INDIA

Presented by:

Chan Lai Ming 98-4254-L-07Wong Mui San 98-4489-A-07Andy Tay Hu-Kang 97-4157-Y-07Tan Tuan Leng 98-4260-L-07

India

• 6th largest country • 2nd largest population• Started out as a British colony• Gained independence in August 1947• Separated from Pakistan and Bangaladesh• Self-ruling democracy• Current ruling party: Bharatiya Janata Party (BJP)

headed by Atal Behari Vajpayee

Practice Hindutva

History: Caste System

• Lifelong social stratification

• Existed for almost 3,000 years

• Ritual pollution

History: Caste System (cont)

Caste OccupationBraham Priests or scholarsKshatriya Nobles and warriorsVaishva Merchants and skilled artisansShudra Common labourersHarijan Outcastes; degrading labour

•Abolished in 1949•Industrialization and urbanization

Indian Business Model: Swardeshi

• After independence, India's economic policies were driven by her leaders' deep distrust of foreign trade and admiration for the Stalinist Soviet Model of Self-reliant industrialization

• Practised Swardeshi (self-reliance)

Indian Business Model: Swardeshi • Policy of export pessimism

• Based largely on Indian political aversion to foreign trade and investment

• Domestic competition limited

• Centralized government planning

-- 5-year plans

Strengths of Swardeshi

• High Tariffs and Licenses for Imports

- discourage foreign trade

- policy of protectionism

- gain economies of scale and efficiency

• Local Licensing and Quota Schemes

- ensure no powerful local enterprise

- granted licenses became monopoly devices

Strengths of Swardeshi

• Guaranteed Profits- domestic licensing scheme

• Rent Seeking- setting up License Rajs (King of Licenses)

• Institutional Framework- more developed- inherited common-law system of justice from Britain

Weaknesses of Swardeshi

• Inefficient

- disastrous impact in domestic industries

- uncompetitive for exports

• Lack of Innovation

- no local or foreign competitors

Weaknesses of Swardeshi

• Corruption

- entry barrier for new businesses

- expensive business cost

• Labour Laws and Unions

- outdated labour laws

- unions play prominent role in labour market

- low skilled labour and low productivity

Need for Economic Reforms

• Rapid and sustained improvement in the quality of her citizens’ life

• Increase the productivity of capital, land and labour

• Unprecedented economic crisis and socio-political turmoil in July 1991

• Defaulting on her international commitments

Need for Economic Reforms (cont)

• Denial of foreign funds and downgrading of her credit rating from Moody’s

• Resort to borrowing against their gold reserves from the International Monetary Fund (IMF)

• Need to restore international confidence in the economy and to redress the imbalances that had emerged in external and domestic financial conditions

Technology

• Introduction

• Under British Rule -- Tightly controlled and depleted India’s resources

• Post Independence -- Inward looking Strategy

Information Technology

Post Independence

Ignored by government, most of it in Foreign control

Change in policy in 1965 -- Bhabha Committee formed to reinvent the industry and have self reliance

Department of Electronics (DoE) former in 1970

Electronics Corporation of India Limited (ECIL) formed in 1971 (monopolistic)

Before 1991

• Computer Maintenance Corporation (CMC) formed in 1975

• Stagnation of import volume from 1977-1986

• Slashed duties on imported computer component in 1986

• The polices were impeding India’s IT industry

After 1991

• Liberalisation of Economy

• Removal of barriers to Foreign Investment

• Implemented income-tax exemptions on profits from software exports

• Granting of more Internet Service Provider (ISP) licenses in 1998

• National Task Force on Information Technology and Software Development was set up on May 22, 1998

Advantages of India in IT Industry

• Abundance of cheap skilled software personnel

• Relatively unregulated by government

• Access to top quality western management

Advantages of India in IT Industry

• English is widely spoken

• Experienced software engineers who have worked in the Silicon Valley and came back

• Lower Operating Costs

Weaknesses

• Poor Telecommunications Infrastructure

Nuclear Technology

• India’s Nuclear Policy -- World Free of Nuclear Weapons

• Began in 1969 with help from Canada and USA

• First Nuclear Test in 1974 -- End of Foreign Assistance

• Refusal to sign Non-Proliferation Treaty in 1968

• Safety concerns at Nuclear Plants

Other ways of harnessing Nuclear Technology

• Nuclear Energy

• Applications in Agriculture

• Medicine / Healthcare

• Spin of Technologies

• Water Management

• Space Technology

Nuclear Tests of 1998

• Conducted 2 Nuclear Tests in May 1998

• Received Worldwide Condemnation and Economic sanctions were enacted

• Did not revoke any Treaties because none were signed in the first place

• Remained Defiant

• Refused to sign the Comprehensive Test Treat Ban but is negotiating for total disarmament

Reasons for Adoption of Nuclear Weapons

• Aggressive stance of Neighbours, Pakistan and China

But…….

Possible Real Reasons??

• Need for recognition

• Breaking out of Colonial Legacy

• To be a force to be reckoned with

India’s Financial Markets

• 6 Broad Institutions:

1. Commercial banks 2. Specialized banking institutions 3. Mutual credit organizations 4. Informal financing organizations 5. Organized securities exchanges 6. Insurance and pension funds

Financial Reforms

• Liberalization of Capital Markets

-- Foreign Institutional Investors (FIIs) are permitted to invest in Indian capital

markets on registration with the SEBI (Joint Business Council, 1994)

-- Simplified common application forms

Financial Reforms

-- Foreign brokers are permitted to assist investors

-- All mutual funds are allowed to apply for firm allocation in public issues

-- These funds are also exempted from income tax regardless of whether they are in the private or public sectors

Financial Reforms (Contd)

-- Consolidated payment of stamp duty

-- The Securities Contract (Regulations) Rules have been amended to enable widely held stock broking companies to become members of the stock market.

• Reduction in Statutory Liquidity Ratio (SLR)-- Set to be reduced to 25% from a high 47%


• Liberalization of interest rates

-- Banks are now able to set their own prime lending rates.

-- The banks’ prime lending rates have to be declared and be uniformly applicable at all branches


•Unified exchange rate

-- Introduced in March 1993

-- Provides a powerful incentive for exports including services, exports and remittances

-- Greatly reduced the incentive for forward remittances flowing to the illegal “hawala” market

Financial Reforms (Contd)• Convertibility of the Rupee

-- Full convertibility of the rupee on the capital account in the 1995-1996 budget

• New private sector banks-- The restrictions on the formation of new banks in the private sector have been removed

-- Existing private banks are also allowed to expand without the fear of nationalization

Financial Reforms (Contd)-- Banks can raise capital contributions from foreign institutional investors up to 20%, and up to 40% from non-resident Indians (NRIs)

-- permitted to close non-viable branches other than in the rural areas

• Elimination of government access to RBI-- Government deficits will not be automatically monetized -- Easier to control the growth of the money supply as well as inflation


• Strengthening of the SEBI-- Armed with the necessary authority and power

for the regulation and reform of the capital market

-- To improve trading practices, disclosure and investor protection

• Incorporation of International Accounting practices -- implemented in 1992-1993


-- ensures that the banks’ balance sheets reflect an accurate financial position, which is a prerequisite for effective monitoring and improving performance

-- improve the transparency of the capital markets to protect investors and boost greater market efficiency

In 25 December 1997, India’s investment rating was raised to that of the lowest investment grade rating level, Baa3 by Moody’s.

India’s Service Industry

Telecommunications

-- India’s telecommunication sector has the highest proportion of unfulfilled demand among all service sectors

-- India’s burgeoning middle class has kept demand for telephones far ahead of availability

-- Widely considered as a strategic investment to maintain and develop competitive advantage at all levels – national, regional and firm

Government Organization in the Telecom Sector

• Videsh Sinchar Nigam Limited (VSNL)

• Mahanagar Telephone Nigam Limited (MTNL)

• Department of Telecommunications (DOT)

• Indian Telephone Industries (ITI)

New Telecom Policy

• Availability of telephones on demand and in all villages in 1997

• Providing a PCO for every 500 people

• Opening up of the sub-sector of value-added services to private investors in July 1992 for electronic mail, voice mail, data, audio text, video text, video conferencing, radio paging and cellular mobile telephone services

New Telecom Policy

• Delicensing the manufacture of telecommunications equipment

• Granting licences on the basis of circles

• Allowing foreign equity participation up to 49%

• Setting up of a regulatory body (TRAI)

• Reducing custom duties on mobile phones

Private Sectors & MNCs

• AT&T

• Singapore Telecoms

• Australian Telecoms

• CIT Alcatel of France

• Siemens

• Ericsson

• Fujitsu

India’s Service Industry• Railways

-- The 150 year old Indian railways employs 1.6 million people and carries some 13 million passengers and 1.2 million tones of goods on 13,500 trains a day

-- Fifty years ago, it carried most of the country’s freight but today road transport carries more.

-- The freight trains are profitable but its market share is shrinking.

Performance of the Railways

Modernization Programmes

• Electrification • Heavier and faster passenger and freight trains are

designed• Bringing computers and modern telecommunication

systems into freight management • Tapping in the capital markets through the Indian

Railway Finance Corporation • Build-Own-Lease-Transfer (BOLT) and Own-Your-

Wagon Scheme (OYWS) to encourage private participation and also to supplement resources

Year 2000 Railway Budget

• Highlights

-- Introduction of at least 19 new trains

-- Free travel for girls going to school

-- Information Technology

-- 5% hike in some already high freight rates

India’s Service Industry

• Airlines-- 4 international airports; New Delhi, Bombay, Calcutta and Madras -- Its flag carrier, Air India is largely restricted to international operations-- The domestic carrier Indian Airlines operates to some neighbouring countries-- A feeder route airline, Vayudoot links remote or low traffic areas to nodal points-- Helicopter Corporation of India providing access to mountain areas and to handle the offshore personnel transport requirements

India Aviation Reforms

• India’s Dis-investment Commission has proposed that 60% of Air India equity should be sold off to the private sector and that a foreign airline should take the lion’s share of that as a strategic partner

• Plan is to sell off 51% of Indian Airlines’ equity, with the most of that going to a major Indian business or to financial institutions

India Aviation Reforms

• Govt. to inject loans and equity of up to US$475 million to offset the airlines’ past losses and to provide funds for new aircraft

• Proposed “open skies” for all routes with private-sector investment in both airlines and airports

• Creation of an independent regulatory authority like the US’s Federal Aviation Administration

Future of Indian Economy

• Eradication of Poverty

Poverty Alleviation and Employment Plans

– Integrated Rural Development Programme (IRDP)

– Training Rural Youth for Self-Employment (TRYSEM)

– Development of Women and Children in Rural Areas (DWCRA)

Performance of Special Employment and Poverty Alleviation Programmes

(In lakh)

Education

Increase Literacy and Improve Education System

(i) Education for All – Free and compulsory primary education up to 5th

standard and total eradication of illiteracy

(ii) Education of prioritised groups – Girls, SCs/ STs and Backward classes and

educationally backward minorities

Education

(iii) Access and quality – Equal access and opportunity for all up to

school stage and improvement of quality at all levels.

(iv) Financing of education – Increase in government and non-government

spending on education, and bringing this up to 6% GDP level.

Foreign Direct Investment• Encouraging FDI

FDI by Host Region (US $ Million)

Country 1994 1995 1996 1997 e

China 33787 35849 40800 45300

India 973 1964 2382 3264Indonesia 2109 4348 6194

5350Korea, Rep. 809 1776 2325 2341Malaysia 4342 4132 4672 3754Philippines 1591 1459 1520 1253Thailand 1322 2002 2268 3600All developing countries including China 95582 105511 129813 148944

Share of India in developing countries (%) 1.0 1.9 1.8 2.2 Source : World Investment Report, United Nations, 1998.‘e’ : estimates.Note : Figures for India in this table may not be comparable with those in other tables because of differences in coverage andsource of information

Foreign Direct Investment : Actual Flows vs. Approvals

1994 1995 1996 1997 1998* Total (91 to 98)ApprovalsRs crore 13590 37489 39453 57149 25103 189968US$ million 4332 11245 11142 15752 6132 54268Actual InflowsRs crore 3009 6720 8431 12085 8433 41490US$ million 958 2100 2383 3330 2073 11806Actual Inflows as % of Approvals 22.1 18.7 21.4 21.1 33.8 21.7(In US $ terms)

Source : RBI* : Upto September, 1998. Figures are provisional.Note : The approval and actual inflows figures include NRI direct investments approved by RBI.

Conclusion

• India has potential to be the top economies in the world

• Must manage bilateral relations with Pakistan and rid the stigma of a nuclear pariah

• Uphold financial reforms

• Crack down on corruption, reduce poverty, increase literacy

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INDIA