the indian model

8/3/2019 The Indian Model

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Reforms continued despite changing governments

NDA Coalition

1998-04

UPA Coalition

2004-

Third Front Coalition1996-98

Congress Led Coalition

1991-96

Firststepstowardsliberalization

Liberalization of the currencyregime

De-licensingofindustry

Beginningofarationalizationofindirectanddirecttaxes

OpeningofmanysectorstoFDI

Authorizationof foreignportfolio investments

Beginningofcapitalmarketreformsinitiated

Bigcut incorporateandpersonal taxrates Continued reduction in importduties

Firststepsonallowingprivatesectorininsurance

Firststepstowardsdismantlingadministeredpricinginoil&gas

De-materialization,electronictradingstarts

ImplementationofVAT&proposedGoodsandServicesTax(GST)

Continuedfocusoninfrastructure

Renewedfocusonrural infrastructure

FDIlimitrelaxationinkeysectors

Fiscalconsolidationalongwithrationalizationoftaxes

NewTelecomPolicy

Massiveroadupgradeprograms

ElectricityActtousher inprivatecompetition

BankingSecuritizationAct

Refinancingstategovernment.debtatcheaperrates

Concretestepsonprivatization

Removal of tax on long-termcapital gains

Are foreign direct investments encouraged and inwhat ways? What are the limitations?

The government has always encouraged FDI flows, but

bureaucratic and political obstacles have penalized such

flows into India. However, FDI flows have picked up in

recent times, backed by policy support (relaxation of FDI

limits in sectors such as telecom, construction, media

and civil aviation). This trend is apparent in the metals

and mining sector (Posco announced a USD 13 billion

steel plant in Orissa) and in other sectors - telecom

(Vodafones purchase of a 10% stake in Bharti Telecom)

and IT (investments by Cisco, Intel and Microsoft). The

progress on tax reforms in terms of introduction of

VAT/GST and any introduction of labour reforms should

attract much higher FDI flows as global companies aspire

to take advantage of Indias strengths. AT Kearneys FDIConfidence Index 2004 ranked India as the third most

attractive FDI destination in the world, after China and

the US, attributing it to Indias educated workforce, man-

agement talent, rule of law, cultural affinity, regulatory

environment and large market.

How is the infrastructure developing?

India has been amongst the fastest growing economies in

the world and is currently ranked the 4th largest in PPP

terms. However, a burgeoning population, rapid economic

growth and increased urbanization have started making

pressing demands on Indias existing infrastructure. In

that sense, the importance of improved infrastructure for

the sustained economic growth cannot be understated.

India made some progress on this front over the years in

the form of power sector reforms and allowing private sec-

tor participation in various key infrastructure sectors such

as roads, ports and airlines/airports. The past few yearshave clearly indicated that successive governments have

realized the need to remove infrastructural bottlenecks

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The Swiss Asset Management Magazine Excerpt from Invest in India June 2006


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and have initiated various projects. This is clear from the

fact that infrastructure investments are projected to be

around USD 171.3 billion between financial years 2004

and 2007, a sharp rise from the previous years.

How much does Indian economy depend on oilimports?

India imports over 70% of its oil requirements, whichcurrently accounts for around 35% of its total imports.

Both oil consumption growth (-0.3%) and petroleum

products demand growth (-0.4%), have been flat in 2005,

due to lackluster diesel demand, which accounts for 35-

40% of total oil products and 80% of auto fuels. Better

roads, new cars (better fuel efficiency) and increasing

usage of Compressed Natural Gas (CNG) could be con-

tributing partly to this trend. However, a fast growing

economy along with heightened demand for automobiles

on the back of rising incomes and increased infrastruc-

ture spending, are likely to push oil demand further up.

However, compared to the past, India is in a much betterposition to tackle the high oil prices due to stability on

the external front. Foreign exchange reserves accretion

has continued helped by increased services exports, ris-

ing inflows from overseas Indians and foreign portfolio

investors.

How much does outsourcing (from foreign coun-tries to India) weight in the actual economy and

how could this evolve in future years?

Indias IT-IT enabled services sector is expected to

log USD 36 billion in revenues in financial year 2006,

accounting for 4.8% of GDP in 2006. The NASSCOM-McKinsey Report 2005 indicates that the offshore IT-

business process outsourcing segment has the capability

to generate USD 60 billion in export revenues. At this

level, these two industries alone can ensure India's GDP

grows by around 1 percent for the next five years.

Could you please give a few figures about the popu-lation of India?

As per the previous census

in 2001, the countrys

total population was

1028.7 million, a

21.3 % increaseover the number for

1991. Indias popu-

lation is young, with

54% under the age of

25 and 80% under 45.

Do you think the country canensure appropriate education for a signifi-cant portion of the population in order to secure

enough increase in labour supply for specializedoutsourcing services?

India has a robust higher education system that oper-ates through a network of universities and autonomous

colleges designated as deemed universities. India has the

largest English speaking IT talent pool in the world -

over 120,000 trained IT professionals and approximately

3 million other graduates are added each year. Firms

such as AT Kearney and IMD have ranked India amongst

the top countries in terms of availability of educated and

skilled manpower.

What are the main challenges to address for India?

Over the short to medium term, there are few risks

that could manifest themselves as road blocks for India.

Given the fact that India imports most of its oil require-

ments, the rising energy prices certainly pose a prob-

lem for the economy. However, if they do not move up

sharply, the growing economy might be able to absorb

the additional costs. Rising interest rates in developed

economies might impact global liquidity and flows into

emerging markets. And lastly, political wrangling might

slowdown the key reforms which are essential for sus-

taining the current momentum of economic growth and

moving into a higher growth trajectory. Overall, these

risks might impact short term sentiment, but the long

term outlook continues to be positive.

An interview conducted by Indira C. Tasan

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Investments on infrastructure

Effected Projected

In billions of US Dollars 2000-2003 2004-2007

Airports 1.3 2.4

Irrigation 11.8 28.1

Ports 0.9 3.5

Power 16.4 65.7

Railways 9 10.5

Roads 13.9 18.2

Telecom 14.7 15.8

Tourism 0.1 0.6

Urbaninfrastructure 11.5 26.4

Total 79.6 171.3Source:CRIS

INFAC

35%< 14 years

8%> 59 years

16%40-59 years

22%25-39 years 19%

15-24 years

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Though often compared, India and China do not have

much in common, except that they both promise to be

the next great economic powers. On their way to global

supremacy, each one has its own distinct strengths and

weaknesses. The more that is known about them in

detail the better, as the success of an investment in thesecountries depends on the capacity to play on the best of

both worlds.

Sukumar Rajah, CIO Equity and

Head of Franklin Templeton India

PROS CONS

Quickdevelopmentofaworld-classinfrastructure. Laxlabourlaws.

Acquisitionofaglobalscalebydifferentsectors Overinvestmentinvarioussectors. Opacityinoperations.

Fastgrowingjobcreationallowingasmoothrestructutingofvariousstateownedenterprises.

Crowdingoutoftheprivatesectorfromcapitalmarketsduetothegovernmentsstronginvolvment,leadingtoinefficientallocationofcapital.

RecordFDIinflow. Delayedreformsincapitalmarketsandbankingsystems.

Fasterpolicymakingandimplementation. InefficiencyofthebankingsystemduetoahighlevelofNPAs.

China

AcquisitionofaglobalscalebyentrepreneurialandnewsectorslikeITandrelatedservices.

Globalcompetitivenessofthemanufacturingsectoringeneral.

Earlyinstitutionalreforms.World-classcapitalmarketandbankingsystem.

Earlyshakeoutinthecorporatesectorinthereformprocess.

Establishmentofastrongandindependentregulatoryframeworkindifferentsectors.

Impedimentofslowpolicymakingandbureaucraticredtapetoefficiencyandeffectiveness.

Slownessofthetaxreforms.Complexityofthetaxstructure.

SlowFDIinflowcomparedtoChina.

Scarcityofcompanieshavingreachedaglobalscale.

Negativeimpactofthelackofworld-classinfrastructureongrowthprospects.

PROS CONSIndia

China and India

Th nw titns

face To face

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the indian model

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