Situation

India had important economic reforms to establish globalization. However, we can also
see the negative effects caused by globalization and capitalism in India; where they were only
enriching a small minority of the large Indian population. Inequalities in India are still very
strong; the wealthiest 1% of the population owns 53% of the country’s wealth. Capitalism
created a luxurious living standard for India’s 1%, but at the same time it disrupted the income
distribution and condemned the majority to a rough, unhealthy life style. Where it came to the
point the income gap between the rich and the poor are getting wider each day.
India needs a fast growing economy to sustain its increasing population. According to
United Nations India is expected to have the highest population, surpassing China in 5 years.
Despite the economic growth, unemployment rates have risen and 50% of India’s working-age
population is out of labor force. “For one thing, the Indian economy isn’t creating enough jobs to
absorb the 1 million Indians who enter the job market each month.”

Current Situation

One of Narendra Modi’s biggest reforms was the introduction of goods and services tax
(GST), which had crucial impact on public finances and was a barrier against tax evasion.
Another important policy taken my Modi was the banknotes, India’s highest denominations 500
and 1,000 rupee banknotes (accounted for 86% of the cash in the country), would no longer be
the circulating money and therefore had to be deposited in banks as a deposit for an exchange
(Appendix A). Demonization was done to get ahead of corruption and black money which
enabled the Indian government to increase its tax collection and tax efficiency. Also it allowed
the Indian government to monitor where the transaction money goes to enhance safety in
transactions and limited illegal practices such as smuggling, drug trafficking and terrorism
practices. As stated by the Pearson India’s Economy Case 2-1 “Some critics noted that ‘shock
treatment’ of this type had previously occurred only in countries experiencing hyperinflation or
economic collapse.”
The most important advancement was experienced by the banks, because India’s banking
system was lagging behind, even compared to Asian economies which were considered ‘low
performing, underdeveloped’. The demonetization ensured a shift from transaction in cash to
transaction by the bank, resulting in a development of Indian Banking system. This advancement
decreased the transaction and synchronization costs for Indian businessman who were exporting
goods and services.
Even though after the elections, the government had passed bills regarding changes in
goods and services tax and the foreign investment quota, most of the economic reforms took
place in only administrational areas because the ruling party was the minority in the parliament.
However, long-term challenges remain important in the country: India's discrimination
against women and girls, an inadequate energy production and distribution system, limited
enforcement of intellectual property rights, inadequate transport and inadequate agricultural
infrastructure, limitation of non-agricultural employment opportunities, high spending and
inadequately targeted subsidies, poor quality basic and higher education, and continued
migration from rural to urban. India, apart from its political problems, has two major problems;
population surplus and poverty. Poverty and malnutrition are still very high and literacy is very
low due to weak education system Bombay, Delhi and Calcutta which are the three largest, most
developed cities in India, the literacy rate is 53 percent for women, 75 percent for men, and 64
percent for the total population. With China, one of the two countries with a world population
above 1 billion, India will soon become the most populous country in the world due to its high
population growth rate. Despite the optimistic expectations that the birth rate will decline, the
population of India is estimated to reach 1.4 billion by 2025. India is expected to be the most
populous country in the world by crossing China in 2028.

Detailed Findings

Prime minister Narendra Modi has a central-right background and capitalist view of the
economy which means privatization in economy is the first recommendation for the government
and will be the following trend in India. Private economies have two different sides; first
government/state owned public organizations tend to be not efficient enough and are mostly
deficit. However, in public management well-structured and mutually beneficial agreements
between the government and private sector enable the use of private capital and strengthen the
efficiency of monitoring made by private firms. Project financing such as BOT (Build-Operate-
Transfer) where these agreements can ensure good use of capital that are very scarce in
underdeveloped countries such as India. In order to increase productivity and decrease the
amount of wasted capital and resources, privatization would be a rational way for a mixed, both
command and market economy like India. Sectors and practices (road networks, auto parks,
railways etc.) in which the Indian government transfer to private firms would be an important
step for improving the development of the Indian economy.
One of the reasons for objection against Modi could be his policies towards privatization.
This is due to the fact that these kind of high populous countries (China, India, Russia) have been
historically ruled by strict, command-oriented state capitalism. The trend of privatization, would
increase the decentralization of the economy and the state. Nationalist parties, political
opponents of Modi might be seeing this movement towards privatization as losing the India’s
core practices and fundamentals.
As it’s mentioned in the situation analysis and case study, one of the biggest challenges
India’s facing currently is unemployment. According to Indian Statistical Institute, each year 10
million people join the labor force. This obligates the government to take major steps towards
their small-scale manufacturing industry in the industrial sector in order to create new jobs for 10
million people which would be the best growth opportunity/alternative for India. The
government can give financial incentives such as subsidies, grants to local industrial firms in
order to grow the infant sectors/ companies. China had the a similar economic approach during
1970-1990’s where they had infant industries which couldn’t compete with developed country
economies. They gave financial supports to its companies in order for them to produce higher
quality, priced goods. Even though 53% of India’s population depends on employment in
agricultural sector, agriculture contributes only to 17% to India’s GDP. It can be seen in
Appendix C that industrial and service sectors are the two fastest growing sectors. Rural to urban
migration could be taken advantage of to enable employment opportunities in especially those
sectors. “About 450 millions of 1.2 billion Indians migrated within the country, according to
recently released Census 2011 data. Of this, 78 million, or 15.6% of all domestic migrants,
moved from rural to urban areas.”
 A rooted, stable education system is essential for each country’s economic, social,
political development. Another challenge in India which can be turned into an opportunity is its
inadequate education system. The government should be able to provide its youth with basic
knowledge on certain sectors to create a gradual improvement in their economic, and social
system. For example, in Turkey there are technical schools for people who would want to enter a
specific job market with certain knowledge level. If workers have a better understanding of
needs of the economy and sectors, they would have the knowledge to produce quality outputs to
meet standards of advanced economies. This recommendation goes hand to hand with other
opportunities because having well-educated workers in the economy is fundamental for every
advancement.

Impact of IT sector for India’s Gross National Product has showed gradual increase after
2000’s. India has over 5000 technology software and services companies. 65% of these
companies are owned by local Indian firms, and the other 35% are owned by international
companies. However, despite the majority of Indian tech companies, more than 50% of the IT
sector revenue belongs to international companies. This revenue and resource, capital difference
create barriers for local firms to develop and compete in an environment where the international
companies have enough resources to draw them out of competition. Local tech companies could
form a partnership, union with each other to apply for mutual, bigger financial funds in order to
have an access to more capital. They could create a small Silicon Valley including only those
local companies to create a learning, experience sharing atmosphere where they would be having
competitive advantage against international companies. Research and development is crucial for
IT sector. Knowledge exchange between companies would help the local firms to have mutual
R&D and eventually lower their costs. Along with the improvement of IT sector, internet and
smartphones have gained strong presences in Indian society. Especially young people who have
the right to vote currently or in couple years are the fans of Modi’s social media. New
generations lay important amount of significance on social media presence and construct their
perception according to the internet. Modi’s successful digital media strategy would help the
government to achieve economic reforms with his new generation fans behind.

Position (SWOT Analysis)

Strengths
Young Population: participation in the economy of the population is high due to the young
population.
Globalization: Enables the shift to export-driven economy easily.
New Foreign Investments Quota: FDI will boost the employment by creating new jobs,
opportunities for Indian workers.
Rural to Urban Migration: 54% of India’s GVA belongs to service sector, and 30%of it
belongs to industrial sector. Increase in urban population will help to create a bigger service and
industrial sector.

Weaknesses
Inflation of Rupi: Makes the population restless due to the ineffective use of monetary reforms,
the gap between lower class and high class expands. Prices of the goods and services fluctuate,
creating an uncertainty around Indian economy.
Weak Education System: Low-income, developing country with undeveloped, slow education
system will increase immigration of more qualified, better educated, foreign people. At the same
time, weak education system will lower the creativity and innovation in the country. Resulting
with the inability to create added-value products for Indian economy.
Discrimination Against Women: Participation of women in economy is low. Labor Factor in
the economy decreases.

Opportunities
Fastest Growing Economy (Appendix B):This is an important opportunity for big international
firms to invest in India. Either as FDI (Foreign Direct Investment) or establishment of
distributors in India by foreign countries.
One of the Largest Population: Labor-intensive jobs are suitable for India. High population
signifies high consuming economy. Suitable for big international companies to penetrate and
instill advancement in technology.

Threats
Pakistani War: War between Pakistan and India causes instability on the Kashmir region (Paki-
Indi border), which effects the reliability of the country and the overall economy. This unstable
economic environment, decreases the foreign capital flow to the country, and investment from
both international and local firms.
 Appendix

Appendix A.

Appendix B.

Appendix C.
Source: IMF, WB Group (*) Prediction

Sector 2012 2013 2014 2015 2016 2017*

Agriculture 1,5 4,2 -0,2 1,2 2,0 3,0
Industrial 3,5 5,0 5,9 7,4 8,1 7,4
Service 10,0 9,6 11,6 9,9 8,8 8,1
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