INDIA ON THE MOVE AN ANALYSIS

By Group - 8

1991 ECONOMIC CRISIS

In the beginning of 1985, India started having problems. By the end of 1990, it became a serious Economic Crisis or Financial crisis. The government was close to default as:
1. 2.

The Central Bank refused new credit, Foreign exchange reserves reduced to three weeks worth of imports.

India has to put 67 tons of GOLD reserves as collateral to IMF for $2.2 billion foreign reserves.

CAUSES
1. 2.

3.
4.

Currency overvaluation which subjected the exchange rate to severe adjustments. The Gulf War in 1990 resulted in an oil price hike which led to: High import bill. Exports slumping. Credit drying up, and Investors taking out their money due to low investors confidence. The world growth declined by 4.5% in 1991, and it affected US the most on which India was highly dependent. Efforts for trade and industrial liberalization in 1980s along with tax reforms led to a rise in fiscal deficits from 35% of GDP to 53% of GDP which caused Balance of Payments (BoP) problems. Political instability caused due to coalition government in India. Low export/GDP ratio led to the following consequences: Rising trade and current account deficits Deteriorating external debt profile.

1. 2.

1991-1995

1991-1995 (Strategy) Macroeconomic management of reforms

Reducing Fiscal and revenue deficits. Debt financing pattern pre 1991 curbed. Tax Reforms Trade Policy/External Sector Industrial Policy Infrastructure Sector Divestment/Privatization Policies Financial Sector Attraction of FDI State Level Economic Reforms

Structural and sector-specific economic reforms

1991-1995 (Performance) Devaluation of Rupee. BOP crisis over by March 1994. Forex Reserve risen to more than adequate level of $15.07 Billion. CAD as a % of GDP was nearly eliminated. Export growth rate was 20% in 1993-94 over previous years. Unemployment declined to 5.61% in 1993-94. Growing disparity between richer and poorer states within India. Ratio of trade to GDP increased from 13.1 % to 20.3 % from 1990 to 2000. Gross FDI as a %of GDP rose to 0.6%

INDUSTRIAL RECESSION

Strategy: Growth slowdown to a combination of supply . Deceleration in manufacturing growth to 6.1 per cent in 1997-98 as against 7.4 per cent in 1996-97. Industrial growth fell to 7.1 per cent in 1996-97 and to 4.6 per cent in 1997-98. Context: It began in a year (1996-97) when agricultural production registered a remarkable increase because of the good monsoon; and It persists despite the fact that there has been no significant cutback in government expenditures in 1997-98, when the fiscal deficit rose to 6.1 per cent of GDP.

1. 2.

1. 2. 3. 4.

Performance: GDP grew by just 5 per cent in 1997-98 as compared with 7.5 per cent in 1996-97. 2 per cent decline in the contribution of agriculture. Consumer non-durables did not perform well. High cost of durables input due to exchange rate lead to high cost of production.

INDIA SHINING
1. 2. 3. 4. 5.

STRATEGY: To attain 8% GDP growth 5% reduction in poverty by 2007 and 15 % by 2012 Increase literacy rate to 75% Increase in quality employment Reduction in mortality rates
PERFORMANCE: Average growth rate of 8.6% from 2003 to 2008. Came out of global recession 2008 performing much better than other countries Gross Capital Formation from 12% to 16% during the period 2003-2008 During the period average growth of investment stood at 17% Huge amount of foreign investments has been coming to India since 1991 High growth in technology and IT sector adding 55% of GDP to economy FDI increased from $6 billion to $20 billion Industrial sector increased from 5.3% to 9.1% Manufacturing sector increased from 4.35 to 8.6% Service sector has also shown notable growth from 8.1% to 10.2% of GDP Consumption growth inc from 1% in 2003 to 6% in 2007 Per Capita income growth rate doubled from 3.5% to 6.5%

2003-2008

INDIA UPTO 2008-09

THERE HAVE BEEN THREE MAJOR CRISES
1. 2. 3.

1991-92 balance of payment (BOP) crisis 1997-98 fallout from the Asian financial crisis 2000-02 crisis caused by the worldwide bursting of the dotcom bubble and 9/11 incident.

2003-04 to 2007-08: India had been growing at an annual average rate of 8.8 per cent. Fears of over-heating of the economy prompted the Reserve Bank of India (RBI) to begin monetary tightening as early as September 2004 when the cash-reserve ratio (CRR) for commercial banks was raised. The sharp increase in global fuel and food prices in the first quarter of 2008 aggravated inflationary concerns and resulted in further monetary tightening that saw interest rates being hiked until August 2008.

CAUSES FOR THE SLOWDOWN IN 200809

Monetary Tightening Industrial Sector Weakness Monsoon-dependent Agriculture Investment Weakness Fiscal Measures the growth in exports and imports has started declining in September and October 2008 respectively. The government introduced fiscal stimulus packages amounting to 1.3 per cent of GDP in 2008-09 which has worsened the already high fiscal deficit situation. The additional borrowing to finance the huge deficit has already raised yields on government bonds in the last few months of the year. Global Integration Liberalization in industry, investment, foreign trade, financial sector and capital flows that was undertaken after the balance of payment crisis in early 1990s led to India becoming well integrated with the world economy.

POLICY RESPONSE TO THE ECONOMIC SLOWDOWN

Monetary Policy Measures and Fiscal Stimulus India has to substantially relax its permit and approval system by carrying out procedural reforms which will raise the investment climate for both domestic and foreign investment. The real challenge for Indian policy makers is to raise the share of Indias exports in major markets and product segments. Central bank lowered repo rate and cash reserve ratio (CRR) several times in the recession period. That pumped more cash in the market and improved liquidity. Indias financial system played a vital role. The banks and financial institutions were not tempted to buy the mortgage-supported securities and credit-default swaps that ruined several Western financial institutions. Among the drivers of growth, domestic capital formation retained much of its momentum from preceding years.

Despite of the major slowdown in the IT industry across the globe, Indian software industry survived during the economic downturn. Also the Indian IT sector had started exploring European countries and was not completely dependent on the US.

WILL INDIA BECOME A GLOBAL POWER?

The threat to India from religious bigotry Addressing the Naxalite issue Sustainable development without contributing much to the carbon footprint Enhance resource access for people in the bottom of the heap and checking the demands of those in position of advantage Rent seeking and corruption to be rooted out by institutionalizing laws. Indian courts have to be proactive to deliver justice quickly One size fits all strategy will never work for a country like India Inequality to be addressed. Sanitation and healthcare investments to be increased

INDIA COMPARED TO OTHER EMERGING ECONOMIES HDI value for India was 0.547. Ranked 134 out of 187 countries. Among the comparable BRICS nations, India spends the least on public healthcare. As a developing country, innovation in India is much higher than in China. The agricultural sector of China is more developed than that of India.

INDIA v/s CHINA

INDIA v/s CHINA

In the inevitable comparisons between the worlds two largest countries and two fastestgrowing economies, India usually ends up on the losing end. Indias economic growth has consistently trailed Chinas. India hasnt eradicated poverty as quickly as China, even when India started its pro-growth reforms a dozen years after China. India has struggled to compete with China in large-scale, export-oriented manufacturing, and doesnt attract as much foreign investment as China. The fractured government in India acts more slowly than Chinas to implement policy or build much-needed infrastructure.( Just compare Beijings ultra-organized 2008 Olympics to New Delhis embarrassing 2010 Commonwealth Games.) But at the same time, Indias economic system has some often ignored advantages over Chinas: More Balanced Growth (Private Consumption) More rational Companies and Banks. (Bank credit to the private sector in China reached 148% of GDP in 2009 compared to only 54% in India.) Democracy

THE PATH FORWARD

Addressing Fiscal Challenges

Improving Business Conditions

Lowering poverty and inequality Improving Sectoral Growth by increasing the Productivity. Improving the Infrastructure Financial Sector Reforms India should make use of IT to improve the effectiveness and efficiency of its Business and other economic operations. Cut down on corruption and inefficient government

THANK YOU !!!

Group 8 Section 1 1. Dishank Wadhwa 2. Inder Rishi 3. Insha Rahman 4. Khushali Patel 5. Santosh Krishnan 6. Swetha SubhasChandran