Economic Liberalization in India Past Achievements and Future Challenges

6 August 2011

© Confederation of Indian Industry

• The early burst of reforms in the early to mid nineties made sweeping changes such as

• Reduction in tariff barriers• Removal of barriers to entry in industry• Removal of controls in the financial sector• Encouragement to foreign investment and technology • Rationalization of tax structure

• These have ensured macroeconomic stability and driven the economy towards greater competitiveness

• These measures have also helped India in emerging as a resurgent, vibrant and dynamic nation, leading global growth

• India is the second fastest growing economy in the world after China• India was able to withstand the repercussion of the global economic crisis• India’s participation is required in all global negotiations ranging from global trade to

climate related deals

Economic Reforms

• Post-1991, CII worked on multiple fronts to facilitate liberalization:• Engaged with administration to calibrate policies to sequence reforms and minimize

industry adjustment pains• Sensitized officials and Members of Parliament for reforms through sustained

interaction• Worked with industry to build consensus recommendations• Organized seminars to disseminate awareness among industry• Interacted persuasively with different stakeholders across society to create buy-in

• Globalisation was a key plank of CII’s endeavours since 1991. Some of CII’s pioneering initiatives that helped industry to align with global imperatives include:

• Arranging outward missions through networking with international governments, industry associations, institutes and academia for opening new avenues for Indian industry

• Initiating Quality Movement in India; Sundaram Fasteners first company to get ISO9000 certification (1991)

• Organising exhibitions/shows to showcase Indian products• Initiating debate on key economy/ industry issues • Laying thrust on Corporate Governance: Developing Code of Corporate Governance

CII’s Role

Robust GDP Growth

5.3

%

1.4

%

5.4

%

5.7

% 6.4

% 7.3

%

8.0

%

4.3

%

6.7

%

6.4

%

4.4

%

5.8

%

3.8

%

8.5

%

7.5

%

9.5

%

9.6

%

9.3

%

6.8

% 8.0

%

8.5

%

0.0

1000.0

2000.0

3000.0

4000.0

5000.0

6000.01

99

1

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

(Rs. 0

00

' Cro

re)

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

Y-O

-Y G

row

th (

%)

GDP GDP Growth Rate

Source: Economic survey 2010-11 and CSO

• GDP has surged from 5.7% during 1991-00 to 7.7% during 2001-11

-0.5

%

3.4

%

3.8

%

3.8

% 5.1

% 5.9

%

2.4

%

4.7

%

4.5

%

2.5

% 4.1

%

2.1

%

6.8

%

7.1

%

7.8

%

8.0

%

7.8

%

5.3

% 6.5

%

7.1

%

-5,000

10,000

15,00020,00025,00030,000

35,00040,00045,000

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

(Rs.

)

-1.0%0.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%8.0%9.0%

Y-O

-Y G

row

th (

%)

Per Capita Income Growth in Per Capita Income

GDP

Per Capita Income

• Per Capita Income has more than doubled from Rs. 15,826 in 1991 to Rs. 41,129 in 2011; has been increasing at an average annual rate of about 7% since 2004

Structural Change in GDP Composition

• GDP has undergone a marked structural change over a span of two decades• Agriculture contribution has shrunk to 16.6% in 2011 from 34.0% in 1991• Share of tertiary sector has increased commendably, in fact is becoming

engine of growth• Flat growth in Secondary sector is however, a cause of worry given the

reducing employment elasticity of agricultural sector

Composition of GDP (1991 v/s 2011)

34.0%

23.2%

42.7%

Agriculture, 16.6%

Industry, 25.7%

Services, 57.7%

1991

2011

Source: Economic survey 2010-11 and CSO

Savings and Investment (as % of GDP)

• Savings as a proportion of GDP moved up by more than ten percentage points from 22.8% in 1991 to 33.7% in 2010

• Investment to GDP ratio also jumped from 26.0% to 30.8%, however expected to declined to 29.5% in 2011 due to rising interest rate

22.8

%

21.5

%

21.2

%

21.9

%

24.4

%

24.4

%

22.7

%

23.8

%

22.3

%

24.8

%

23.7

%

23.5

% 26.3

% 29.8

%

32.4

%

33.5

%

34.6

%

36.9

%

32.2

%26.0

%

22.1

%

23.1

%

22.5

% 25.5

%

26.2

%

24.0

%

25.3

%

23.3

%

25.9

%

24.3

%

22.8

%

25.2

%

27.6

% 32.8

%

34.7

%

35.7

%

38.1

%

34.5

%

33.7

%30

.8%

-

500

1,000

1,500

2,000

2,500

3,000

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

(Rs.

000

' Cro

re)

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

Y-O

-Y G

row

th (%

)

Savings Investment Savings as % of GDP Investment as % of GDP

Source: Economic survey 2010-11 and CSO

Merchandise and Service Trade

18.5

18.3

18.9

22.7

26.9

32.3

34.1

35.7

34.3

37.5

45.5

44.7

53.8 66

.3 85.2 10

5.2

128.

9 166.

2

189.

0

182.

2

250.

5

27.9

21.1

24.3

26.7

35.9

43.7

48.9

51.2

47.5

55.4

57.9

56.3

64.5 80

.0

118.

9 157.

1 190.

7

257.

6

308.

5

300.

6

380.

9

0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

400.019

91

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

(US

$ B

illi

on

)

Merchandise Exports Merchandise Imports

• Merchandise exports soared to cross US$250 bn in 2011 from US$ 18.5 bn in 1991, about 14 fold increase

• Service exports went up to US$132 bn in 2011 from mere US$ 4.6 bn in 1991, registering a CAGR of 18.3%

• Backed by robust exports of IT and ITes services; close to $60 billion in 2010-11

• Merchandise and Service imports grown at a CAGR of about 14.0% and 17.1% respectively

• Faster rise in imports over exports have undoubtly widened trade deficit yet it has helped in keeping global demand alive in the wake of the global economic crisis

• Trade as a proportion of GDP has increased magnificently from 9.0% in 1991 to 87.9% in 2011

Source: RBI

4.6 5.0

4.7 5.3 6.1 7.3

7.5 9.4 13.2

15.7

16.3

17.1

20.8 26.9

43.2

57.7

73.8

90.3

106.0

95.8

132.0

3.6

3.8

3.6 4.7 5.5 7.5

6.7 8.1 11.0

11.6

14.6

13.8

17.1

16.7 2

7.8 34.5 4

4.3 51.5

52.0 60.0

84.3

-10.0

10.0

30.0

50.0

70.0

90.0

110.0

130.0

150.0

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

(US

$ B

illio

n)

Service Exports Service Imports

Merchandise Trade

Service Trade

FDI Inflows

• FDI inflows have grown multiple fold from just US$ 97 mn in 1991 to US$ 30.4 bn with an average annual compound growth rate of 33.3%

• FDI inflows as a proportion of total foreign investment inflows has fallen from 157.8% in 2008-09 to 49.1% in 2011 due to faster rise in portfolio investment

• Indian companies have made an outward investment totaling US$80 billion in the first decade of the century mostly in developed economies

94.2

%

97.0

%

56.4

%

14.1

% 25.6

% 43.8

%

46.0

% 66.1

%

102.

5%

41.6

% 59.3

% 75.2

%

83.7

%

27.5

% 39.4

%

41.8

%

76.5

%

56.1

%

157.

8%

53.8

%

49.1

%

0

5000

10000

15000

20000

25000

30000

35000

40000

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

US$

Mill

ion

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

140.0%

160.0%

180.0%

FDI a

s %

of T

otal

For

eign

Inflo

ws

FDI Inflow s As % of Total foreign Investment Inflow s

Source: RBI

SENSEX

• Steps taken over the last two decades have resulted into maturing of nascent financial market. Further, robust economic growth and fast pace of globalization has led to buoyant investors’ sentiment

• SENSEX has increased from a level of 1908.9 in 1991 to 18518.2 in 2011 at a CAGR of 12.0%

Trends in Capital Market - SENSEX ans BSE 100

0.0

3,000.0

6,000.0

9,000.0

12,000.0

15,000.0

18,000.0

21,000.0

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

SENSEX BSE 100

Source: BSE, bseindia.com

Move Towards Inclusive Growth

• While the first phase of reforms had unleashed economic growth, it was felt that the benefits of growth must be more equitably distributed

• Starting 2005, the UPA government has shifted the focus to inclusive growth through greater allocation to socially beneficial schemes and programmes

• Total Plan Allocation increased markedly from Rs. 9.6 thousand crore in 1991 to Rs. 335.5 thousand crore in 2011-12, nearly 35 fold increase

Source: Budget and Government Sources

Some flagship schemes

• Bharat Nirman - Total Budget allocation for 2011-12: Rs. 58,000 crore• NREGA - Total Budget allocation for 2011-12: Rs. 40,000 crore• JNNURM - Total Budget allocation for 2011-12: Rs. 49 crore

• Corporate Social Responsibility• Set up Social Development and Community Affairs Council in 1995• Developed Action Agenda for Affirmative Action and worked to generate

awareness and intensify industry efforts• Facilitates industry interventions in society through NGO partnerships• Undertakes public health and community welfare activities in factories• Spearheaded the India Business Trust for HIV/AIDS

• Environment Management• Set up Environment Management Division after Rio Summit in 1992• Initiated Green Building movement in India through its Centre of Excellence

Green Business Center• Engages in climate change mitigation efforts

CII’s Initiative on Socio Responsibilities

Social indicators

• Overall literacy rate has gone up from just over half to almost three-quarters during 1991 and 2011

• Literacy level among female folk which constitutes about half of the population has nearly doubled

• Among young people, the rates are higher as the Right to Education law kicks in

Source: Economic Survey

52.2%

74.0%64.1%

82.1%

39.3%

65.5%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

Overall Males Females

1991 2011

35.6%

27.5%

35.0%

28.3%

37.0%

25.7%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

Total Rural Urban

1991 2005

• Overall, poverty has declined by eight percentage points from as high as 35.6% in 1991 to 27.5% in 2005

• Decline was more pronounced in urban areas as compared to rural areas

• Urban poverty fell by double digits. Rural poverty came down by seven percentage points

Literacy Rates

Poverty Estimates

Source: Planning Commission

Sector Deficit Eleventh Plan (2007-12) Targets

Roads/

Highways

65,590 km of NH comprise only 2% of network; carry 40% of traffic; 12% 4-laned; 50% 2-laned; and 38% single-laned

6-lane 6,500 km in GQ; 4-lane 6,736 km NS-EW; 4-lane 20,000 km; 2-lane 20,000 km; 1,000 km Expressway

PortsInadequate berths and rail/road connectivity

New capacity: 485 m MT in major ports; 345 m MT in minor ports

Airports

Inadequate runways, aircraft handling capacity, parking space and terminal buildings

Modernize 4 metro and 35 non-metro airports; 10 greenfield airports

Railways

Old technology; saturated routes; slow speeds (freight: 22 kmph; passenger: 50 kmph)

8,132 km new rail; 7,148 km gauge conversion; modernize 22 stations; dedicated freight corridors

Power

13.8% peaking deficit; 9.6% energy shortage; 40% transmission and distribution losses; absence of competition

Add 78,577 MW; access to all rural households

Source: Planning Commission

Major Plans for Infrastructure Development

Power and Road

Source: CMIE, Industry Analysis Service

Installed Capacity in Power Sector: All India

66,086.3

153,774.8

-

20,000.0

40,000.0

60,000.0

80,000.0

100,000.0

120,000.0

140,000.0

160,000.0

180,000.0

1991 2011

MW

• Total installed capacity has more than doubled during 1991 and 2011

• Even after 20 years, thermal power remained the most dominant form

• There is a need to change the present composition in favour of hydro, nuclear and other bio-produce power to conserve coal for industrial purposes

Road Length

2,327.4

4,236.4

-

500.0

1,000.0

1,500.0

2,000.0

2,500.0

3,000.0

3,500.0

4,000.0

4,500.0

1991 2008

( 000

' Km

)

Source: Ministry of Road, Transport and Highways

• Public-private-multilateral partnerships have been successful in implementing highways programme

• NHAI to award 7,994 km of highway projects in the FY 2012

• Going to generate demand for cement, steel, and bitumen of worth Rs 42,000 crore

• Though the sectoral performance has improved, yet to be enhanced considerably to ensure optimal utilization of resources and to avoid overrunning of cost

Installed Capacity: Power

Road Length

Steel and Telecom

• Steel production has surged nearly five fold in last 20 years

• India fourth largest steel producer in the world and is expected to become the second largest producer by 2013

• Steel production capacity to touch 120 Million Tonnes by 2013 and over 150 Million Tonnes by 2020

Source: CMIE, Industry Analysis Service

Finished Steel Production

13,566.0

66,013.0

-

10,000.0

20,000.0

30,000.0

40,000.0

50,000.0

60,000.0

70,000.0

1991 2011

(000

' Ton

nes)

Telecom Subscriber Base

5.1

826.9

0.0

100.0

200.0

300.0

400.0

500.0

600.0

700.0

800.0

900.0

1991 2011

(Milli

ons)

Source: Department of Telecommunications, Ministry of Communications and Information Technology

• Private sector participation has lead to sharp reduction in tariffs and rapid increase in penetration of basic/mobile telephones

• Registering a CAGR of 29.0% during 1991 and 2011

• Teledensity improved from 0.6 (per 100 person) in 1991 to 66.2 twenty years later

Finished Steel Production

Telecom

• High inflation level above comfortable zone – 9.4% in June 2011

• Industrial slow down – IIP has grown by 5.6% in May 2011 as compared to 8.5% in May 2010

• Falling investment - 30.8% in 2010 to 29.5% in 2011

• High interest rates have impacted credit to MSMEs in manufacturing sector as well as key industries – Non food credit growth to MSMEs declined from 21.1% in April, 2010 to 20.6% in April, 2011

• Inadequate infrastructure continues to be a major structural bottleneck

• Shrink in FDI inflows due to structural bottlenecks – In 2010-11, FDI inflows shrunk by 28% to US$ 27 billion from a level of US$ 38 billion in 2009-10

• Weak enforcement and monitoring

• Likely overshooting of fiscal deficit – Though fiscal deficit is budgeted at 4.6% for FY 2012, however, developments in recent months like deceleration in growth, high crude oil prices, high subsidy and rising interest rates are casting doubts

Challenges

• Investment Climate:• FDI in sectors such as retail, insurance, defence, etc needs to be expanded drastically• Rapid clearance of large projects

• Financial Sector Reforms: • Liberalize financing guidelines• Facilitate increased access to international debt markets• Encourage development of the corporate debt market

• Agriculture Sector Reforms: • Allow FDI in food retailing to integrate distorted supply chain• Encouragement to PPP model in strengthening agriculture research and extension programmes • Exempting horticulture produce from APMC Act• Move towards unified national market and allow free movement of produce

• Infrastructure: • For greater investment in infrastructure policy framework needs to be made more friendly

• Social Sector: • Much better delivery of government services to the poor with the support of state governments

Agenda for further reforms

CII has been a strong partner to government during the reforms period and will continue to build the partnership of Government and industry to make India a developed nation in the next two decades

Thank You