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India on the Move

Fantastic5
SiskaTania,Theresia,Tomy Hendratmoko,Rito Halim,Julianto Samudi

Background
1.1billionpeople 600,000Villages,70%populationrural Diversity language,culture,religion Multiparty,Multitiereddemocracy FederalStructureofGovernment Centre 29States&6Uts 240,000LocalGovernmentInstitutions

Background
Indiasufferedafinancialcollapsein1992,buthadbeen growingatalmost6%annuallyby2002makingitoneof thefastestgrowingeconomiesoftheworld.

Indiaremovedalmostallitsimportandcapacitylicensing restrictionsandadoptedtheWashingtonConsensus. FinancialcontrolswereenforcedbytheInternational MonetaryFund(IMF),thusmakingmajoreconomic reformsinIndiathatwouldgrantthemloansinorderto moveitalongtowardamoremarketorientedeconomy.

Background
Thefocusofthesereformswastoreducethe governmentsbureaucracyandstabilizethecountrys macroeconomicbalance.Competitionbarriersbecameless burdensome,inflationwaslowered,andthecurrent accountwasbalanced.

Eventhoughtheseissuesillustratearoadtoimprovement, hugefiscaldeficitsstillexistedandinterruptionsand corruptioninPakistancontinued.

Background
ForeigninvestmentbecameslowtoenterIndiaduetothe continuedrestrictionsonforeignownership,theslow progressofprivatization,andIndiassubstandard infrastructure.

ToachievegrowthinIndia,significantreformsneededto bepassed.SuccessinIndiasgrowthperformanceplanfor economicandsocialgrowthintorealitywouldbethe countrysbiggestobstacle.

Questions
1.WhydidIndiaexperiencerelativelysloweconomicgrowth(3,5%)from independenceuntil1991? 2.Canyouidentifythekeyfactorsthatcouldhaveaffectedmorerapid development?CommentonBalanceofPaymentinlast5years? 3.WhydidRao adoptthepostcrisis,WashingtonConsensusstrategy?Howisit working? 4.HowbigadealareInstitutionalproblems(includingfiscaldeficits),Corruption, Religiousandpoliticalfrictions? 5.IsIndiaanattractivesiteforforeigndirectinvestment?WhataretheProsand Cons

COUNTRY ANALYSIS
CONTEXT DOMESTIC
EconomicResources 3.3millionsquarekilometers Itssubcontinentisafertileand mineralrichregion 1.05billionpopulationin2002 Highlydependentuponagriculture PoliticalSystem Parliamentarydemocracymodeled TheCongressPartycontrolfor33of the44yearsfollowingindependence SocialStructure Anextremelydiversecountry(dialects, regionandreligious) SpecificCasteofstructuredhierarchy Domesticstrifewasacommon occurrence Institutions Legalandeducationalsystembasedon Englishstandards Ideology Nehruism (aliberalidealistictypeof fabianist socialism)isusedbythefirst PrimeMinister

COUNTRY ANALYSIS
CONTEXT INTERNATIONAL
TradingRelationships BadrelationshipwithPakistan PermitRajisacomplexsystemoflicensingthatfosteredbothinefficiencyand corruption MultilateralInstitutions ForeignDirectInvestment(FDI)enteredIndia Indiassubstandardinfrastructureprovedtobealargedeterrenttoforeigninvestors GlobalIndustries Focusingoncompetitiveexportactivity BecomestrengthcountryonInformationTechnologysources RisingtheIndianentrepreneurs

COUNTRY ANALYSIS
STRATEGY GOALS
EconomicGrowth GDP$3.1trillion(GDPgrowthrate8% 2010) WorldclassrecognitioninIT.By2002, softwareexportsandservicemadeup 2%ofIndiasGDP,andpredicted continuouslygrowing FullEmployment Byimprovingthecountrysprimary educationsystem,unemployment becamedecrease RisingtheIndianentrepreneurs PriceStability GovernmentreleasedISImodeltomake theeconomiesclosedcomparedtoother economiesintheworld.Itwasnot sustainablebecauseofinefficiencyinthe industry,whichwaseffectedtothe pricingstability Consumption Hasabigsourcesofoilandnatural Exports Focusingonexportsgrowth

COUNTRY ANALYSIS
STRATEGY GOALS
PoliticalStability,Sovereignty ConflictwithPakistan DomesticstrifewasacommonoccurrenceinIndia Tightbureaucracy Educational,Health,WelfareImprovement Improvingthecountrysprimaryeducationsystem Improvingindustryproductivityperformance Killedtightbureaucracytoreducecorruption

COUNTRY ANALYSIS
STRATEGY POLICIES
Fiscal Investingintheinfrastructureand sorelyneededsocialwelfareprogram Raisinginterestratestolevelashigh as12%in2002 Therighttotaxtheagricultureand propertysectors Debtservicing Monetary In2002,ManageCPIat156(%change 4.7%) Incomes Exportfocusing RisingtheIndianentrepreneurs BecomeaworldclassrecognitioninIT TradeandInvestment Foreigndirectinvestment Privatizationpolicy EconomicSectors Achievingitseconomicpotential SocialSectors Publicsectorreform,transport infrastructure,agriculturalandrural development,removaloflabor regulations,education,energysecurity, andpublichealthandnutrition

COUNTRY ANALYSIS
PERFORMANCE ECONOMIC
GrossNationalProduct(GNP) 2002RealGNPGrowthis4.4% Unemployment Indiaisrankedasmediumhuman development Inflation In2002,ManageCPIat156(%change 4.7%) BalanceofPayments Deficitfiscalpolicy (focusoninfrastructure) CapacityUtilization Stillpotentialcapacityutilization

PERFORMANCE POLITICAL
Independence Dependonparliamentary RegimeChanges Domesticstrifewasacommon occurrence

PERFORMANCE SOCIAL
Improvingon: Infrastructure Educationalsystem Healthwelfare Incomedistribution

Why did India experience relatively slow economic growth (3,5%) from independence until 1991?
Indiaspopulationhadreached1.05billionby2002andwasgrowingat1.5%, morethanthecountrycouldsupportatthetime.Domesticissuesexisted betweennumerousreligions.IndiasgovernmentadoptedanImport SubstitutionIndustrializationmodel(ISI)inordertoprotecttheeconomy againstforeigncompetitionbutthismodelprovedtocreateahighfiscal deficitof5.6%forthecountryandmakingthemreevaluatetheirunion budget TheISImodelwasbasedonregulationsintheprivateandpublicsector,trade andforeigndirectinvestmentwhichmadetheeconomyclosedcomparedto othereconomiesintheworld.Thissystemwasnotsustainableinthelong termbecauseitencouragedinefficiencyintheindustryperformance.Inan efforttomovetowardsaneconomymoreregulatedbythedisciplineof marketcompetition,Indiaremovedalmostallitsrestrictionsandthe countriestariffsweresimplifiedandlowered

Why did India experience relatively slow economic growth (3,5%) from independence until 1991?
Indiasgrowthperformanceplanwaswritteninfiveyearsegmentsinorder totargetdifferentareasofdeficitthecountryfaced[Exhibit10b].Agricultural productivitywouldbeincreased,environmentalconcernswouldbeassessed andtradinginallcommoditieswouldbeallowedincludingtheremovalof barriersoftradeandcommerce.Indiaquicklyrealizeditsneedtoincrease tradetoalleviatetheirbalanceofpaymentshortfalls

Can you identify the key factors that could have affected more rapid development? Comment on Balance of Payment in last 5 years?
Theeffectedkeyfactorsonrapiddevelopmentare: Politicalstability Efficiencyonindustry Governmentpolicies Educationallevel BalanceofPaymentinthelast5yearsshowedthatIndiahasdeficit,because Indiafocusedoninfrastructuredevelopment.ThepoliticalissuewithPakistan wasalsocausedincrementofexpenditure. Meanwhiletheincomestillfocusedonexportgrowinganddebt.Indiastill neededsomeimportedproductandalsointerestloanpayment.

Why did Rao adopt the post-crisis, Washington Consensus strategy? How is it working?
PrimeMinisterRao wasforcedtoturntotheIMF forassistance.Thiswasaresultofabalanceof paymentcrisisduetohighinterestratesand inflationdrivenbythefallofitsprincipaltrading partner,theSovietUnion.TheIMFgrantedloans toIndiaundertheconditionthattheybegin makingmajoreconomicreformsconsistentwith theWashingtonConsensuswhichprescribedten policiesaimedtoreducestateparticipationinthe economies,endrestrictionsontradeandcapital flows,andreducetaxburdenultimatelyseekinga marketorientedsystem.Mostimportantly,these policiesneededtobeusedtominimizetheroleof thegovernmentineconomicdecisionsorthe economywouldsimplycollapse.

Why did Rao adopt the post-crisis, Washington Consensus strategy? How is it working?
Oneofthemostimportantresultsfromthesemarketreformswastoreduce IndiasfiscaldeficittoahigherGDP,estimatedin20022003to5.9%andin 20032004to5.6%accordingtotheunionBudget[Exhibit11a].Areformed economythatgrewatarespectablerateinanenvironmentwithlowinflation andinterestratescouldhelpnotonlyIndiaseconomy,butalsoassistIndias privateandforeigninvestmenttoincrease TherehavebeenintensedebatesontheWashingtonconsensus,in particularissuesaroundtheliberalizedmarkets,opentrade,privatizedfirms, astablemacroeconomy,andastablelegalenvironmentwithadequate propertyrightprotection.Advocatesoffullliberalizationreformsarguethat byincreasingthesizeofmarketsandbyfosteringproductmarket competition,liberalizationenhancesgrowth.However,criticspointoutthat liberalizationcanbedetrimentaltogrowthbyinhibitinginfantindustries whichcancauseacountrygreatdangerduetogovernmentfailuresofthese lessdevelopednations

Why did Rao adopt the post-crisis, Washington Consensus strategy? How is it working?
Theeffectofthe1991liberalizationonperformancemeasuressuchasproductivity, investmentandoutput,variedaccordingtothetechnologicalcapabilitiesofindustries andfirmsandtheinstitutionalenvironmentsfacedacrossIndiaduringthattime. Reducingbarrierstoentrytoforeignproductsandfirmshadapositiveeffecton economicperformanceforfirmsandindustriesthatwereclosertothetechnological frontierbutperformanceinfirmsandindustriesthatwerefarfromthatfrontierwere actuallydamaged.Incumbentfirmsthataresufficientlyclosetothetechnological frontiercouldsurviveanddeterentrybyinnovatingbutfirmsthosethatwerebelow thatfrontierwereinaweakerpositiontofightexternalentryasthisthreatreduced theexpectedpayofffrominnovating,sincetheirexpectedlifehorizonhadbecome shorter. Theseresearchfindingsdrawseveralimportantpolicyinsights.First,thatthestageof technologicaldevelopmentofafirmorindustrymatters.Second,thattheimpactof liberalizationonafirmsperformancedependsuponinstitutionssuchaslabor regulationswhichdifferacrossregionsandaffecttheincentivesforfirmstoinvestand innovate.Domesticpolicyreformsalsoplayacentralroleindeterminingtheextentto whichfirmsandindustriesbenefitfrommacroeconomicreformswhichlowerbarriers toentry.

Why did Rao adopt the post-crisis, Washington Consensus strategy? How is it working?
NoncompetitivepoliciesmayhavelimitedcostswhencountriessuchasIndiaarefar fromtheworldtechnologyfrontiermakingitmorecostlynearthefrontierforthem. Liberalizingentryoropeninguptotradeisparticularlygrowthenhancingfor countriesalreadyclosetotheworldtechnologicalfrontierbutlessforcountriesfar belowthefrontier,suchasIndiain1991.Althoughtheadoptionoffreemarket orientedpolicieshasaccentuateddisparitiesworldwide,liberalizationpolicies,inmy opinion,didnothaveaglobal,nationaloralongtermperspectiveforIndia.The packagedidnotprojectitselfintothefuturenordiditmakeanattempttooutlinethe typeofsocietylikelytoemergeinthefutureanditdidnotmeasureitsrelative positionintheglobalframe. LiberalizationinIndiain1991failedtoportraywhatwouldbetherelativepositionof thecountyversusadevelopedcountry.Littleattentionwaspaidtoindicatethelimits andpotentialdangersofexcessiverelianceonfreemarketsystemespeciallyin societieswithlargeinterpersonaldisparitiessuchasIndiahad.Thepackagehadvery littletooffertoaskilledmanualworkerbasedinruralandbackwardsurroundingsas thisrepresentstheconcernsoftheorganized,vocalandtheinfluentialsectionsand nottheoverwhelmingmajorityoftheIndianpopulationandtheirsocioeconomic problems.

How big a deal are Institutional problems (including fiscal deficits), Corruption, Religious and political frictions?
Theeffectisverybig.Allthosefactorsareimportantissuesinanalyzingacountry. Fiscal FiscaldeficitscouldmeanthatGovernmentdoesnothavetherightstrategyin runningthecountry.FiscallevelmustbewellmaintainedsothatGovernmentcan provideagoodenvironmentforinvestorstogrowtheirbusinessesandstillatthe otherhandmaintainpeopleswelfarebynotintroducinghighleveloftaxrate. Corruption Corruptionisbyfarthedeadliestdiseaseforcountrysgrowth.Indiastayedat number72inCorruptionPerceptionIndexyear2002,basedontheranking providedbyTransparencyInternational. Itwillpreventacountrytoimproveitseconomicgrowth,sinceitcouldcreate inefficientorganization,usuallyverybureaucraticsystem,andwilldemoralize people.

How big a deal are Institutional problems (including fiscal deficits), Corruption, Religious and political frictions?
Religious IndiahadreligioustensionsoverthedisputeofAyodhya temple,causingthe deathof2000peopleinyear1992.Oter disputealsooccurredinstateGujarat causingcasualtyofmorethan2000people. Thisreligioustensionisnotgoodforeconomicgrowth,sinceforeigninvestorswill seethisasathreattotheirinvestment. Politicalfrictions ExternallyIndiahadaverybadpoliticalconflictagainstPakistan.Thedisputehad beenoverthedisputedstateofKashmir.Therecentconflictinvolvedterrorists fromPakistanthatstormedParliamentofIndiacausing12dead. Internally,thefrictionbetweenpoliticalpartiesandothergroupsalsocausedthe deathofRajivGandhiin1991andlongrivalriesbetweenseveralparties. Thisfrictionwouldalsokeepinvestorsaway,sincetheywouldnothaveany securityguaranteefortheirinvestment

Is India an attractive site for foreign direct investment? What are the Pros and Cons
Indiarankssecondintheworldintermsoffinancialattractiveness,peopleandskills availabilityandbusinessenvironmentaccordingtoATKearney's2007GlobalServices LocationIndexandtheywelcomelongterminvestments.Thecountry'sfinancial stabilityinthecurrentenvironmentoffinancialturbulenceandapossibleunwinding ofmacroimbalancessendsclearmessagestoprospectiveforeigninvestorsabout India'spositionasanexpandinginvestmentdestination."India'sexternalsectorhas displayedconsiderablestrengthandresiliencesincethereformsin1991 despite severaldomesticaswellasglobalpoliticaleventsandsupplyshocksinfoodandfuel. "Thestrongmacroeconomicfundamentals,growingsizeoftheeconomyand improvinginvestmentclimatehasattractedglobalcorporationtoinvestinIndia.A majoroutcomeoftheeconomicreformsprocessaimedatopeninguptheeconomy andembracingglobalizationhasledtotremendousincreaseinForeignDirect Investment(FDI)inflowsintoIndia",saysthecountry'spowerfulindustrylobbyist

Is India an attractive site for foreign direct investment? What are the Pros and Cons
BrandingIndiaasa"safeandstable"investmentdestinationamidglobalfinancial turmoiltodayissupportedbytheFDIinflowsintoIndia.Duringthefiscalyear(2008 09)itclosedat$35billionsignifyingover$11billioninvestedinthepreviousfinancial year.In200708,reinvestedearningsofforeignfirmsinIndiastoodat$5.5billion. GlobalfirmsroutedmostoftheinvestmentthroughtaxhavenslikeMauritiusand Singaporeduring200708,whileJapanesefirmspouredmoremoneyintoIndia.Many investmentswereexpectedtoflowintopetroleum,manufacturingandtheelectronic hardwaresectors.Policymakersestimatedthattosustainhighgrowthrates,India wouldneedmassiveinvestmentsinthefiveyearperiodtoMarch2012,including $500billionininfrastructure. Thecountry'scurrentaccountdeficit(CAD)representsthedifferenceofinflowsand outflowsofforeignexchange,barringcapitalmovements,surgedby72%to$15.8 billionintheJulySeptemberquarterover$9.2billioninthesameperiodlastyeardue tohigherimports.In1991,thesewerenegativeinthe4million[Exhibit8].Exhibit12 alsoillustratesthecombinedfiscaldeficitsforCenterandStatesfrom1990through 2002.TheReserveBankofIndiareportedthattheexternalsectorneededtobe monitoredclosely. AlthoughtheeconomywaswellpoisedtoabsorbahigherCADfor acoupleofyears,thisshouldnotremainapersistingtrend

Is India an attractive site for foreign direct investment? What are the Pros and Cons
Pros Foreigninvestortrust,shownbytheratingprovidedbyATKearney StrongsupportbyGovernmentasaresultofWashingtonConsensus GrowthofIT RiseofIndianEntrepreneurs LargebaseofEnglishspeakingpeople Cons SocialandPoliticalconflict Corruptionthatstillprevailsthroughoutthecountry Lackofinfrastructure(roads,electricity)

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