INDIA ON THE MOVE Case analysis

Case Overview

Decision point is Feb 2003. Challenge of achieving goals of 10th

Five year plan along with fiscal stability and religious as well as political stability

Approaching national elections next year

What do the number tell?

Interpretation of numbers India exceedingly low on HDI – 124th rank out of 173 countries Annual growth rate – 6 % (lower than china but better as

compared to other Asian countries Consumption remains high – 66 % Govt spending stable at 13 % (revenues not the expenditure is

the problem) Investment not grown (ranging from 19 % to 22 %) Trade has increased from 5.1 % to 9.1 % Savings have increased from 11 % to 23 % Share of agriculture has gone down. Sharp depreciation of rupee from 8.3 r/$ to 48.6. Wide difference across states – literacy, sex ratio, pop growth Low productivity in public sector Rising share of IT services in trade composition Large size of deficits Politically fragmented economy

What was the performance of the economy till 1990?

Performance of the economy till 1990

Govt intensive strategy of import substitution

High investment in public sector High regulations – high tariffs, taxes,

price controls, FDI, etc GDP growth up to 5 to 6 % pa. High Consumption & low Investment Low level of Govt revenues Huge fiscal deficit Moderate inflation

Why did India experience slow economic growth from independence until 1991?

Analysis

Huge population burden – more than 1 billion Democratic structure as against authoritarian or dictatorship

in many other countries leading to operational inefficiency and lack of clear direction

Fragmented society – religions/ caste/ languages/ rural-urban/ geographic diversities

Implementation of mix Soviet- style of development strategy More emphasis on government investment, import

substitution, autonomy & self sustenance rather than growth High stake of public sector (more than 49 % of output & 100

% of financial systems) Extremely high tariffs, control over foreign investments, price

controls, license raj, huge bureaucracy Rigid labour laws leading to rigidities in wages, low

productivity & low mobility

What is Washington consensus strategy?

10 point agenda of Washington Consensus

Fiscal tightening/ discipline Interest rate liberalization More investment in health & education Competitive exchange rate - Devaluation Removal of barriers on trade -Tariffs down Removal of barriers to foreign investment - FDI Deregulation Privatization Tax reforms Security to property rights

What were the options open in front of PM Rao?

Options available before Prime minister Narasimha Rao

Japan style industrial policy of developing capital intensive with domestic capital & foreign technology – India 40 years behind from Japan, Korea & Taiwan

China style low value added export strategy – India 30 years behind China & lack of FDI

Korea/ Mexico / Brazil style debt leveraged strategy – India already debt ridden

USSR style divestiture strategy – with the wake of violence & strife between different communities, India could not go far this strategy

What were the issues?

Issues

Fiscal imbalance Corruption Religious friction Pakistan Democratic fragmentation

Tenth Five-Year Plan (2002–2007)

Attain 8% GDP growth per year. Reduction of poverty ratio by 5 percentage points

by 2007. Providing gainful and high-quality employment at

least to the addition to the labour force;*All children in India in school by 2003; all children to complete 5 years of schooling by 2007.

Reduction in gender gaps in literacy and wage rates by at least 50% by 2007;*Reduction in the decadal rate of population growth between 2001 and 2011 to 16.2%;*Increase in Literacy Rates to 75 per cent within the Tenth Plan period (2002 - 2007)

Why did Rao adopted the post-crisis, “Washington Consensus” strategy?

Analysis

Combination of high oil prices (raising the price of imports) & collapse of the USSR (leading to fall in exports) in 1991 resulted into exhaustion of foreign exchange.

Realization of limitations of import substitution policy

Forcing to ship gold to London as a collateral to get additional loan from IMF

End of political regime of Nehru – Gandhi family with sudden death of Rajeev Gandhi

How gradual liberalization & privatization was handled?

Process of handling privatization & liberalization

Process started in late 1980s – Rajeev Gandhi regime

Devaluation of rupee – 22 % (1993) Current account convertibility (1994) Reduction in import restrictions & elimination of

capacity licensing Cutting down tariffs Gradual reduction in price controls Reduction in restrictions on foreign ownership Liberalization of banking Broadening tax base to increase govt revenues Tightening of monetary policy

What were the positive outcomes of the liberalization & privatization policy?

Positive outcomes of the liberalization policy

High growth of IT industry Extraordinary growth of outsourcing

industry Rise of Indian entrepreneurs Rise in FDI Rising competitiveness of Indian

companies

What were the problems associated with liberalization & privatization?

Problems associated with liberalization & privatization

Unproductive government enterprises leading to over employment of resources

Difficulty in forcing layoffs in large public sectors Reducing government bureaucracy Stabilizing macro economic balance Low level of infrastructure facilities in terms of power,

roads, seaports & airports leading to slow growth of FDI Corruption & lack of transparency – 72nd rank in

corruption Perception Index – 2002 No clear policy of disinvestment – capital or consumer

goods, sick or profitable units? Slow speed of reforms in the wake of elections Failure to control fiscal deficit

How big a deal are Hindu-Muslim friction? Demographic fragmentation?

Social & Political conflicts Quasi war between India & Pakistan

during 1999 to 2001 leading to diversion of economic issues

Religious tensions between hindu & muslim in 1992 on Ayodhya temple dispute

Godhara riots in 2002 Vajpayee govt losing political support

to bring back economy on the growth path

Is fiscal discipline so much necessary before going towards liberalization?

Impact of fiscal indiscipline Fiscal deficits of central govt rose to 5.9 % & with state

govt to more than 10 % of GDP 50 % of govt expen on debt servicing Less investment of economic & social infrastructure High rate of interest for pvt investment – 12 % Excess expenditure on defense, subsidies,

rehabilitation , etc. Lack of political will power to broaden tax base – agr

tax No resources to increase budget allocation for

education % health Differential rate between lending rate (12 %) &

inflation (4%) is 8 %

Is India an attractive site for foreign direct investment?

Pros & Cons

Pros – Stability & resilience Proper legal framework Favourabley changing govt policies Stable growth in terms of GDP, etc High consumption potential Cons – Low labour productivity Corruption Slow rate of reforms High fiscal deficits Lack of political will pwer