Thank you, Dr. Bergsten, for hosting me today to discuss India's role in the global economy and the future of India-US relations. These are two different, but I believe, inter-related ideas. It could not be at a more appropriate time, with less than a week left for Prime Minister Manmohan Singh's official visit to the United States.
In this city of great institutions, the Peterson Institute is of special significance for me, because on my last tour of duty here as Minister for Commerce at the Embassy in the early 1990s, I relied a great deal on the wisdom and analysis of the Peterson Institute to make sense of a world that was then caught in tectonic political and economic shifts.
That was also a time of momentous change in the direction of the Indian economy. It was a change that was triggered by the immediate cause of an external payment crisis, but it was in response also to a fundamental reorientation in the mindset that had begun in the 1980s on what it would take to accelerate the economic development of the world's second most populous nation.
India's nearly two decades of economic reforms have taken place in our own unique circumstances of a vibrant democracy and federal polity, unparalleled pluralism and diversity, and extraordinary social and economic challenges. They took place at a time when regional political parties were growing in strength and coalition politics was becoming the basis of governance in Delhi. Our reforms had to proceed on the basis of a deliberative process of forging and sustaining political and social consensus, which may have seemed slow, but provided an enduring foundation to move forward. We had to be mindful of the extreme economic vulnerabilities of hundreds of millions of people in India. And we had to be conscious that while we should open ourselves to the winds of change, we had to protect ourselves from being overwhelmed by storms. Like any prudent economic entity, we had to look at ourselves to make the right tradeoff between risks and returns.
Today, backed by a widespread national consensus, our economic policy is irreversibly on the path of competition and openness. It is inspired not only by the success that we have achieved over the past two decades, but it is also driven by the energy and aspirations of an increasingly young India.
We are now the second fastest growing economy in the world, which has averaged growth of 8.8 percent per year between 2004 and 2007, even as we strengthened our overall macroeconomic stability. Our manufacturing and services sectors have grown and modernized. Our external economic engagement has been transformed. And, we have shown, both in the 1990s and now, a capacity to withstand the worst impacts of international economic crises.
We are also aware of the challenges that lie ahead for us. Our first task is to restore the momentum of economic growth, which has moderated in the face of the global economic crisis. Though our financial sector remained sound, we were affected by the secondary impact of the crisis. Our stock values went down as foreign institutional investors withdrew money because of their own liquidity pressures at home. We faced a severe credit crunch and a sharp downturn in our labor-intensive export industries. Timely action by the Reserve Bank to ease interest rates (which were high) and ensure more liquidity and by the Government to cut value added tax and excise duties to stimulate domestic demand helped to manage the impact. We grew at 6.7 percent last year and will probably grow at 6.5 percent this year-a reasonable performance in the prevailing circumstances.
We are now seeing the return of investor confidence, reflected in both domestic investments and foreign capital inflows, which is accelerating business momentum, with industrial growth rebounding to touch double digits in recent months. The Government intends to ease the stimulus measures, gradually, next year. We have no doubt that with a savings rate of 35 percent of GDP, we can with prudent policies, sound investments and continuing reforms, return to a long-term growth path of 8-10 percent a year. As we seek to accelerate growth, our priority is also to make this growth inclusive. And for this we need to build our economy on all three legs-services, manufacturing, and agriculture.
The services sector, powered by the revolutionary changes in communications technology and India's human capital was the first to connect with the global economy, particularly the US economy. The dynamism and growth of the IT sector has had a transformative impact in India, nurturing a merit and performance driven ethos and instilling the confidence that Indians can compete with the best in the world. This sector continues to grow, branching out into new areas such as engineering design services and bio-informatics as well as moving up the value chain, with a greater focus on innovation. The expansion of the domestic services market, where IT penetration is still thin, also affords new opportunities.
In recent years India has also achieved a significant turnaround in manufacturing, particularly in low-cost, high-tech manufacturing or what has been described as "frugal engineering". For instance India has now emerged as the largest global hub for the manufacture of small, fuel efficient cars, with the indigenously designed Nano changing the paradigm of automobile production. Godrej, the Indian company, is building a refrigerator that will cost less than a hundred dollars for the rural market in India. At the other end of the spectrum, India's Chandrayaan Moon Mission was undertaken at one-sixth the cost of similar Moon Missions elsewhere, while India has emerged as the most cost-effective producer of small nuclear power plants. Expansion and diversification of the manufacturing sector is a key priority for generating employment. Particular focus will be on creating conditions to facilitate the growth of small and medium enterprises, which account for over one third of the industrial sector and make a key contribution to job creation.
Agricultural productivity has plateaued in recent years with the share of agriculture in the GDP now down to 18 percent. As this sector still supports around 60 percent of the population, catalyzing the next leap in agricultural productivity is a core national concern. Massive public investment is underway in expanding irrigation and building rural infrastructure which will be critical for developing agribusinesses and food processing, providing new opportunities for rural growth and development.
Education will be the key to empowering our people and transforming their lives. The sweeping education reforms currently underway aim both at massive expansion of capacity and at qualitative improvements at all levels-schools, higher education, and skill development, with a very significant increase in allocation of government resources for this sector.
Infrastructure development will be critical to support our growth objectives. It is estimated that we will need to invest $500 billion in infrastructure over the next five years and another $500 billion in the five years thereafter. And in building the roads, ports, airports, and high-speed rail freight corridors to connect India to itself and the world and in powering a fivefold expansion in electricity generation, we will seek an increasing role for the private sector, opening up exciting business opportunities, which will become new drivers of growth. Building this infrastructure will be an enormous task. But, I also believe that as we have gone down the path of economic reforms, we have now a reached a stage where we have built institutional capacities, management capabilities, and regulatory structures that enable mobilization and deployment of massive resources.
Even more than resources, we will seek to focus on stimulating innovations in products, systems, and development processes to find solutions that are suited to our contexts and circumstances, which give us modern and efficient infrastructure; reach education, communication and healthcare to the farthest and the poorest areas; ensure our food security; and make conventional energy cleaner, renewable energy more affordable, and energy use more efficient. Addressing the challenge of climate change is a high priority for us. Our emphasis on climate change is reflected in our ambitious National Action Plan on Climate Change which comprises eight missions. These draw from our civilization tradition that treats nature as a force of nurture; from our contemporary needs; and, from our desire to be good global citizens.
Although much of our demand is generated domestically and most of the investment is financed by our own savings, foreign investments and trade will continue to be an integral part of our growth and modernization process. And we will continue to address reforms that stimulate further investments and collaborations in India and enable us to meet our key priorities. Indeed, the most fundamental change in the Indian economy is that it is now increasingly part of the currents of globalization. Our trade has grown; our net capital inflows have increased and Indian companies are now increasingly investing abroad to exploit synergies, improve market access and acquire technologies. This is a trend that we see continuing as Indian companies increasingly seek to position themselves in the global market. A revival of the global economy would be important for India to realize its full growth potential.
Just as India's success is, in its own modest way, an affirmation of the values of democracy, pluralism, individual freedoms and rule of law, so too the economic progress of one-sixth of humanity will be of great consequence to the world. A nation of one billion people, experiencing a growth rate of 8-10 percent, driven principally by the domestic market and savings, could be an anchor of global economic stability and will certainly be a great economic opportunity, whether it is in the field of consumer goods, urban services, rural development and public infrastructure. And, in addressing our own challenges of clean and renewable energy, affordable healthcare and food security, we can contribute to finding solutions that apply to the world.
With our growing global integration, we are engaging more purposefully with the world. And, as our stakes in the global order are increasing, we recognize, too, that we must assume greater responsibility for shaping it and have a greater voice in the counsels of global governance, including the U.N. Security Council.
We will continue to support an open, stable global trading regime that is a positive sum game, reflecting a fair and equitable balance of interest which is the spirit in which we are approaching the revitalization of the Doha Round in the WTO. We also support the reform and expansion of the global architecture of economic governance and coordination to reflect contemporary realities, make it more representative and improve its effectiveness in dealing with the challenges of the 21st century. India will always participate constructively in international efforts, whether we are seeking arrangements for trade or climate change or investment.
Our economic future will depend on global peace, stability and security. And, nowhere is that question of greater importance than in Asia, where the center of gravity of global opportunities and challenges of the 21st century is shifting. Some of these challenges, like proliferation and extremist violence, weak states in uncertain transitions or facing internal instability, are in India's immediate neighborhood, but present threats that are global in reach. The security of sea-lanes of communication in the Indian Ocean and in the seas around India are vital to our security and our economy. As our economic activities become reliant on cyberspace and outer space, we will increasingly need to ensure security and fair access to these common spaces.
We will approach our security challenges by striving to build, in partnership with others, on the historic opportunity that we have at this stage in human history to create a global order and international arrangements defined by consensus and cooperation, not by divisions and domination. We approach our neighborhood on the premise that our inter-linked destinies demand a cooperative relationship of shared prosperity and security. And, we will work with our partners in the region and beyond to address challenges like extremism, terrorism and proliferation.
The United States has been an important partner for India in the pursuit of our national development goals and our efforts to foster a climate of stability and peace in the world. Over the last decade, India-US relations have undergone a remarkable transformation, with the process making a seamless transition through election cycles and changes in governments in both countries. This is a relationship that increasingly reflects the character of the relationship between the world's two largest democracies. It has met the test of public goodwill and broad political support in both countries. It stands on the bedrock of shared values and is invigorated by our many converging interests. Our political engagement has intensified, our mutual understanding has deepened and our collaboration has expanded into new frontiers. Our security and defense cooperation has expanded significantly, especially in areas such as maritime security and counter-terrorism. And, the India-US civil nuclear agreement of October 2008 was as much an instrument as a symbol of this transformed India-US relationship.
Nowhere is the vitality of our relationship more visible, and nowhere is its potential more promising than in the ever-expanding partnerships of enterprise, investment, trade, research and innovation that are being built by Indians and Americans. Our trade has doubled in the last five years; US exports to India went up three times. Our investments are growing rapidly in both directions. While trade in goods has declined in 2009 as a result of the constraint in US demand we hope that as the US economy rebounds we will be able to recapture the momentum in our trade flows. Trade in services has continued to grow and is broadly balanced with over $10 billion of US exports and over $12 billion of Indian exports in 2008.
We are two nations blessed with talent, enterprise and innovation, with a strong emphasis on science and education. We have a sense of comfort derived from our shared commitment to democracy, pluralism, rule of law and individual liberty, and, above all, a new warmth and purpose in our political ties. I see our future economic partnership not merely in terms of opportunities for multiplying trade and investment, but also for finding solutions to the pressing global challenges of our times, for creating technological leadership for our two countries, for shaping the nature of economy and business in the 21st century, and for bringing prosperity not just to our people, but to the world.
We are at an important juncture, with less than a week left for the meeting between Prime Minister Manmohan Singh and President Obama on November 24. This will be an opportunity for us to consolidate all that we have achieved in the recent past and turn our progress into a springboard for deepening our cooperation and setting new directions in our relationship. Even as we strengthen our growing cooperation in security, counter-terrorism and defense, we will give high priority to deepening economic ties. Besides discussing government initiatives, Prime Minister and President Obama will meet our reconstituted CEO's Forum to be briefed on how we can expand our economic cooperation. We will also increase our emphasis on cooperation in clean and renewable energy, education, science and technology and agriculture. The agenda reflects the extraordinary breadth of our bilateral engagement and the vision of cooperation of our two leaders. At the heart of their effort will be to create a framework that brings our two people into a closer relationship of shared endeavors, which will not only be of great benefit to our two nations, but also of value to the entire world.