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GK Lecture # 03

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Economic reforms

in India

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HW/ Revision

• Book Building Issues and Fixed Price Issues• Green Shoe Option / Red Herring Prospectus

• GDR / ADR

• Venture Capital

• Angel Investor• Hostile Takeover

• Underwriter

• GDP, GNP, NNP, Liquidity, Inflation, causes,

control, Monetary/Fiscal policy, CRR, SLR,Credit policy

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Agenda for the day

An introduction  62 years of history

Basic terminologies Types of economic systems The PLUSES and the MINUSES Finally, THE REFORMS

Final summary

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It’s a new India breathing.For decades, India was a nation lost in

an ideological quagmire.

While our ASEAN neighbours rose fromashes and rebuilt themselves in 30

years flat, we fell behind. Wrongideological choices, a parasitic politicalsystem and imprisonment of the Indian

entrepreneurial instinct createda sad situation.

 An introduction

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The Indian elephant has stirred onlyrecently, and 15 years of economic

reforms have unleashed a wave ofLPG forces. While huge challengeson basic human issues remain, hopeabout India as a global power burns

brighter than ever.

 An introduction

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1947 – Economic Independence,

Socialism - the Economic Model

1950s – Five Year planning –

centralized model of growth,

Russia as the ideal, IDRA, License

Raj/ Permit Raj1960s – PSUs as Role Models,

Push to Agriculture

Indian Economy

.

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1970s - Banks Nationalization,Poor GDP growth rates, Loss

making PSUs, Mounting govt. debt

1980s - Poor exports, MRTP,

FERA, Poor quality of products, No

choice for Consumers, No FDI / FII,License – Quota - Permit-raj

destroyed our internal vibrancy

Indian Economy

.

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Slowly, thingsstarted

changing.

For the better.

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Rajiv Gandhi

brought the first

set of Reforms.

P.V. Narasimha Rao

opened the floodgates.

Focus: PSUs and Infrastructure to be privatized.

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Focus: Disinvestment, FDI, FIIinflow, Political consensus onreforms

P. Chidambaram Pranab Mukherjee

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Focus: Stock market reforms,Foreign investment liberalized

 Yashwant Sinha

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Focus: Indian software exports ZOOM

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India

emerging as a global‘ITES’ and Servicessuperpower

Also a dominant player

in International TradeNegotiations as one

of the BRIC economies

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LPGLiberalization – Privatization – 

Globalization

GDP – GNP – NNP

Inflation The 3 sectors of an economy

Tariff walls, WTO/GATT, IPR

Basic terminologies

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GDP breakdown 

I n d u

( 2 7 . 5 S e r v( 5 1 . 3

    A

   g

   r    i   c   u

    l    t   u

   r   e

 

    (    2

    1

 .    2

    %

    )

50.7%26.6%

     2     2 .     7

     %

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Types of economic systems

DISPARITIES - Within the globaleconomy, great disparities existbetween economic systems due

to differences in technology

Types of world economies:

Capitalistic Command Mixed

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Capitalistic economies Also known as a Market Economy

Means of production are privately owned

Minimal government intervention – Laissez 

faire 

Competitive markets exist

Freedom of enterprise

Profitable products, based on marketsupply and demand

Most efficient producers survive (trans.,labor, quality)

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Command economies Opposite from pure capitalism Also known as Communism or Marxism Totalitarian: all production and property

are owned and controlled by centralgovernment Central government makes all decisions

regarding prices, quotas, plant locationand size, and the use of resources

Market factors are often ignored Former Soviet Union, People’s Republic

of China

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Mixed economies Between Capitalism and Command Retains features or mechanisms of

both economies

Examples: – United States: capitalistic, but

government provides many

services that otherwise would notbe available – China: command, but allowed

private ownership but ‘No Voice’

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Socialistic pattern

based on USSR model

Nehruvian Strategy

Shift in economic

output

Evolution of Indian economy

after independence

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Two incompatible roles ofState

Rule of Law could not beenforced on capitalists

Social aspirations

Main drawbacks in India

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Green revolution

Regional disparity

Large scaleindustrialization

Nationalization of banksHindu rate of growth

The PLUS side and key features

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Towards self-sufficiency

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 First generation reforms

Why, Aims, Objectives

The 4 Ds – Delicensing,

Decontrol, Disinvestment,Debureaucratisation

Gains, FailuresNeed for Second Gen reforms

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INDIAN reforms - the philosophy

Plug into the

Global Economy

Large scale economic reforms to

bring capital for growth needs

FDI recognised as a

Growth Driver 

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Major first gen economic reforms

Industrial Delicensing Liberal FDI regime (FERA eased, 40% 51%) Freedom to invest & expand (MRTP eased) Telecom, Power, Oil & Gas, Roads, Consumer

electronics, Insurance, Banking sectors opened

up Simplification of investment procedures (FIPB) Tax rationalisation done; Tariffs reduced SSI sector dereserved Currency convertibility (LERMS, devaluation,

full conv.) PSU divestment started WTO compatibility SEBI made effective

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Second gen economic reforms PSU disinvestment to be acceleratedFiscal deficit needs to be checked (10% gross)Poverty reduction, Even growth across the countryReducing real interest rates to boost investment in

key sectors like Housing, Education, Irrigation etc.Labour market reforms – Hire and FireThrust to agri investments & a Second GreenRevolutionBanking sector reforms – consolidation, NPA

reduction (Securitisation Act) IPR protectionStock market regulations; Corporate GovernanceSocial Security initiatives

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Third generation reforms

On-going…  Major labour reforms needed

Sunset provisions in law-making needed

Complete overhauling of major policyframeworks needed – Esp inInfrastructure development etc.

Tariff walls need to be brought down

More focus on non-software exports also

needed

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The new face of India

World’s largest democracy

Second largest emerging market

Liberal Foreign Investment Regime Skilled and competitive labour force

Large domestic market

Independent judiciary

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Indian advantages in knowledge service

High-end IT enabled services are the next growth frontier!

People-High Quality HR- Cost- Language Adv.

Government Support-FDI – Liberalization - IT bill

Location

Advantages - Time Zonedifference- Country Risk

Infrastructure- Developing at a rapid pace

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Final summary 1947 Economic Independence 1947-60 Series of economic legislations

1960-70 Nationalisation of banks

1970-80 Restricting internal & external

competition 1980-90 First steps towards Reforms

1991-96 First Generation EconomicReforms

1997-03 Second Generation EconomicReforms

2004 onwards - Third Generationstructural reforms

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Best

 wishes!