Indian Economic & Trade Policy

Session-1

MBA (IB) – 2006-09

Course Structure & Evaluation

• 1. Structure of Indian Economy

• 2. Policy & Execution • 3. Sector-specific Issues & Development

(Agriculture, Industry & Service)

• 4. Social Sector Development & Poverty

• 5. Overview of External Sector

• 6. Trade Policy

• 7. FDI – An Indian Perspective

• 8.Review of the Course

Economic Planning

Key Objectives – Growth, Equity & Social Justice

Other objectives –

1. Economic Growth

2. Reduction of Inequality

3. Employment

4. Economic Self-Reliance

5. Modernisation of various sectors

6. Redressing regional imbalances

How these objectives are related to business?

GROWTH PERFORMANCE IN THE FIVE YEAR PLAN PERIOD

Plan Target Actual

First 2.1 3.6

Second 4.5 4.21

Third 5.6 2.72

Fourth 5.7 2.05

Fifth 4.4 4.83

Sixth 5.2 5.54

Seventh 5.0 6.02

Eighth 5.6 6.0

Ninth 6.5 5.35

Indian Economy – Policy & Challenges• Post-Independence- Focus on large scale industrialization- Hindu growth rate- Green Revolution (self-sufficiency in food)- Anti-poverty development programme- Policy shift from control to gradual decontrol

• Post-1990 Period- Broad based reforms & SAP- Demand driven growth supported by investment

& private consumption- Capital inflows & business environment- Inclusive growth, sustainable business, CSR

Performance of Indian Economy:

• Four Phases: I (1951-65), II (1965-81), III(1981-88), IV (1989-2006)

• Phase-I: 1951-65 (growth 4.1%)- Coherent Dev. Strategy – institution building- Relatively liberal policy: free import regime, - liberal investment licensing, - Open to direct foreign investment

Performance of Indian Economy:• Phase-II: 1965-81 (growth 3.2%) – darkest period- Foreign exchange budgeting – tight imports and

investments- Major policy shift towards state control- Nationalization of banks, oil companies, coal mines- Restriction on foreign company operation- Investment by large firms to core sectors- Ceiling on urban land holding- Labour laws – firms with more than 100 employees- Growth rate declined 2.6% (1966-75)Many restrictions imposed during this period proved

politically difficult to undo later

Performance of Indian Economy:• Phase-II: 1965-81 contd…- Growth rate declined to 2.6 (1965-75) – it was clear

that govt. strategy did not work.- Strategy to easy up on state controls - Administrative measures, capacity expansion, de-

licensing select sectors, - Import liberalization – open general licensing

(1977) & further expansion- Major depreciation of rupee to expand exports- Expansionary fiscal policy & external borrowing

Performance of Indian Economy:• Phase-III: 1981-88 (growth 4.2%)- Acceleration of liberalization and expansionary

fiscal policy financed by external borrowing- It improved growth up to 7.6% (1988-89)- BoP crisis –Gulf war - jump in in Oil prices - Growth declined to 1.2% (1991-92)

Performance of Indian Economy:• Phase-IV: 1989- 2006- Policy shift from piecemeal reform to more systematic reforms- Dismantle licensing on machinery & raw material imports,

lower industrial tariffs, - open to foreign investment, - Reform in direct & indirect taxes, financial sector- Trimming of fiscal deficit- Open select sector to private sector – telecom, civil aviation- Growth rate up 7.1% (1993-97)- Reforms became slow during 1996-1999 - political factor - New initiatives in 1999 - Foreign & domestic competition,

focus on infrastructure, import licensing on consumer goods, - Reduction in tariffs, pvt of public sector, insurance sector,

liberal interest rate, freed up several external capital A/c- Urban land ceiling Act replaced, Huge highway construction- Electricity Act 2003, Amendment of company Act 1956

GDP Growth (at factor cost)

Sectoral Growth Performance (%)

Period Agrl & Allied

Industry Manf. Service Total GDP

1951-65 2.9 6.7 6.6 4.7 4.1

1965-81 2.1 4.0 3.9 4.3 3.2

1981-88 2.1 6.3 7.1 6.5 4.8

1988-06 3.4 6.5 6.8 7.8 6.3

Sectoral Growth – Recent Trend

Sectoral Composition of GDP (%)

Period Agrl & Allied

Industry Manf. Service Total GDP

1950-51 57 15 9 28 100

1964-65 49 21 12 31 100

1980-81 40 24 14 36 100

1987-88 33 26 16 41 100

2004-05 21 27 17 52 100

Structural Transformation in India• Agrarian rural economy to modern one – by

passed industrial growth to service sector growth• 90 % workforce in informal sector outside Agr.• Slow industrial (Manf.) growth – loss of comp.

advantage• Stagnation/slow growth of unskilled labour-

intensive sectors – apparel, textile, footwear, • Organized sector growth limited to capital based

(steel, auto) or service based (software, pharma)• Trade sector – trade facilitation, high tariffs,

export subsidy

ECONOMIC CRISIS, GROWTH & REFORMS

Macro Economic Crisis of 1990s – three aspects

• Fragile BoP situation

• Inflationary Pressure

• Fiscal Imbalance

ECONOMIC REFORMS After 1990

I. Macro Economic StabilisationControl of Inflation

Fiscal Adjustment and Reforms

Measure for BoP Improvement (Devaluation)

II. Structural ReformsTrade and Capital Flow (External Sector

Reforms)

Industrial Deregulation

Disinvestment

Financial Sector Reforms

Reforms for Growth• Forex-Market Reforms (Full current A/c convertibility)

• Reforms in Foreign Investment Regime (Liberalising rules for FDI and allowing FII)

• Reforms in Infrastructure (PPP)• Reforms in the form of EXIM policy (Tariff Rate

reduction, QR removal, etc)

• Allowing Indian companies to invest abroad• Challenges and Opportunities (Threat to SSIs?)

• Joint Ventures with Foreign Companies in India and Abroad

• Compatibles with WTO Framework

Emerging India– in Trade Perspective(Faster Integrating to World Economy)

• GDP Growth 13.8% (in real $ terms) 2003-07• Merchandise Export (in current $) 18.1 billion in

(1991) doubled in 1999-00 & 102.7 billion in 2005-06• Service Exports increased from 26.9 billion in 2003-4

to 60.6 billion In 2005-06• Trade constitutes 43% of GDP: Export as % of GDP

– 7.2% (1991), 11.6% (1999-00) 20.5% (2005-06)• FDI- $7.8 billion (2005-6) 16.4 (2006-7) 25 (2007-8)• Remittance (Abroad)– highest in in world $17.2 billon

(2002-03 to 24.6 billion (2005-06), 27 billion 2007-08

Investment Scenarios

Growth of Capital Formation

Sectoral Employment Shares by Current Daily Status (CDS Basis)

Employment and Unemployment in million person (by CDS basis)

Employment Growth

Social Sector Issues- Poverty

Growth of MPCEs (monthly per-capita consumption expenditure)

Public Delivery of Social Services• Failure of public delivery: health, water, education,

social security• Health care – 80% of outpatient & 55% of inpatient

care provided by private sector –Absenteeism of govt. health workers- 40%

• Education– high absenteeism, dropout, poor quality, highly govt. controlled higher education

• Social Security-

Political Economy of India• India – the fastest growing democracy in world• Good economics is not always to be good politics • Fertile land for parties - usually ruled by dynasties• Governance: identical agenda across groups,

regions, states and parties• The wave of reforms started under compulsion

and spread across states with uneven impacts.• The Challenges - Moving from compulsion-driven

reforms to strategy-driven reforms • Policy Sluggishness: Political stability v/s policy

stability - India’s best economic performance has been in the politically most uncertain decade

Positive Trends

• Re-enforcing Efficiency – • Globalisation has made Indian economy efficient• Regionalisation has made federation of India

effective and efficient• Predominance of local issues will make our

utilities efficient

• Removing restrictions to leverage the benefits of comparative advantage

Challenges Ahead• GLOBALISING Indian Economy • REGIONALISING Indian Governance • LOCALISING Indian Society • Supply side challenges• Effective Centre-State partnership• Dismantling of unproductive and regressive

state functionary• Nationally Acceptable Common Minimum

Programme (NACMP) for all