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News Item - Hindu Business Online on Feb 02, 2009

Lecture at the Dhanalakshmi College, Mahabalipuram.

India gets approximately 97 per cent of its total investment through domestic sources. The balance three per cent is what constitutes foreign investment. Yet, it is this meagre foreign investment that gets a disproportionately high share of media and debating space in the country, said Mr M.R. Venkatesh, Chartered Accountant.

Speaking with students of the Dhanalakshmi College, Mahabalipuram, as part of the BL Club lecture series presented by Indian Overseas Bank, Mr Venkatesh pointed out that it was a high domestic savings rate and not Government programmes or policies that had insulated the country against the global meltdown.

According to him, most Western countries, notably the US, now had a negative savings rate. Consequently, these countries were dependent on the rest of the world for capital, even to finance their own consumption. Consequently, instead of capital flowing from the rich countries to the poor, globalisation has been turned on its head. In today’s world, capital flows mostly from the poor to the rich countries.

Similarly, thanks to a variety of factors, the US had lost its competitive edge in the manufacture of export goods. While the US was an engine of global consumption, the rest of the world supplied goods to the US while also parking its export surplus with the US. In effect, the world was not only producing goods for the US, but also financing its consumption.

This, according to Mr Venkatesh, could not go on forever and the system was already under strain.

Naturally, as the engine of global consumption sputters, the rest of the world is unable to produce and export. The only substitute for this export-driven economic model adopted by most Asian countries, according to Mr Venkatesh, is to increase domestic consumption.

Unfortunately for many Asian countries, thanks to a variety of domestic factors including culture, an increase in domestic consumption was virtually ruled out. Therefore, most Asian countries were sure to face the consequences of the American recession.

India, despite its substantial savings rate, is also substantially consumption-driven. Therefore, if appropriate policies are put in place, it could counter the fall in global demand by countering domestic consumption. For this, it needs to cut its indirect tax rate, create better infrastructure and improve overall governance, he said.

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