over 7%. This year we expect to repeat that performance. If you look at the last 15 years, the general growth rate in our economy has been about 6%. It’s our ambition in the next couple of years to move the growth rate up to at least 8%, and maybe 10%. The basic reason is that India’s savings rate has shot up dramatically in recent years, from around 22% of our GDP to about 28%.

How will you make India more attractive for FDI?

Most sectors of the economy are open for private direct investment. Recently we opened up the real estate sector. One sector that is not open at this stage―and there is a lot of demand for it―is retailing. We have not made that decision yet-there are still some hesitations. But over a period of time this will open up. We are also getting ready to introduce an element of privatization into the defense industry.

What about the impact of higher oil prices?

As of now, the higher oil prices have been absorbed by the system quite well, because our growth rate this year will be 7%. But we haven't passed on the full burden of the rise in import costs to the primary consumers because we have reduced taxes. We have cut the profits of the oil companies. So the fiscal problem has in the process gotten a little worse. We cannot absorb further increases in oil prices by tax cuts, so there’s this uncertainty about the impact of higher energy prices on the growth rate of the economy.

India’s IT sector has experienced fantastic growth in recent years. But don't you need to do more to encourage manufacturing growth?

We need to pay a lot more attention to manufacturing. And the Indian manufacturing story is going to look better and better in years to come. In the last five years Indian manufacturing, under the pressure of international competition, has become leaner, meaner, and more efficient. You hear of more and more Indian companies not only doing well in India but acquiring companies aboad.

Are your reforms moving fast enough?

They are not moving fast enough for my taste. But politics is the art of the possible. We are a relatively slow-moving elephant economy, but when the elephant does move, it makes a sizable difference.