8/4/2019 final eeb

1/22

ECONOMIC ENVIRONMENT OF BUSINESS

INDIA ON MOVE

Presented by: Group 4

Div A

8/4/2019 final eeb

2/22

What led to 1991 economic crises in India?

External borrowing to finance the deficits

Rising debt service obligations

TWO IMMEDIATE EXTERNAL SHOCKS

First, the Gulf crisis in August 1990 exposed the Middle

Easts strategic relevance for India.

Petroleum import costs in 19901991 increased by halfto US$5.7 billion

Contributed to the large current account deficit of 3.1

percent in 19901991.

8/4/2019 final eeb

3/22

8/4/2019 final eeb

4/22

THE SECOND SHOCK

Global recession:

World growth had declined from 4.5 percent in

1988 to 2.25 percent in 1991. Export growth in the United StatesIndias

largest marketturned negative in 1991.

Conditions in the Soviet Union, another majorexport destination, had also worsened.

In 19901991 Indias exports grew only 4

percent

8/4/2019 final eeb

5/22

INTERNAL INSTABILITY

India was also suffering from internal politicalinstability

A campaign by the BJP to build a Hindutemple at the site of a sixteenth-centurymosque in Ayodhya resulted in widespreadcommunal violence

In May 1991, while campaigning for thegeneral elections, former Prime Minister RajivGandhi was assassinated.

8/4/2019 final eeb

6/22

By September 1990, net inflows of Non-ResidentIndian deposits had turned negative.

Access to commercial borrowing had become more

costly, and by December even short-term credit was

restricted. Foreign exchange reserves fell to $1.2

billion in January 1991.

By the time a new government took over in June,

reserves could cover only two weeks of imports.India was close to defaulting on its sovereign debt

for the first time in its history.

8/4/2019 final eeb

7/22

8/4/2019 final eeb

8/22

What were the policy reforms taken in

1990-95

India removed almost all import and capacitylicensing restrictions

Subsidies were restricted and tariffs weresimplified and lowered

The 40% cap on foreign ownership wasremoved , RBI granted automatic approval for

investments up to 51% The government made allowances for private

banks and a limited number of foreign bankbranches

8/4/2019 final eeb

9/22

Approved foreign institutional investors were

licensed and controls governing takeovers

were relaxed

To reduce fiscal deficit tax base was broadened

and steps to reduce expenditure were taken.

8/4/2019 final eeb

10/22

Impact of policy reforms

When reform process started, real GDP declined

to less than 1% in 1991-92

Although price stabilization measures were taken,decline in GDP was unexpected

Looking at the data of 1994-95, it can be assumed

that economic reforms have performed well

8/4/2019 final eeb

11/22

Indian economy grew at 6% of satisfactory rate

after the reforms

This also lowered inflation and interest rates

Investment in education sector helped to grow

technology sector Growth of entrepreneurs because of increase in

private and foreign investments

Change in mindset of people reforms werebeing taken as positive growth

India was able to recover fast from crisis

situation

8/4/2019 final eeb

12/22

Macro Economic Indicator1990-1991 1995-1996

GDP Growth Rate -1.2% 7.2%

IIP Growth Rate -1.3% 13.2%

Agricultural Growth Rate 1.2% 1.4%

Fiscal Deficit 8.5% 4.5%

Interest Rates 19% 16%

Exports 4% 26%

Imports 8% 39%

Current Account Deficit 3.2% 1.3%

Inflation 13.2% 8.9%

Foreign Exchange Reserve $1.2bn $36bn

8/4/2019 final eeb

13/22

But post 1995 data shows totally contradictorytrends

Industrial economy started slowing because ofdecline in industrial production

It was believed that industrial slowdown is the

result of credit crunch Against this, there was another argument that

recession was because of slow growth in the realsector and thus demand constraints

Other factors also affected the growth such as: Unplanned borrowing by the government

Political pressure on RBI resulting in credit crunch

As a result interest rates remained very high after 1996

8/4/2019 final eeb

14/22

What led to the industrial

slowdown/recession between 1996-1997 to

2003-2004?

31.3730.32 30.69 30.01

29.53

27.3427.

83

26.00 25.9124.99

25.825.05

25.82 25.55

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04

industrial growth

1990-91

1991-92

1992-93

1993-94

1994-95

1995-96

1996-97

1997-98

1998-99

1999-00

2000-01

2001-02

2002-03

2003-04

8/4/2019 final eeb

15/22

Domestic

Decline in agricultural production in 1997-98

Tight monetary policy, leading to credit crunch

Small and medium corporates have found it

difficult to access institutional funds

Capital markets (both primary and secondary)have remained depressed

Deficiencies in infrastructure services

8/4/2019 final eeb

16/22

External

Export growth has been sluggish since 1996-97

Low demand for exports has adversely affected industrialproduction.

Indian Rupee has depreciated since August 1997

Depreciation has eroded competitiveness of Indianproducts overseas by making them more expensive

Several industries like steel, chemicals and electroniccomponents have been subject to competitive pressurefrom imports

8/4/2019 final eeb

17/22

What led to the rise in India in 2003-04?

Supply chain management

Reduced inventory holding period

Declining interest as a percentage of sales

Adoption of financial engineering to reduce

interest costs

Improved infrastructure situation

Opportunities arising from

IT, BPO, biotechnology and bioinformatics

8/4/2019 final eeb

18/22

Improvement in Indias education system

Resulted in better employment opportunities

Rise of Indian entrepreneurs

Privatization

8/4/2019 final eeb

19/22

Can India become super power? If

yes, then what needs to be done for it?

India's march towards becoming an economic superpower bythe year 2020 is inevitable

Avoid making the mistakes the Western countries are making

now. Western countries are making mistakes that jeopardizetheir economic standing. If India avoids those mistakes it cansurpass the West

Fifty per cent of India's population is less than 25 years of age

Fifty per cent of our GDP comes from services withagriculture and manufacturing contributing 25 per cent each.

8/4/2019 final eeb

20/22

If we can achieve 10 per cent growth in each ofthese sectors in the next 10-15 years, we can

become an economic superpower.

Indian expertise in IT, pharma and heavyengineering has been accepted globally

India can deliver technologically superiorproducts, competitively

India has a great pool of human capital:smart, savy, entrepreneurial, artistic, etc. India

possesses great natural resources

8/4/2019 final eeb

21/22

BIBLIOGRAPHY

Rbi.gov.in

Indiabudget.nic.in

Analysing Macro Economics Rakesh P.Singh

HBS case INDIA ON THE MOVE

8/4/2019 final eeb

22/22

THANK YOU