India on the Move Final

8/3/2019 India on the Move Final

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India on the MoveSiska

Tania,

Theresia,

Tomy Hendratmoko,

Rito Halim,

Julianto Samudi

Fantastic 5





BackgroundIndia suffered a financial collapse in 1992, but had been

growing at

almost

6%

annually

by

2002

making

it

one

of

the fastest growing economies of the world.

India

removed

almost

all

its

import

and

capacity

licensing

restrictions and adopted the Washington Consensus.

Financial controls were enforced by the International

Monetary Fund (IMF), thus making major economic

reforms in India that would grant them loans in order to

move it along toward a more market‐oriented economy.



The focus of these reforms was to reduce the

governments’ bureaucracy and stabilize the country’s

macroeconomic balance.

Competition

barriers

became

less

burdensome, inflation was lowered, and the current

account was balanced.

Even though these issues illustrate a road to improvement,

huge fiscal deficits still existed and interruptions and

corruption

in

Pakistan

continued.

Background



Foreign investment became slow to enter India due to the

continued restrictions on foreign ownership, the slow

progress of

privatization,

and

India’s

substandard

infrastructure.

To achieve

growth

in

India,

significant

reforms

needed

to

be passed. Success in India’s growth performance plan for

economic and social growth into reality would be the

country’s’

biggest

obstacle.

Background



Questions1. Why did India experience relatively slow economic growth (3,5%) from

independence until 1991?

2. Can you identify the key factors that could have affected more rapid

development? Comment

on

Balance

of

Payment

in

last

5 years?

3. Why did Rao adopt the post‐crisis, “Washington Consensus” strategy? How is it

working?

4. How big a deal are Institutional problems (including fiscal deficits), Corruption,

Religious and

political

frictions?

5. Is India an attractive site for foreign direct investment? What are the Pros and

Cons



COUNTRY ANALYSIS

CONTEXT ‐ DOMESTIC

Economic Resources• 3.3 million square kilometers

•

Its

subcontinent

is

a

fertile

and

mineral‐rich region

• 1.05 billion population in 2002

• Highly dependent upon agriculture

Political System

• Parliamentary democracy modeled

• The Congress Party control for 33 of

the 44 years following independence

Social Structure• An extremely diverse country (dialects,

region

and

religious)• Specific “Caste” of structured hierarchy

• Domestic strife was a common

occurrence

Institutions• Legal and educational system based on

English standards

Ideology

•

Nehruism (a

liberal

idealistic

type

of

fabianist socialism) is used by the first

Prime Minister



COUNTRY ANALYSIS

CONTEXT ‐ INTERNATIONAL

Trading Relationships• Bad relationship with Pakistan

•

“Permit

Raj”

is

a

complex

system

of

licensing

that

fostered

both

inefficiency

and

corruption

Multilateral Institutions• Foreign Direct Investment (FDI) entered India

•

India’s

substandard

infrastructure

proved

to

be

a

large

deterrent

to

foreign

investors

Global Industries• Focusing on competitive export activity

• Become strength country on Information Technology sources

•

Rising

the

Indian

entrepreneurs



COUNTRY ANALYSIS

STRATEGY ‐ GOALS

Economic Growth• GDP $3.1 trillion (GDP growth rate 8%

‐ 2010)

• World‐class recognition in IT. By 2002,

software exports and service made up

2% of India’s GDP, and predicted

continuously growing

Full Employment

• By improving the country’s primary

education system, unemployment

became decrease

•

Rising

the

Indian

entrepreneurs

Price Stability Government released ISI model to make

the economies closed compared to other

economies in the world. It was not

sustainable because of inefficiency in the

industry, which was effected to the

pricing stability

Consumption

Has a big sources of oil and natural

Exports

Focusing

on

exports

growth



COUNTRY ANALYSIS

STRATEGY ‐ GOALS

Political Stability, Sovereignty • Conflict with Pakistan

• Domestic strife was a common occurrence in India

• Tight bureaucracy

Educational, Health, Welfare Improvement

• Improving the country’s primary education system

•

Improving

industry

productivity

performance• Killed tight bureaucracy to reduce corruption



COUNTRY ANALYSIS

STRATEGY ‐ POLICIES

Fiscal

• Investing in the infrastructure and

sorely needed social welfare program

• Raising interest rates to level as high

as 12% in 2002

• The right to tax the agriculture and

property sectors

• Debt servicing

Monetary

In 2002, Manage CPI at 156 (% change

4.7%)

Incomes

• Export focusing

• Rising the Indian entrepreneurs

• Become a world‐class recognition in IT

Trade and Investment

• Foreign direct investment

•

Privatization

policy

Economic SectorsAchieving its economic potential

Social SectorsPublic sector reform, transport

infrastructure, agricultural and rural

development, removal of labor

regulations, education, energy security,

and

public

health

and

nutrition



COUNTRY ANALYSIS

PERFORMANCE ‐ ECONOMIC

Gross National Product (GNP)2002 Real GNP Growth is 4.4%

Unemployment

India is ranked as medium human

development

Inflation

In 2002, Manage CPI at 156 (% change

4.7%)

Balance of Payments

Deficit

fiscal

policy

(focus on infrastructure)

Capacity UtilizationStill potential capacity utilization

Independence

Depend on parliamentary

Regime ChangesDomestic strife was a common

occurrence

PERFORMANCE ‐ POLITICAL

Improving on:

• Infrastructure

• Educational system

•Health

welfare

• Income distribution

PERFORMANCE ‐ SOCIAL



Why did India experience relatively slow economic growth (3,5%) from


India’s population had reached 1.05 billion by 2002 and was growing at 1.5%,

more than the country could support at the time. Domestic issues existed

between numerous religions. India’s government adopted an Import

Substitution Industrialization model (ISI) in order to protect the economy

against foreign competition but this model proved to create a high fiscal

deficit of 5.6% for the country and making them reevaluate their union

budget

The ISI model was based on regulations in the private and public sector, trade

and foreign direct investment which made the economy closed compared to

other economies in the world. This system was not sustainable in the long

term

because

it

encouraged

inefficiency

in

the

industry

performance.

In

an

effort to move towards an economy more regulated by the discipline of

market competition, India removed almost all its restrictions and the

countries’ tariffs were simplified and lowered



Why did India experience relatively slow economic growth (3,5%) from


India’s growth performance plan was written in five year segments in order

to target different areas of deficit the country faced [Exhibit 10b]. Agricultural

productivity would

be

increased,

environmental

concerns

would

be

assessed

and trading in all commodities would be allowed including the removal of

barriers of trade and commerce. India quickly realized its need to increase

trade to alleviate their balance of payment shortfalls



Can you identify the key factors that could have affected more rapid

development? Comment on Balance of Payment in last 5 years?

The effected key factors on rapid development are:

• Political stability

• Efficiency on industry

• Government policies

• Educational level

Balance of Payment in the last 5 years showed that India has deficit , because

India

focused

on

infrastructure

development.

The

political

issue

with

Pakistan

was also caused increment of expenditure.

Meanwhile the income still focused on export growing and debt. India still

needed some imported product and also interest loan payment.



Why did Rao adopt the post-crisis, “Washington Consensus” strategy? How is it

working?

Prime Minister Rao was forced to turn to the IMF

for assistance. This was a result of a balance of

payment crisis due to high interest rates and

inflation driven

by

the

fall

of

its

principal

trading

partner, the Soviet Union. The IMF granted loans

to India under the condition that they begin

making major economic reforms consistent with

the “Washington

Consensus”

which

prescribed

ten

policies aimed to reduce state participation in the

economies, end restrictions on trade and capital

flows, and reduce tax burden ultimately seeking a

market oriented system. Most importantly, these

policies needed

to

be

used

to

minimize

the

role

of

the government in economic decisions or the

economy would simply collapse.




working?

One of the most important results from these market reforms was to reduce

India’s fiscal deficit to a higher GDP, estimated in 2002‐2003 to 5.9% and in

2003‐2004

to

5.6%

according

to

the

union

Budget

[Exhibit

11a].

A

reformed

economy that grew at a respectable rate in an environment with low inflation

and interest rates could help not only India’s economy, but also assist India’s

private and foreign investment to increase

There have been intense debates on the ”Washington consensus”, in

particular issues around the liberalized markets, open trade, privatized firms,

a stable macro economy, and a stable legal environment with adequate

property right protection. Advocates of full liberalization reforms argue that

by increasing

the

size

of

markets

and

by

fostering

product

market

competition, liberalization enhances growth. However, critics point out that

liberalization can be detrimental to growth by inhibiting infant industries

which can cause a country great danger due to government failures of these

less developed nations




working?

The effect of the 1991 liberalization on performance measures such as productivity,

investment and output, varied according to the technological capabilities of industries

and firms and the institutional environments faced across India during that time.

Reducing barriers

to

entry

to

foreign

products

and

firms

had

a positive

effect

on

economic performance for firms and industries that were closer to the technological

frontier but performance in firms and industries that were far from that frontier were

actually damaged . Incumbent firms that are sufficiently close to the technological

frontier could survive and deter entry by innovating but firms those that were below

that frontier

were

in

a weaker

position

to

fight

external

entry

as

this

threat

reduced

the expected payoff from innovating, since their expected life horizon had become

shorter.

These research findings draw several important policy insights. First, that the stage of

technological development

of

a firm

or

industry

matters.

Second,

that

the

impact

of

liberalization on a firms performance depends upon institutions such as labor

regulations which differ across regions and affect the incentives for firms to invest and

innovate. Domestic policy reforms also play a central role in determining the extent to

which firms and industries benefit from macroeconomic reforms which lower barriers

to entry.




working?

Non‐competitive policies may have limited costs when countries such as India are far

from the world technology frontier making it more costly near the frontier for them.

Liberalizing entry or opening up to trade is particularly growth‐enhancing for

countries already

close

to

the

world

technological

frontier

but

less

for

countries

far

below the frontier, such as India in 1991. Although the adoption of free market

oriented policies has accentuated disparities worldwide, liberalization policies, in my

opinion, did not have a global, national or a long‐term perspective for India. The

package did not project itself into the future nor did it make an attempt to outline the

type of

society

likely

to

emerge

in

the

future

and

it

did

not

measure

its

relative

position in the global frame.

Liberalization in India in 1991 failed to portray what would be the relative position of

the county versus a developed country. Little attention was paid to indicate the limits

and potential

dangers

of

excessive

reliance

on

free

market

system

especially

in

societies with large interpersonal disparities such as India had. The package had very

little to offer to a skilled manual worker based in rural and backward surroundings as

this represents the concerns of the organized, vocal and the influential sections and

not the overwhelming majority of the Indian population and their socio‐economic

problems.



How big a deal are Institutional problems (including fiscal deficits), Corruption,

Religious and political frictions?

The effect is very big. All those factors are important issues in analyzing a country.

Fiscal

Fiscal deficits

could

mean

that

Government

does

not

have

the

right

strategy

in

running the country. Fiscal level must be well maintained so that Government can

provide a good environment for investors to grow their businesses and still at the

other hand maintain people’s welfare by not introducing high level of tax rate.

Corruption

Corruption is by far the deadliest disease for country’s growth. India stayed at

number 72 in Corruption Perception Index year 2002, based on the ranking

provided by Transparency International.

It will prevent a country to improve its economic growth, since it could create

inefficient organization,

usually

very

bureaucratic

system,

and

will

demoralize

people.



How big a deal are Institutional problems (including fiscal deficits), Corruption,

Religious and political frictions?

Religious

India had religious tensions over the dispute of Ayodhya temple, causing the

death of 2000 people in year 1992. Oter dispute also occurred in state Gujarat

causing casualty

of

more

than

2000

people.

This religious tension is not good for economic growth, since foreign investors will

see this as a threat to their investment.

Political frictions

Externally India

had

a very

bad

political

conflict

against

Pakistan.

The

dispute

had

been over the disputed state of Kashmir. The recent conflict involved terrorists

from Pakistan that stormed Parliament of India causing 12 dead.

Internally, the friction between political parties and other groups also caused the

death of Rajiv Gandhi in 1991 and long rivalries between several parties.

This friction

would

also

keep

investors

away,

since

they

would

not

have

any

security guarantee for their investment



Is India an attractive site for foreign direct investment? What are the Pros and

Cons

India ranks second in the world in terms of financial attractiveness, people and skills

availability and business environment according to AT Kearney's 2007 Global Services

Location Index and they welcome long term investments. The country's financial

stability in

the

current

environment

of

financial

turbulence

and

a possible

unwinding

of macro imbalances sends clear messages to prospective foreign investors about

India's position as an expanding investment destination. "India's external sector has

displayed considerable strength and resilience since the reforms in 1991‐ despite

several domestic as well as global political events and supply shocks in food and fuel.

"The strong macroeconomic fundamentals, growing size of the economy and

improving investment climate has attracted global corporation to invest in India. A

major outcome of the economic reforms process aimed at opening up the economy

and embracing globalization has led to tremendous increase in Foreign Direct

Investment (FDI)

inflows

into

India",

says

the

country's

powerful

industry

lobbyist




Cons

Branding India as a "safe and stable" investment destination amid global financial

turmoil today is supported by the FDI inflows into India. During the fiscal year (2008‐

09) it closed at $35 billion signifying over $11 billion invested in the previous financial

year. In

2007

‐08,

reinvested

earnings

of

foreign

firms

in

India

stood

at

$5.5

billion.

Global firms routed most of the investment through tax havens like Mauritius and

Singapore during 2007‐08, while Japanese firms poured more money into India. Many

investments were expected to flow into petroleum, manufacturing and the electronic

hardware sectors . Policy makers estimated that to sustain high growth rates, India

would need

massive

investments

in

the

five

year

period

to

March

2012,

including

$500 billion in infrastructure.

The country's current account deficit (CAD) represents the difference of inflows and

outflows of foreign exchange, barring capital movements, surged by 72% to $15.8

billion in

the

July

‐September

quarter

over

$9.2

billion

in

the

same

period

last

year

due

to higher imports . In 1991, these were negative in the 4 million [Exhibit 8]. Exhibit 12

also illustrates the combined fiscal deficits for Center and States from 1990 through

2002. The Reserve Bank of India reported that the external sector needed to be

monitored closely. Although the economy was well poised to absorb a higher CAD for

a couple

of

years,

this

should

not

remain

a persisting

trend




Cons

Pros

Foreign investor trust, shown by the rating provided by AT Kearney

Strong support by Government as a result of Washington Consensus

Growth of

IT

Rise of Indian Entrepreneurs

Large base of English speaking people

Cons

Social and

Political

conflict

Corruption that still prevails throughout the country

Lack of infrastructure (roads, electricity)



Thank You

Documents

India on the Move Final