india and it's reform
TRANSCRIPT
INDIA & ITS REFORMSThursday, November 26, 2015 | Presented by Melvin Hade
ECON 12005 Economic System | Berly Martawardaja, M.Sc.
India After Independence India’s Reform
India’s Services Sector
India’s Poverty & Growth
Chapter OneChapter Two
Chapter Three Chapter Four
Opening Clip
Source: Credit Suisse
INDIA AFTER INDEPENDENCEChapter One
- Nehru, 1st Prime Minister of India
“Long years ago we made a tryst with destiny, and now the time comes when we shall redeem our pledge. The achievement
we celebrate today is but a step, an opening of opportunity, to the great triumph and
achievements that await us.”
ECONOMIC SYSTEM
INDIA’S GOAL AFTER INDEPENDENCE
Abolish PovertyEnding of Ignorance
Equal Opportunities Eradicate Diseases
ECONOMIC SYSTEMINDIA’S PLANNING PROCESS
India Five Year Plan
Establish a socialistic society through economic growth with self-reliance,
social justice and alleviation of poverty.
1. Democratic political framework 2. Mechanism of mixed economy 3. Private-Public Sector Enrolment
Planning Commission, Government of India
Objective of Development Policy
How?
Who?
ECONOMIC SYSTEM
INDIA’S 1ST & 2ND FIVE YEAR PLAN
Raise domestic savings for growth
1st Plan 2nd Plan
Help the economy resurrect from colonial rule
Created by the Planning Commission
1951 - 1956 1957 - 1961
Implementation of Industrial Strategy
Development of heavy industries and supported dominant role from the public sector
1. Encourage small scale industry
6. Reducing income inequality3. Reducing foreign dominance
4. Building indigenous capacity
2. National self-reliance 5. High growth rate
ECONOMIC SYSTEM
INDIA’S FIFTH FIVE YEAR PLAN
1974-1979“To accelerate the process of production with a mild v e r s i o n o f e c o n o m i c liberalization that was started in 1980s”
Establishment of 3 Committees:
1. Narsimhan Committee: Fiscal Policy
2. Sengupta Committee: Public Sector
3. Hussain Committee: Trade Policy
Delicensing Activity:
1. 32 industry groups were delicensed without any investment limit
2. Entry into the industrial sector was made easier
ECONOMIC SYSTEM
FAILURE IN THE PLANNING PROCESS (PLANNED VS REALITY)
Lowest Rates of Growth Rising Public Deficit
High Growth High Public Savings
India’s average growth rate
was less than 4% in
comparison to 5.2% per
annum in other developing
countries between
1950-1990
Total public sector
borrowings averaged
4.4% of GDP in 1960-1975
6% of GDP in 1980
9% of GDP in 1990.
High Degree of Self-Reliance
Balance of Payment Crisis
ECONOMIC SYSTEM
WHY IT FAILED?
Failure in the Generation of Public Savings
No Social Improvements; Literacy, Education and Healthcare
Public sector-instead of being a generator of savings for the community’s good, became a consumer of community’s savings. As a result, the government needs to borrow to meet its own expenditure and public sector deficits and investments.
The people wasn’t equipped with education and literacy rate to support growth. Hence, the massive development plan mostly failed, as suggested by Indian leading economist, Amartya Sen.
ECONOMIC SYSTEM
THE BHAGWATI-SEN DEBATE
Amartya Sen Professor, Economics & Philosophy at Harvard University
Jagdish Bhagwati Economics & Law Professor at Columbia University
ECONOMIC SYSTEM
DEBATE ON PATHWAY TO DEVELOPMENT
Amartya SenJ. BhagwatiPrioritizes on accelerated growth
Generation of investments
Higher growth rate
Social improvement and reduction in poverty
Focuses on literacy, education and social improvement
Economics as a discipline has moved away from values of freedom to the
creation of income and wealth
Social opportunities is the main element in the development
process
ECONOMIC SYSTEM
6 CHARACTERISTICS OF INDIA AFTER INDEPENDENCESelf-Sufficiency Resources Management Private Sector Control
Incentive for Small Scale Firms
Labor Protection Prioritizes Tertiary Education
As a country emerging from colonialism, this was important to be
achieved. India wants to avoid dependance
on imports.
To ensure that investible resources were channeled to
the “right industries”
Investment licensing, Import licensing,
controls on the use of FX, credit allocation &
prices
Access to credit, tax concessions, subsidized
interest rates and preferential treatment
in government procurement.
Compulsory for firms (with >300 workers) to seek the permission of
governments for dismissing workers.
India invests greater on tertiary education
than on primary education, up until
the year 2000.
ECONOMIC SYSTEM
INDIA’S REFORMChapter Two
India’s Reforms
1980s Reform 1991 Reform
Pro-Business Pro-Market
ECONOMIC SYSTEM
1980 REFORMS |
Import Liberalization
Export Tax Incentives
Liberal Access to Credit and Foreign Exchange
Relaxation on Industrial Licensing
Pro-Business
ECONOMIC SYSTEM
1990 REFORMS | “PRO-MARKET”1 9 9 1 R E F O R M O B J E C T I V E S
E C O N O M I C L I B E R A L I Z AT I O N
M A C R O E C O N O M I C S TA B I L I T Y
K E Y I N F L U E N C E R
N A R A S I M H A R A O P R I M E M I N I S T E R O F I N D I A
M A N M O H A N S I N G H M I N I S T E R O F F I N A N C E
ECONOMIC SYSTEM
1991 REFORMS |
Liberalization of Trade in
Services (Telco)
Progressive Reduction
on Non-Tariff Barriers
Liberalization of Inward FDI
& Portfolio Investment
Abolition on
Industrial Licensing
Pro-Market
ECONOMIC SYSTEM
0
1
2
3
4
1970S 1980S 1990S
3.3%
3.9%
0.7%
Source: International Monetary Fund
-0.5
0.5
1.5
2.5
1970S 1980S 1990S
1.6%
2.5%
-0.5%
Annual Average Growth Rate of GDP per Worker
Total Factor Productivity
ECONOMIC SYSTEM
0
0.6
1.2
1.8
2.4
3
3.6
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 20080.07 0.03 0.09
0.190.29
0.58 0.61
0.85
0.610.46
0.75
1.11 1.07
0.70.8 0.87
2.11 2.04
3.55
India’s Foreign Direct Investment, Net Inflows (% of GDP)Source: The World Bank
India’s Economic Reform
ECONOMIC SYSTEM
-2
0
2
4
6
8
10
1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
India USA Indonesia
India’s GDP Growth to GDP, 1979 - 1999Source: The World Bank
INDIA’S POVERTY & GROWTHChapter Three
ECONOMIC SYSTEM
-2
0
2
4
6
8
10
1950-1954 1960-64 1970-74 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998
3.93.4
5
2.92.2
6.74
6.01
3.48
7.29
3.82
5.254.78
3.97
9.63
5.955.53
1.06
5.484.75
6.66
7.57 7.55
4.05
6.18
8.85
India’s GDP Growth, 1950 - 1999Source: The World Bank
ECONOMIC SYSTEM
0
266.667
533.333
800
1066.667
1333.333
1600
1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
India’s GDP per Capita, 1979 - 1999Source: The World Bank
Trend Line
Actual
ECONOMIC SYSTEM
India’s Export , 1958 - 2014Source: Ministry of Commerce and Industry
ECONOMIC SYSTEM
DETERMINANTS OF INDIA’S ECONOMIC GROWTH
1. Changing Attitudes
2. Foreign Direct Investment
The government’s attitude shifted from a centrally-planned government to decentralized & public sector-focused to private sector-focused. This stimulates entrepreneurship and expansion of the private sector.
Foreign Direct Investment (FDI) grew exponentially after the economic reforms in 1991 and until today India is one of the top destinations for FDI in the world.
ECONOMIC SYSTEM
DETERMINANTS OF INDIA’S ECONOMIC GROWTH3. Economic Liberalization
Domestic firms gain access to import
capital goodsNew Technologies
Increase quality and expands production
Growth
Foreign investor invest and enter the
market
Increase domestic competition
Put pressure on incumbent to
upgrade technologies
Efficient firms drive out inefficient firms in
industry sector
Resources gets reallocated to more
productive use
Overall productivity increases and attracts labor
Workers move from agricultural sector to
industry
Less workers in the agriculture sector
Labor market tightens
Higher wage in agriculture sector
ECONOMIC SYSTEM
INDIA’S ECONOMY TODAY
7th Largest EconomyGDP: $ 2.2 Trillion
2nd Largest Labor ForceCapitalistic Economy
Potentially the world’s fastest growing economy until 2050
10th Largest Importer
19th Largest Exporter
BUT, POVERTY.
ECONOMIC SYSTEM
BUT, POVERTY.India’s GDP per Capita, 1960 - 2014
Source: The World Bank
ECONOMIC SYSTEM
BUT, POVERTY.Poverty Rate in Developing Nations, 1975 - 2014
Source: The World Bank
ECONOMIC SYSTEM
BUT, POVERTY.Poverty Rate in India, 1975 - 2014
25
30
35
40
45
50
55
1973-74 1977-78 1983 1987-88 1993-94 1999-00 2004-2005
54.9
51.3
44.5
38.9
36
26.127.5
Source: The World Bank
ECONOMIC SYSTEM
BUT, POVERTY.
Country Literacy Rate
HDI Rank
China 96.2% 106th
Indonesia 93.9% 111th
Brazil 92.6% 79th
Cambodia 77% 136th
Kenya 78% 147th
India 74% 134th
Source: UNESCO
INDIA’S SERVICES SECTORChapter Four
ECONOMIC SYSTEM
OVERVIEW OF SERVICES SECTOR IN INDIA
▸ India shifted from agriculture to the services sector.
▸ Surpassed Japan as the 3rd largest smartphone market.
▸ World’s fastest growing telecommunication industry.
▸ Indian ICT Industry contributed 7.5% to GDP and India’s trade surplus.
▸ Growth in the services sector has been linked to the 1980s and 1990s economic reforms and liberalization.
ECONOMIC SYSTEM
CHALLENGES TO INDIA’S SERVICES SECTOR
1. Lack of decent employment. (Basu & Maertens, 2007)
2. Poor business environment. (Joshi, 2008)
3. Lack of integrated service sector policy between sub-sectors. (Banga, 2005)
4. Strong focus on skill-intensive services but majority of the population remains unskilled and poorly educated. (Kochhar et al, 2006)
ECONOMIC SYSTEM
8
18
28
38
48
58
1950-51 1956-57 1962-63 1968-69 1974-75 1980-81 1986-87 1992-93 1998-99 2004-05 2010-11
Agriculture Industry Manufacturing Services
Services
Industry
Agriculture
Manufacturing
Sectoral Contribution to GDP, 1950 - 2011
ECONOMIC SYSTEM
Source: Asian Development Bank
15
30
45
60
75
1993-94 1999-2000 2004-05 2009-10
22 22.4 23.425.3
15.2 15.918.1
21.5
62.8 61.7
58.5
53.2
India Sectoral Employment (as % of Total Employment), 1993 - 2010
Services
Industry
Agriculture
ECONOMIC SYSTEM
Source: Asian Development Bank
Sectoral Employment in 2013
Services 48%
39%
13%
Services 29%
23%
48%
Sectoral Contribution to GDP in 2014
ECONOMIC SYSTEM
FDI LIMIT ON SERVICES SECTOR
ProhibitedUp to 20%
Up to 26%
Up to 49%
Up to 51%
Up to 71%
Up to 100%
Real Estate Banking Broadcasting Services
Petroleum Refining
Multi-brand retailing
Air transport services
Oil & Gas
Construction Insurance Domestic air transport
Telecommunications services
Courier Services
Railway Transport Print Media Private
Security Distribution
Legal Services
Financial Services Healthcare
Atomic Energy
Cable Networks
Tourism & Travel
Postal Services Education
ECONOMIC SYSTEM
RECOMMENDED POLICY IN THE SERVICES SECTOR
1. Services Sector Focus in Policymaking: Policy is focused on agriculture and manufacturing, not services.
2. Regulatory Reforms: Issues of transparency
3. Removal of FDI Restrictions: India’s FDI restriction is higher than of Republic of Korea.
4. Boosting service sector education and employment
5. Taxes and Subsidies: Corporate taxes in India is 30-40%, compared to 17% in Singapore and 25% in China.
6. Access and Availability of Infrastructures: Government invests to low on public infrastructures
Source: Asian Development Bank
ECONOMIC SYSTEM
CONCLUSION & KEY TAKEAWAYSEconomic
Liberalization is KeyNext Economic
PowerhouseAgriculture-Service Shift
Sen vs Bhagwati IlliteracySocio-Economic
Challenges
Liberalization is the main reason that caused India
to “take-off”
Major institution has predicted that India
will be the fastest growing economy
until 2050.
India skipped the utilisation of the
manufacturing sector and moved to services
straight away.
Debate on stimulating growth from social
improvement first, or high economic growth
India’s literacy is far below other developing
countries, with only approximately 74%
Poverty, infrastructure, rural opportunities,
income gap remains key issue for India
THANK YOUThursday, November 26, 2015 | Presented by Melvin Hade
ECON 12005 Economic System | Berly Martawardaja, M.Sc.