India grapples to structure its economy

(1950-1975)

Deepak Shenoy, On Friday 12 August 2011, 7:32 PM

After Independence, our country was built on socialist principles, as the first prime minister,

Jawaharlal Nehru sought to emulate the Soviet Union, which seemed to be doing better than the

rest of the west that was ravaged by World War II. Nehru followed the path of state controlled

industrialization, active intervention, central planning and mandatory licensing of all businesses.

A business would have to satisfy requirements from 80 agencies before getting a license, and

even then, the state would determine what was produced, how much of it, and what could be

charged for it. India followed a policy of import substitution — that is, produce as much as

possible locally instead of importing.

Nehru created five year plans — a concept followed even now — where targets were set and

budgets allocated in planned five year periods. He didn't like the word "profit" — in a

conversation with Tata, he supposedly said "Never talk to me about the word profit; it is a dirty

word". The hatred of profit was ensconced in a "super-tax" levied on all companies. If it made a

profit of more than 6% of your capital+reserves, a company was taxed upto 60% of such excess

profits.

These policies discouraged private sector investment and even savings. For a long time, it was

believed that anything foreign was bad; that any purchase from abroad, even of raw materials,

was abhorrent. This created a tilt towards public owned industry and a mentality of anti-

capitalism that survives till today.

For many years after 1950, India ran trade deficits and spent a lot more than it earned from taxes

(budget deficits). [1] The financing of such deficits were from borrowings abroad (foreign aid)

and from the RBI issuing rupees against dollars. In 1966, however, foreign aid stopped, with

other countries requiring that India open up its economy for trade. The 1965 war with Pakistan

had depleted government coffers as did the drought of that year. The public savings rate was

negative, so the government chose to tell the RBI to print money and finance the deficit.

After the complete stoppage of foreign aid in 1966, India had to devalue the rupee, from the

value of Rs. 4.76=$1 down to Rs. 7.50 = $1.

But we did not deliver on the promised liberalization. Even so, foreign aid resumed much of the

trade deficit was covered from borrowings abroad, while the RBI printed the rest. The printing

resulted in high inflation.

(WPI statistics collected from RBI and normalized)

During 1966, inflation crossed 10% and subsequently came down, until the major oil crises in

1974-75 took inflation to beyond 20%. The 70s were a tumultuous time, with the financial crisis

of 1971 that broke the dollar away from Gold, the India-Pakistan war, and then the oil crisis.

Meanwhile, the government raised taxes at as high as 97% in 1970-74. (The highest rate of tax

would stay above 50% till 1992).

Apart from income tax, there was a wealth tax — in the 70s, 8% of all wealth above Rs. 15 lakhs

was supposed to be handed over to the government. Surcharges were randomly introduced and

other variations added, some with retrospective effect, to tax speculation, "unearned" income or

to reduce consumption.

In 1975, the Emergency was imposed, and the era after that, till the liberalization in 1991 will be

covered in a separate article. However, it's noteworthy that because of retrograde socialist

policies, India grew at an average of just 3.5% per year, known as the "Hindu rate of growth",

from 1950 to 1985.

Nationalisation (Industry)

In 1953, much to the chagrin of J.R.D. Tata, Air India was nationalized. The government

already owned 49% since 1948 in return for being allowed to run international operations as

India's flag carrier. The carrier was nationalized in 1953 along with all other private airlines, with

domestic operations being moved to Indian Airlines.

Most of the steel and coal industries were nationalized, with some notable exceptions like Tata

Steel. Car manufacturers like Hindustan Motors and Premier

Automobiles were given tacit support by the government for being

"Indian" which gave us the then ubiquitous Ambassador and Fiat cars.

Bank Nationalisation

On July 19, 1969, Indira Gandhi nationalized 14 banks, with the aim of controlling credit

delivery, a measure largely supported because it was believed that banks were the bastions of the

rich. (Another 8 Banks would be nationalized in 1980).

Notes

The Rs. 1 note was issued in 1949:

(Did you know: The one rupee note is the only one issued by the Government of India. Every

other note is issued by the Reserve Bank of India, with the writing "I promise to pay the bearer a

sum of [] rupees")

In 1949, we also removed the king's photo and replaced it with the Three Lion stamp.

In 1954 we had high denomination notes, of upto Rs. 10,000 each. (Remember, this is a time

when the per capita income was Rs. 290. The equivalent today would be to have a note of Rs. 15

lakhs (1.5 million).

Such high denomination notes were denotified in 1978.

Most of what the common man used were coins, and until 1955, we used the "anna" system,

where one anna was approximately 6 paise. We decimalized in 1957, and a rupee was 100 paise

(instead of 16 annas).

Quotes & Quirks

"If the standard of living of our people is to be substantially raised by undertaking large schemes

of development, both the rich and the middle classes should come forward to place their savings

at the disposal of the Government."

Shanmukhan Chetty, 1947 (First Indian Budget)

Indira Gandhi served perhaps the most controversial period as Finance Minister. Here's what

she believed: A nation's strength ultimately consists in what it can do on its own, and not in

what it can borrow from others. - "Preface, 4th Five Year Plan", Government of India Planning

Commission (July 18, 1970)

But the quirkiest of all finance ministers, and a shrewd one too, was Morarji Desai. He is most

often remembered for championing the Urine Therapy. He told journalist Khushwant Singh that

he was advised to drink his own urine when in his 40s to cure piles (hemorrhoids), and he got

immediate results. Thereafter, he continued the practice and was quite open about it, saying you

should not do anything you would be ashamed of.

Just as the Finance Ministers were quirky, the era was marked by chaos and disorder. Not only

was a finance minister sacked, an emergency declared, did parties split, war break out but banks

were nationalized, Indians paid the highest taxes and India's growth rate was abysmal. Yeh hai

India meri jaan!

Wait for our next piece on the Emergency and what happens after it.

Reforms shape India’s economy (1980-90)

Natalia George, Yahoo!India Finance, On Sunday 14 August 2011, 9:40 AM

The emergency in June 1975 was declared after a court verdict that Indira Gandhi won her seat

by misusing public resources. With the suspension of democracy, a number of terrible

experiments were conducted in the name of progress. Population was thought to be a problem; so

Sanjay Gandhi embarked on a much reviled program of forced male sterilization. Civil rights

were suspended, and thousands of protesters were arrested. Censorship prevented Indian

journalists from reporting anything deemed sensitive, when foreign media did so, their offices

were shut. Censors even demanded changes to the climax of the blockbuster film "Sholay",

because they didn't want to show an ex-police officer killing a dacoit. (The original ending

survives now on the internet)

With emergency suspending unions' rights to strike, and allowing industrialists to fire at will, a

number of labourers faced the stick. Indira Gandhi also created a 20 point economic program

that was supposed to kickstart the industrial and agricultural sector, but it only pushed up

unemployment. In the end, Mrs. Gandhi called for elections and got voted out of power to make

Morarji Desai the first non Congress Prime Minister ever.

The beginning of the 1980's saw widespread gloom in India's macroeconomic performance after

the emergency was officially declared over in 1977. However, during the period from 1980-90

the economy began to pick up and the rate of growth increased to 5.8 per cent and was exceeded

by only eight out of 113 countries. Only after the growth accelerated in the 1980s, was there a

significant downward trend in poverty.

A point to note here, however, was that although GDP growth did pick up by almost 6 per cent in

the 1980s, it was driven mainly by a massive expansion in the country's fiscal deficit.

The growing structural imbalances in the economy - the current account deficit climbed to over 2

per cent of the GDP by the end of the 1980s and inevitably culminated in a severe balance of

payments crisis in July 1991. It was this balance of payments crisis that forced India to procure a

$1.8 billion IMF loan that led to the adoption of a major reform package and acted as a "tipping

point" in India's economic history.

Major reforms

It is argued that reforms in India cannot be credited with higher growth because the growth rate

crossed the 5 per cent mark in the 1980s, well before the launch of the July 1991 reforms. This is

an incorrect reading since liberalization was already under way during the 1980s and played a

crucial role in stimulating growth during that decade. The reforms in the 1980s must be viewed

as precursor to those in the 1990s.

The 1980s reforms proved particularly crucial in building the confidence of politicians regarding

the ability of policy changes such as devaluation, trade liberalization, and delicensing of

investments to spur growth without disruption.

Here are five major reforms during the era:

The government introduced several export incentives after 1985, relaxing the foreign

exchange constraint. 50 per cent of business profits attributable to exports were made

income tax deductible; in the 1988 budget this concession was extended to 100 per cent

of export profits while the interest rate on export credit was reduced from 12 to 9 per

cent.

There was a steady decline in the share of canalized imports. Between 1980—81 and

1986—87, the share of these imports in total imports declined from 67 to 27 percent.

Imports of petroleum, oil and lubricants imports declined increasing room for imports of

machinery and raw materials by entrepreneurs.

The Open General License (OGL) list was steadily expanded. This list was reintroduced

in 1976 with 79 capital goods items on it. The number of capital goods items included in

the OGL list expanded steadily reaching 1,007 in April 1987, 1,170 in April 1988, and

1,329 in April 1990.

There was a relaxation of industrial controls and related reforms. Delicensing received a

major boost in 1985 with 25 industries being delicensed and firms that came under the

purview of the Monopolies and Restrictive Trade Practices (MRTP) Act were subject to

different rules and could not take advantage of the liberalizing policy changes. Price and

distribution controls on cement and aluminum were entirely abolished. Also, there was a

major reform of the tax system. The multi-point excise duties were converted into a

modified value-added (MODVAT) tax, which enabled manufacturers to deduct excise

paid on domestically produced inputs and countervailing duties paid on imported inputs

from their excise obligations on output.

The Indian government also fixed a realistic exchange rate for the Rupee.

Inflation in India

Inflation in India was relatively stable between 1983 to 1990 averaging 6.75 per cent recording a

low of 3 per cent in early 1986 and a high of about 10 per cent.

GDP GROWTH

From 1980 to 1989, the economy grew at an annual rate of 5.5 per cent, or 3.3 per cent on a per

capita basis. Industry grew at an annual rate of 6.6 per cent and agriculture at a rate of 3.6

percent. A high rate of investment was a major factor that improved economic growth.

A high rate of investment was a major factor in improved economic growth. Investment went

from about 19 per cent of GDP in the early 1970s to nearly 25 per cent in the early 1980s. India,

however, required a higher rate of investment to attain comparable economic growth than did

most other low-income developing countries, indicating a lower rate of return on investments.

GDP grew at the annual rate of 7.6 percent from 1988—89 to 1990—91. Exports, which had

grown annually at a paltry 1.2 percent rate during 1980—85, registered a hefty annual growth of

14.4 percent during 1985—90.

Beginning of the stock market boom

The stock markets started to see renewed interest, with more and more investors joining the

Bombay Stock Exchange to trade. The Reliance stock was listed in 1977, and many companies

from the Birla and Tata stable continued to gather steam. Dhirubhai Ambani became a public

darling when he stopped the BSE after a standoff with operators that were shorting his

company's stocks. Towards the late 80s, stocks had a massive upsurge on the buying by

operators like Harshad Mehta, which eventually led to a massive market crash in 92.

Important events

India's second largest IT firm Infosys is founded in Pune. The founders started the

company with an initial investment of Rs 10,000. The company today is worth billions

and has an employee strength of 133,560.

NABARD was established on the recommendations of Shivaraman Committee, by an act

of Parliament on 12 July 1982 to implement the National Bank for Agriculture and Rural

Development Act 1981.

Maruti 800, also known as people's car, is India's first affordable car manufactured

by Maruti Suzuki India was introduced in 1983.

On 5 March 1984, the then Prime Minister of India, Indira Gandhi ordered Operation

Blue Star, an Indian military operation to remove Sikh separatists from the Golden

Temple in Amritsar which eventually led to Indira Gandhi's assassination by her two Sikh

security guards. This, highly controversial operation resulted in the deaths of some 1500

people, both civilians and army personnel. The carnage severely dented the Inidan

Army's image.

On the night of December 2 1984 India was struck by one of the world's worst industrial

catastrophes, the Bhopal gas tragedy. A methyl isocyanate leak from a Union Carbide

pesticide plant in Bhopal, Madhya Pradesh killed more than 2,000 people and injured

about 15,000 to 22,000 others.

The Union Budget 1986 proposed the setting up of Unit Trust of India's mutual fund and

Mahanagar Telephone Nigam Ltd. for Delhi and Mumbai.

High-profile tax raids were conducted on suspected evaders - including Dhirubhai

Ambani

Under Rajiv Gandhi's administration the Union Budget of 1987 proposed the minimum

corporate tax, known today as MAT or Minimum Alternate Tax. Budget estimates for

collections of this tax were modest (Rs 75 crore) but it has since become a major source

of revenue

Interesting Trivia

V P Singh, as Finance Minister, reduced gold smuggling by the simple tactic of offering part of

the gold recovered in anti-smuggling operations to the policemen involved.

Rajiv Gandhi, in response to a question asking if Doordashan and All India Radio would be

made autonomous said, "The People are not ready for it. [a free press]"

The Era of Globalisation begins (1990-2000)

Padma Swaminathan, Yahoo! India Finance, On Monday 15 August 2011, 10:31 AM

Before the 90s India was probably one of the least preferred economies in the world. But 1991

saw the nation entering into a new phase of economic reforms under the stewardship of the

current Prime Minister Manmonhan Singh, then Finance Minister (1991-95). Call it the era of

globalization, Indian economy for the first time saw a fundamental shift from its socialist

ideologies. There were some signs of macro-economic changes during Rajiv Gandhi's era but our

economy was already damaged by then. The oil crisis in the 70s and the Gulf war in the 90s

tipped the financial situation into a crisis where the foreign reserves were available only for three

weeks. Something drastic had to be done.

Manmohan carves India's economy

This is where the then Finance Minister Manmohan Singh stepped in. In his historic budget

speech June 21, 1991, he announced a bold financial move of opening the markets.

"The grave economic crisis now facing our country requires determined action on the part of

Government. 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."

Source: Trading Economics

With this war cry, Manmohan did away with the Statement of Industrial Policy ( July 24, 1991),

investment licensing and myriad entry restrictions on MRTP firms. He called for the New

Industrial Policy. The reforms in the 1990s were more systematic and they gave rise to a

decidedly more stable and sustainable growth from 1992. It also ended public sector monopoly

in many sectors and initiated a policy of automatic approval for foreign direct investment up to

51 per cent.

One of the primary culprits that led to the 1990-91 crisis was the mounting fiscal deficit during

the preceding years. The fiscal deficit as a percentage of GDP had been over 7.5% during 1984-

95 and it touched a high of 8.4% of GDP by 1990-91. This was coupled with current account

balance at 3.3% of GDP backed by a 9.9% rate of inflation. This issue was immediately

addressed by the new government and the gross fiscal deficit was scaled down to 5.9% in 1991-

92.

The increased international trade, freer economy, technological improvements prompted by

tremendous growth in information technology combined to show the positive effects from 1994.

The post reform years showed quick and efficient recovery from the acute macroeconomic crisis

of 1991. The real GDP in 1990s increased at an annual rate of 6% which is even more

impressive because the rest of the world was going through a minor recession.

In the area of foreign investment, the government abolished the threshold of 40 per cent on

foreign equity investment. Multi-national cola giants like Pepsico and Coca-Cola entered the

market and Indians saw the emergence of new brands that they had only heard of or seen in

television in the western world.

The other major reform of the 90s was when the government set up a governing body to oversee

the securities markets in India. It was formed officially by the Government of India in 1992 with

SEBI Act 1992[2] being passed by the Indian Parliament.

The stock markets in India remained stagnant due to the controlled nature of the economy up to

the early 1990s when the Indian economy began 'liberalizing'. As the controls began to be

dismantled or eased out, the stock markets witnessed a flurry of Initial Public Offers (IPOs). This

resulted in many new companies across different industry segments to come up with new

products and services.

Dream Budget: 1996

The highlight of the era was in the mid 90s when there was a change of guard and the coalition

government came to power. The seeds that were sown by Manmohan Singh started bearing fruit.

And to consolidate the great work, in came another exceptional finance minister -- Palaniappan

Chidambaram. He presented a dream Budget in March 1997 and became a darling of India Inc

after he slashed the maximum rate of income tax to 30 per cent, reduced the corporate tax to 35

per cent and cut the average level of tariffs to just a shade over 25 per cent in his second Budget.

Chidambaram, who was the Finance Minister in 1996, had boldly challenged the notion that to

improve the government's fiscal position, it was necessary to make certain sections worse off

through taxation. A MBA graduate from Harvard School of Business, he widened the tax base

whereby the overall income tax rate had gone up.

Source: Trading Economics

Era of Rollback Sinha

However, when the BJP government came into power in 1999, it was more pro-liberal than its

Opposition. BJP's tenure saw two Finance Ministers--Yashwant and Jaswant Sinha. Yashwant

Sinha's period saw some bold measures being taken which brought its share of criticism. None

of that withstanding, India was promoted as a software destination. It was in fact during BJP's

tenure that India's economy was opened further. Yashwant Sinha is credited with lowering real

interest rates, introducing tax deduction for interest on housing loans, making key changes in

telecom policy, helping fund the National Highways Authority of India. However under political

pressure he was forced to rollback some of his policies like restoration of 20 per cent rebate on

specified savings made by taxpayers earning between Rs 1.5 lakh and Rs 5 lakh a year in the

year 2002. In the same year he had to roll back five of his policies that were announced during

the course of his tenure as finance minister. With maximum number of rollbacks under his belt

he earned the monicker of being a 'Roll back' finance minister.

People Who Shaped The Economy In This Era

Manmohan Singh (1991-1996)

P.Chidambaram (1996-1998)

Yashwant Sinha (1998-2002)

Impact of the reforms:

It is very clear that Manmohan Singh's policies dominated this era. The effect of his moves is

being seen today.

Total foreign investment in India grew from $132 million 1991-1992 to $5.3 billion In

1995-1996

Disinvestment of Public Sector Units began

An open economy ensured more FIIs entered the market and the middle-class domestic

consumption increased

Sustained GDP growth of over 6 per cent for the first time since independence.

The new electronic-tradebased National Stock Exchange was established in 1993 and set

high technical and governance standards, which soon had to be emulated by the much

older Bombay Stock Exchange

Opening of the economy ushered in global media moguls like Rupert Murdoch to enter

India and India saw the boom of satellite television channels

The Indian IT sector started gaining importance in the global market and new

entrepreneurial ventures like Infosys, HCL Tech saw the light of the day when they

became listed companies.

Scams that haunted India:

India's growth during this phase had its own share of problems. The centre that tackled the

economic crisis couldn't avert serious frauds and scams that hit the stock markets and the

political circles. It might not have been to the scale of A Raja & Co but it did create ripples.

Harshad Mehta Scam:

Back in 1992 he was the super start of stock markets. He was called "the bull of the markets".

However his success story didn't last long. He triggered a rise in the Bombay Stock Exchange in

the year 1992 by trading in shares at a premium across many segments. Taking advantage of the

loopholes in the banking system, Mehta carefully planned his steps and triggered a securities

scam diverting funds worth Rs 4000 crore from the banks to stockbrokers between April 1991

and May 1992. Mehta has siphoned off huge sums of money from several banks and millions of

investors were conned in the process. His scam was exposed, the markets crashed and he was

arrested and banned for life from trading in the stock markets. He was later charged with 72

criminal cases. Investors even today haven't been able to overcome the horror of losing over

thousands of crores of rupees in the markets.

The Telgi Scam:

He is the face behind one of India's biggest scams. Abdul Karim Telgi had mastered the art of

forging stamp papers and selling them to banks and other institutions. In 1994, Abdul Karim

Telgi acquired a stamp paper license from the Indian government and began printing fake stamp

papers. He bribed officials to enter the government security press in Nashik and bought special

machines to print fake stamp papers. Telgi's network spread across 13 states involving 176

offices, 1,000 employees and 123 bank accounts in 18 cities.

The Fodder Scam:

If you haven't heard of Bihar's fodder scam of 1996, you might still be able to recognize it by the

name of "Chara Ghotala ," as it is popularly known in the vernacular language. The Fodder Scam

involved the alleged embezzlement of about Rs 950 crore from the government treasury of the

eastern Indian state of Bihar[3]. The scandal involved fabrication of "vast herds of fictitious

livestock" for which fodder, medicine and animal husbandry equipment was supposedly

procured.

The Hawala Scandal

The Hawala Scam that was revealed in 1996 alleged a nexus between politicians and hawala

brokers. Thus, for the first time in Indian politics, it gave public a feeling of open loot. Most

major political players were accused of accepting bribes and making payments to Hizbul

Mujahideen militants in Kashmir. Those accused included L. K. Advani, V. C. Shukla, P. Shiv

Shankar, Sharad Yadav, Balram Jakhar, and Madan Lal Khurana. Many were acquitted in 1997

and 1998, partly because the court considered the hawala records as 'inadequate' main evidence.

Quotable quotes

Finance Minister Manmohan Singh at the Parliament

During his speech in Parliament while presenting the Budget in 1994-95, he quoted Victor

Hugo: "No power on earth can stop an idea whose time has come." The result was that

productivity in the Indian industry grew like never before.

Interview with the Finance Minister Manmohan Singh

Chidambaram and his love for Tamil

Chidambaram always quoted Tamil poet Tiruvalluvar before presenting the budget.

The Rebel Sinha

To a debate on the Finance bill in 2000-01 Finance Minister strongly defended himself on being

linked with the stock market crash and said, "I am not the Finance Minister for the Bombay

Stock Exchange."

With every other budget after the liberalization being termed as the dream budget, Sinha was

often seen quoting poetries during his budget speech. In his first budget after BJP government

came to power at the centre, Yashwant Sinha, quoted the pre-Independence North Indian rebel

poet Ramdhari Singh Dinkar, urging the nation to be a "warrior to create future history, as the

stars of the night faded to make way for the whole sky."

Sinha also ended the 53-year tradition of a 5 p.m. budget, a practice the British had started to

bridge the time difference with their Parliament.

Despite such large scale scams, at the dawn of the millemium, India had already emerged as the

second fastest growing economy in the world. Given that in 1991, India faced a virtual

bankruptcy, the efforts taken by the Finance Ministers to have a sustained growth should be

lauded. The youth of today is enjoying the fruits of liberalization, thanks to Manmohan Singh &

Co. Thus, growth during the 1990s has been more robust, exhibiting far less volatility and

continues till today

India’s economy as it stands today (2000-2011) Natalia George, Yahoo!India Finance, On Monday 15 August 2011, 3:56 PM

Opening its doors to globalization in the nineties led to the miraculous growth story that India is today. During the 1990s India was one of the fastest growing economies in the world and has since seen a long and unprecedented period of welfare enhancement. India's trade as a proportion of GDP rose from 13.1 per cent in 1990 to 20.3 per cent in 2000.

The last decade has been one of the most tumultuous and volatile times for both, the global as

Economic reforms picked up pace in 2000-04 and fiscal deficits trended down after 2002 and

r all

well as Indian economy. We witnessed, the most gruesome terror attacks, shocking financial scams were unearthed and some of the world's strongest financial institutions crumbled like a pack of cards. The Indian economy, however, continues to stand tall and unfazed and will continue to sail through these turbulent waters.

there was a based upswing in Indian industrial output and investment from the second half of 2002. India's Tenth Five-Year Plan (2002-07) targeted an annual growth rate of eight per cent.Along with this growth target, the government also laid down targets for human and social development. A reduction of the poverty rate by five percentage points by 2007; providing gainful employment to at least those who join the labour force during 2002-07; education fochildren in schools by 2003; and an increase in the literacy rate to 75 percent by March 2007.

Reforms taken by the government

The government of India introduced a scheme called the States' Fiscal Reforms Facility (2000-05). Under the Facility, the central government set up a five-year incentive fund 'to encourage states to implement fiscal reforms that could be monitored'. These measures included:

• Measures to improve quality of life through improvement in basic public services such as primary health, primary education, and rural infrastructural services such as electricity, water, and roads.

• Clustering high-tech industries and services (for example, in software parks). • Setting up Special Economic Zones and Agri-Economic Zones to promote exports. • Formulating state-level industrial policies to attract investments. • Power-sector reforms that restructure state Electricity Boards by separating generation,

transmission and distribution activities.

Historic market rally

With India's growth roadmap looking strong, the Indian courses reflected investors' faith in the economy and the Sensex rallied to 10000 points, the amazing rally continued for the next 19 months with the index peaking at 21000 on 8 January 2008.

India's GDP before the global economic downturn

The world economy rebounded strongly till 2006; the net result was a decline in the gross fiscal deficit from almost 10 per cent of GDP in 200-02 to 7.5 per cent in 2004-05 and an even larger decline in the revenue deficit from 7 per cent to 3.7 per cent of GDP.

US subprime crisis shakes global economy

The beginning of 2006 saw the US housing bubble burst leading to sub-primes crisis that sunk most major economies in the world. Since 1 January, 2008, owners of stocks in US corporatsuffered about $ 8 trillion in losses, as their holdings declined in value from $ 20 trillion to $ 12 trillion. Some of the world leading financial institutes and banks suffered heavy losses and some of them were even declared bankrupt.

ions

Global downturn mars investor sentiment in India

In the third week of January 2008, the Sensex experienced huge falls along with other markets around the world and on January 21, 2008, the Sensex saw its highest ever loss of 1,408 points at the end of the session on high volatility as investors panicked following weak global cues amid fears of a recession in the US.

The next day, the markets index went into a free fall. The index hit the lower circuit breaker in barely a minute after the markets opened at 10 AM. Trading was suspended for an hour. On reopening at 10.55 am, the market saw its biggest intra-day fall when it hit a low of 15,332, down 2,273 points.

How Indian authorities helped India stay afloat amid crisis But strangely, when the global economy tumbled on fears of the US recession, India managed to stay afloat with only some minor fluctuations.

How did India stay unaffected?

• The banking system in India was so well established that India didn't face any mortgage issues like the USA did. Even as Greenspan, got swept away by the "irrational exuberance" accompanying the real estate and sub-prime mortgage bubble, India's then RBI governor Dr Reddy went the other way and tightened lending rates, curtailed securitization and derivative products, and increased risk weightings on commercial buildings and shopping mall construction, as a real estate bubble took shape in India.

• India is not completely dependent on the US or other countries for exports and import of products

• Employment in India also remained quite steady • Also, nationalizing of major Indian commercial banks some four decades ago helped in

averting recession to some extent

India's GDP post US subprime crisis

Post the economic downturn the year 2009 saw a significant slowdown in India's official GDP growth rate to 6.1% as well as the return of a large projected fiscal deficit of 10.3% of GDP which would be among the highest in the world. Historically, from 2000 until 2011, India's average quarterly GDP growth was 7.45 per cent reaching an historical high of 11.80 per cent in December of 2003 and a record low of 1.60 per cent in December of 2002. The year 2009 saw a significant slowdown in India's official GDP growth rate to 6.1% as well as the return of a large projected fiscal deficit of 10.3% of GDP which would be among the highest in the world.

Important events

• In May 2000 the central bank intervened on the foreign exchange markets and announces moves to stabilize the rupee after the currency hit a record low against the U.S. dollar

• India joined a select group of six countries when it announced regular summits with the European Union in June 2000

• In 2001 a massive earthquake, measuring 7.9 on the Richter scale, hit Gujarat taking more than more 30,000 lives

• On 26 December, 2004 --The strongest ever earthquake in past 40 years, measuring 9.0 on the Richter Scale originated from the Indian Ocean , creating tsunami tidal waves that swept across much of the coastlines of South Asia. More than 15,000 reported killed in India and 250,000 across the globe.

The destruction caused by the Tsunami eventually was over $1.6 billion. This exceeded the ng

cost to

• The Telecom Regulatory Authority of India slashed tariffs for international bandwidth

rate Tata Steel took over Anglo Dutch steel maker Corus

ht

estimated losses of US$ 600 millions as originally expected by the officials. The Indian fishigroups were adversely affected by the Tsunami. The most notable damage was to that of Nagapatnam, a fishing town in Tamil Nadu. Many fishing vessels were damaged and the repair them was estimated to be over US$125 million. This amount also included buying of new nets and other accessories required for fishing.

prices by up to 70% in 2005. • In 2006, Indian steel conglome

in the largest ever Indian takeover of a foreign company making Tata Steel the world's fifth-largest steel group. Two years later in 2008 the group's auto arm Tata Motors bougtwo iconic British automobile manufacturing companies, Jaguar and Land Rover, from Ford, their American owners.

• On January 2009 Ramalinga Raju, founder of Satyam Computer Services, a

leading Indian outsourcing company that served more than a third of the Fortune 500 companies, confessed that he inflated the balance sheet by Rs 7000 crore, building up to India's largest-ever corporate fraud. This resulted in a blood bath at Dalal Street and threw the industry into turmoil.

• The 2G spectrum scam came to light after the auction of airwaves for 3G services in April 2010 which amounted to Rs 67,719 crore to the exchequer. The scam involved the

issue of 1232 licenses b y the ruling Congress-led UPA alliance of the 2G spectrum to 85 companies including many new telecom companies with little or no experience in the telecom sector at a price set in the year 2001.

This past decade saw a multitude of scams and terrorist attacks shake the Indian economy but the economy continues to remain one of the fastest growing in the world. In fact in Finance Minister Pranab Mukherjee's words in the Budget speech of 2009-10: The structure of India 's economy has changed rapidly in the last ten years. External trade and external capital flows are an important part of the economy and so is the contribution of the services sector to the GDP at well over 50 per cent.

However, the country is also rapidly becoming costlier as inflation rates still continue to spiral to dizzying heights. The central bank has been working incessantly to reign in the surging price index and the Prime Minsiter too keeps assuring us "inflation will be tamed" . With a little help from the government in the form of resolving supply side issues and with the easing of global crude oil prices inflation rates may moderate further albeit still above the RBI's comfort zone.

India's yawning fiscal gap too continues to plague the economy but the government has promised to reign in the fiscal deficit more aggressively. Reforms like liberalisation in retail and introduction of foreign investments in Indian mutual fund will also boost the Indian economy.

Today, the US is at the brink of a double dip recession and coupled with the Euro crisis, the global economy is once again threatened into a freefall. However, Indian politicians ans analysts alike expect India's GDP to continue to grow at a robust 8.5 per cent, such is their faith in the strength of India's economic fundamentals.

Quirks and Quotes

This era has seen the most entertaining budget speeches from finance minister Pranab Mukherjee. His strongly Bengali accented English is the butt of most jokes. Hear him here.

He found inspiration in Mahatma Gandhi and Kautilya and quoted from them in his 2009 Budget speech. "Just as one plucks fruits from a garden as they ripen, so shall a King have revenue collected as it becomes due. Just as one does not collect unripe fruits, he shall avoid taking wealth that is not due because that will make the people angry and spoil the very sources of revenue."

India ahead

India's proved to the world in the last 64 years that nothing in this world can really shake its economy -- be it recession, tsunami or scams. It has in fact, by hook or by crook (quite literally) risen to the occasion and come out smiling, rock solid as ever -- a base our Finance Ministers extraordinaire Manmohan Singh and Yashwant Sinha gave us. We are still working towards achieving a double-digit growth, but given our resilience and power, India should figure in the world's 'developed nations' list sooner than we dreamwith some inspiration from our current Finance Minister Pranab Mukherjee who once said: "With strong hearts, enlightened minds and

willing hands, we will have to overcome all odds and remove all obstacles to create a brave new India of our dreams.