gowda economy

7/27/2019 Gowda Economy

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The Indian Economy

An Overview and Analysis


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Class Exercise: What else could havehappened? What else can happen?

Counterfactuals & Scenarios

Where would Indias economy be todayif:

Liberalization had not occurred at all

What all could still go wrong with India

on the economic front? Different doomsday scenarios


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How Has the Indian Economy Evolved?


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4

25%

23% 24%16%

13%

9%

4%

3%


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What Happened?

We missed the Industrial Revolution

Impact of British Rule

Positive

Stable economy, stable polity, legal system

Fiscal conservatism

Infrastructure (Rail, ICS, Data Collection)

Negative

Traditional industries decimated (Textiles)

Did not invest in industrializing India


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In the 1800s, The British Empire

produced a new territorial domain forthe evolution of the economy


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Aurobindo & Naoroji on British Rule

Sri Aurobindo

One great fact the terrible poverty of Indiaand its rapid increase during British rule, that is

economic imperialism

Dadabhai Naoroji

The cost to India of British colonization was,contrary to rhetoric, to the vast benefit ofBritain and the extreme disadvantage of India

The evils of foreign rule involved the triple loss

of wealth, wisdom, and work


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Economic Strategy Pre-Independence

Congress did not have a clear economic

strategyAgreement on problems:

Povert

Threat of famineNeed to maintain economic independence

Inequalities within society

Drain Theory:

Dadabhai Naoroji


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Congress: Strands of Thought

Bombay Plan (developed by leaders of industry)

Economic development through growth oftextile and consumer industries

State to provide infrastructure, protect

industry, invest in expensive industriesPlanned Modernization

Advocated by Civil servants and Thinkers

from princely states Influenced by Japan

Pragmatic view of roles of industry, state

Expert panel to provide intellectual brain


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Congress: Strands of Thought

Nehru & Bose

Imperialism propelled by capitalist expansionState to develop mother industries

Ownershi in ublic sector for redistributive

and security reasonsGandhi

Industrialize and perish

Caste (and consequent occupational roles)can be dissolved through moral persuasion

Decentralized, independent development


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The IndianArguments &

Pressures &Claims of

Influences on IndiasEconomic Development

EconomyIntellectuals

DemocraticPolitics

Social &culturalnorms


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Four Phases of Indias EconomicGrowthPanagariya (2008)

Phase I (1951-65): Takeoff under Liberal Regime; Open foreign

investment policy; relatively open trade policy untillate 1950s; investment licensing tightens only towardsthe late 1950s earl 1960s

Phase II (1965-81): Socialism struck with vengeance

Phase III:

Ad hoc liberalization during 1975-79, 1980-84 andthen more substantial liberalization during 1985-86and 1986-87.

Phase IV (1988-present):

Systemic and systematic liberalization


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Figure 1.1: Average Growth Rate

4.8

6.3

5

6

7

.

3.2

0

1

2

3

4

1951-65 1965-81 1981-88 1988-06


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Features Common to the Four Phases

Reasons why India escaped prolongedstagnation or decline

Macroeconomic stability

Political stability Gradual and predictable policy

changes

Capacity to implement policies


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Post-Independence: The Agenda

in the Early Years (Phase I)

Multipronged Development => Self-reliance

Rapid industrialization; import subsn; K goodsPrevention of foreign capital domination

Land reforms: abolish zamindari; land to tenant

Introduction of CooperativesGrowth with equity: therefore positive

discrimination and reservations for SC & ST

State to play central role through directparticipation in the economic process => activepublic sector

Planned rapid industrialisation within a democratic

& civil libertarian framework (an uncharted path!)


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Nehruvian Activist Agenda

Constitutional democracy

Economic & social redistributionState-directed industrialization

State to create conditions for economic expansion;

Forego quicker growth (through consumer industries) forlong-term development

State industrial investment would be a counterweight tocyclical swings and fashions of private investment

Productive public sector => resources for redistribution

(1947 AICC Committee: transfer from private to publicownership should commence after a period of five years)

Nehru does not push fully due to lack of consensus =>

Mixed Economy prevails


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Nehruvian Perspective:Theory & Practice

Economic planning within mixed economy Unique combination of democracy, markets and economic planning

Industrial licensing system More restrictive after Industrial Policy Resolution 1956

Tariff policy (infant industry protection) Emphasis on import substitution

Foreign exchange shortages justify such regulation Mahalanobis Model: Heavy + Capital Goods Industries Public Sector captures commanding heights of the economy Small scale industry protection; expected to address unemployment Significant investments in health and education; neglected by British

Science & Technology: Atomic Energy, National Labs, CSIR => Indias scientific manpower

In practice, pragmatism rather than doctrinaire approach; notmuch opposition from organized business, which was activelyconsulted; lays the foundation for Indias physical and human

infrastructure, the precondition for modern Indias development


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Problems Nehru faced

Unequal distribution of land ownership

defended by a powerful social orderPower to legislate regarding land reforms

given to states

Low eve s o pro uctivity

Great inequalities of social order largelypreserved

Bureaucracy to push developmental agenda

Industrialization based on PlanningCommission for strategy, & bureaucrats forimplementation


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Nehrus Achievements and theImmediate Post-Nehru Period

Moderate growth

Democratic legitimacyEconomic stability through prudent financial

management

Undermined by crisesPolitical discontinuity Shastris early death

Wars with China (1962) & Pakistan (1965)

Successive monsoon failures 1965, 1966Devaluation of currency to get IMF aid


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Indira Gandhi Early Years(Phase II)

Fears about Indias external vulnerability

Had to establish herself politically Used economic policy as active instrument

Success of green revolution created bullockca italists as economic and olitical force

State subsidies to gain their support Other interest groups flexed their muscles Economic populism to gain support of poor

Leftward shift bank nationalization Constraints on pvt. industry (e.g. MRTP) Indirect taxes to fund populism Fiscal conservatism broadly maintained


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By the late 1980s (Phase III) Protectionist system of controls primarily to sustain

state, not support development

Huge bureaucracy to rein in business

Deficits increased, fiscal prudence slowly declined

fund deficit, more conditions put by foreign lenders Rajiv Gandhi enters and moves toward liberalization

Lowers taxes and tariffs, introduces computers

Telecom Revolution Even though teledensity does not rise that much, the Public

Call Offices make communication available to all easily

Fiscal crisis in 1991


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The Indian Economy grew at more than 5% per year for the last 25years (1980-2005). It rose in the early 1980s because of improved

efficiency of capital use and again after 2001, because of higherinvestment. Liberalisation in 1991 was a less significant break foreither investment or efficiency of capital use.

0.30

0.35

0.40

6.00

7.00

8.00

0.10

0.15

0.20

0.25

1955-56

1959-60

1963-64

1967-68

1971-72

1975-76

1979-80

1983-84

1987-88

1991-92

1995-96

1999-00

2003-04

2.00

3.00

4.00

5.00

investment rate GDP growth 5 years


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The Public SectorGrew larger than envisaged, and in more areas

Over-zealous bureaucracy

Compulsions of electoral politics

Performance below expectations

Lack of requisite autonomy Constant interference by administrative ministries

Excess manpower due to political interference

But did achieve variety of social objectivesPSU sales decline from 45% to 37% Seven of top 10 firms in 1998 are PSUs (six in oil)

Privatization slow: Modern Foods, Sterlite

Navratna privatization or disinvestment now opposed


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Sectoral Growth

Agriculture grew consistently slower

than the GDP

Industrial growth picked up in Phase I

u r r y Services showed a more stable

pattern with growth accelerating

particularly in Phase IV.


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Growth Rates of Sectoral GDP (atfactor cost)

Period Agriculture & Allied Industry Manufacturing Services GDP

1 2 4 5 6 7

1951-65 2.9 6.7 6.6 4.7 4.1

1965-81 2.1 4.0 3.9 4.3 3.2

1981-88 2.1 6.3 7.1 6.5 4.8

1988-06 3.4 6.5 6.8 7.8 6.3


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Sectoral Shares

The share of agriculture declined

consistently

The share of industry rose initially but

The share of services roseconsistently


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The Composition of the GDPYear Agriculture and Allied Industry Manufacturing Services

1950-51 57 15 9 28

1964-65 49 21 12 31

-

1987-88 33 26 16 41

2004-05 21 27 17 52


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Liberalization (Phase IV)

Dismantling of licensing system

Removal of MRTP

Removal of technology import restrictions

Reduced tariffs

Reduced taxes

FERA FEMA & Current accountconvertibility

Divestment in public sector


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Changes in Indian Macroeconomics

Old Indian Macroeconomy New Indian Macroeconomy

Sequence of Agricultural Shocks Conventional Business CycleClosed Economy Open economy, removal of trade

barriers, de facto convertability

Distortionar Tax Polic and Tax distortions eased and fiscalFiscal Crisis

crisis in check

Primitive financial markets withilliquidity, government control,and lack of speculative pricediscovery

Equity market a success, withgenuine liquidity, and nogovernment control over prices


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Political Economy of Liberalization By or on behalf of elites who have been in revolt against

earlier model of state-directed economic development

Liberalization also helps children of government servants (IIMs?) Crisis of 1989-91 offered elites a window of opportunity to

renegotiate states relationship to private capital Governing elites thought liberalization would offer new sources

o patronage to compensate or t ose ost ue to s r n age oregulatory role successful ones managed to do this (DeveGowda, Sharad Pawar, etc.)

Not yet run counter to the interests of the countrys mostpowerful social groups

No role of vision, success due to stealth; reformers perish Sequencing influenced by political considerations Increasingly being implemented in successive micro-reforms

at state level


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ConcernsUnaimed liberalization could:

Widen the gap in social opportunity between rich & poor Sharpen rural-urban divide Increase regional imbalances

Number of poor large in absolute termsconomy as o e eva ua e on e as s o w a appens

to poor & dispossessed Is growth all that matters? What about quality of life?

Is India drifting dangerously towards a state ofindebtedness and economic dependency in an uncertain

world economy? Is Indian policy to be dictated by World Bank etc?


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Liberalization: Dalit Perspectives

State and public sector are emancipators

Even this benefits only a small portion of Dalits

Dalit communities, due to history, are less preparedfor marketplace competition

,

oriented initiatives will result in a new exclusion As basic stepping stones to developmenteducation,

healthget privatized, exclusion of Dalits will worsen

What applies to Dalits also applies to numerous

historically disadvantaged groups 60 years after Independence, people Below Poverty

Line still constitute more than 25% of India

Now SEZs, (earlier development), displaced poorwithout making them benefit from progress


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The reforms are not simply about the renegotiation ofIndias relationships with the global market-place, nor evenare they about the relationships of private capital with the

Indian state in the formal economy; the reforms are alsoabout the reworking of the idea of the State itself and ofthe states capacity to work on behalf of those who standoutside Indias (expanding) social and economic elites.


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Todays and Tomorrows India

http://www.youtube.com/watch?v=pr

MwTWOYDz8&feature=related


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India is growing!Source: Economist

India will be the third largest economy by 2040

India will be the 5th largest consumer market by 2025


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China

India

Russia

UK Germany Japan US

Italy France Germany Japan

Italy France Germany

Italy France Germany

The BRICs Verdict on the Indian Economy

Overtaking the G6:When BRICs US$GDP will exceed G6

G-6, Brazil, Russia & China expected to slow down over the next50 years, Indias growth rate to remain above 5% throughoutIndias GDP to outstrip Japans in 2032

India per capita income to rise to 35 times current levels by 2050GS BRICSs Model Projections

Brazil

BRICs

2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

G6

* dots indicate when BRICs US$GDP exceeds US$GDP in the G6


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GDP growth (%)

Strong growth in the last few years

7.5

9.5 9.79.2

6.77.28

10

12

0

2

4

6

2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 AE


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Annual Percentage change

India set to grow faster than other regions

Economies 2008 2009 Projections

2010 2011

World 3.0 -0.8 3.9 4.3

Advanced Economies 0.5 -3.2 2.1 2.4

United States -

Source: IMF, January 2010

. . . .

Euro Area 0.6 -3.9 1.0 1.6

Japan -1.2 -5.3 1.7 2.2

Developing Asia 7.9 6.5 8.4 8.4

China 9.6 8.7 10.0 9.7

India 7.3 5.6 7.7 7.8

Brazil 5.1 -0.4 4.7 3.7


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Integration with Global Economy

Gross Flows (Current and Capital Accounts)

Year Billion USD % to GDP

1957 5.2 19.5

1967 9.6 20.7

1977 20.4 22.0

1987 53.0 23.9

1997 177.3 49.9

2007 909.3 110.0


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India's trade performance..

195

252.3

312

414.3

450.5

200

300

400

500

US$ billion

Over the six year period 2002-03-

2007-08, average annual growth

in

Exports 25%

Imports 31%

42.268.5 95.1 95.2

114.1

141.9

-100

0

100

1990-911995-962000-012001-022002-032003-042004-052005-062006-072007-08 2008-09

Exports Imports Total Linear (Total )

Source: Reserve Bank of India

Government envisages to double the share of India in global trade by

2020. Indias total share in goods and services trade was 1.6% in 2008

Trade 28%

However total trade grew only by

10% in 2008-09 due to the global

slowdown


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Indias forex reserves..fifth largest

in world

141.5151.6

199.2

309.7

252.0

150.0

200.0

250.0

300.0

350.0

US$ billion

Largest holders of forexreserves1.Peoples Republic of China2.Japan & Euro zone3.Russia4.Taiwan

42.354.1

76.1

113.0

0.0

50.0

100.0

2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09


.

6.South Korea7.Brazil8.Hong Kong9.Singapore10.Germany

Source: Wikipedia

Forex reserves touched an all time high of US$ 314.6 billion in May 2008

Forex reserves for the week ending March 26, 2010 stood at US$ 277.0

billion


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Inflation level.

7.9

7.1

3.73.4

5.4

6.4

4.4

5.4

4.7

8.4

4.0

5.0

6.0

7.0

8.0

9.0

Wholesale Price Index (in percent)

0.0

1.0

2.0

3.0

Average

1991-92 to

1999-00

2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09


Inflation touched a peak of 12.8% in August 2008 due to increased

pressure on global commodity prices

Wholesale price index for the month of February 2010 was 9.9% (y-o-y)


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Index of Industrial Production

6.2

5.36.0

7.4

9.2 9.1

12.5

9.0

6.1

5.05.7

7.0

8.4 8.2

11.6

8.5

4.0

6.0

8.0

10.0

12.0

14.0

(in percent) Manufacturing sector has

witnessed a perceptible slowdown

due to

(i) Global meltdown and

(ii) Contractionary monetarypolicy stance of RBI

IIP Growth inApril09 - 1.2%

2.9

2.52.7 2.6

0.0

2.0

Avg

growth

1990s

2000-012001-022002-032003-042004-052005-062006-072007-082008-09

Manufacturing General

Source: Central Statistical Organization

For the economy to clock 8-10% growth, manufacturing sector

needs to grow by at least 12%

May09 - 2.2%

June09 - 7.8%July09 - 7.2%

Aug09 - 10.2%

Sept09 - 9.1%

Oct09 - 10.3%

Nov09 - 11.7%

Dec09 - 16.8%

Jan10 - 16.7%


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Increasing Discretionary Income

Increasing discretionary income


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Given the demography & rapidly growing middle class, Indiahas huge untapped market potential..

17

2

6

5

9

713

80%

90%

100%

Share of Average Household Consumption

Discretionary Discretionary

Indias middle classconstitutes 50 million

people at present. Likely to

go up to 583 million people

Growing middle class..

42

25

6

5

12

10

3

3

8

11

20

0%

10%

20%

30%

40%

50%

60%

70%

2005 2025

Food, Beverages, and Tobacco Apparel Housing Utilities

Household Products Personal Products & Services Transportation

Communication Education & Recreation Health Care

xpen ure

(52%)

Necessities

(48%) Necessities(30%)

Expenditure

(70%)

Source : McKinsey Global Institute

by 2025

Households that can

afford discretionary

spending likely to go up

from 8 million at present to

94 million by 2025


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Higher disposable income, easyavailability of credit and high

exposure to media and brands hasincreased the average propensity toconsume

77

104

153

225

326

562

0 100 200 300 400 500 600

2004

2005

2006

2007

2008

2009*

*Upto 31st Dec 2009

Telecom subscriber base (in millions)

The domestic market is growing

over 500 million and is currentlyadding around 8-10 millionsubscribers every month; about 50%penetration is expected by 2012

Automobile production now exceeds

10 million units per annum includingpassenger vehicles, commercialvehicles, two- and three-wheelers

6.37.2

8.59.7

11.1 10.9 11.2 11.4

0

5

10

15

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10*

Automobile production (inmillions)

* Apr-Jan 2010


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India has the advantage of being one of the youngest countries

Size of 15-59 age group

in 2007 (in million)

Size of 15-59 age group

in 2050 (in million)

Growth of 15-59 age

group ( in million)

India 696 1020 324

United States 191 225 34

Japan 76 45 -31

What sets India apart..

In the year 2006, about 52% of Indias population was below 25 yearsMedian age would be 30 years even as late as 2025

Indias work force (15-59 years) would go up by around 324 million by 2050.

Germany 50 36 -14

United Kingdom 36 36 0

France 37 35 -2

China 895 755 -140

Source: United Nations


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INDIAS DEMOGRAPHIC DIVIDEND WILL CONTINUE TILL 2025(% share of age groups)

36

60

33

62

30

6568 69 68

40

50

60

70

80

5 5 5 6 67

0

10

20

30

0-14 years 15-64 years 65+

2000 2005 2010 2015 2020 2025

India will remain a young nation with the median age going up

from 21 in 2000 to 26 in 2025


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Strong knowledge base.

1989000

0 500000 1000000 1500000 2000000 2500000

Graduates

Availability of Graduates

Indias educational infrastructure

Over 380 universities (11,200 colleges)1,500 research institutions and around9,000 PhDs

Over 200 000 en ineerin raduates

What sets India apart..

258000

9000

Post Graduates

PhD's

Source : A.T. Kearney

Over 250,000 post graduates and2,000,000 graduates

India has a significant English speakingpopulation

India has the third largest scientific and technical manpower in the world

The number of MNCs undertaking R&D activity in India has gone up from 100

in the year 2003 to 300 in 2007


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Factors Driving Indias Growth

Population & demographic trends:

Every two years, India would be adding all of Germanyslabor force!

Human capital English-speaking skilled workers: scientists, trained IT

specialists, technicians and engineers

Rising integration into global trade and investment Can also capitalize on Diaspora, especially in USA

Investment trends: huge potential ininfrastructure PPP to finance and execute infrastructure projects (rail,

airport, seaports)

Policy and institutional determinants of growth Macro policies Institutional and regulatory environment


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Drivers of Economic Transformation Spirit of entrepreneurship

Unleashed with the IT revolution and emergence of BPO/ outsourcing industry

Rise of knowledge based industry, taking cue fromsuccessful entrepreneurs in the Silicon Valley

IT industry leveraged on Modular Development and Global

Delivery Model Benefits from 24 hr work day and productivity gains

Technology drove outsourcing of business processes Indian IT Cos devising strategies to move up value chain

Other sectors transforming are Pharma and Auto-ancillaries Huge opportunities seen in improving supply chain

efficiencies and catering to domestic market across sectors Telecom revolution unleashes tremendous economic impact


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India Growth Story

Several constraints still exist

Infrastructure remains a critical bottleneck Quality of education archaic; not innovation-oriented How can we educate 500 million youngsters properly?

PSUs still hold mono ol in some sectors Aerospace, defense production & nuclear power prodn.

Reforms slowed due to need for political consensus Capital markets still not very efficient Slow growth in agriculture, occupation of 60% people Urbanization at a rapid pace, but not planned or

managed carefully Can lead to huge impacts on environment & efficiency

Challenge to ensure inclusive growth, Economic gains to be equitably distributed while

evolving right incentives for growth


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INDIAS BOOMING MIDDLE CLASS


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How many? India's 200m-strong middle class is the

most economically dynamic group on theplanet, but is largely uninterested in politicsor social reform

300 million Indians live on less than 1 adaya quarter of the world's utterly poor

Yet since 1985, more than 400m (out of atotal population of 1bn) have risen out ofrelative povertyto $5 a dayand another300m will follow over the next two decadesif the economy continues to grow at over 7per cent a year


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Who are they? According to the National Council of Applied

Economic Research, the term "middle class"applies to those earning between $4,000 and$21,000 a year ($20,000-$120,000 inpurchasing power parity terms).

But this definition suits only about 60m (under6 per cent) of the population. Nevertheless,there seems to be an underlying intuition aboutthe "middle class-ness" of those moving upfrom $5 a day to $10

People who employ household help are middleclass?


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Impact? The shifting of expenditure from needs to wants is

what distinguishes the Indian middle class most

sharply from the middling social groups of the past The average middle class consumption per capita per

year works out to Rs 12,546

ew researc rom e c nsey o a ns u e

(MGI) shows that within a generation, the country willbecome a nation of upwardly mobile middle-classhouseholds, consuming goods ranging from high-endcars to designer clothing.

In two decades the country will surpass Germany asthe world's fifth largest consumer market


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A new breed of ferociously upwardly mobile Indians isemergingyoung graduates of India's top colleges

who can command large salaries from Indian andforeign multinationals

Their tastes are indistinguishable from those of -

luxury cars and wear designer clothes, employ maidsand full-time cooks, and regularly vacation abroad. B

By 2025, there will be 9.5 million Indians in this classand their spending power will hit 14.1 trillion rupees20 percent of total Indian consumption

Consumerism spurred by advertising, easy access tothe Internet and plethora of media options


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Value-conscious consumers Before India embarked on its program of economic

reforms, the country had only 0.8 fixed telephones

per 100 people, and virtually no mobile phones. Now, mobile phone subscribers are expected to reach

211 million by end-2008.

n a s mo e mar e s curren y grow ng even as er

than China's, and overall communications spendingwill grow at a very rapid 13.4 percent per year overthe next two decades.

Other fast-growing categories will include transport,education and health care.

But Indias mobile telephony costs are among thelowest in the world (and companies still make profits!)


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How the Indian Consumer Really Behaves

http://www.youtube.com/watch?v=P

6NoYjf4--Q&feature=related


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Consumption Patterns The character of consumption will change

dramatically over the next 20 years. A hugeshift is underway from spending onnecessities (food, clothing) to choice-basedspending on categories such as householdapp ances an res auran s

Households that can afford discretionaryconsumption will grow from 8 million todayto 94 million by 2025

Companies have to understand the psycheof those classes which are beginning to jointhe middle classes -


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Growth of Middle India Much of the consumption and income growth is not in

the metros, its in the Tier II and Tier III cities

51 districts in India have at least one town with apopulation of more than 500,000. Together, theyhave twice the market potential of the four metros

, , .

Swamy BBDO) Towns such as Chandigarh, Ahmedabad, Jaipur,

Lucknow, Indore and Pune have three-quarters ormore of the affluence levels of Mumbai. On growthpotential they do even better. That small-town urban

India is attractive in terms of purchasing power, timespent on media, and product consumption comesacross clearly.


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Myths & Realities Myth: The Indian middle class lives in the metros. Reality: Of the 80 million households that constitute the

Indian middle class, only 25 million are in Tier I cities. Closeto 55 million belong to the smaller towns. Mercedes sells morecars in small-town Ludhiana than it does in Mumbai.

M th: India is a " rice sensitive" market. Reality: For products such as Vim Bar dishwashing detergent

and Head & Shoulders shampoo, the Indian market easilyabsorbed price hikes of 13% and 18%, respectively, in 2007.Yet for years, candy manufacturers have been trying in vainto increase prices from 50p to Re 1. Value sensitivity, notprice sensitivity, is the buzzword.

Myth: Imported is always premium. Reality: Euro RSCG's brand momentum study in 2004 showed

that eight of the top 10 brands in the country were of Indianorigin. The days of "imported equals premium" are long past.


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Tapping the Bunty Syndrome Confidence: Grasim, a brand of suits, through the message

of "be self-made," has saluted the "We'll get there no

matter what" spirit of the youth. The message is enhancedby the use of a celebrity (the actor Akshay Kumar) whohas made a name for himself on his own in a field whererelatives already in the profession are seen as aprerequ s e or crea ng equ y n e n us ry.

Gandhian values: Idea, a mobile-services brand, haspropagated caste equality, while Tata Tea has tried toappeal to the young in Tier II cities with a call to "wake upto the issues."

Pride: Durables brand Voltas has challenged the monopoly

of Korean brands in the air-conditioner space by projectingitself as "India's own AC." Family values: The concept of being able to give back to

parents has been used to good effect by MasterCard andHDFC Bank.


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Tailoring Products to These Consumers

Smart companies know that old consumer habits die hard.

For generations, rural Indian families have either madetheir own clothes from bolts of cloth or had the local tailormake their garments relatively cheaply.

Many remain suspicious of ready-to-wear clothes.

Arvind Mills, India's leading denim manufacturer,

overcame these misgivings by offering a "ready to stitch"jeans kit to local village tailors.

It also distributed sewing-machine attachments forstitching the heavy denim and trained the tailors to use

the kits. Within two months, more than a million of these Ruf 'n Tufkits were sold


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Middle Class Politics Middle-class skeptical about the capacity of

the state Behaves more like the contemporary

consuming classes of the west, relentlessly

lifestyles while taking political parties to beas bad as each other and non-party politicsto be hopelessly idealistic

Rarely mobilize politicallybrief exceptions,the Anti-Reservation Movement

Or as part of Resident Welfare Associations


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Global Outlook Keen on expanding frontiers: supported nuclear tests,

Indian economys liberalization

Now, post-nuclear tests, take Indias new status forgranted; they simply assume it is India's due to betreated as the "equal" of the US and the rest, andmove on to talk of economic opportunities

Commitment to an India which plays a decisive role

on the international stagebut now, instead ofthrough "non-aligned" solidarity and ancient history, itis through software and finance

Sense of citizenship is weak: they do not, on thewhole, extend a sense of solidarity to the poor; they

often do not acknowledge the role of the state in theirown rise or its capacity to solve any of the country'sproblems


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Entrepreneurial Indian middle class also marked by

entrepreneurial spirit focused in thought,global in outlook, proactive in approach,and meticulous in execution Rishikesha T.

,

Represented by companies such as Infosysand Bharti Airtel

All have been global in outlook in terms ofadopting global standards, the besttechnology and operating on global scales

Examples of middle class to billionaires


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The Formal Corporate Sector

Indian Entrepreneurship Before


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Independence1800s

Opium Trade with China--Jamsetji Jeejeebhoy, etc

Inter-War Period

Heavy IndustryTatas, Birlas, Dalmias, Walchand, SinghaniasMaharaja of MysoreSteel (Vishweshwarayya)

Textile Mill Magnates


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Indian Business Houses in


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Pre-liberalization Era Expansion & consolidation (in spite of constraints of

industrial policy) expansion of industrial base Acquisition of British business houses in India Growth in 1914-47 due to British focus on World Wars;

Great Depression

Strategic use of industrial licensing system Corner icenses to prevent competition

Expand into unrelated lines just because license is obtained Compete easily in political markets of corridors of power Precious little innovation

Dependent on State Funds Industrialists often owned small % of shares; LIC, etc. rest

Global expansion by far-sighted houses (e.g. Aditya Birla) Third generation splits weakened many houses

External pressures on joint-family Availability of funding from FIs and banks

Indian Business Houses in


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Pre-liberalization Era

Weak on technology, quality

Control remained with familymembers, though family members

Forward-looking houses high onprofessionalization

Business became more respectable,

but few could attain the status of pre-independence business leaders!


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Impact of liberalization on Business Liberalization => competition => technical change. But Indian

business also now more ambitious & efficient (better K/output)

Existing business houses invested in new product lines, tended tobe more focused

Tatas sell TOMCO to HLL; SRF sells finance arm, buys core biz

ome e or s a ec eve opmen ; more esp. arma

Import of technology (Auto: unpacking; i.e., different sources) Nicholas Piramal buys entire R&D lab of Hoechst

Entry of multinationals challenges Indian cos.

Lots of JV, M&A, acquisition of Indian firms (Parle)

New class of entrepreneurs

Educated, informed, ambitious, progressive; not old money

IT Success

No products; efficient processes; leverage educated rawmaterial & labour cost arbitra e untouched b overnment


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Now, the Indian Multinational? LN Mittal: does his empire qualify?

Bharat Forge, Moser Baer, Wipro, TataSteel, Aditya Birla, all busy buyingcompanies abroad

Aditya Birla overseas expansion since license-

permit raj days, to avoid dealing with Indiangovernment restrictions on growth

ONGC Videsh: a PSU playing in

international markets The Entrepreneurial Success of the Indian

Diaspora and its demonstration effect

India: Some Complexities and


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Contradictions


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India: The Cold Statistics

More than one-third below poverty line

42% of rural population spend just Rs 447a month on food, light, clothing, etc.

(53/1125) Literacy 65-70%

More than 20% lack access to potable

water

Only 36% households have toilets

Life expectancy at birth 61 years

77


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India: Corruption An Endemic Problem

India is ranked at #84 out of 180 countrieson TIs Corruption Perception Index 2009with score of 3.4 10

New Zealand #1 9.4 / 10

Germany #14 8.0 / 10

France #24 6.9 / 10

China #79 3.6 / 10

Indias rank slipped by 14 positions in last4 years!

78


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India: Governance Indicators

79


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Whos Losing Out? Whos Ignored?

The Other Side of India Shining

Indias Informal Economy


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Indias Informal Sector Low level of organisation; small in scale usually employing

< ten workers and often from the immediate family;

Heterogeneity in activities;

Easier entry and exit than in formal sector;

between labour and capital; informal capital sources Mostly labour intensive work, requiring low-level skills;

usually no formal training as workers learn on the job;

Labour relations based on casual employment and or

social relationships as opposed to formal contracts; Due to their isolation and invisibility, workers in the

informal sector are often largely unaware of their rights,cannot organise them and have little negotiating power

with their employers and intermediaries (ILO 2000).


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Magnitude of Informal Sector Larger than the organized sector in terms of the

relative share in GDP as well as the workforce.

Produces about 60 per cent of Indias GDP and alsoprovides livelihood to nearly 93 per cent of the

.

Whereas a report by National Commission forEnterprises in the Unorganised Sector (NCEUS)

estimated the un-organised/informal sectorworkers as comprising about 86% of work force in

the Indian economy in 2004-2005 and informalemployment both in the organised and unorganisedsector as 92%


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Social Regulation of Indian EconomyGender

Caste

Religion Spatial Clusters

Labour: in dependent alliance with caste patrons

Capital: rise of Intermediate Class; dominate non-metros

State Regulation: doesnt go below surface

Huge untaxed, unregulated, externality-driven economy

Tremendous corruption at implementation level Reforms create more opportunity for market

exploitation of rents and labour

Conversion of black to white

Monthly incomes of cultivators have declined in thelatest period. All other workers incomes have


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increased, especially in the organised sector.

12000

15000

18000

1993-94

0

3000

6000

9000

ag-wages

nonag

wages

self-emp

agri

self-emp

nonagri

private

salaries

govt

salaries

1999-00

2004-05

The gap between organised sector salaries and self-employed/wages started at the end of 1990s and has beengrowing thereafter. Real incomes of self-employed in agriculture


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have declined since the onset of agrarian crisis after 1997-98

Indices of per worker income (1999-00 series)

380.0

430.0

480.0

ag-wages

nonag

wages

self-em

80.0

130.0

180.0

230.0280.0

330.0

1993-94

1994-95

1995-96

1996-97

1997-98

1998-99

1999-00

2000-01

2001-02

2002-03

2003-04

2004-05

agri

self-empnonagri

private

salaries

govt

salaries


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Inequality Among States

YET POVERTY LEVEL HAS DECLINED SIGNIFICANTLY IN 1990s


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54.951.3

44.538.9

36.026.1

30

40

50

60

0

10

20

1973-74 1977-78 1883 1987-88 1993-94 1999-00

Poverty ratio (%)

H i ll ?


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Has it really? Professor Utsa Patnaik, in her study of nutritional status

and hunger in India, showed how 76% of families or 840

million people in India do not get the requisite dailyintake of calories -- ie 2,100 calories for urban and 2,400calories for rural residents.

According to the Arjun Sengupta Committee Report on

Unorganised Sector Workers, about 77% of people in thecountry subsist on under Rs 20 per day.

Further, the National Family Health Survey-3 states thatin India, 46% of children under the age of five are

undernourished. The Right to Food campaign registered more than 5,000

starvation deaths in different parts of the countrybetween 2001 and 2005.

The desperation on the farm


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Human Development Index:

I di d H N i hb (2005)


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India and Her Neighbours (2005)

Thus, New Government Estimates:

E Thi d I di I P


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Every Third Indian Is Poor

The Suresh Tendulkar committee has revised the poverty line in terms ofmoney spent per person per month. From Rs356.30 a month, this hasincreased to Rs446.68 in rural areas. In urban areas it has risen fromRs538.60 to Rs578.8. At present, the Centre measures poverty by

measuring calorie intake.

Ab f S i l S f t N t


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Absence of Social Safety Nets People Fall Into Poverty Too!

The World Bank estimates that one-quarter of all Indians fall into poverty as

event of hospitalisation

Other factors: excessive spending onweddings and deaths

Indians investment in gold is partly atraditional social safety net

Ambedkar


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Ambedkar On 26th January 1950, we are going to enter into a life of

contradictions. In politics we will have equality and in socialand economic life we will have inequality. In politics we willbe recognized by the principle of one man, one vote andone value. In our social and economic life, we shall, byreason of our social and economic structure, continue to be

, . How long shall we continue to lead this life of

contradiction? How long shall we continue to deny equalityin our social and economic life? If we continue to deny it forlong, we will do so only by putting our political democracyin peril. We must remove this contradiction at the earliestpossible moment or else those who suffer for inequality willblow up the structure of political democracy which thisassembly has so laboriously built up.

gowda economy

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