hanmer msl: 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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‘21 Years of Economic Reforms: The Journey So Far and the Road Ahead is the latest executive report from Hanmer MSL. It draws on research and is a meta-survey which shares insights and commentary on India’s growth story over the last two decades. It also looks ahead and shares thoughts on the upcoming union budget which will be delivered by Finance Minster, Pranab Mukherjee in March. The report takes us through a brief history of India, key reforms that has shaped its development, the challenges that remain and what we can expect in terms of growth, investment and private and public consumption. asia.mslgroup.com

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Page 1: Hanmer MSL: India’s Economic Growth Story

A report by Hanmer MSL, part of MSLGROUP

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

Page 2: Hanmer MSL: India’s Economic Growth Story

For over 20 years, MSLGROUP Asia has counseled global, regional and local clients, helping them to establish, protect and expand their businesses in Asia. The largest PR and social media network in both Greater China and India, MSLGROUP Asia is headquartered in China and includes 28 owned offices and more than 1,370 colleagues across Shanghai, Beijing, Guangzhou, Chengdu, Hong Kong, Taipei, Tokyo, Seoul, Singapore, Kuala Lumpur, Mumbai, Delhi, Ahmedabad, Pune, Bangalore, Chennai, Hyderabad and Kolkata. A satellite network of people reaches an additional 125 Indian cities

and a strong affiliate network of independent agencies across the region adds another 23 Asian cities to our reach. The team includes leading agencies in India and Greater China, including Genedigi Group, ICL MSL, 20:20 MSL and Hanmer MSL. In recent years, MSLGROUP Asia has been recognized with more than 50 awards, including “PR Agency of the Year” for Hanmer MSL India, 20:20 MSL India, MSL China, MSL Singapore and ICL MSL Taiwan from both international and local industry groups. Learn more about us at: asia.mslgroup.com+ Twitter + Facebook

MSLGROUP is Publicis Groupe’s PR, speciality communications and engagement group, advisors in all aspects of communication strategy: from consumer PR to employee communications, from public affairs to reputation management and from crisis communications to event management. With more than 3,000 people, its offices span 22 countries. Adding affiliates and partners into

the equation, MSLGROUP’s reach increases to 4,000 employees in 83 countries. Today the largest PR network in Greater China and India, the group offers strategic planning and counsel, insight-guided thinking and big, compelling ideas – followed by thorough execution. Learn more about us at: www.mslgroup.com + http://blog.mslgroup.com + Twitter: @msl_group +youtube.com/mslgroupofficial

Hanmer MSL is one of India’s largest multidiscipline communications firms and a leader in the area of speciality communications services including financial communications, social media, crisis and issues management, corporate reputation, strategic public relations, events and activation and creative services. Through its powerful network of more than 400

staff across offices in Mumbai, Delhi, Bangalore, Chennai, Kolkata, Ahmedabad, Hyderabad and Pune, as well as the reach of the MSLGROUP and Publicis Groupe international network, Hanmer MSL works with more than 150 leading Indian brands and multinationals to deliver world-class communications.

Page 3: Hanmer MSL: India’s Economic Growth Story

» EXECUTIVE SUMMARY

» REFORMS: A BRIEF HISTORY

a. Launchpadb. Falling short

» KEY ACHIEVEMENTS

a. Growth b. Innovation c. Investment d. The battle against poverty e. Literacy

» WHAT’S LEFT

a. Social sector b. Hunger c. Corruption d. 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

» INDIA’S ECONOMIC JOURNEY

» INDUSTRY MILESTONES

» INDIA AT A GLANCE

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Table of contents

Page 4: Hanmer MSL: India’s Economic Growth Story

Executive summary

4

On July 24, 1991, with the country dangerously

close 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 collateral for 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 world’s 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 wholesome indicator. 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 India’s 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.

Page 5: Hanmer MSL: India’s Economic Growth Story

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 you

travel 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 don’t 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 to

present 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 serious

political 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 country’s 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.

Page 6: Hanmer MSL: India’s Economic Growth Story

6

When India gained independence from

British 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 answer

to 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

wasn’t working, the government sought to

put growth on the fast track in the 1980s

by 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 party’s surprise

choice for prime ministership.

While Rao continued to spout the party’s

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

Page 7: Hanmer MSL: India’s Economic Growth Story

7

Economics is a subject that does

not greatly respect one’s wishes.

-Nikita Khrushchev, Soviet leader

In economics, the majority is always

wrong.

-John Kenneth Galbraith, economist

India, Rao knew, had no choice. Reform, even

if 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.

Launchpad

While 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-clearing

contracts.

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 match

China 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 show

for every negative. For instance, in 1991,

Manmohan Singh’s 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-Cola’s acquisition

of 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 aren’t 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 subsidised Photo by Terinea IT Support on Flickr

Page 8: Hanmer MSL: India’s Economic Growth Story

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 the

deserving.

There are other worrying signs. India’s

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 Hazare’s call for a

countrywide agitation to demand an effective

anti-corruption law was answered by citizens

across the socio-economic spectrum. The

government’s image — and the polity’s as a

whole — suffered.

India’s journey has been long and arduous.

As it takes on the challenges listed above, a

longer and tougher struggle lies ahead.

Page 9: Hanmer MSL: India’s Economic Growth Story

The new government, which assumed office barely a month ago, inherited an economy in deep crisis. The balance of payments situation is precarious.

We have been at the edge of a precipice since December 1990 and more so since April 1991. The foreign exchange crisis constitutes a serious threat to the sustainability of growth processes and orderly implementation of our development programmes.

Internal public debt of the central government has accumulated to about 55% of GDP. The burden of servicing this debt has become onerous. Interest payments alone are about 4% of GDP and constitute almost 20% of the government’s total expenditure. Without decisive action now, the situation will move beyond the possibility of corrective action.

There is no time to lose. Neither the government nor the economy can live beyond its means year after year. The room 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 have now reached a stage of development where we should welcome, rather than fear, foreign investment.

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

Victor Hugo once said: “No power on earth can stop an idea whose time has come.” I suggest to this august house that the emergence of India as a major economic power in the world happens to be one such idea. Let the whole world hear it loud and clear. India is now wide awake. We shall prevail. We shall overcome.

1950-80 1980-92 1992-2003 2003-100

2

4

6

8

10

3.5%

5.5%6%

8.5%

INDIA’s GDP GROWTH

Excerpts from Manmohan Singh’s 1991 budget speech

9

Source: Economic Survey 2010-11

Page 10: Hanmer MSL: India’s Economic Growth Story

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 hit

7.5% (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

StatesMean % growth

(2000–04)

Mean % growth

(2004–09)

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

Page 11: Hanmer MSL: India’s Economic Growth Story

The savings rate shot up from 21.5% of the

GDP in 1991–92 to 34% in 2010–11. As a result,

investment levels eventually rose to 37% of

the GDP from 22.1%, enabling sustainable

growth of more than 8%. In layman’s 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, India’s 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 India’s 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 in

2010–11.

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 world’s cheapest car, produced

by the Tatas is an example of this ingenuity.

Savings rate 1980–81 1990–91 2000–01 2010–11

As % of GDP 18.5 22.8 23.7 34

Source: Economic Survey (2010–11)

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 Indian

companies would not be able to compete and

would be gobbled up by multinationals.

That didn’t 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 China’s 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 have willingly 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 who

want it. The first lesson of politics

is to disregard the first lesson of

economics.

-Thomas Sowell, writer

Photo by Balaji.B on Flickr

Page 12: Hanmer MSL: India’s Economic Growth Story

12

India’s 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

India’s 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, India’s 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 the

volatility 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

country’s 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 billionFDI 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 a

totally 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

Page 13: Hanmer MSL: India’s Economic Growth Story

13

why the desperately poor have radicalised and

taken 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

India’s 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%).

India’s 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

Homes reporting hunger

1983 1993–94 1999–2000

2004–05

% of population

17.3 5.2 3.6 2.5

Source: Economic Survey (2010–11)

Poverty ratio 1993–94 2004–05 2009–10

% of population 45.3 37.2 32

POVERTY RATES

HUNGER RATE

The growth and, perhaps, rising literacy levels

sparked 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 Mao’s one-child policy, but that

could 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, India’s 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 zero

to 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 we’re facing with

debt are man-made. We created them. It’s called

fantasy economics. Fantasy economics

only works in a fantasy world. It doesn’t 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

Page 14: Hanmer MSL: India’s Economic Growth Story

14

Literacy

Literacy rates are closely linked to the poverty

ratio. It is no surprise then that as India’s

poverty ratio dropped, the literacy rate shot up.

Since 1991, India’s 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 1950–51 1960–61 1970–71 1980–81 1990–91 2000–01 2010–11

% of population

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 free enterprise 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. Those

whom God has so joined together, let no man put

asunder.

-John F Kennedy, former US president

Photo by United Nations Photo on Flickr

Page 15: Hanmer MSL: India’s Economic Growth Story

15

What’s left

A remarkable story has been scripted over the

last two decades. Yet, a longer journey awaits.

There is a large, unfinished reforms agenda,

not least of which is fixing a basic issue – ease

of doing business.

The Heritage Foundation’s 2011 Index of

Economic Freedom ranked India 124th among

183 countries on this parameter. The World

Bank’s Doing Business report, meanwhile,

placed India 134th among 183 nations.

Globally, there seems to be consensus that

India has lots to do before it can be called

business-friendly.

From getting building permits to enforcement

of contracts, the Indian story is one of

unending red tape, restrictions and delays.

India has the dubious distinction of leading the

world in terms of legal backlog – nearly 31.5

million pending cases. Rigid labour laws are

a barrier for those wishing to set up labour-

intensive industries that could provide millions

of jobs, not to mention curbs on investment in

infrastructure, retail and education.

Here are a few sectors that require urgent

attention.

• Social sectorA boom in social spending has been

accompanied by innovations such as the

National Rural Employment Guarantee

Scheme, the Sarva Shikhsa Abhiyan (a

national education mission), the Right to

Education and the Food Security Act that

extends subsidised food facilities to the

poor. There is also a rural health mission

and the Jawaharlal Nehru National Urban

Renewal Mission.

Social spending rose from 5.49% of

GDP in 2005-06 to 7.27% in 2009-10.

However, these schemes are beset by

corruption and waste. Free government

schools and health centres are barely

functional, while unions ensure that there

is no accountability from teachers, health

workers and other service providers.

Absenteeism is rampant and bribes are the

norm.

There is little accountability, and

administrative reforms are the need of the

hour.

The lack of education has led to severe

shortage of skilled labour, and the

shambolic school system ensures that

those who pass through it are functionally

illiterate.

India needs to take great strides in

education and vocational training.

7.27Spending on social sector, as percentage of

GDP, in 2009-10. In 2005-06, it was 5.49%

• Hunger

India’s nutritional indicators are

staggering. Anaemia affects over 80%

of the population in some states. Child

malnutrition, measured by low weight

for age, affects 46.7% of all children (on

this count, we fare worse than any African

country).

There has been virtually no improvement

in child malnutrition between 1998-99

and 2005-06. Indian children suffer from

stunting and low weight. Calorie intake

is falling despite rising income, probably

because poor people want to switch to

superior, tasty food rather than get more

calories out of basic food.

Hence, nutrition is a bigger problem than

hunger, which makes awareness of the

importance of vitamin, iron and iodine

intake critical.

80Estimated percentage of Indian children

suffering from anaemia

46.7Estimated percentage of children who

suffer from malnutrition, measured by low

weight for age. India fares worse than any

African country on this count. There has

been virtually no improvement in child

malnutrition between 1998-99 and

2005-06

I had four or five years in school

training as a soprano. I fell

into pop singing because of

economics. I got out of high school

and had to go work, and they weren’t

hiring opera singers.

-Jo Stafford, singer

An economist is a man who states

the obvious in terms of the

incomprehensible.

-Alfred A Knopf, publisher

Page 16: Hanmer MSL: India’s Economic Growth Story

16

There can be no real individual

freedom in the presence of economic

insecurity.

-Chester Bowles, former US diplomat

If all economists were laid end to end, they would

not reach a conclusion.

-George Bernard Shaw, writer

• Corruption

This 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 among

the 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 jury’s 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, 150

of the Lok Sabha’s 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 and

even the Prime Minister’s Office would go

a long way in reducing corruption. Another

option is to fast-track cases against

politicians.

87India’s rank, among 178 countries, on

Transparency International’s Corruption

Perception Index

Photo by India Kangaroo on Flickr

Page 17: Hanmer MSL: India’s Economic Growth Story

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

• Infrastructure

Lack of infrastructure could prove to be

a major hurdle to the country’s progress.

It could impede the delivery of health

services 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 provides

opportunities for corruption.

India requires transparency in policies

and procedures, and an end to political

discretion in these areas.

• Administrative reforms

While 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 the

consumer more.

• Fiscal management

The country’s 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. “Fiscal

restraint 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 anybody’s 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

Chartered’s Global Focus – 2012 report.

Isn’t it interesting that the same

people who laugh at science fiction listen to weather

forecasts and economists?

-Kelvin Throop III, fictional character

created by RAJ Philips

An economist is an expert who will

know tomorrow why the things he predicted

yesterday didn’t happen today.

-Laurence J Peter, academic

Photo by celblau on Flickr

Page 18: Hanmer MSL: India’s Economic Growth Story

18

Indian banks, meanwhile, are under pressure

amid the high policy rates and low growth.

However, most banks are in good enough

shape to absorb the pressure; they are also

better capitalised than they were in 2008-

09. Also, the government intends to boost

their capital base by March 2012; further

announcements on this are expected in the

budget.

Finally, the focus on increasing the purchasing

power of vulnerable groups without a

corresponding emphasis on supply-side

policies has resulted in inflation. Hence,

expenditure reforms are critical.

“Subsidies need to be reduced, particularly

given that the expected slippage in the FY12

fiscal deficit to 5.6% of GDP from the targeted

4.6% is driven primarily by the subsidy

burden,” said the Standard Chartered report.

This report too said that this year’s provincial

elections would make it tough to curb populist

expenditure.

At the same time, it pointed out, slower growth

might curb revenues. This would probably

keep the FY13 fiscal deficit at a high 5.5% of

GDP.

Barclays Capital’s The Emerging Markets

Quarterly report also predicted that the

government would miss its fiscal deficit target.

Note: All forecasts except USD-INR refer to the April-March fiscal year starting in the year in the column heading;

*end-period. Source: Standard Chartered Research

STANDARD CHARTERED FORECASTS FOR INDIA

2011 2012 2013 2014

GDP (real % y/y) 7.0 7.4 8.0 8.0

WPI (% y/y) 8.7 6.5 6.0 6.0

Repo rate (%)* 8.5 7.0 7.0 7.0

USD- INR* 51.5 48.5 46.5 44.0

Current account

balance (% GDP)

-3.1 -2.8 -2.6 -2.5

Fiscal balance

(% GDP)

-5.6 -5.5 -5.0 -5.0

In all recorded history there has

not been one economist who has had to worry about

where the next meal would come from.

-Peter Drucker, management guru

Economics is the painful elaboration

of the obvious.

-Friedrich von Hayek, economist

Page 19: Hanmer MSL: India’s Economic Growth Story

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 it’s 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 BMI’s growth projection for

India. However, if growth does not exceed the 6.8% predicted, it

would 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 Industrial

production 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 this

downturn, nor is the government in a position to enact stimulative

fiscal measures,” the BMI report said.

19

What lies ahead

Page 20: Hanmer MSL: India’s Economic Growth Story

20

The deteriorating global situation will also

impact 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.

It’s clear, said Standard Chartered’s 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 policy

inaction 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 government’s ability to restore investors’

confidence in India’s 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 beyond

issues 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 the

first 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

Page 21: Hanmer MSL: India’s Economic Growth Story

21

Most of the companies surveyed for the report

were 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 didn’t plan to enter the country or were

preparing to withdraw.

The areas of concern, Barclays Capital’s 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: They’re both

wrong.

-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 world’s

most 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 protests

and paralysed parliament. Critics predicted it

would it would kill family-run shops that make

up more than 90% of India’s 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 retail

had whipped up xenophobic sentiments about

the return of colonialism.

Almost as a consolation for reform’s

proponents and to reassure global investors,

the government allowed 100% foreign

ownership of single-brand stores.

Photo by Greenbelf Alliance on Flickr

Page 22: Hanmer MSL: India’s Economic Growth Story

22

Expect brands such as Ikea, Adidas and Marks

and Spencer, which were allowed to own up

to 51% of a store, to flock to India without

domestic partners. The decision “is likely to

result in more foreign companies entering

the market or expanding their presence”, said

Fitch, the credit agency.

“This is a welcome move with a clear potential

to lift the general mood in the economy,”

chimed in Rajan Bharti Mittal, vice-chairman

and managing director of Bharti Enterprises,

one of the country’s largest retailers, to

Financial Times.

However, the fear of policy reversal still lurks.

That’s why Ikea, the Swedish furniture giant, is

not expected to come to India soon, though it

is keen to.

It doesn’t help that policy flip-flops aren’t

the only challenge; land acquisition and a

market that is anything but homogenous are

problems too. That’s why the World Bank

ranks India 132nd out of 183 countries for ease

of doing business.

The evolution of the retail sector, it now

seems, will be long drawn out.

13% Rise in FDI in India in the first 11 months of

2011 from a year earlier; total FDI for the

period was $50.81 billion, according to an

Ernst & Young report

25%Rise in number of projects; total number of

projects in the period was 864, said the report

70%Proportion of firms, of the 382 surveyed, that

planned to increase or maintain operations in

India; 19% said they didn’t plan to enter the

country or were preparing to withdraw

Private and public consumption

Though food inflation has come down to

manageable levels, there was great pressure

Having an in-house economist became for many business people something

like having a resident astrologer

for the royal court: I don’t quite understand what

this fellow is saying but there must be

something to it.

-Linden, writer

Economics is the only field in which

two people can get a Nobel Prize for saying exactly the

opposite thing.

-Heard at the London School of Economics

on household budgets over the last 18

months. As a result, the outlook is grim on

private consumption, which accounts for

roughly 65% of the GDP.

Interest rates (the repo rate, the benchmark

at which the central bank buys government

securities from banks to control money supply,

was at 8.5% at the time of writing) are pretty

high too with a wary RBI refusing to lower

them until it is certain inflation has been

tamed.

The stock markets aren’t doing great either,

staying range-bound between 16,000 and

17,500 points. Even the rupee has weakened

more than 19% since its July 2011 peak.

BMI expects private consumption to grow by

6.0% and 6.2% in FY2011-12 and FY2012-13

respectively – a considerable slowdown from

the 8.8% growth in FY2010-11.

“While household consumption – currently

at its weakest level on record – is likely to

find a floor thanks to government spending

in rural areas and a healthy labour market,

weak consumption will weigh on investment

in a feedback loop,” said Standard Chartered’s

Global Focus – 2012 report.

On the public consumption front, the

government has been hamstrung by the

global financial crisis. One indicator of this is

the fall in public spending growth – in 2008,

government spending averaged 26.7% y-o-y

growth. Spending over the 2011’s four quarters

expanded only at 3.2%.

Combine negative revenue growth and a

growing expenditure bill due to the various

social schemes announced and what you

get is little room for the government to push

through fiscal stimulation.

BMI projected public consumption to grow

by 3% and 5% in FY2011-12 and FY 2012-13

respectively.

65 Percentage of GDP accounted for by private

consumption

Page 23: Hanmer MSL: India’s Economic Growth Story

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

pregnant—inflation 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.

India’s 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, raising benchmark 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 Capital’s 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 current fiscal 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 ministry’s 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 expand money 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 Singh’s 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 rupee’s overvaluation and deteriorating risk sentiment. The Barclays Capital report said the rupee would remain weak in the near term, clawing back 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.

Page 24: Hanmer MSL: India’s Economic Growth Story

24

When goods don’t 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 process

indistinguishable 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

Ind’l prod’n 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

Page 25: Hanmer MSL: India’s Economic Growth Story

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, here

are the issues that are likely to be on Pranab

Mukherjee’s 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 marketsWith 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 creationIndia’s unemployment rate fluctuates

between 9% and 10%. However, as the

workforce gets increasingly younger,

even 7% growth may not be enough.

What’s 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.

• AgricultureGrowing 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; it’s 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 hasn’t eased

supply or made farmers richer. It’s the

delivery mechanism that has failed; better

subsidy management is the need of the

hour.

Page 26: Hanmer MSL: India’s Economic Growth Story

26

India’s economic journey

500 BC : Silver punch-marked coins minted; it’s a period of intensive trade and urban development

1 AD : India has 32.9% share of global income, the largest in the world

1000 : India has 28.9% share of world income, the largest in the world

1500 : India has 24.5% share of world income, second largest in the world after China, which has 25% share

1600 : India’s income of £17.5 million (under Akbar’s Mughal empire, population of roughly 150 million) was greater than the entire treasury of Great Britain in 1800 (£16 million)

1700 : India has 24.4% share of world income, largest in the world, under Aurangzeb’s empire

1793 : Cornwallis’ Permanent Settlement Instituted in Bengal

1820 : China is world’s largest economy followed by the UK and India. Industrial revolution in the UK, British begin treating India as an unequal partner

1850 : India’s GDP estimated at 40% of China’s. British cotton exports reach 30% of Indian market

1868 : First estimation of India’s national income by Dadabhai Naoroji

1870 : India has 12.2% share of world income

1913 : India has 7.6% share of world income

1947 : India gains Independence

1950 : Government sets up Planning Commission, Jawaharlal Nehru is chairman. Objective is to streamline resource allocation, put economy on development path

1951 : First Five-Year Plan launched. Major portion of resources directed to agriculture, rural infrastructure. Food production rises by 18%

1952 : India has 3.8% share of world income

1973 : Economy at $494.8 billion, has 3.1% share of world income

1980–1991 : Economy virtually closed

1991 : Balance of payments crisis. External debt rises to $70 billion, exacerbated by Gulf War. Rising oil prices deplete country’s foreign exchange reserves. India is on the verge of default; has enough to pay for only three weeks worth of imports. In May, government sells and pledges gold to raise $605 million. Rupee devalued on July 1 and 3. Economic reforms begin

1992 : Government switches from fixed exchange rate system to dual exchange system. Boost for the economy, but inflation rate is high and poor industrial growth cause concern. Securities and Exchange Board of India established to oversee financial markets

1993 : Unified exchange rate system introduced

1993-2010 : Reforms continue. Public sector disinvestment introduced, as are various administrative reforms. Stock market booms, crossing 20,000 points at one stage before falling due to an economic slowdown

2009 : Global slowdown impacts economy, jobs; India, however, maintains a growth rate of over 6%

2010 : India’s economy is at $4.06 trillion, accounting for roughly 6% share of world income, the fourth largest in the world

2011 : Fuel prices deregulated. Inflation hits record highs, crossing 12%. Numerous rate hikes follow

2012 : Inflation brought under control, but fears of slowing growth persist

Far better an approximate

answer to the right question, which is often vague, than an exact answer

to the wrong question, which can always be made precise.

-John Tukey, statistician

In general, the art of government

consists in taking as much money as possible from one party of the

citizens to give to the other.

-Voltaire, philosopher

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27

Industry milestones

1945 : Tata Motors established in Mumbai to build locomotives

1952 : 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) in the US with back-office operations in Pune Tata obtains software contract from Burroughs, first major software project outsourced by the US

1975 : Azim Premji’s Bangalore-based Wipro starts selling first computer made in India

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

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

1979 : Wipro, to fill a gap after IBM’s exit, hires Sridhar Mitta to set up offices in Bangalore to make computers

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

1983 : Anil Ambani joins Reliance

1986 : Sunil Mittal founds Bharti Telecom

1988 : Gautam Adani opens trading house in India

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

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

1995 : Essar Group run by Nand Kishore Ruia’s sons, Shashi and Ravi, extends from shipping 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 India’s richest person, Wipro has highest market capitalisation in the country

2005 : Ambani brothers split their business empire. Lenovo acquires IBM’s personal computer business

2006 : Lakshmi Mittal’s Luxembourg-based ArcelorMittal becomes world’s largest steel maker

2008 : Tata acquires Jaguar

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

2010 : Bharti Airtel becomes world’s fifth largest telecom operator. Lakshmi Mittal is Europe’s 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 can’t get rid of poverty by giving people money.

-PJ O’Rourke, political satirist

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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

Page 29: Hanmer MSL: India’s Economic Growth Story

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