India's Economic Growth Story

7/30/2019 India's Economic Growth Story

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A report by Hanmer MSL, part of MSLGROUP

21 years of economic reforms:The journey so far and the road ahead


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EXECUTIVE SUMMARY

REFORMS: A BRIEF HISTORY

a. Launchpad

b. Falling short

KEY ACHIEVEMENTSa. Growth

b. Innovation

c. Investment

d. The battle against poverty

e. Literacy

WHATS LEFT

a. Social sector

b. Hunger

c. Corruptiond. Infrastructure

e. Administrative reforms

f. Fiscal management

WHAT LIES AHEAD

a. Growth

b. Investment

c. Private and public consumption

d. Will the RBI relent?

TOP PRIORITIES

INDIAS ECONOMIC JOURNEY

INDUSTRY MILESTONES

INDIA AT A GLANCE

04

06

10

15

19

25

26

27

28

Table of contents


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Executive summary

4

On July 24, 1991, with the country dangerouslyclose to defaulting on its debt and with foreign

exchange reserves enough to pay only for

three weeks of imports, then finance minister

Manmohan Singh presented a landmark

budget.

India gave up socialism, adopted liberalisation

and started shaking off the fetters that had

held it back for far too long.

Days earlier, the country had airlifted 47 tons

of gold to the Bank of England as collateralfor debt, and turned in desperation to the

International Monetary Fund (IMF) for aid.

Singh went on to devalue the rupee, started

unravelling the licence raj and began opening

the country to foreign capital. Suddenly,

multinationals such as Coca-Cola, which had

been driven out of India years earlier, were

being wooed to return.

Singh concluded his speech in Parliament by

quoting Victor Hugo: No power on Earth can

stop an idea whose time has come.

A moment of humiliation was turned into one

of hope. It was historic.

Since then, India has averaged growth of 7%,

second only to China. India has also witnessed

the rise of the middle-class, the worlds

largest, which has contributed to and partaken

of the growth in equal measure.

However, economic reforms are not an end

in themselves. Growth is not a wholesomeindicator. Equally important are quality of

life, literacy, the battle against poverty, and

equitable growth. The last has spawned the

most heated debates. While supporters of

the economic policy say that the effect on the

overall population will inevitably be slow, its

critics assert that reforms have only made the

rich richer and the poor poorer.

In Indias cities, the changes are obvious

the once-ubiquitous Premier Padmini

has disappeared while Marutis, Hyundais,Hondas, Mitsubishis, Mercedes and Skodas

jostle for space on cramped roads. Malls and

multiplexes have become the new places to

be seen at.


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5

In economics it is a

far, far wiser thing

to be right than to

be consistent.

-John Kenneth

Galbraith,

economist

A study of

economics usually

reveals that the

best time to buy

anything is last

year.

-Marty Allen,

comedian

However, the paradox is apparent as youtravel to the rural heartland. India has fared

miserably in agriculture, which is growing at a

mere 2% on average even as grain stocks are

ravaged by rodents, hundreds of thousands

die of starvation and farmers in Vidarbha

region and Andhra Pradesh province commit

suicide due to crippling debt.

Of what use are reforms if children dont have

schools to go to, child labour is rampant, and

healthcare and sanitation are all but absent,

ask the critics. Reforms cannot succeed unless

they are coupled with social renewal. An

economy that works cannot be built on weak

social foundations.

The good news is that India is now a resilient

economy that is relatively insulated from the

global crisis. All it needs is another major

push.

This is what India is looking forward to as

Finance Minister Pranab Mukherjee rises topresent the union budget in early March. A

lot has been achieved in the past 21 years.

Lots more needs to be done a concrete

policy on FDI in core sectors, a faster pace of

public sector disinvestment, administrative

reforms that are key to maintaining growth

and building a strong economy, elimination

of wastage in social sector programmes and

sustainable spending.

None of this easy, and much of it has seriouspolitical connotations. Several crucial

provincial elections are being held this year;

the temptation to use the budget as a tool to

attract votes will be immense.

The country has also seen a mass campaign

against corruption and the government has

come off looking badly. There could be a

tendency to neutralise the sentiment with

populist decisions that would eventually hurt

the economy.

Finally, India is one of the few shining lights

amid the turmoil in the global economy. Its

growth is based on internal demand and the

vibrant services sector. However, India is not

insulated against the gloom. The challenge

before Mukherjee is to use the situation to

the countrys advantage by pushing through

key reform such as FDI in retail, which could

open the floodgates of foreign investment and

further bolster the economy.

Will he? Time will tell.


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6

When India gained independence fromBritish rule in 1947, there was hope but no

deliverance.

A country that should have reached out to

the world, giving a wide canvas to its huge

potential and skill instead adopted an inward

looking economic model, sceptical of free

markets and international trade. Socialism,

with an emphasis on self-sufficiency and the

public sector, became the mantra.

As the government decided that the answerto poverty was tax-and-spend, peak income-

tax rates hit 97.75% in the 1970s, and growth

averaged a mere 3.5% the so-called Hindu

Rate of Growth while other Asian economies

managed double that. To top it all, the poverty

ratio was not even dented in the 30 years that

followed.

Unable to fathom why Nehruvian socialism

wasnt working, the government sought to

put growth on the fast track in the 1980sby borrowing big. It succeeded for a while,

with growth accelerating to 5.5%, but it was

unsustainable, eventually resulting in the

foreign exchange crisis of 1991.

Ultimately, it fell upon a political lightweight,

PV Narasimha Rao, to turn around the

economy. Rao was the quintessential political

backroom player, crafty and well versed in

the way politics and the bureaucracy worked,

yet never a public icon. After Rajiv Gandhi

was assassinated in 1991 before the general

election and the Congress formed a minority

government, he was the partys surprise

choice for prime ministership.

While Rao continued to spout the partys

economic mantra in public, it was clear to

him after the collapse of the Soviet Union

that socialism was past its sell-by date. He

already had a shining example in China of

what reforms could do Deng Xiaoping had

sparked off an economic revolution, freeing

markets and opening up the country to

investment.

Reforms: A brief history


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7

Economics is a

subject that does

not greatly respect

ones wishes.

-Nikita Khrushchev,

Soviet leader

In economics, the

majority is always

wrong.

-John Kenneth

Galbraith,

economist

India, Rao knew, had no choice. Reform, evenif slow and pragmatic, was the only answer.

A political storm followed the opposition

alleged that Rao had sold out to the IMF but

two years of financial stability and 7.5% growth

changed all that. Soon, most political parties

were singing the reforms tune. The process

had taken deep root and it continued, even if

haltingly at times.

LaunchpadWhile labour law reform remained neglected

because of its political implications, India

emerged as a force in intellect-intensive

industries such as computer software.

By the time the Asian financial crisis hit in

1997, India was financially strong enough to

keep growing though it slowed without

great damage or having to seek aid. This was

around the time the software industry came

into its own, bagging major Y2K bug-clearingcontracts.

The crisis second wave in 2001 saw India in

an even stronger position with corporations

outsourcing their software and business

services to Indian firms.

While India has never been able to matchChina in its manufacturing and export might,

largely due to restrictive labour laws, it has

come to be seen as a services hub.

Indian laws make it very tough to shed

workers, making entrepreneurs wary of setting

up labour-intensive factories for exports. One

indicator of how this hurt industry was that,

as a garment manufacturing hub, India was

overtaken by Bangladesh!

However, India has several positives to showfor every negative. For instance, in 1991,

Manmohan Singhs budget lowered the

maximum import duty to a still whopping

150% from an unimaginable 300%. Today,

the standard import duty is 10%, roughly the

average for South-East Asia. At that time,

more than 800 items were reserved for

production by small-scale industries, and

more for the public sector. These reservations

have been brought down substantially.

Controls on industries, imports and foreign

exchange are much more relaxed. Private

investment in previously restricted sectors,

such as telecom and infrastructure, has shown

great results.

The sceptics were proven wrong. In the

2000s, India averaged 8.5% growth. With the

abolition of controls, industry flourished and

many companies went on to make a mark

globally. Indian companies were taken over

by multinationals (Coca-Colas acquisitionof Parle brands, for instance) while Indian

firms took over iconic foreign ones (the Tatas

acquisition of Jaguar is an example).

Falling short

The failures on the social front arent due

to lack of resources. In fact, social sector

spending has risen consistently over the last

two decades. The problem lies in the delivery

of service, most notably in the provision

of affordable food to the poor. Corruption

and wastage led to the failure of the Public

Distribution System, through which subsidisedPhoto by Terinea IT Support on Flickr


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8

Did you ever

think that making

a speech on

economics is a lot

like pissing down

your leg? It seems

hot to you, but

it never does to

anyone else.-Lyndon B Johnson,

former US president

First rule of

Economics 101:our desires are

insatiable. Second

rule: we can

stomach only three

Big Macs at a time.

-Doug Horton,

clergyman

grain and kitchen fuel were supplied to thedeserving.

There are other worrying signs. Indias

proportion of underweight children a

measure of malnutrition was the third-worst

in the world at 46.7%. There is an internal

militant communist insurgency dubbed

Naxalism that is spread over several

provinces and has deprived a large part of

central India from the economic benefits

enjoyed by the rest of the country.

In recent times, there has been an outcry

against corruption, which has affected

the entire administrative chain. Ministers

have been jailed for crimes ranging from

undervaluing telecom spectrum to taking

bribes in return for construction contracts

for the Commonwealth Games held in

Delhi. Social activist Anna Hazares call for acountrywide agitation to demand an effective

anti-corruption law was answered by citizens

across the socio-economic spectrum. The

governments image and the politys as a

whole suffered.

Indias journey has been long and arduous.

As it takes on the challenges listed above, a

longer and tougher struggle lies ahead.


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The new government, which assumed office barely a monthago, inherited an economy in deep crisis. The balance ofpayments situation is precarious.

We have been at the edge of a precipice since December1990 and more so since April 1991. The foreign exchangecrisis constitutes a serious threat to the sustainability ofgrowth processes and orderly implementation of ourdevelopment programmes.

Internal public debt of the central government hasaccumulated to about 55% of GDP. The burden of servicing

this debt has become onerous. Interest payments aloneare about 4% of GDP and constitute almost 20% of thegovernments total expenditure. Without decisive actionnow, the situation will move beyond the possibility ofcorrective action.

There is no time to lose. Neither the government nor theeconomy can live beyond its means year after year. Theroom for manoeuvre, to live on borrowed money or time,does not exist any more.

The time has come to expose Indian industry to

competition from abroad in a phased manner.

After four decades of planning for industrialisation, we havenow reached a stage of development where we shouldwelcome, rather than fear, foreign investment.

Few would disagree that I am one of the most harassedfinance ministers in recent times.

Victor Hugo once said: No power on earth can stop an ideawhose time has come. I suggest to this august house thatthe emergence of India as a major economic power in the

world happens to be one such idea. Let the whole worldhear it loud and clear. India is now wide awake. We shallprevail. We shall overcome.

1950-80 1980-92 1992-2003 2003-10

0

2

4

6

8

10

3.5%

5.5%6%

8.5%

INDIAs GDP GROWTH

Excerpts from Manmohan

Singhs 1991 budget speech

9

Source: Economic Survey 2010-11


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While India has made rapid strides on various

counts, its growth has often been outpaced by

the Asian tiger economies. On the other hand,

its emphasis on slower but stronger, risk-

free growth has held it in good stead during

troubled times.

Here are some of the long strides taken during

the last two decades.

Growth

The quick growth often touching 8.5% over

the last decade found a paradox in the slow

pace of reforms. The impact was felt after

years.

It was only in 1994-95 that GDP growth hit7.5% (1994-95 to 1996-97). Growth averaged

only 5.5% between 1997 and 2002 due to

global economic troubles (1997-99), two

droughts (2000 and 2002) and a recession in

2001.

From 2005 onwards, however, growth

averaged 9.5%. The recession of 2007-09

again slowed growth to 6.8%, but it bounced

back to 8% and 8.5% respectively over the

next two years.

GDP GROWTH IN POOR STATES

Source: Central Statistical Organisation data

States

Mean %

growth

(200004)

Mean %

growth

(200409)

Bihar 4.5 12.4

Chhattisgarh 6.1 9.7

Jharkhand 1.9 8.5

Madhya Pradesh 1.9 6.6

Orissa 4.8 10.2

Uttar Pradesh 3.3 6.7

All India 5.6 8.5

Key achievements

10


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The savings rate shot up from 21.5% of theGDP in 199192 to 34% in 201011. As a result,

investment levels eventually rose to 37% of

the GDP from 22.1%, enabling sustainable

growth of more than 8%. In laymans terms,

the higher the domestic savings rate the less

dependent India is on foreign inflows. This,

in turn, makes it easier to tide over financial

turbulence and strengthens the economy.

The savings rate apart, Indias per capita

income is up from $300 in 1991 to $1,700

today. This has led to a tax collections spike,

which in turn has financed the rise in social

and infrastructure spending.

These impressive growth and savings figures

were not achieved by setting up sweat shops factories using cheap, often exploited

labour to churn out goods for exports that

are preferred by several Asian countries,

most notably China. Most of Indias exports

are based on the intellect, such as software

services.

It should be noted that though India is

known for software services, they account for

only 2% of the GDP. Other services legal,

engineering, R&D exceeded $10 billion in201011.

As much as exports of these services matter,

India remains driven mainly by domestic

demand.

Innovation

Jugaad has become a buzzword in India.

Loosely translated as making do, it signifies

Indians success in producing goods cheaper

than most other countries can with only a

fraction of the resources available elsewhere.

The Nano, the worlds cheapest car, produced

by the Tatas is an example of this ingenuity.

Savings rate 198081 199091 200001 201011

As % of GDP 18.5 22.8 23.7 34

Source: Economic Survey (201011)

SAVINGS RATE

The initial production run cost the equivalent

of $2,000 and has found a rival in a car being

launched by Bajaj Auto for the equivalent of

$3,000. The Nano, incidentally, claims to run

25 kilometres per litre of petrol far more

than any other car in India.

Most cellphone calls cost less than a rupee,

while hospitals such as Narayan Hrudalaya

provide major surgeries at a fifth of the cost in

the West.

Over time,jugaad has come to imply

innovation.

Investment

When India began welcoming foreign direct

investment (FDI), many feared that Indiancompanies would not be able to compete and

would be gobbled up by multinationals.

That didnt happen. Not only did Indian

companies hold their own, many used the

opportunity to go global themselves

outbound FDI as a proportion of GDP is 0.9%,

higher than Chinas 0.6%.

Tata Steel, for instance, acquired European

steel major Corus and Tata Motors bought

Jaguar Land Rover. The Birla group acquired

Canadian firm Novellis to become the sixth

largest aluminum company in the world, while

Bharti Airtel took over Zain and is present in 14

African countries.11

History shows

that where ethics

and economics

come in conflict,

victory is always

with economics.

Vested interests

have never been

known to havewillingly divested

themselves unless

there was sufficient

force to compel

them.

-BR Ambedkar,

author of the Indian

constitution

The first lesson

of economics is

scarcity: There is

never enough of

anything to satisfy

all those whowant it. The first

lesson of politics

is to disregard

the first lesson of

economics.

-Thomas Sowell,

writer

Photo by Balaji.B on Flickr


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12

Indias FDI norms have been the subject

of much debate. The significant barriers,

especially in retail, ensured that inflows were

never as high as they could have been FDI

peaked at $26 billion in 2009-10 before

slipping to $19.4 billion the next year.

That said, most leading multinationals do

business in India. Accenture and IBM have

more employees here than in the US. Intel

and Microsoft use India as R&D hubs, while

Suzuki, Hyundai, Bosch, Pfizer and others use

it as a manufacturing base.

One reason why FDI has been steady is that

Indias stock markets plagued by price

manipulations, fraud and delayed settlements

in the past have been cleaned up.

In 1992, following a large securities fraud,

India created a fully electronic exchange

the National Stock Exchange even before

London or New York did. This ended most

rigging.

Shares were held only in electronic form

and settlements were down to T+3 levels

(payment after three days of the transaction).

Today, Indias stock markets are among the

most efficient in the world.

Before reforms, India got foreign aid by the

bucketful but had little to show for it. While at$5.9 billion (2009-10) it still seems like a lot, it

pales in comparison to the foreign investment

of $51.2 billion and remittances from overseas

Indians at $53.9 billion in the same period.

Remittances have helped balance thevolatility of foreign capital in tough times. This

has allowed the government to decline aid

from smaller donors, asking them to approach

non-profits directly.

The country has opted instead for debt

from the World Bank. It is an indicator of the

countrys confidence that its soft loans have

fallen from almost 100% in the 1970s to less

than 30% today.

India, in fact, has become a substantial donor.Among its recent grants was $1 billion to

Bangladesh. Credits worth $5 billion to African

countries were also announced recently.

$26 billion

FDI in 2009-10; it slipped to $19.4 billion the

next year

0.9%

Outbound FDI as a proportion of GDP; in

China, it is 0.6%

The battle against poverty

Many believe that the reforms have

bypassed poor sections such as the Dalits

(untouchables as per the now-abolished caste

system; they still face discrimination across

India) and regions. This, the critics say, is

I learned that

economics was

not an exact

science and that

the most erudite

men would analyse

the economic

ills of the world

and derive atotally different

conclusion.

-Edith Clara

Summerskill, UK

politician

A large part of

crime is economics

if people are

working and have a

home and family to

support, then

I believe you

can reduce the

crime rate.-Vincent Frank,

musician

Photo by Niyantha on Flickr

Photo by Tobias Leeger on Flickr


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13

why the desperately poor have radicalised andtaken up Naxalism. Almost one-fourth of India

is affected by this campaign against the state.

The fact is that the proportion of people

claiming to be hungry in some or all months

fell from 17.3% in 1983 to 2.5% in 2004-05.

Six backward states, accounting for half of

Indias population Uttar Pradesh, Bihar,

Madhya Pradesh, Orissa, Chhattisgarh and

Jharkhand grew fast, many faster than the

national average, though admittedly from a

smaller base.

Between 2004 and 2009, growth surged

in poor northern and central states Bihar

(12.4%), Chhattisgarh (9.7%), Jharkhand

(8.5%), Madhya Pradesh (6.6%), Orissa

(10.2%) and Uttar Pradesh (6.7%).

Indias growth could have been possible only

if the bulk of the population improved its

productivity. While national growth raised tax

revenues, which was shared with the states,it was a case of trickle-up, not trickle-down

growth.

Source: Food and Nutrition in India: Facts and

Interpretations, by Angus Deaton and Jean Dreze in

Economic and Political Weekly, February 14, 2009

Homesreporting

hunger

1983 199394 19992000

200405

% ofpopulation

17.3 5.2 3.6 2.5

Source: Economic Survey (201011)

Poverty ratio 199394 200405 200910

% of population 45.3 37.2 32

POVERTY RATES

HUNGER RATE

The growth and, perhaps, rising literacy levelssparked a demographic transformation.

Over the last decade, for the first time since

independence, the number of children aged

0-6 years declined by 3.08%. The sharpest

decline was in poor states.

Again for the first time since independence,

the number of workers is rising and that of

dependents is falling.

China reaped a demographic dividend earlier

thanks to Maos one-child policy, but thatcould backfire once the country starts ageing.

The condition of Dalits was thought to be

the worst, especially in Uttar Pradesh with

a population of 200 million, Indias biggest

state. However, Dalits have emerged as a

major political force. Today, the state has a

Dalit chief minister, Mayawati.

A recent survey in two districts of Uttar

Pradesh showed great leaps in Dalits living

standards TV ownership was up from zeroto 45%, cellphone ownership up from zero

to 36%, two-wheeler ownership up from zero

to 12.3%, and children eating leftovers down

from 95.9% to 16.2%.

The findings on Dalits social status were even

more striking. Cases of Dalits being seated

separately at weddings were down from 77.3%

to 8.9%, cases of non-Dalits accepting food

at a Dalit home were up from 8.9% to 77.3%,

bonded labour incidence was down from 32%to 1%, the Dalit proportion running their own

businesses was up from 6% to 37% and the

proportion of those working as agricultural

labourers was down from 46.1% to 20.5%.

Today, many Dalit businessmen have become

millionaires and there is also a Dalit Chamber

of Commerce and Industry.

While the upliftment of Dalits is far from

complete, they have gained substantially from

reforms.

All of the problems

were facing with

debt are man-

made. We created

them. Its called

fantasy economics.

Fantasy economics

only works in a

fantasy world. Itdoesnt work in

reality.

-Michele Bachmann,

US politician

Economics has

never been a

science - and it is

even less now than

a few years ago.

-Paul Samuelson,

economist


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14

Literacy

Literacy rates are closely linked to the poverty

ratio. It is no surprise then that as Indiaspoverty ratio dropped, the literacy rate shot up.

Since 1991, Indias literacy rate rose by a record

21.83% to 74.04%. In the earlier two decades,

it rose only 17.8%.

Again, the poorer states fared better. In

the last decade, the improvement in all-

India literacy (9.7%) was exceeded by Bihar

Source: Census 2011

Literacyrate 195051 196061 197071 198081 199091 200001 201011

% ofpopulation

18.3 28.3 34.4 43.6 52.2 64.8 74

LITERACY TRAIL

(16.82%), Uttar Pradesh (11.45%), Orissa

(10.37%) and Jharkhand (16.07%).

Women did even better on the literacy scale.

Female literacy improved dramatically

by 11.8% across India, and higher in Bihar

(20.2%), Uttar Pradesh (17.1%), Orissa (13.9%)

and Jharkhand (15.3%)

Every nation on

the Earth that

embraces market

economics and

the free enterprise

system is pulling

millions of its

people out of

poverty. The freeenterprise system

creates prosperity,

not denies it.

-Marco Rubio, US

politician

Geography

has made us

neighbours. History

has made us

friends. Economics

has made us

partners, and

necessity has made

us allies. Thosewhom God has so

joined together,

let no man put

asunder.

-John F Kennedy,

former US president

Photo by United Nations Photo on Flickr


15/29


16/29

16

There can be no

real individual

freedom in

the presence

of economic

insecurity.

-Chester Bowles,

former USdiplomat

If all economists

were laid end toend, they would

not reach a

conclusion.

-George Bernard

Shaw, writer

CorruptionThis is the hottest topic of discussion

in India today, and has implications for

businesses.

After enduring two generations of

criminals and corruption in politics and

the bureaucracy, public anger has boiled

over. A mass campaign for effective

anti-corruption laws led by social activist

Anna Hazare found resonance across the

country. It was especially popular amongthe youth and shook the government into

action.

While the law that the government tabled

in parliament which was eventually not

voted on became the subject of heated

debate, there is little doubt that the

campaign marked the rise of an assertive

middle class and media. Will it affect

election results in the end? The jurys out

on that.

Most people believe that corruption

is getting worse and that politicians

are catalysing the rot in the system.

The Corruption Perception Index of

Transparency International ranks India

87th out of 178 countries, behind China

(78th). India has actually improved its score

slightly, from 2.7 out of 10 in 2002 to 3.3 in

2010. This may be because several areas

licenses, foreign exchange norms, etc have been deregulated, which reduces the

avenues of corruption.

There are, however, areas where corruption

is still rampant real estate and

government-financed infrastructure, for

instance. There is too much room here for

political discretion and favouritism. This

affects the business climate and investor

sentiment.

As far as criminality in politics goes, 150of the Lok Sabhas 545 seats were won by

those with criminal records; in the 2004

election, 128 such politicians won.

The glacial pace of the judicial process

allows criminals to dominate polls through

bribery and intimidation. Obviously, this has

led to greater corruption in government

An effective Lokpal an anti-corruption

ombudsman that has the powers to

investigate ministers, the bureaucracy andeven the Prime Ministers Office would go

a long way in reducing corruption. Another

option is to fast-track cases against

politicians.

87Indias rank, among 178 countries, on

Transparency Internationals Corruption

Perception Index

Photo by India Kangaroo on Flickr


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17

150Number of Lok Sabha members with

criminal records. The Lok Sabha, the lower

house of parliament, has 545 members

in all. In the 2004 election, 128 politicians

with criminal records were elected to it

InfrastructureLack of infrastructure could prove to be

a major hurdle to the countrys progress.

It could impede the delivery of healthservices and education, and prevent social

schemes from reaching the needy.

Here, too, corruption is endemic because

roads, power, ports, railways and telecom

are all linked to natural resources, land

and government contracts all of which

provide ample opportunity for kickbacks.

No agricultural land can be converted into

non-agricultural land for industry without

state permission, which too providesopportunities for corruption.

India requires transparency in policies

and procedures, and an end to political

discretion in these areas.

Administrative reformsWhile economic reform is deep-rooted

and well on its way, governance reforms

are languishing. If India is to maintain its

growth rate and ensure that the benefits

of the economic miracle reach everybody,it cannot afford to ignore governance

reforms.

Reform of the judicial system will improve

detection and lower corruption; it will

also improve contract enforcement and

protection of property rights.

If national resources such as mines

and telecom spectrum are auctioned

transparently, it too will improve the

economic environment and benefit theconsumer more.

Fiscal managementThe countrys fiscal situation is a concern,

as is the management of the fiscal deficit

and foreign borrowings. The union

budget is expected to bring an admission

that the fiscal deficit target of 4.6% will

be missed, wrote James Lamont in the

Financial Times on January 26. Fiscalrestraint will become more difficult the

nearer the Congress party gets to the 2014

parliamentary elections, which are often

won by doling out freebies and welfare

programmes to the poor. Already a vote-

winning food security bill is in the works,

he added. The impact of this bill on the

deficit is anybodys guess.

External stresses are likely to remain a

theme for the rest of FY12 and in H1-FY13.

We expect little relief for the trade deficit

as exports slow and the reduction in the

import bill is limited by oil imports and

investors huge appetite for gold. Hence,

despite stable flows in the form of services

exports and remittances, funding the

current account deficit forecast at 3.1%

of GDP in FY12 and 2.8% in FY13 may

prove challenging, predicted Standard

Chartereds Global Focus 2012 report.

Isnt it interesting

that the same

people who laugh

at science fiction

listen to weather

forecasts and

economists?

-Kelvin Throop III,

fictional charactercreated by RAJ

Philips

An economist is

an expert who will

know tomorrowwhy the things

he predicted

yesterday didnt

happen today.

-Laurence J Peter,

academic

Photo by celblau on Flickr


18/29


19/29

According to a recent Business Monitor International (BMI) report,real GDP growth is expected to slow to a three-year low of 6.8%

in FY2011-12 on the back of the rising cost of capital (the central

bank has been raising interest rates regularly to curb inflation that

hit 12% at one stage), receding export growth and slowing credit

expansion. We expect activity to recover somewhat in FY2012-13

(with our full-year growth forecast currently at 7.3%) as the central

bank starts to cut its policy rates, which have essentially choked the

Indian economy over the past year, said the report titled Economic

Analysis An Economic Resurgence or the Calm Before the Storm?

Growth

While its widely expected that India will escape the pain that many

Euro zone economies as well as the US are experiencing, the BMI

report states that purchasing managers indices (PMI) suggest a

rebound in overall economic activity. Manufacturing PMI rose from

its September 2011 low of 50.4 to 57.5 in January 2012 an eight-

month high. The PMI for services rose to 58.0 from a low of 49.1 in

October 2011.

This could lead to a reassessment of BMIs growth projection for

India. However, if growth does not exceed the 6.8% predicted, itwould mean a sustained slowdown through H2 FY2011-12. If that

happens, growth could fall to 6.4% year-on-year (y-o-y) in H2 from

7.3% in H1.

Also, a Financial Times report on January 26 said that many

industrialists have been discouraged by growth slipping from

forecasts of 9%. Double-digit growth, said Richard Iley, economist

at French bank BNP Paribas, to the newspaper, is firmly in the rear

view mirror.

Despite the encouraging PMI data, macroeconomic trends suggest

a weakening economy. Q3 of FY2011-12 started badly, with Industrialproduction falling for the first time on a y-o-y basis since June 2009.

Exports fell too. November trade data showed growth falling to

3.9% y-o-y.

Finally, commercial credit growth, which has been falling since the

beginning of 2011, dropped to 13.4% y-o-y in December 2011 a

level last seen in December 2009.

Until the Reserve Bank of India (RBI) loosens its official stance

on monetary policy, which we do not see happening until Q212,

consumption and investment activity are likely to remain weak.

Furthermore, we do not see the country exporting its way out of thisdownturn, nor is the government in a position to enact stimulative

fiscal measures, the BMI report said.

19

What lies ahead


20/29

20

The deteriorating global situation will alsoimpact Indian exports this year. World GDP

growth could slow to 2.8% (it was 3.1% in 2011),

the US economy will continue to stagnate and

the Euro zone seems to be on the brink of a

recession. BMI expects net exports to contract,

with their growth clocking -6% and -3.6% in

FY2011-12 and FY2012-13 respectively.

High inflation, delays in government approvals

and rising interest rates have also affected

business sentiment. Expectations that Prime

Minister Manmohan Singh, said the Financial

Times, would use his second term for bold

reforms have quickly drained away. Instead,

the Congress party-led coalition has suffered

repeated setbacks at the hands of the

opposition, its allies and civil society activists.

We in India have had our share of problems.

The Indian economy has slowed down

and Inflation edged up. Concern about

corruption moved to the centrestage, Singh

acknowledged.

This was reflected in the Bombay Stock

Exchange index, the Sensex, turning stagnant

and the rupee falling 16% over 2011.

Its clear, said Standard Chartereds Global

Focus 2012 report, that the current

combination of relatively slow growth and

Economic statistics

are like a bikini,

what they reveal

is important, what

they conceal is

vital.

-Sir Frank

Holmes, professor

Doing

econometrics

is like trying to

learn the laws

of electricity by

playing the radio.

-Guy Orcutt,

economist

high inflation is a warning signal that policyinaction needs to be addressed and reforms

need to be accelerated. The economic outlook

for the rest of FY12 and FY 13 will hinge on

the governments ability to restore investors

confidence in Indias long-term story

Investment

An Ernst & Young report released at the World

Economic Forum in Davos in January said FDI

in India is set to swell as investors look beyondissues transparency, poor infrastructure and

policy paralysis in search of growth.

The fundamentals that make India attractive

to investors remain intact, Farokh T Balsara,

head of markets at Ernst & Young India,

wrote. However, our respondents continue

to cite inadequate infrastructure and a lack

of governance and transparency as major

obstacles to investment.

FDI in India rose 13% to $50.81 billion in thefirst 11 months of 2011 from a year earlier,

while the total number of projects rose 25%

to 864, the report said, quoting additional data

from the Financial Times FDI Intelligence

service.

Photo by SknaB noIA on Flickr


21/29

21

Most of the companies surveyed for the reportwere confident of the long-term prospects for

investment in India. Of the 382 international

firms surveyed, 70% planned to increase or

maintain operations in India, while 19% said

they didnt plan to enter the country or were

preparing to withdraw.

The areas of concern, Barclays Capitals The

Emerging Markets Quarterly report said,

were weaknesses in private sector capital

expenditure (a result of monetary tightening)

and slower government investments due to its

poor fiscal health.

Automakers led investments in India last year,

boosting spending by 46%, the Ernst & Young

report said. Technology and life sciences

companies came next, while spending by

foreign firms on infrastructure and retail

projects declined. Ford had said earlier

that it would spend $142 million on Indian

operations, while Renault-Nissan also said it

would step up investments.

While foreign investment in several industries

has been facilitated, it remains a touchy issue

for retail.

With a market of 1.2 billion people and worth

about $450 billion, and a middle class in

The First Law of

Economists: For

every economist,

there exists an

equal and opposite

economist. The

Second Law of

Economists:

Theyre bothwrong.

-David Wildasin,

professor

An economist is

someone who,

when he finds

something that

works in practice,

tries to make it

work in theory.

-Joan Violet

Robinson,

economist

consumerist mode, India is one of the worldsmost attractive retail markets. However,

pushing through FDI in retail is an uphill

battle, as the government discovered recently.

In November 2011, New Delhi said it

was throwing open the market to global

supermarket chains such as Wal-mart and

Carrefour and Tesco only to be forced by its

allies to withdraw the move.

The proposal to permit foreign groups to own

up to 51% of supermarkets sparked protestsand paralysed parliament. Critics predicted it

would it would kill family-run shops that make

up more than 90% of Indias retail sector.

Tesco branded the U-turn a missed

opportunity. Harsh Mariwala, the head

of consumer products firm Marico, called

it a highly regressive move, reported

the Financial Times. Rajiv Kumar, of the

Federation of Indian Chambers of Commerce

and Industry, said opponents of FDI in retailhad whipped up xenophobic sentiments about

the return of colonialism.

Almost as a consolation for reforms

proponents and to reassure global investors,

the government allowed 100% foreign

ownership of single-brand stores.

Photo by Greenbelf Alliance on Flickr


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23/29

23

Inflation is the one

form of taxation

that can be

imposed without

legislation.

-Milton Friedman,

economist

Having a little

inflation is like

being a little

pregnantinflation

feeds on itself and

quickly passes the

little mark.

-Dian Cohen,

economist

6.2%Expected rise in private consumption in

FY2012-13, according to BMI, a considerable

fall from the 8.8% growth in FY2010-11

3.2%Growth in government spending over the four

quarters of 2011. In 2008, it averaged 26.7%

year-on-year growth

Will the RBI relent?As FY2012-13 approaches, the easing of key

interest rates could be crucial, providing a

much-needed boost. Through FY2012-13, BMI

expects cuts of 75 basis points on the back of

falling inflation. The cuts could be higher if

inflation recedes faster than expected.

Indias policymakers have battled over the

past 18 months to bring down inflation, the

highest among BRIC (Brazil, Russia, India,

China) nations.While inflation fell to acceptable levels at the

beginning of 2012, it has come at the cost of

growth.

Rather than economic growth, we expect

downside surprises to come through on

inflation, Robert Prior-Wandesforde,

economist at Credit Suisse in Singapore, told

the Financial Times.

This because policymakers have resorted to

monetary tightening to rein in prices, raisingbenchmark lending rates 13 times over

the past two years despite other emerging

markets despite critics pointing out that other

emerging markets cut them to protect growth.

They accused the RBI of acting timidly, while

industrialists blamed higher borrowing

costs for choking off growth and deterring

investment.

As Barclays Capitals The Emerging Markets

Quarterly report pointed out: higher interest

rates and prolonged tightness in liquidity are

visibly hurting several rate-sensitive sectors

such as manufacturing, construction, real

estate, banking and finance. Credit growth has

already slowed considerably and, we estimate,

might only be in the mid-teens for the currentfiscal year, in marked contrast with the average

of more than 20% rate of recent years.

However, food inflation is falling fast. As

Pranab Mukherjee pointed out the substantial

improvement, Kaushik Basu, the finance

ministrys chief economic advisor, told the

Financial Times: We have seen the worst of

the [rate] rises.

The Barclays Capital report estimated that

repo rate the RBI drops the rate to expandmoney supply and raises it to squeeze supply

cuts could be introduced from mid-2012.

The rate increases, though, found support

in some quarters. C Rangarajan, Manmohan

Singhs chief economic adviser, said that India,

which has a high poverty rate, must keep

inflation below 5% to achieve sustainable

growth. His views found an echo in the RBI.

The Financial Times reported that RBI officials

felt that the economy cannot grow more than

8% without inflicting high inflation on the poor.

Besides, not everyone is impressed with the

excessive pessimism. Arvind Panagariya,

economist at Columbia University, told the

newspaper that India can quickly recover the 2

percentage points of economic growth it lost

during the global financial crisis.

Former World Bank chief economist Joseph

Stiglitz pointed to the achievement of 7%

growth amid the downturn.

The risk remains, though, of global commodity

prices surging as they did in 2010, flaming

inflation again and delaying rate cuts.

The RBI has one other worry a weakening

rupee. Currency depreciation in a country that

runs a current account deficit and imports

most of its oil may fuel inflation again.

The weakening is a result of the rupees

overvaluation and deteriorating risk sentiment.

The Barclays Capital report said the rupee

would remain weak in the near term, clawingback to 49/$ in six months and to 48/$ in a

year.

Keeping prices in check while maintaining

growth will be a key challenge for Mukherjee.


24/29

24

When goods dont

cross borders,

soldiers will.

-Fredric Bastiat,

economist

The primary

reason for a tariff

is that it enables

the exploitation

of the domestic

consumer

by a processindistinguishable

from sheer

robbery.

-Albert Jay Noc,

author

Source: Economist Intelligence Unit

f: BMI forecasts. 1 GDP at market prices,fiscal years ending March 31 (1990=1990/91). 2 2011=FY2011/12,factor

cost, f=BMI forecast. 3 New series used from 2005/06 onwards. Sources: 4 Central Statistics Organsation/BMI; 5

World Bank/UN/BMI

GROWTH AND INFLATION (% CHANGE)

EYE ON INDIA

2007 2008 2009 2010 2011 2012 2013 2014 2015

Real GDP growth 9.3 5.7 5.2 8.3 6.5 6.1 6.8 6.5 6.6

ASEAN 6.7 4.3 1.1 7.9 5.2 5.2 5.7 5.7 5.8

China 14.2 9.6 9.2 10.4 9.2 8.1 8.4 7.9 7.9

India 9.6 5.1 9.1 8.8 7.1 6.3 8.3 8.2 8.4

Inflation 4.9 7.1 2.8 5.1 5.9 4.9 4.6 4.4 4.2

ASEAN 5.6 9.9 2.6 4.4 6.0 4.9 4.7 4.6 4.7

China 4.8 5.9 -0.7 3.2 5.6 3.5 4.9 4.3 3.9

India 6.4 8.3 10.8 12.0 8.9 7.8 7.9 7.7 7.5

2012 2013 2014 2015 2016 2017

Nominal GDP 1,4

(in Rs bn)

104,241.3 f 118,401.2 f 133,486.1 f 150,232.6 f 168,945.7 f 189,900.4f

Nominal GDP 2,4

(in $ bn)2,287.6 f 2,620.2 f 3,108.8 f 3,669.8 f 4,223.6 f 4,747.5 f

Real GDP growth 2,4

(% change, y-o-y)7.3 f 7.8 f 7.7 f 7.5 f 7.5 f 7.4 f

GDP per capita 4(in $)

1,818 f 2,055 f 2,407 f 2,805 f 3,189 f 3,542 f

Population5 (in mn) 1,258.4 f 1,275.1 f 1,291.8 f 1,308.2 f 1,324.4 f 1,340.4 f

Indl prodn index(% y-o-y, average) 3,4

0.0 f 7.5 f 7.9 f 7.6 f 7.5 f 7.5 f


25/29

25

Top priorities

In the long run we

are all dead.

-John Maynard

Keynes,

economist

It is difficult

to get a man

to understand

something

when his salary

depends on his not

understanding it.

-Upton Sinclair,

author and

politician

As the country looks ahead to the budget, hereare the issues that are likely to be on Pranab

Mukherjees mind.

Fiscal consolidation

Growth has slowed along with a slippage in

investment. Interest rates have been raised

to arrest inflation, which has squeezed

funds available to fuel growth. To top it all,

the fiscal deficit target of 4.6% is likely to

be missed. The budget would do well to lay

a roadmap for fiscal consolidation, allowing

the RBI to lower rates and stimulate

demand. The threat of Inflation could be

neutralised by easing supply constraints.

Helping markets

With growth slowing and rates rising,

Indian markets have been stagnant for far

too long. The abolition of the Securities

Transaction Tax to make transactions

cheaper and resisting the temptation to

raise taxes in order to boost revenues

would aid the return of market buoyancy.

Two other policy changes are critical:

public sector disinvestment needs to get

on the fast track again and pension and

provident funds should be allowed to

invest more in stocks.

Job creation

Indias unemployment rate fluctuates

between 9% and 10%. However, as the

workforce gets increasingly younger,

even 7% growth may not be enough.Whats urgently needed is investment in

and, perhaps, cheaper credit for labour-

intensive industries. Skill development is

important, but there are few incentives for

industry to upgrade employees talents.

Most importantly, inclusive growth would

ensure that all industry sectors and

sections of society would flourish, creating

more employment.

Bring back reformsPolitical constraints have pushed

reforms to the backburner. This has

contributed to the slowdown and loss

of investor sentiment. The introduction

and subsequent withdrawal of a policy

allowing FDI in retail is an example. The

government needs to send a clear signal

that it is serious about reforms.

Agriculture

Growing at a mere 2%, agriculture is a

worry. If food security is to be achieved,

India will have to do better on this front.

The farm-to-consumer chain is far too

long; its time to link farmers to markets.

This will make agriculture more lucrative

and lower food prices. India spends the

equivalent of $20 billion on food and

fertiliser subsidies, but that hasnt eased

supply or made farmers richer. Its the

delivery mechanism that has failed; better

subsidy management is the need of thehour.


26/29


27/29

27

Industry milestones

1945 : Tata Motors established in Mumbai to build locomotives1952 : Mohan Mittal starts steel business (later Ispat) in Kolkata

1956 : Nand Kishore Ruia founds the iron ore export company Essar in Chennai

1969 : Tata appoints FC Kohli to head computer services

1970 : OP Jindal opens steel plant in Hisar

1972 : India-born MIT graduate Narendra Patni founds Data Conversion (later Patni) inthe US with back-office operations in PuneTata obtains software contract from Burroughs, first major software projectoutsourced by the US

1975 : Azim Premjis Bangalore-based Wipro starts selling first computer made in India

1977 : 57 foreign firms, including IBM, shut Indian plants rather than meet demands forsome degree of Indian ownership

1978 : Karnataka state agency Keonics establishes Electronics City in Bangalore. Denglaunches economic reforms in China

1979 : Wipro, to fill a gap after IBMs exit, hires Sridhar Mitta to set up offices inBangalore to make computers

1981 : Narayana Murthy founds Infosys in Bangalore. Mukesh Ambani joins familybusiness, Reliance

1983 : Anil Ambani joins Reliance

1986 : Sunil Mittal founds Bharti Telecom1988 : Gautam Adani opens trading house in India

1991 : India sets up Software Technology Parks of India (STPIs) to promote softwareexports, opens first park at Electronics City of Bangalore. OP Jindal splits betweenhis children his steel and power conglomerate. India abandons socialism,liberalises economy after Manmohan Singh is appointed finance minister. Wiprowins software contract from a US customer that interacts via the internet

1993 : American Express outsources management of credit card business to its Indianoffice, first major project of business process outsourcing to India

1995 : Essar Group run by Nand Kishore Ruias sons, Shashi and Ravi, extends fromshipping to steel, oil, power and telecom. Lakshmi, son of Mohan Mittal, founds

his own steel business, LNM Group (later Mittal Steel). LG acquires Zenith

1998 : Gautam Adani buys Mundra port, creates a special economic zone of 100 sq km.

1999 : Azim Premji becomes Indias richest person, Wipro has highest marketcapitalisation in the country

2005 : Ambani brothers split their business empire. Lenovo acquires IBMs personalcomputer business

2006 : Lakshmi Mittals Luxembourg-based ArcelorMittal becomes worlds largest steelmaker

2008 : Tata acquires Jaguar

2009 : Anil and Mukesh Ambani are 6th and 7th richest persons in the world respectively.Infosys sets up worlds largest corporate university at Mysore.

2010 : Bharti Airtel becomes worlds fifth largest telecom operator. Lakshmi Mittal isEuropes richest person

We contend that

for a nation to try

to tax itself into

prosperity is like a

man standing in a

bucket and trying

to lift himself up by

the handle.

-Winston Churchill,

former England

prime minister

You cant get rid of

poverty by giving

people money.

-PJ ORourke,

political satirist


28/29

28

India at a glance

Capital

New Delhi

Largest city

Mumbai

Official languages

Hindi, English

Area

3,287,263 sq km

Population

1,210,193,422 (2011 census)

Population density

367.3/sq km

GDP (purchasing power parity), 2011 estimate

$4.469 trillion; $3,703 per capita

GDP (nominal), 2011 estimate

$1.843 trillion; $1,527 per capita

Photo by smlp.co.uk on Flickr


29/29

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