Case analysis

INDIA ON THE MOVE

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 postcrisis, 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 HinduMuslim 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