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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. Launchpadb. Falling short
» KEY ACHIEVEMENTS
a. Growth b. Innovation c. Investment d. The battle against poverty e. Literacy
» WHAT’S LEFT
a. Social sector b. Hunger c. Corruption d. 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
» INDIA’S ECONOMIC JOURNEY
» INDUSTRY MILESTONES
» INDIA AT A GLANCE
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Table of contents
Executive summary
4
On July 24, 1991, with the country dangerously
close 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 collateral for 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 world’s 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 wholesome indicator. 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 India’s 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.
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 you
travel 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 don’t 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 to
present 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 serious
political 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 country’s 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.
6
When India gained independence from
British 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 answer
to 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
wasn’t working, the government sought to
put growth on the fast track in the 1980s
by 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 party’s surprise
choice for prime ministership.
While Rao continued to spout the party’s
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
7
Economics is a subject that does
not greatly respect one’s wishes.
-Nikita Khrushchev, Soviet leader
In economics, the majority is always
wrong.
-John Kenneth Galbraith, economist
India, Rao knew, had no choice. Reform, even
if 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.
Launchpad
While 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-clearing
contracts.
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 match
China 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 show
for every negative. For instance, in 1991,
Manmohan Singh’s 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-Cola’s acquisition
of 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 aren’t 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 subsidised Photo by Terinea IT Support on Flickr
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 the
deserving.
There are other worrying signs. India’s
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 Hazare’s call for a
countrywide agitation to demand an effective
anti-corruption law was answered by citizens
across the socio-economic spectrum. The
government’s image — and the polity’s as a
whole — suffered.
India’s journey has been long and arduous.
As it takes on the challenges listed above, a
longer and tougher struggle lies ahead.
The new government, which assumed office barely a month ago, inherited an economy in deep crisis. The balance of payments situation is precarious.
We have been at the edge of a precipice since December 1990 and more so since April 1991. The foreign exchange crisis constitutes a serious threat to the sustainability of growth processes and orderly implementation of our development programmes.
Internal public debt of the central government has accumulated to about 55% of GDP. The burden of servicing this debt has become onerous. Interest payments alone are about 4% of GDP and constitute almost 20% of the government’s total expenditure. Without decisive action now, the situation will move beyond the possibility of corrective action.
There is no time to lose. Neither the government nor the economy can live beyond its means year after year. The room 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 have now reached a stage of development where we should welcome, rather than fear, foreign investment.
Few would disagree that I am one of the most harassed finance ministers in recent times.
Victor Hugo once said: “No power on earth can stop an idea whose time has come.” I suggest to this august house that the emergence of India as a major economic power in the world happens to be one such idea. Let the whole world hear it loud and clear. India is now wide awake. We shall prevail. We shall overcome.
1950-80 1980-92 1992-2003 2003-100
2
4
6
8
10
3.5%
5.5%6%
8.5%
INDIA’s GDP GROWTH
Excerpts from Manmohan Singh’s 1991 budget speech
9
Source: Economic Survey 2010-11
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 hit
7.5% (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
StatesMean % growth
(2000–04)
Mean % growth
(2004–09)
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
The savings rate shot up from 21.5% of the
GDP in 1991–92 to 34% in 2010–11. As a result,
investment levels eventually rose to 37% of
the GDP from 22.1%, enabling sustainable
growth of more than 8%. In layman’s 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, India’s 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 India’s 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 in
2010–11.
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 world’s cheapest car, produced
by the Tatas is an example of this ingenuity.
Savings rate 1980–81 1990–91 2000–01 2010–11
As % of GDP 18.5 22.8 23.7 34
Source: Economic Survey (2010–11)
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 Indian
companies would not be able to compete and
would be gobbled up by multinationals.
That didn’t 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 China’s 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 have willingly 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 who
want it. The first lesson of politics
is to disregard the first lesson of
economics.
-Thomas Sowell, writer
Photo by Balaji.B on Flickr
12
India’s 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
India’s 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, India’s 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 the
volatility 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
country’s 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 billionFDI 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 a
totally 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
13
why the desperately poor have radicalised and
taken 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
India’s 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%).
India’s 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
Homes reporting hunger
1983 1993–94 1999–2000
2004–05
% of population
17.3 5.2 3.6 2.5
Source: Economic Survey (2010–11)
Poverty ratio 1993–94 2004–05 2009–10
% of population 45.3 37.2 32
POVERTY RATES
HUNGER RATE
The growth and, perhaps, rising literacy levels
sparked 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 Mao’s one-child policy, but that
could 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, India’s 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 zero
to 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 we’re facing with
debt are man-made. We created them. It’s called
fantasy economics. Fantasy economics
only works in a fantasy world. It doesn’t 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
14
Literacy
Literacy rates are closely linked to the poverty
ratio. It is no surprise then that as India’s
poverty ratio dropped, the literacy rate shot up.
Since 1991, India’s 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 1950–51 1960–61 1970–71 1980–81 1990–91 2000–01 2010–11
% of population
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 free enterprise 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. Those
whom God has so joined together, let no man put
asunder.
-John F Kennedy, former US president
Photo by United Nations Photo on Flickr
15
What’s left
A remarkable story has been scripted over the
last two decades. Yet, a longer journey awaits.
There is a large, unfinished reforms agenda,
not least of which is fixing a basic issue – ease
of doing business.
The Heritage Foundation’s 2011 Index of
Economic Freedom ranked India 124th among
183 countries on this parameter. The World
Bank’s Doing Business report, meanwhile,
placed India 134th among 183 nations.
Globally, there seems to be consensus that
India has lots to do before it can be called
business-friendly.
From getting building permits to enforcement
of contracts, the Indian story is one of
unending red tape, restrictions and delays.
India has the dubious distinction of leading the
world in terms of legal backlog – nearly 31.5
million pending cases. Rigid labour laws are
a barrier for those wishing to set up labour-
intensive industries that could provide millions
of jobs, not to mention curbs on investment in
infrastructure, retail and education.
Here are a few sectors that require urgent
attention.
• Social sectorA boom in social spending has been
accompanied by innovations such as the
National Rural Employment Guarantee
Scheme, the Sarva Shikhsa Abhiyan (a
national education mission), the Right to
Education and the Food Security Act that
extends subsidised food facilities to the
poor. There is also a rural health mission
and the Jawaharlal Nehru National Urban
Renewal Mission.
Social spending rose from 5.49% of
GDP in 2005-06 to 7.27% in 2009-10.
However, these schemes are beset by
corruption and waste. Free government
schools and health centres are barely
functional, while unions ensure that there
is no accountability from teachers, health
workers and other service providers.
Absenteeism is rampant and bribes are the
norm.
There is little accountability, and
administrative reforms are the need of the
hour.
The lack of education has led to severe
shortage of skilled labour, and the
shambolic school system ensures that
those who pass through it are functionally
illiterate.
India needs to take great strides in
education and vocational training.
7.27Spending on social sector, as percentage of
GDP, in 2009-10. In 2005-06, it was 5.49%
• Hunger
India’s nutritional indicators are
staggering. Anaemia affects over 80%
of the population in some states. Child
malnutrition, measured by low weight
for age, affects 46.7% of all children (on
this count, we fare worse than any African
country).
There has been virtually no improvement
in child malnutrition between 1998-99
and 2005-06. Indian children suffer from
stunting and low weight. Calorie intake
is falling despite rising income, probably
because poor people want to switch to
superior, tasty food rather than get more
calories out of basic food.
Hence, nutrition is a bigger problem than
hunger, which makes awareness of the
importance of vitamin, iron and iodine
intake critical.
80Estimated percentage of Indian children
suffering from anaemia
46.7Estimated percentage of children who
suffer from malnutrition, measured by low
weight for age. India fares worse than any
African country on this count. There has
been virtually no improvement in child
malnutrition between 1998-99 and
2005-06
I had four or five years in school
training as a soprano. I fell
into pop singing because of
economics. I got out of high school
and had to go work, and they weren’t
hiring opera singers.
-Jo Stafford, singer
An economist is a man who states
the obvious in terms of the
incomprehensible.
-Alfred A Knopf, publisher
16
There can be no real individual
freedom in the presence of economic
insecurity.
-Chester Bowles, former US diplomat
If all economists were laid end to end, they would
not reach a conclusion.
-George Bernard Shaw, writer
• Corruption
This 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 among
the 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 jury’s 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, 150
of the Lok Sabha’s 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 and
even the Prime Minister’s Office would go
a long way in reducing corruption. Another
option is to fast-track cases against
politicians.
87India’s rank, among 178 countries, on
Transparency International’s Corruption
Perception Index
Photo by India Kangaroo on Flickr
17
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
• Infrastructure
Lack of infrastructure could prove to be
a major hurdle to the country’s progress.
It could impede the delivery of health
services 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 provides
opportunities for corruption.
India requires transparency in policies
and procedures, and an end to political
discretion in these areas.
• Administrative reforms
While 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 the
consumer more.
• Fiscal management
The country’s 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. “Fiscal
restraint 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 anybody’s 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
Chartered’s Global Focus – 2012 report.
Isn’t it interesting that the same
people who laugh at science fiction listen to weather
forecasts and economists?
-Kelvin Throop III, fictional character
created by RAJ Philips
An economist is an expert who will
know tomorrow why the things he predicted
yesterday didn’t happen today.
-Laurence J Peter, academic
Photo by celblau on Flickr
18
Indian banks, meanwhile, are under pressure
amid the high policy rates and low growth.
However, most banks are in good enough
shape to absorb the pressure; they are also
better capitalised than they were in 2008-
09. Also, the government intends to boost
their capital base by March 2012; further
announcements on this are expected in the
budget.
Finally, the focus on increasing the purchasing
power of vulnerable groups without a
corresponding emphasis on supply-side
policies has resulted in inflation. Hence,
expenditure reforms are critical.
“Subsidies need to be reduced, particularly
given that the expected slippage in the FY12
fiscal deficit to 5.6% of GDP from the targeted
4.6% is driven primarily by the subsidy
burden,” said the Standard Chartered report.
This report too said that this year’s provincial
elections would make it tough to curb populist
expenditure.
At the same time, it pointed out, slower growth
might curb revenues. This would probably
keep the FY13 fiscal deficit at a high 5.5% of
GDP.
Barclays Capital’s The Emerging Markets
Quarterly report also predicted that the
government would miss its fiscal deficit target.
Note: All forecasts except USD-INR refer to the April-March fiscal year starting in the year in the column heading;
*end-period. Source: Standard Chartered Research
STANDARD CHARTERED FORECASTS FOR INDIA
2011 2012 2013 2014
GDP (real % y/y) 7.0 7.4 8.0 8.0
WPI (% y/y) 8.7 6.5 6.0 6.0
Repo rate (%)* 8.5 7.0 7.0 7.0
USD- INR* 51.5 48.5 46.5 44.0
Current account
balance (% GDP)
-3.1 -2.8 -2.6 -2.5
Fiscal balance
(% GDP)
-5.6 -5.5 -5.0 -5.0
In all recorded history there has
not been one economist who has had to worry about
where the next meal would come from.
-Peter Drucker, management guru
Economics is the painful elaboration
of the obvious.
-Friedrich von Hayek, economist
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 it’s 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 BMI’s growth projection for
India. However, if growth does not exceed the 6.8% predicted, it
would 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 Industrial
production 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 this
downturn, nor is the government in a position to enact stimulative
fiscal measures,” the BMI report said.
19
What lies ahead
20
The deteriorating global situation will also
impact 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.
It’s clear, said Standard Chartered’s 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 policy
inaction 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 government’s ability to restore investors’
confidence in India’s 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 beyond
issues 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 the
first 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
21
Most of the companies surveyed for the report
were 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 didn’t plan to enter the country or were
preparing to withdraw.
The areas of concern, Barclays Capital’s 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: They’re both
wrong.
-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 world’s
most 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 protests
and paralysed parliament. Critics predicted it
would it would kill family-run shops that make
up more than 90% of India’s 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 retail
had whipped up xenophobic sentiments about
the return of colonialism.
Almost as a consolation for reform’s
proponents and to reassure global investors,
the government allowed 100% foreign
ownership of single-brand stores.
Photo by Greenbelf Alliance on Flickr
22
Expect brands such as Ikea, Adidas and Marks
and Spencer, which were allowed to own up
to 51% of a store, to flock to India without
domestic partners. The decision “is likely to
result in more foreign companies entering
the market or expanding their presence”, said
Fitch, the credit agency.
“This is a welcome move with a clear potential
to lift the general mood in the economy,”
chimed in Rajan Bharti Mittal, vice-chairman
and managing director of Bharti Enterprises,
one of the country’s largest retailers, to
Financial Times.
However, the fear of policy reversal still lurks.
That’s why Ikea, the Swedish furniture giant, is
not expected to come to India soon, though it
is keen to.
It doesn’t help that policy flip-flops aren’t
the only challenge; land acquisition and a
market that is anything but homogenous are
problems too. That’s why the World Bank
ranks India 132nd out of 183 countries for ease
of doing business.
The evolution of the retail sector, it now
seems, will be long drawn out.
13% Rise in FDI in India in the first 11 months of
2011 from a year earlier; total FDI for the
period was $50.81 billion, according to an
Ernst & Young report
25%Rise in number of projects; total number of
projects in the period was 864, said the report
70%Proportion of firms, of the 382 surveyed, that
planned to increase or maintain operations in
India; 19% said they didn’t plan to enter the
country or were preparing to withdraw
Private and public consumption
Though food inflation has come down to
manageable levels, there was great pressure
Having an in-house economist became for many business people something
like having a resident astrologer
for the royal court: I don’t quite understand what
this fellow is saying but there must be
something to it.
-Linden, writer
Economics is the only field in which
two people can get a Nobel Prize for saying exactly the
opposite thing.
-Heard at the London School of Economics
on household budgets over the last 18
months. As a result, the outlook is grim on
private consumption, which accounts for
roughly 65% of the GDP.
Interest rates (the repo rate, the benchmark
at which the central bank buys government
securities from banks to control money supply,
was at 8.5% at the time of writing) are pretty
high too with a wary RBI refusing to lower
them until it is certain inflation has been
tamed.
The stock markets aren’t doing great either,
staying range-bound between 16,000 and
17,500 points. Even the rupee has weakened
more than 19% since its July 2011 peak.
BMI expects private consumption to grow by
6.0% and 6.2% in FY2011-12 and FY2012-13
respectively – a considerable slowdown from
the 8.8% growth in FY2010-11.
“While household consumption – currently
at its weakest level on record – is likely to
find a floor thanks to government spending
in rural areas and a healthy labour market,
weak consumption will weigh on investment
in a feedback loop,” said Standard Chartered’s
Global Focus – 2012 report.
On the public consumption front, the
government has been hamstrung by the
global financial crisis. One indicator of this is
the fall in public spending growth – in 2008,
government spending averaged 26.7% y-o-y
growth. Spending over the 2011’s four quarters
expanded only at 3.2%.
Combine negative revenue growth and a
growing expenditure bill due to the various
social schemes announced and what you
get is little room for the government to push
through fiscal stimulation.
BMI projected public consumption to grow
by 3% and 5% in FY2011-12 and FY 2012-13
respectively.
65 Percentage of GDP accounted for by private
consumption
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
pregnant—inflation 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.
India’s 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, raising benchmark 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 Capital’s 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 current fiscal 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 ministry’s 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 expand money 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 Singh’s 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 rupee’s overvaluation and deteriorating risk sentiment. The Barclays Capital report said the rupee would remain weak in the near term, clawing back 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.
24
When goods don’t 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 process
indistinguishable 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
Ind’l prod’n 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
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, here
are the issues that are likely to be on Pranab
Mukherjee’s 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 marketsWith 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 creationIndia’s unemployment rate fluctuates
between 9% and 10%. However, as the
workforce gets increasingly younger,
even 7% growth may not be enough.
What’s 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.
• AgricultureGrowing 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; it’s 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 hasn’t eased
supply or made farmers richer. It’s the
delivery mechanism that has failed; better
subsidy management is the need of the
hour.
26
India’s economic journey
500 BC : Silver punch-marked coins minted; it’s a period of intensive trade and urban development
1 AD : India has 32.9% share of global income, the largest in the world
1000 : India has 28.9% share of world income, the largest in the world
1500 : India has 24.5% share of world income, second largest in the world after China, which has 25% share
1600 : India’s income of £17.5 million (under Akbar’s Mughal empire, population of roughly 150 million) was greater than the entire treasury of Great Britain in 1800 (£16 million)
1700 : India has 24.4% share of world income, largest in the world, under Aurangzeb’s empire
1793 : Cornwallis’ Permanent Settlement Instituted in Bengal
1820 : China is world’s largest economy followed by the UK and India. Industrial revolution in the UK, British begin treating India as an unequal partner
1850 : India’s GDP estimated at 40% of China’s. British cotton exports reach 30% of Indian market
1868 : First estimation of India’s national income by Dadabhai Naoroji
1870 : India has 12.2% share of world income
1913 : India has 7.6% share of world income
1947 : India gains Independence
1950 : Government sets up Planning Commission, Jawaharlal Nehru is chairman. Objective is to streamline resource allocation, put economy on development path
1951 : First Five-Year Plan launched. Major portion of resources directed to agriculture, rural infrastructure. Food production rises by 18%
1952 : India has 3.8% share of world income
1973 : Economy at $494.8 billion, has 3.1% share of world income
1980–1991 : Economy virtually closed
1991 : Balance of payments crisis. External debt rises to $70 billion, exacerbated by Gulf War. Rising oil prices deplete country’s foreign exchange reserves. India is on the verge of default; has enough to pay for only three weeks worth of imports. In May, government sells and pledges gold to raise $605 million. Rupee devalued on July 1 and 3. Economic reforms begin
1992 : Government switches from fixed exchange rate system to dual exchange system. Boost for the economy, but inflation rate is high and poor industrial growth cause concern. Securities and Exchange Board of India established to oversee financial markets
1993 : Unified exchange rate system introduced
1993-2010 : Reforms continue. Public sector disinvestment introduced, as are various administrative reforms. Stock market booms, crossing 20,000 points at one stage before falling due to an economic slowdown
2009 : Global slowdown impacts economy, jobs; India, however, maintains a growth rate of over 6%
2010 : India’s economy is at $4.06 trillion, accounting for roughly 6% share of world income, the fourth largest in the world
2011 : Fuel prices deregulated. Inflation hits record highs, crossing 12%. Numerous rate hikes follow
2012 : Inflation brought under control, but fears of slowing growth persist
Far better an approximate
answer to the right question, which is often vague, than an exact answer
to the wrong question, which can always be made precise.
-John Tukey, statistician
In general, the art of government
consists in taking as much money as possible from one party of the
citizens to give to the other.
-Voltaire, philosopher
27
Industry milestones
1945 : Tata Motors established in Mumbai to build locomotives
1952 : 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) in the US with back-office operations in Pune Tata obtains software contract from Burroughs, first major software project outsourced by the US
1975 : Azim Premji’s Bangalore-based Wipro starts selling first computer made in India
1977 : 57 foreign firms, including IBM, shut Indian plants rather than meet demands for some degree of Indian ownership
1978 : Karnataka state agency Keonics establishes Electronics City in Bangalore. Deng launches economic reforms in China
1979 : Wipro, to fill a gap after IBM’s exit, hires Sridhar Mitta to set up offices in Bangalore to make computers
1981 : Narayana Murthy founds Infosys in Bangalore. Mukesh Ambani joins family business, Reliance
1983 : Anil Ambani joins Reliance
1986 : Sunil Mittal founds Bharti Telecom
1988 : Gautam Adani opens trading house in India
1991 : India sets up Software Technology Parks of India (STPIs) to promote software exports, opens first park at Electronics City of Bangalore. OP Jindal splits between his children his steel and power conglomerate. India abandons socialism, liberalises economy after Manmohan Singh is appointed finance minister. Wipro wins software contract from a US customer that interacts via the internet
1993 : American Express outsources management of credit card business to its Indian office, first major project of business process outsourcing to India
1995 : Essar Group run by Nand Kishore Ruia’s sons, Shashi and Ravi, extends from shipping 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 India’s richest person, Wipro has highest market capitalisation in the country
2005 : Ambani brothers split their business empire. Lenovo acquires IBM’s personal computer business
2006 : Lakshmi Mittal’s Luxembourg-based ArcelorMittal becomes world’s largest steel maker
2008 : Tata acquires Jaguar
2009 : Anil and Mukesh Ambani are 6th and 7th richest persons in the world respectively. Infosys sets up world’s largest corporate university at Mysore.
2010 : Bharti Airtel becomes world’s fifth largest telecom operator. Lakshmi Mittal is Europe’s 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 can’t get rid of poverty by giving people money.
-PJ O’Rourke, political satirist
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
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