Post on 04-Apr-2018
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A report by Hanmer MSL, part of MSLGROUP
21 years of economic reforms:The journey so far and the road ahead
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EXECUTIVE SUMMARY
REFORMS: A BRIEF HISTORY
a. Launchpad
b. Falling short
KEY ACHIEVEMENTSa. Growth
b. Innovation
c. Investment
d. The battle against poverty
e. Literacy
WHATS LEFT
a. Social sector
b. Hunger
c. Corruptiond. Infrastructure
e. Administrative reforms
f. Fiscal management
WHAT LIES AHEAD
a. Growth
b. Investment
c. Private and public consumption
d. Will the RBI relent?
TOP PRIORITIES
INDIAS ECONOMIC JOURNEY
INDUSTRY MILESTONES
INDIA AT A GLANCE
04
06
10
15
19
25
26
27
28
Table of contents
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Executive summary
4
On July 24, 1991, with the country dangerouslyclose to defaulting on its debt and with foreign
exchange reserves enough to pay only for
three weeks of imports, then finance minister
Manmohan Singh presented a landmark
budget.
India gave up socialism, adopted liberalisation
and started shaking off the fetters that had
held it back for far too long.
Days earlier, the country had airlifted 47 tons
of gold to the Bank of England as collateralfor debt, and turned in desperation to the
International Monetary Fund (IMF) for aid.
Singh went on to devalue the rupee, started
unravelling the licence raj and began opening
the country to foreign capital. Suddenly,
multinationals such as Coca-Cola, which had
been driven out of India years earlier, were
being wooed to return.
Singh concluded his speech in Parliament by
quoting Victor Hugo: No power on Earth can
stop an idea whose time has come.
A moment of humiliation was turned into one
of hope. It was historic.
Since then, India has averaged growth of 7%,
second only to China. India has also witnessed
the rise of the middle-class, the worlds
largest, which has contributed to and partaken
of the growth in equal measure.
However, economic reforms are not an end
in themselves. Growth is not a wholesomeindicator. Equally important are quality of
life, literacy, the battle against poverty, and
equitable growth. The last has spawned the
most heated debates. While supporters of
the economic policy say that the effect on the
overall population will inevitably be slow, its
critics assert that reforms have only made the
rich richer and the poor poorer.
In Indias cities, the changes are obvious
the once-ubiquitous Premier Padmini
has disappeared while Marutis, Hyundais,Hondas, Mitsubishis, Mercedes and Skodas
jostle for space on cramped roads. Malls and
multiplexes have become the new places to
be seen at.
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5
In economics it is a
far, far wiser thing
to be right than to
be consistent.
-John Kenneth
Galbraith,
economist
A study of
economics usually
reveals that the
best time to buy
anything is last
year.
-Marty Allen,
comedian
However, the paradox is apparent as youtravel to the rural heartland. India has fared
miserably in agriculture, which is growing at a
mere 2% on average even as grain stocks are
ravaged by rodents, hundreds of thousands
die of starvation and farmers in Vidarbha
region and Andhra Pradesh province commit
suicide due to crippling debt.
Of what use are reforms if children dont have
schools to go to, child labour is rampant, and
healthcare and sanitation are all but absent,
ask the critics. Reforms cannot succeed unless
they are coupled with social renewal. An
economy that works cannot be built on weak
social foundations.
The good news is that India is now a resilient
economy that is relatively insulated from the
global crisis. All it needs is another major
push.
This is what India is looking forward to as
Finance Minister Pranab Mukherjee rises topresent the union budget in early March. A
lot has been achieved in the past 21 years.
Lots more needs to be done a concrete
policy on FDI in core sectors, a faster pace of
public sector disinvestment, administrative
reforms that are key to maintaining growth
and building a strong economy, elimination
of wastage in social sector programmes and
sustainable spending.
None of this easy, and much of it has seriouspolitical connotations. Several crucial
provincial elections are being held this year;
the temptation to use the budget as a tool to
attract votes will be immense.
The country has also seen a mass campaign
against corruption and the government has
come off looking badly. There could be a
tendency to neutralise the sentiment with
populist decisions that would eventually hurt
the economy.
Finally, India is one of the few shining lights
amid the turmoil in the global economy. Its
growth is based on internal demand and the
vibrant services sector. However, India is not
insulated against the gloom. The challenge
before Mukherjee is to use the situation to
the countrys advantage by pushing through
key reform such as FDI in retail, which could
open the floodgates of foreign investment and
further bolster the economy.
Will he? Time will tell.
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6
When India gained independence fromBritish rule in 1947, there was hope but no
deliverance.
A country that should have reached out to
the world, giving a wide canvas to its huge
potential and skill instead adopted an inward
looking economic model, sceptical of free
markets and international trade. Socialism,
with an emphasis on self-sufficiency and the
public sector, became the mantra.
As the government decided that the answerto poverty was tax-and-spend, peak income-
tax rates hit 97.75% in the 1970s, and growth
averaged a mere 3.5% the so-called Hindu
Rate of Growth while other Asian economies
managed double that. To top it all, the poverty
ratio was not even dented in the 30 years that
followed.
Unable to fathom why Nehruvian socialism
wasnt working, the government sought to
put growth on the fast track in the 1980sby borrowing big. It succeeded for a while,
with growth accelerating to 5.5%, but it was
unsustainable, eventually resulting in the
foreign exchange crisis of 1991.
Ultimately, it fell upon a political lightweight,
PV Narasimha Rao, to turn around the
economy. Rao was the quintessential political
backroom player, crafty and well versed in
the way politics and the bureaucracy worked,
yet never a public icon. After Rajiv Gandhi
was assassinated in 1991 before the general
election and the Congress formed a minority
government, he was the partys surprise
choice for prime ministership.
While Rao continued to spout the partys
economic mantra in public, it was clear to
him after the collapse of the Soviet Union
that socialism was past its sell-by date. He
already had a shining example in China of
what reforms could do Deng Xiaoping had
sparked off an economic revolution, freeing
markets and opening up the country to
investment.
Reforms: A brief history
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7
Economics is a
subject that does
not greatly respect
ones wishes.
-Nikita Khrushchev,
Soviet leader
In economics, the
majority is always
wrong.
-John Kenneth
Galbraith,
economist
India, Rao knew, had no choice. Reform, evenif slow and pragmatic, was the only answer.
A political storm followed the opposition
alleged that Rao had sold out to the IMF but
two years of financial stability and 7.5% growth
changed all that. Soon, most political parties
were singing the reforms tune. The process
had taken deep root and it continued, even if
haltingly at times.
LaunchpadWhile labour law reform remained neglected
because of its political implications, India
emerged as a force in intellect-intensive
industries such as computer software.
By the time the Asian financial crisis hit in
1997, India was financially strong enough to
keep growing though it slowed without
great damage or having to seek aid. This was
around the time the software industry came
into its own, bagging major Y2K bug-clearingcontracts.
The crisis second wave in 2001 saw India in
an even stronger position with corporations
outsourcing their software and business
services to Indian firms.
While India has never been able to matchChina in its manufacturing and export might,
largely due to restrictive labour laws, it has
come to be seen as a services hub.
Indian laws make it very tough to shed
workers, making entrepreneurs wary of setting
up labour-intensive factories for exports. One
indicator of how this hurt industry was that,
as a garment manufacturing hub, India was
overtaken by Bangladesh!
However, India has several positives to showfor every negative. For instance, in 1991,
Manmohan Singhs budget lowered the
maximum import duty to a still whopping
150% from an unimaginable 300%. Today,
the standard import duty is 10%, roughly the
average for South-East Asia. At that time,
more than 800 items were reserved for
production by small-scale industries, and
more for the public sector. These reservations
have been brought down substantially.
Controls on industries, imports and foreign
exchange are much more relaxed. Private
investment in previously restricted sectors,
such as telecom and infrastructure, has shown
great results.
The sceptics were proven wrong. In the
2000s, India averaged 8.5% growth. With the
abolition of controls, industry flourished and
many companies went on to make a mark
globally. Indian companies were taken over
by multinationals (Coca-Colas acquisitionof Parle brands, for instance) while Indian
firms took over iconic foreign ones (the Tatas
acquisition of Jaguar is an example).
Falling short
The failures on the social front arent due
to lack of resources. In fact, social sector
spending has risen consistently over the last
two decades. The problem lies in the delivery
of service, most notably in the provision
of affordable food to the poor. Corruption
and wastage led to the failure of the Public
Distribution System, through which subsidisedPhoto by Terinea IT Support on Flickr
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8
Did you ever
think that making
a speech on
economics is a lot
like pissing down
your leg? It seems
hot to you, but
it never does to
anyone else.-Lyndon B Johnson,
former US president
First rule of
Economics 101:our desires are
insatiable. Second
rule: we can
stomach only three
Big Macs at a time.
-Doug Horton,
clergyman
grain and kitchen fuel were supplied to thedeserving.
There are other worrying signs. Indias
proportion of underweight children a
measure of malnutrition was the third-worst
in the world at 46.7%. There is an internal
militant communist insurgency dubbed
Naxalism that is spread over several
provinces and has deprived a large part of
central India from the economic benefits
enjoyed by the rest of the country.
In recent times, there has been an outcry
against corruption, which has affected
the entire administrative chain. Ministers
have been jailed for crimes ranging from
undervaluing telecom spectrum to taking
bribes in return for construction contracts
for the Commonwealth Games held in
Delhi. Social activist Anna Hazares call for acountrywide agitation to demand an effective
anti-corruption law was answered by citizens
across the socio-economic spectrum. The
governments image and the politys as a
whole suffered.
Indias journey has been long and arduous.
As it takes on the challenges listed above, a
longer and tougher struggle lies ahead.
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The new government, which assumed office barely a monthago, inherited an economy in deep crisis. The balance ofpayments situation is precarious.
We have been at the edge of a precipice since December1990 and more so since April 1991. The foreign exchangecrisis constitutes a serious threat to the sustainability ofgrowth processes and orderly implementation of ourdevelopment programmes.
Internal public debt of the central government hasaccumulated to about 55% of GDP. The burden of servicing
this debt has become onerous. Interest payments aloneare about 4% of GDP and constitute almost 20% of thegovernments total expenditure. Without decisive actionnow, the situation will move beyond the possibility ofcorrective action.
There is no time to lose. Neither the government nor theeconomy can live beyond its means year after year. Theroom for manoeuvre, to live on borrowed money or time,does not exist any more.
The time has come to expose Indian industry to
competition from abroad in a phased manner.
After four decades of planning for industrialisation, we havenow reached a stage of development where we shouldwelcome, rather than fear, foreign investment.
Few would disagree that I am one of the most harassedfinance ministers in recent times.
Victor Hugo once said: No power on earth can stop an ideawhose time has come. I suggest to this august house thatthe emergence of India as a major economic power in the
world happens to be one such idea. Let the whole worldhear it loud and clear. India is now wide awake. We shallprevail. We shall overcome.
1950-80 1980-92 1992-2003 2003-10
0
2
4
6
8
10
3.5%
5.5%6%
8.5%
INDIAs GDP GROWTH
Excerpts from Manmohan
Singhs 1991 budget speech
9
Source: Economic Survey 2010-11
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While India has made rapid strides on various
counts, its growth has often been outpaced by
the Asian tiger economies. On the other hand,
its emphasis on slower but stronger, risk-
free growth has held it in good stead during
troubled times.
Here are some of the long strides taken during
the last two decades.
Growth
The quick growth often touching 8.5% over
the last decade found a paradox in the slow
pace of reforms. The impact was felt after
years.
It was only in 1994-95 that GDP growth hit7.5% (1994-95 to 1996-97). Growth averaged
only 5.5% between 1997 and 2002 due to
global economic troubles (1997-99), two
droughts (2000 and 2002) and a recession in
2001.
From 2005 onwards, however, growth
averaged 9.5%. The recession of 2007-09
again slowed growth to 6.8%, but it bounced
back to 8% and 8.5% respectively over the
next two years.
GDP GROWTH IN POOR STATES
Source: Central Statistical Organisation data
States
Mean %
growth
(200004)
Mean %
growth
(200409)
Bihar 4.5 12.4
Chhattisgarh 6.1 9.7
Jharkhand 1.9 8.5
Madhya Pradesh 1.9 6.6
Orissa 4.8 10.2
Uttar Pradesh 3.3 6.7
All India 5.6 8.5
Key achievements
10
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The savings rate shot up from 21.5% of theGDP in 199192 to 34% in 201011. As a result,
investment levels eventually rose to 37% of
the GDP from 22.1%, enabling sustainable
growth of more than 8%. In laymans terms,
the higher the domestic savings rate the less
dependent India is on foreign inflows. This,
in turn, makes it easier to tide over financial
turbulence and strengthens the economy.
The savings rate apart, Indias per capita
income is up from $300 in 1991 to $1,700
today. This has led to a tax collections spike,
which in turn has financed the rise in social
and infrastructure spending.
These impressive growth and savings figures
were not achieved by setting up sweat shops factories using cheap, often exploited
labour to churn out goods for exports that
are preferred by several Asian countries,
most notably China. Most of Indias exports
are based on the intellect, such as software
services.
It should be noted that though India is
known for software services, they account for
only 2% of the GDP. Other services legal,
engineering, R&D exceeded $10 billion in201011.
As much as exports of these services matter,
India remains driven mainly by domestic
demand.
Innovation
Jugaad has become a buzzword in India.
Loosely translated as making do, it signifies
Indians success in producing goods cheaper
than most other countries can with only a
fraction of the resources available elsewhere.
The Nano, the worlds cheapest car, produced
by the Tatas is an example of this ingenuity.
Savings rate 198081 199091 200001 201011
As % of GDP 18.5 22.8 23.7 34
Source: Economic Survey (201011)
SAVINGS RATE
The initial production run cost the equivalent
of $2,000 and has found a rival in a car being
launched by Bajaj Auto for the equivalent of
$3,000. The Nano, incidentally, claims to run
25 kilometres per litre of petrol far more
than any other car in India.
Most cellphone calls cost less than a rupee,
while hospitals such as Narayan Hrudalaya
provide major surgeries at a fifth of the cost in
the West.
Over time,jugaad has come to imply
innovation.
Investment
When India began welcoming foreign direct
investment (FDI), many feared that Indiancompanies would not be able to compete and
would be gobbled up by multinationals.
That didnt happen. Not only did Indian
companies hold their own, many used the
opportunity to go global themselves
outbound FDI as a proportion of GDP is 0.9%,
higher than Chinas 0.6%.
Tata Steel, for instance, acquired European
steel major Corus and Tata Motors bought
Jaguar Land Rover. The Birla group acquired
Canadian firm Novellis to become the sixth
largest aluminum company in the world, while
Bharti Airtel took over Zain and is present in 14
African countries.11
History shows
that where ethics
and economics
come in conflict,
victory is always
with economics.
Vested interests
have never been
known to havewillingly divested
themselves unless
there was sufficient
force to compel
them.
-BR Ambedkar,
author of the Indian
constitution
The first lesson
of economics is
scarcity: There is
never enough of
anything to satisfy
all those whowant it. The first
lesson of politics
is to disregard
the first lesson of
economics.
-Thomas Sowell,
writer
Photo by Balaji.B on Flickr
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12
Indias FDI norms have been the subject
of much debate. The significant barriers,
especially in retail, ensured that inflows were
never as high as they could have been FDI
peaked at $26 billion in 2009-10 before
slipping to $19.4 billion the next year.
That said, most leading multinationals do
business in India. Accenture and IBM have
more employees here than in the US. Intel
and Microsoft use India as R&D hubs, while
Suzuki, Hyundai, Bosch, Pfizer and others use
it as a manufacturing base.
One reason why FDI has been steady is that
Indias stock markets plagued by price
manipulations, fraud and delayed settlements
in the past have been cleaned up.
In 1992, following a large securities fraud,
India created a fully electronic exchange
the National Stock Exchange even before
London or New York did. This ended most
rigging.
Shares were held only in electronic form
and settlements were down to T+3 levels
(payment after three days of the transaction).
Today, Indias stock markets are among the
most efficient in the world.
Before reforms, India got foreign aid by the
bucketful but had little to show for it. While at$5.9 billion (2009-10) it still seems like a lot, it
pales in comparison to the foreign investment
of $51.2 billion and remittances from overseas
Indians at $53.9 billion in the same period.
Remittances have helped balance thevolatility of foreign capital in tough times. This
has allowed the government to decline aid
from smaller donors, asking them to approach
non-profits directly.
The country has opted instead for debt
from the World Bank. It is an indicator of the
countrys confidence that its soft loans have
fallen from almost 100% in the 1970s to less
than 30% today.
India, in fact, has become a substantial donor.Among its recent grants was $1 billion to
Bangladesh. Credits worth $5 billion to African
countries were also announced recently.
$26 billion
FDI in 2009-10; it slipped to $19.4 billion the
next year
0.9%
Outbound FDI as a proportion of GDP; in
China, it is 0.6%
The battle against poverty
Many believe that the reforms have
bypassed poor sections such as the Dalits
(untouchables as per the now-abolished caste
system; they still face discrimination across
India) and regions. This, the critics say, is
I learned that
economics was
not an exact
science and that
the most erudite
men would analyse
the economic
ills of the world
and derive atotally different
conclusion.
-Edith Clara
Summerskill, UK
politician
A large part of
crime is economics
if people are
working and have a
home and family to
support, then
I believe you
can reduce the
crime rate.-Vincent Frank,
musician
Photo by Niyantha on Flickr
Photo by Tobias Leeger on Flickr
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13
why the desperately poor have radicalised andtaken up Naxalism. Almost one-fourth of India
is affected by this campaign against the state.
The fact is that the proportion of people
claiming to be hungry in some or all months
fell from 17.3% in 1983 to 2.5% in 2004-05.
Six backward states, accounting for half of
Indias population Uttar Pradesh, Bihar,
Madhya Pradesh, Orissa, Chhattisgarh and
Jharkhand grew fast, many faster than the
national average, though admittedly from a
smaller base.
Between 2004 and 2009, growth surged
in poor northern and central states Bihar
(12.4%), Chhattisgarh (9.7%), Jharkhand
(8.5%), Madhya Pradesh (6.6%), Orissa
(10.2%) and Uttar Pradesh (6.7%).
Indias growth could have been possible only
if the bulk of the population improved its
productivity. While national growth raised tax
revenues, which was shared with the states,it was a case of trickle-up, not trickle-down
growth.
Source: Food and Nutrition in India: Facts and
Interpretations, by Angus Deaton and Jean Dreze in
Economic and Political Weekly, February 14, 2009
Homesreporting
hunger
1983 199394 19992000
200405
% ofpopulation
17.3 5.2 3.6 2.5
Source: Economic Survey (201011)
Poverty ratio 199394 200405 200910
% of population 45.3 37.2 32
POVERTY RATES
HUNGER RATE
The growth and, perhaps, rising literacy levelssparked a demographic transformation.
Over the last decade, for the first time since
independence, the number of children aged
0-6 years declined by 3.08%. The sharpest
decline was in poor states.
Again for the first time since independence,
the number of workers is rising and that of
dependents is falling.
China reaped a demographic dividend earlier
thanks to Maos one-child policy, but thatcould backfire once the country starts ageing.
The condition of Dalits was thought to be
the worst, especially in Uttar Pradesh with
a population of 200 million, Indias biggest
state. However, Dalits have emerged as a
major political force. Today, the state has a
Dalit chief minister, Mayawati.
A recent survey in two districts of Uttar
Pradesh showed great leaps in Dalits living
standards TV ownership was up from zeroto 45%, cellphone ownership up from zero
to 36%, two-wheeler ownership up from zero
to 12.3%, and children eating leftovers down
from 95.9% to 16.2%.
The findings on Dalits social status were even
more striking. Cases of Dalits being seated
separately at weddings were down from 77.3%
to 8.9%, cases of non-Dalits accepting food
at a Dalit home were up from 8.9% to 77.3%,
bonded labour incidence was down from 32%to 1%, the Dalit proportion running their own
businesses was up from 6% to 37% and the
proportion of those working as agricultural
labourers was down from 46.1% to 20.5%.
Today, many Dalit businessmen have become
millionaires and there is also a Dalit Chamber
of Commerce and Industry.
While the upliftment of Dalits is far from
complete, they have gained substantially from
reforms.
All of the problems
were facing with
debt are man-
made. We created
them. Its called
fantasy economics.
Fantasy economics
only works in a
fantasy world. Itdoesnt work in
reality.
-Michele Bachmann,
US politician
Economics has
never been a
science - and it is
even less now than
a few years ago.
-Paul Samuelson,
economist
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14
Literacy
Literacy rates are closely linked to the poverty
ratio. It is no surprise then that as Indiaspoverty ratio dropped, the literacy rate shot up.
Since 1991, Indias literacy rate rose by a record
21.83% to 74.04%. In the earlier two decades,
it rose only 17.8%.
Again, the poorer states fared better. In
the last decade, the improvement in all-
India literacy (9.7%) was exceeded by Bihar
Source: Census 2011
Literacyrate 195051 196061 197071 198081 199091 200001 201011
% ofpopulation
18.3 28.3 34.4 43.6 52.2 64.8 74
LITERACY TRAIL
(16.82%), Uttar Pradesh (11.45%), Orissa
(10.37%) and Jharkhand (16.07%).
Women did even better on the literacy scale.
Female literacy improved dramatically
by 11.8% across India, and higher in Bihar
(20.2%), Uttar Pradesh (17.1%), Orissa (13.9%)
and Jharkhand (15.3%)
Every nation on
the Earth that
embraces market
economics and
the free enterprise
system is pulling
millions of its
people out of
poverty. The freeenterprise system
creates prosperity,
not denies it.
-Marco Rubio, US
politician
Geography
has made us
neighbours. History
has made us
friends. Economics
has made us
partners, and
necessity has made
us allies. Thosewhom God has so
joined together,
let no man put
asunder.
-John F Kennedy,
former US president
Photo by United Nations Photo on Flickr
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16
There can be no
real individual
freedom in
the presence
of economic
insecurity.
-Chester Bowles,
former USdiplomat
If all economists
were laid end toend, they would
not reach a
conclusion.
-George Bernard
Shaw, writer
CorruptionThis is the hottest topic of discussion
in India today, and has implications for
businesses.
After enduring two generations of
criminals and corruption in politics and
the bureaucracy, public anger has boiled
over. A mass campaign for effective
anti-corruption laws led by social activist
Anna Hazare found resonance across the
country. It was especially popular amongthe youth and shook the government into
action.
While the law that the government tabled
in parliament which was eventually not
voted on became the subject of heated
debate, there is little doubt that the
campaign marked the rise of an assertive
middle class and media. Will it affect
election results in the end? The jurys out
on that.
Most people believe that corruption
is getting worse and that politicians
are catalysing the rot in the system.
The Corruption Perception Index of
Transparency International ranks India
87th out of 178 countries, behind China
(78th). India has actually improved its score
slightly, from 2.7 out of 10 in 2002 to 3.3 in
2010. This may be because several areas
licenses, foreign exchange norms, etc have been deregulated, which reduces the
avenues of corruption.
There are, however, areas where corruption
is still rampant real estate and
government-financed infrastructure, for
instance. There is too much room here for
political discretion and favouritism. This
affects the business climate and investor
sentiment.
As far as criminality in politics goes, 150of the Lok Sabhas 545 seats were won by
those with criminal records; in the 2004
election, 128 such politicians won.
The glacial pace of the judicial process
allows criminals to dominate polls through
bribery and intimidation. Obviously, this has
led to greater corruption in government
An effective Lokpal an anti-corruption
ombudsman that has the powers to
investigate ministers, the bureaucracy andeven the Prime Ministers Office would go
a long way in reducing corruption. Another
option is to fast-track cases against
politicians.
87Indias rank, among 178 countries, on
Transparency Internationals Corruption
Perception Index
Photo by India Kangaroo on Flickr
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150Number of Lok Sabha members with
criminal records. The Lok Sabha, the lower
house of parliament, has 545 members
in all. In the 2004 election, 128 politicians
with criminal records were elected to it
InfrastructureLack of infrastructure could prove to be
a major hurdle to the countrys progress.
It could impede the delivery of healthservices and education, and prevent social
schemes from reaching the needy.
Here, too, corruption is endemic because
roads, power, ports, railways and telecom
are all linked to natural resources, land
and government contracts all of which
provide ample opportunity for kickbacks.
No agricultural land can be converted into
non-agricultural land for industry without
state permission, which too providesopportunities for corruption.
India requires transparency in policies
and procedures, and an end to political
discretion in these areas.
Administrative reformsWhile economic reform is deep-rooted
and well on its way, governance reforms
are languishing. If India is to maintain its
growth rate and ensure that the benefits
of the economic miracle reach everybody,it cannot afford to ignore governance
reforms.
Reform of the judicial system will improve
detection and lower corruption; it will
also improve contract enforcement and
protection of property rights.
If national resources such as mines
and telecom spectrum are auctioned
transparently, it too will improve the
economic environment and benefit theconsumer more.
Fiscal managementThe countrys fiscal situation is a concern,
as is the management of the fiscal deficit
and foreign borrowings. The union
budget is expected to bring an admission
that the fiscal deficit target of 4.6% will
be missed, wrote James Lamont in the
Financial Times on January 26. Fiscalrestraint will become more difficult the
nearer the Congress party gets to the 2014
parliamentary elections, which are often
won by doling out freebies and welfare
programmes to the poor. Already a vote-
winning food security bill is in the works,
he added. The impact of this bill on the
deficit is anybodys guess.
External stresses are likely to remain a
theme for the rest of FY12 and in H1-FY13.
We expect little relief for the trade deficit
as exports slow and the reduction in the
import bill is limited by oil imports and
investors huge appetite for gold. Hence,
despite stable flows in the form of services
exports and remittances, funding the
current account deficit forecast at 3.1%
of GDP in FY12 and 2.8% in FY13 may
prove challenging, predicted Standard
Chartereds Global Focus 2012 report.
Isnt it interesting
that the same
people who laugh
at science fiction
listen to weather
forecasts and
economists?
-Kelvin Throop III,
fictional charactercreated by RAJ
Philips
An economist is
an expert who will
know tomorrowwhy the things
he predicted
yesterday didnt
happen today.
-Laurence J Peter,
academic
Photo by celblau on Flickr
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According to a recent Business Monitor International (BMI) report,real GDP growth is expected to slow to a three-year low of 6.8%
in FY2011-12 on the back of the rising cost of capital (the central
bank has been raising interest rates regularly to curb inflation that
hit 12% at one stage), receding export growth and slowing credit
expansion. We expect activity to recover somewhat in FY2012-13
(with our full-year growth forecast currently at 7.3%) as the central
bank starts to cut its policy rates, which have essentially choked the
Indian economy over the past year, said the report titled Economic
Analysis An Economic Resurgence or the Calm Before the Storm?
Growth
While its widely expected that India will escape the pain that many
Euro zone economies as well as the US are experiencing, the BMI
report states that purchasing managers indices (PMI) suggest a
rebound in overall economic activity. Manufacturing PMI rose from
its September 2011 low of 50.4 to 57.5 in January 2012 an eight-
month high. The PMI for services rose to 58.0 from a low of 49.1 in
October 2011.
This could lead to a reassessment of BMIs growth projection for
India. However, if growth does not exceed the 6.8% predicted, itwould mean a sustained slowdown through H2 FY2011-12. If that
happens, growth could fall to 6.4% year-on-year (y-o-y) in H2 from
7.3% in H1.
Also, a Financial Times report on January 26 said that many
industrialists have been discouraged by growth slipping from
forecasts of 9%. Double-digit growth, said Richard Iley, economist
at French bank BNP Paribas, to the newspaper, is firmly in the rear
view mirror.
Despite the encouraging PMI data, macroeconomic trends suggest
a weakening economy. Q3 of FY2011-12 started badly, with Industrialproduction falling for the first time on a y-o-y basis since June 2009.
Exports fell too. November trade data showed growth falling to
3.9% y-o-y.
Finally, commercial credit growth, which has been falling since the
beginning of 2011, dropped to 13.4% y-o-y in December 2011 a
level last seen in December 2009.
Until the Reserve Bank of India (RBI) loosens its official stance
on monetary policy, which we do not see happening until Q212,
consumption and investment activity are likely to remain weak.
Furthermore, we do not see the country exporting its way out of thisdownturn, nor is the government in a position to enact stimulative
fiscal measures, the BMI report said.
19
What lies ahead
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20
The deteriorating global situation will alsoimpact Indian exports this year. World GDP
growth could slow to 2.8% (it was 3.1% in 2011),
the US economy will continue to stagnate and
the Euro zone seems to be on the brink of a
recession. BMI expects net exports to contract,
with their growth clocking -6% and -3.6% in
FY2011-12 and FY2012-13 respectively.
High inflation, delays in government approvals
and rising interest rates have also affected
business sentiment. Expectations that Prime
Minister Manmohan Singh, said the Financial
Times, would use his second term for bold
reforms have quickly drained away. Instead,
the Congress party-led coalition has suffered
repeated setbacks at the hands of the
opposition, its allies and civil society activists.
We in India have had our share of problems.
The Indian economy has slowed down
and Inflation edged up. Concern about
corruption moved to the centrestage, Singh
acknowledged.
This was reflected in the Bombay Stock
Exchange index, the Sensex, turning stagnant
and the rupee falling 16% over 2011.
Its clear, said Standard Chartereds Global
Focus 2012 report, that the current
combination of relatively slow growth and
Economic statistics
are like a bikini,
what they reveal
is important, what
they conceal is
vital.
-Sir Frank
Holmes, professor
Doing
econometrics
is like trying to
learn the laws
of electricity by
playing the radio.
-Guy Orcutt,
economist
high inflation is a warning signal that policyinaction needs to be addressed and reforms
need to be accelerated. The economic outlook
for the rest of FY12 and FY 13 will hinge on
the governments ability to restore investors
confidence in Indias long-term story
Investment
An Ernst & Young report released at the World
Economic Forum in Davos in January said FDI
in India is set to swell as investors look beyondissues transparency, poor infrastructure and
policy paralysis in search of growth.
The fundamentals that make India attractive
to investors remain intact, Farokh T Balsara,
head of markets at Ernst & Young India,
wrote. However, our respondents continue
to cite inadequate infrastructure and a lack
of governance and transparency as major
obstacles to investment.
FDI in India rose 13% to $50.81 billion in thefirst 11 months of 2011 from a year earlier,
while the total number of projects rose 25%
to 864, the report said, quoting additional data
from the Financial Times FDI Intelligence
service.
Photo by SknaB noIA on Flickr
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Most of the companies surveyed for the reportwere confident of the long-term prospects for
investment in India. Of the 382 international
firms surveyed, 70% planned to increase or
maintain operations in India, while 19% said
they didnt plan to enter the country or were
preparing to withdraw.
The areas of concern, Barclays Capitals The
Emerging Markets Quarterly report said,
were weaknesses in private sector capital
expenditure (a result of monetary tightening)
and slower government investments due to its
poor fiscal health.
Automakers led investments in India last year,
boosting spending by 46%, the Ernst & Young
report said. Technology and life sciences
companies came next, while spending by
foreign firms on infrastructure and retail
projects declined. Ford had said earlier
that it would spend $142 million on Indian
operations, while Renault-Nissan also said it
would step up investments.
While foreign investment in several industries
has been facilitated, it remains a touchy issue
for retail.
With a market of 1.2 billion people and worth
about $450 billion, and a middle class in
The First Law of
Economists: For
every economist,
there exists an
equal and opposite
economist. The
Second Law of
Economists:
Theyre bothwrong.
-David Wildasin,
professor
An economist is
someone who,
when he finds
something that
works in practice,
tries to make it
work in theory.
-Joan Violet
Robinson,
economist
consumerist mode, India is one of the worldsmost attractive retail markets. However,
pushing through FDI in retail is an uphill
battle, as the government discovered recently.
In November 2011, New Delhi said it
was throwing open the market to global
supermarket chains such as Wal-mart and
Carrefour and Tesco only to be forced by its
allies to withdraw the move.
The proposal to permit foreign groups to own
up to 51% of supermarkets sparked protestsand paralysed parliament. Critics predicted it
would it would kill family-run shops that make
up more than 90% of Indias retail sector.
Tesco branded the U-turn a missed
opportunity. Harsh Mariwala, the head
of consumer products firm Marico, called
it a highly regressive move, reported
the Financial Times. Rajiv Kumar, of the
Federation of Indian Chambers of Commerce
and Industry, said opponents of FDI in retailhad whipped up xenophobic sentiments about
the return of colonialism.
Almost as a consolation for reforms
proponents and to reassure global investors,
the government allowed 100% foreign
ownership of single-brand stores.
Photo by Greenbelf Alliance on Flickr
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23
Inflation is the one
form of taxation
that can be
imposed without
legislation.
-Milton Friedman,
economist
Having a little
inflation is like
being a little
pregnantinflation
feeds on itself and
quickly passes the
little mark.
-Dian Cohen,
economist
6.2%Expected rise in private consumption in
FY2012-13, according to BMI, a considerable
fall from the 8.8% growth in FY2010-11
3.2%Growth in government spending over the four
quarters of 2011. In 2008, it averaged 26.7%
year-on-year growth
Will the RBI relent?As FY2012-13 approaches, the easing of key
interest rates could be crucial, providing a
much-needed boost. Through FY2012-13, BMI
expects cuts of 75 basis points on the back of
falling inflation. The cuts could be higher if
inflation recedes faster than expected.
Indias policymakers have battled over the
past 18 months to bring down inflation, the
highest among BRIC (Brazil, Russia, India,
China) nations.While inflation fell to acceptable levels at the
beginning of 2012, it has come at the cost of
growth.
Rather than economic growth, we expect
downside surprises to come through on
inflation, Robert Prior-Wandesforde,
economist at Credit Suisse in Singapore, told
the Financial Times.
This because policymakers have resorted to
monetary tightening to rein in prices, raisingbenchmark lending rates 13 times over
the past two years despite other emerging
markets despite critics pointing out that other
emerging markets cut them to protect growth.
They accused the RBI of acting timidly, while
industrialists blamed higher borrowing
costs for choking off growth and deterring
investment.
As Barclays Capitals The Emerging Markets
Quarterly report pointed out: higher interest
rates and prolonged tightness in liquidity are
visibly hurting several rate-sensitive sectors
such as manufacturing, construction, real
estate, banking and finance. Credit growth has
already slowed considerably and, we estimate,
might only be in the mid-teens for the currentfiscal year, in marked contrast with the average
of more than 20% rate of recent years.
However, food inflation is falling fast. As
Pranab Mukherjee pointed out the substantial
improvement, Kaushik Basu, the finance
ministrys chief economic advisor, told the
Financial Times: We have seen the worst of
the [rate] rises.
The Barclays Capital report estimated that
repo rate the RBI drops the rate to expandmoney supply and raises it to squeeze supply
cuts could be introduced from mid-2012.
The rate increases, though, found support
in some quarters. C Rangarajan, Manmohan
Singhs chief economic adviser, said that India,
which has a high poverty rate, must keep
inflation below 5% to achieve sustainable
growth. His views found an echo in the RBI.
The Financial Times reported that RBI officials
felt that the economy cannot grow more than
8% without inflicting high inflation on the poor.
Besides, not everyone is impressed with the
excessive pessimism. Arvind Panagariya,
economist at Columbia University, told the
newspaper that India can quickly recover the 2
percentage points of economic growth it lost
during the global financial crisis.
Former World Bank chief economist Joseph
Stiglitz pointed to the achievement of 7%
growth amid the downturn.
The risk remains, though, of global commodity
prices surging as they did in 2010, flaming
inflation again and delaying rate cuts.
The RBI has one other worry a weakening
rupee. Currency depreciation in a country that
runs a current account deficit and imports
most of its oil may fuel inflation again.
The weakening is a result of the rupees
overvaluation and deteriorating risk sentiment.
The Barclays Capital report said the rupee
would remain weak in the near term, clawingback to 49/$ in six months and to 48/$ in a
year.
Keeping prices in check while maintaining
growth will be a key challenge for Mukherjee.
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24
When goods dont
cross borders,
soldiers will.
-Fredric Bastiat,
economist
The primary
reason for a tariff
is that it enables
the exploitation
of the domestic
consumer
by a processindistinguishable
from sheer
robbery.
-Albert Jay Noc,
author
Source: Economist Intelligence Unit
f: BMI forecasts. 1 GDP at market prices,fiscal years ending March 31 (1990=1990/91). 2 2011=FY2011/12,factor
cost, f=BMI forecast. 3 New series used from 2005/06 onwards. Sources: 4 Central Statistics Organsation/BMI; 5
World Bank/UN/BMI
GROWTH AND INFLATION (% CHANGE)
EYE ON INDIA
2007 2008 2009 2010 2011 2012 2013 2014 2015
Real GDP growth 9.3 5.7 5.2 8.3 6.5 6.1 6.8 6.5 6.6
ASEAN 6.7 4.3 1.1 7.9 5.2 5.2 5.7 5.7 5.8
China 14.2 9.6 9.2 10.4 9.2 8.1 8.4 7.9 7.9
India 9.6 5.1 9.1 8.8 7.1 6.3 8.3 8.2 8.4
Inflation 4.9 7.1 2.8 5.1 5.9 4.9 4.6 4.4 4.2
ASEAN 5.6 9.9 2.6 4.4 6.0 4.9 4.7 4.6 4.7
China 4.8 5.9 -0.7 3.2 5.6 3.5 4.9 4.3 3.9
India 6.4 8.3 10.8 12.0 8.9 7.8 7.9 7.7 7.5
2012 2013 2014 2015 2016 2017
Nominal GDP 1,4
(in Rs bn)
104,241.3 f 118,401.2 f 133,486.1 f 150,232.6 f 168,945.7 f 189,900.4f
Nominal GDP 2,4
(in $ bn)2,287.6 f 2,620.2 f 3,108.8 f 3,669.8 f 4,223.6 f 4,747.5 f
Real GDP growth 2,4
(% change, y-o-y)7.3 f 7.8 f 7.7 f 7.5 f 7.5 f 7.4 f
GDP per capita 4(in $)
1,818 f 2,055 f 2,407 f 2,805 f 3,189 f 3,542 f
Population5 (in mn) 1,258.4 f 1,275.1 f 1,291.8 f 1,308.2 f 1,324.4 f 1,340.4 f
Indl prodn index(% y-o-y, average) 3,4
0.0 f 7.5 f 7.9 f 7.6 f 7.5 f 7.5 f
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25
Top priorities
In the long run we
are all dead.
-John Maynard
Keynes,
economist
It is difficult
to get a man
to understand
something
when his salary
depends on his not
understanding it.
-Upton Sinclair,
author and
politician
As the country looks ahead to the budget, hereare the issues that are likely to be on Pranab
Mukherjees mind.
Fiscal consolidation
Growth has slowed along with a slippage in
investment. Interest rates have been raised
to arrest inflation, which has squeezed
funds available to fuel growth. To top it all,
the fiscal deficit target of 4.6% is likely to
be missed. The budget would do well to lay
a roadmap for fiscal consolidation, allowing
the RBI to lower rates and stimulate
demand. The threat of Inflation could be
neutralised by easing supply constraints.
Helping markets
With growth slowing and rates rising,
Indian markets have been stagnant for far
too long. The abolition of the Securities
Transaction Tax to make transactions
cheaper and resisting the temptation to
raise taxes in order to boost revenues
would aid the return of market buoyancy.
Two other policy changes are critical:
public sector disinvestment needs to get
on the fast track again and pension and
provident funds should be allowed to
invest more in stocks.
Job creation
Indias unemployment rate fluctuates
between 9% and 10%. However, as the
workforce gets increasingly younger,
even 7% growth may not be enough.Whats urgently needed is investment in
and, perhaps, cheaper credit for labour-
intensive industries. Skill development is
important, but there are few incentives for
industry to upgrade employees talents.
Most importantly, inclusive growth would
ensure that all industry sectors and
sections of society would flourish, creating
more employment.
Bring back reformsPolitical constraints have pushed
reforms to the backburner. This has
contributed to the slowdown and loss
of investor sentiment. The introduction
and subsequent withdrawal of a policy
allowing FDI in retail is an example. The
government needs to send a clear signal
that it is serious about reforms.
Agriculture
Growing at a mere 2%, agriculture is a
worry. If food security is to be achieved,
India will have to do better on this front.
The farm-to-consumer chain is far too
long; its time to link farmers to markets.
This will make agriculture more lucrative
and lower food prices. India spends the
equivalent of $20 billion on food and
fertiliser subsidies, but that hasnt eased
supply or made farmers richer. Its the
delivery mechanism that has failed; better
subsidy management is the need of thehour.
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Industry milestones
1945 : Tata Motors established in Mumbai to build locomotives1952 : Mohan Mittal starts steel business (later Ispat) in Kolkata
1956 : Nand Kishore Ruia founds the iron ore export company Essar in Chennai
1969 : Tata appoints FC Kohli to head computer services
1970 : OP Jindal opens steel plant in Hisar
1972 : India-born MIT graduate Narendra Patni founds Data Conversion (later Patni) inthe US with back-office operations in PuneTata obtains software contract from Burroughs, first major software projectoutsourced by the US
1975 : Azim Premjis Bangalore-based Wipro starts selling first computer made in India
1977 : 57 foreign firms, including IBM, shut Indian plants rather than meet demands forsome degree of Indian ownership
1978 : Karnataka state agency Keonics establishes Electronics City in Bangalore. Denglaunches economic reforms in China
1979 : Wipro, to fill a gap after IBMs exit, hires Sridhar Mitta to set up offices inBangalore to make computers
1981 : Narayana Murthy founds Infosys in Bangalore. Mukesh Ambani joins familybusiness, Reliance
1983 : Anil Ambani joins Reliance
1986 : Sunil Mittal founds Bharti Telecom1988 : Gautam Adani opens trading house in India
1991 : India sets up Software Technology Parks of India (STPIs) to promote softwareexports, opens first park at Electronics City of Bangalore. OP Jindal splits betweenhis children his steel and power conglomerate. India abandons socialism,liberalises economy after Manmohan Singh is appointed finance minister. Wiprowins software contract from a US customer that interacts via the internet
1993 : American Express outsources management of credit card business to its Indianoffice, first major project of business process outsourcing to India
1995 : Essar Group run by Nand Kishore Ruias sons, Shashi and Ravi, extends fromshipping to steel, oil, power and telecom. Lakshmi, son of Mohan Mittal, founds
his own steel business, LNM Group (later Mittal Steel). LG acquires Zenith
1998 : Gautam Adani buys Mundra port, creates a special economic zone of 100 sq km.
1999 : Azim Premji becomes Indias richest person, Wipro has highest marketcapitalisation in the country
2005 : Ambani brothers split their business empire. Lenovo acquires IBMs personalcomputer business
2006 : Lakshmi Mittals Luxembourg-based ArcelorMittal becomes worlds largest steelmaker
2008 : Tata acquires Jaguar
2009 : Anil and Mukesh Ambani are 6th and 7th richest persons in the world respectively.Infosys sets up worlds largest corporate university at Mysore.
2010 : Bharti Airtel becomes worlds fifth largest telecom operator. Lakshmi Mittal isEuropes richest person
We contend that
for a nation to try
to tax itself into
prosperity is like a
man standing in a
bucket and trying
to lift himself up by
the handle.
-Winston Churchill,
former England
prime minister
You cant get rid of
poverty by giving
people money.
-PJ ORourke,
political satirist
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28
India at a glance
Capital
New Delhi
Largest city
Mumbai
Official languages
Hindi, English
Area
3,287,263 sq km
Population
1,210,193,422 (2011 census)
Population density
367.3/sq km
GDP (purchasing power parity), 2011 estimate
$4.469 trillion; $3,703 per capita
GDP (nominal), 2011 estimate
$1.843 trillion; $1,527 per capita
Photo by smlp.co.uk on Flickr
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