Indian Economy is the third-largest in the world. The Indian Agriculture and the manufacturing and textile industries are the main drivers of the Indian Economy. Recently the development in Outsourcing has also been a driver of the Indian Economy in the Fierce competitive Market.
. However, since the early 1990s, India has gradually opened up its markets through economic reforms by reducing government controls on foreign trade and investment. India faces a burgeoning population and the challenge of reducing economic and social inequality. Poverty remains a serious problem, although it has declined significantly since independence, mainly due to the green revolution and economic reforms.
The Overview of The Indian Economy
Economics is divided into two parts :- Micro Economics and Macro Economics. Micro Economics is that branch of economics that concentrate on price, output and wage decisions of individual firms and workers. On the other hand, Macro Economics concentrates on the overall level of economic activity, such as the size of national income.
Demand has also been inflated by an excessively negligent monetary policy. The Indian government, initially was sluggish in reacting to higher prices, and have fractured this year with a series of administrative and fiscal measures, notably "banning wheat exports and lowering fuel taxes; and the Reserve Bank of India (RBI) has tightened monetary policy." Yet the proposal that Indian inflation is controlled can to be based on three universal economic characteristics, which ultimately can resolve the indecision on whether the Indian economy should or shouldn't tighten its monetary policy. The first economic conception is that the accumulation in inflation could largely be attributed by "supply shocks" in the agriculture industry; so monetary policy does not need to be tightened. In fact, manufactured goods have accounted for much more of the rise in inflation over the past year. The main reason for higher prices is that aggregate demand is growing rapidly, but not securely, which can be seen in Figure 1.1 where in this case, the national agricultural industry might fluctuate, meaning that aggregate demand will change and therefore growth along will change.
Fig 1.1: Trade Cycle; "Supply Shocks" Figure 1.2: Fixed Capital Spending
Agricultural Industry , Indian Economy ,2009
Stepping Stones - India's colonial experience framed a solid background which reinforced the belief that the free trade regime during that period was biased against Indian interests and that it cannot be relied upon to generate required growth and reduce poverty. This made India cringe in to a cocoon that was rooted in the belief that self reliance is the only way to move ahead without realizing that the country had little to be self dependent because that character was somewhat lost due to ages of foreign rule. This shift also portrayed India's struggle for economic and political identity outside the sphere of UK and other western powers. India adopted the Soviet model of economic planning. There were three elements of India's policy framework in the 'License Raj' [1] that stifled efficiency and growth until 1970's and somewhat to a lesser extent during the 1980's as reforms were being initiated -
Bureaucratic stronghold over trade, investment and production
Inward looking foreign investment and trade policies
Priority to the public sector
The first two affected the overall efficiency and growth of the private sector and the second became the epitome of an inefficient enterprise. Domestic investment was hindered, foreign trade shriveled and foreign capital was kept out. .It was during this time that Mercedez Benz planned to enter into a joint venture with TELCO (Tata Engineering and Locomotive Company) but because of government sluggishness it went away only to return after 30 years again with TELCO, similarly in 1977 Coca Cola preferred to leave India then to reveal its formula and reduce its equity stake as required under FERA [2]
Around 1991 balance-of-payment crisis occurred due to Gulf war induced oil price shocks. This led to huge borrowings from the IMF and the World Bank. Also the collapse of the Soviet Union set the stage for the initiation of the Economic reforms on a great scale. It took an economic crisis for India to liberalize its trade and FDI regime rather than a fundamental change in attitude towards an open economy. Nonetheless, the 1991 reforms marked a major break from the earlier Kafkaesque controls. Along with the virtual abolition of the industrial licensing system, controls over foreign trade and FDI were considerably relaxed, including the removal of ceilings on equity ownership by TNCs.
Determinants of Foreign Direct Investment in India
Growth in Gross domestic product (GDP)
Macroeconomic Stability
Favorable Regulatory framework.
Growth in Exchange rate
Growing Consumerism
Abundant Human Capital
Favourable foreign trade policy
Rising Infrastructure facilities
India is getting rapidly globalized through FDI .The AT Kearney 2007 Foreign Direct Investment Index and Global services location index sets the backdrop. India continues to be the second most preferred destination for FDI, a position it has guarded since 2005. It is also the top ranker in terms of its attractiveness for global services location. It shows the optimism of investors in the growing Indian clout.
GDP growth rate
Indian economy has been growing steadily since 2000-01 .Indian economy grew at 9.6 % in 2007-08 and 9% in 2007-08 and emerged as the second fastest growing economy in the world after China (11.4%). The economy has been growing at an average growth of 8.8 % in the past four fiscal years (2004-08)
As per the above Mckinsey Global Institute's India Consumer Demand Model, services have been and will be the main drivers of India's GDP growth for the next 20 years. India had notably made its mark in the IT, Software and the BPO sector and is already a world leader in providing back office services. The country is poised to become the hub for R&D activities.
As per Goldman Sachs BRIC [3] model projections (2003) India by the year 2050 is the most promising one in real GDP growth compared to other BRIC countries. By 2050 Indian economy shall be among the biggest in the world.
Goldman Sachs Model Projections
It s no surprise that the coming decades belong to the BRIC countries and G6 [4] countries will lose the game to BRIC by 2050. Have a close look at India in Goldman Sachs BRICs model projections: by 2015 it will surpass the economy of Italy, by 2025 the economy of Germany shall be left behind and India shall be glorified by 2032 when Japanese economy will breathe heavily to catch up with the Indian economy. It clearly shows India's position which is at no.2 with respect to China. The rise in India's significance is evident.
The Crisis and The Impact
One of the earliest reforms was the dismantling of the slave system, initiated by Britain in 1807 through the end to British involvement in the transatlantic slave trade, and again in 1834 through the abolition of colonial slavery. The abolition can be seen as a result of a combination of economic, social and political factors. The economic decline of the British Caribbean and other regions, due to foreign competition, may have rendered the slave system unsustainable, contributing to the need for abolition. However, a more dominant reason for the abolition can be found in the work of anti-slavery pressure groups which pushed for governmental reform. Moreover, this was assisted by 19th century industrialisation and urbanisation which caused the emergence of an alternative middle-class mindset that viewed slavery as part of an outmoded mercantilist system in need of repair. Thus, the social transition, stimulated by industrial development, caused a change in attitude which led to the emergence of the abolitionist movement. In turn, the abolitionist movement, consisting of humanitarian reformers, church missionaries etc exerted political pressure on government ministers, creating a climate in government circles which led directly to the passing of the abolition acts. Therefore, the first major imperial reform of the 19th century, the abolition of slavery, was primarily motivated by social and political factors, rather than merely economic ones. Nevertheless, underlying economic factors, such as the cost of the slave system in regions experiencing economic decline, as well as the economic advantages of industrialisation which caused the emergence of a new middle class with differing views, may have contributed to the change.
Political reforms of the period focus mainly on the development of self-government within the colonies of settlement. The granting of self-government was sparked by an armed rebellion in Canada in 1837 following the failure of the British Governor to grant greater democracy, and the resulting emergence of an oppressed minority of French settlers of Lower Canada. The Canadian rebellion was a catalyst for political reforms, stemming from the 1839 Durham Report which reprimanded the British administration and called for the uniting of Upper and Lower Canada to form a single province with a truly representative system of government. While Britain would retain overall control, locally elected government would decide on domestic policy. The Durham Report became the blueprint for the introduction of self-government to most of the other colonies of settlement, including New Zealand, Cape Colony, and the Australian colonies. Therefore, political factors, focusing on discontent about British administration of colonies and the lack of democracy, dominated the introduction of self-governing colonies, which were a unique new development in the history of the Empire, representing a genuine devolution of political power. However, underlying economic factors also helped to stimulate the reforms. The defence costs for colonies were running high and there were clear economic benefits linked to the granting of self-government, as the colonies of settlement became much more dependent on British investment and British defence after the reforms. Therefore, while the reforms were motivated primarily by political factors, underlying economic benefits of the reforms contributed greatly to their implementation.
In any case, the short-term euphoria of spring 2004 was effectively punctured by the unexpected election results of May and the wayward monsoon of 2004. Most non-official growth forecasts for 2004/5 (as available in September 2004) cluster around a modest 5.5 to 6 percent. However, the growth optimism of recent years also draws strength from a set of analytical papers that have appeared over the past year propounding the case for rapid (7 percent plus), long-run growth of the Indian economy. In this review I shall focus on three main contributions: the much talked about "BRICs report" by Goldman Sachs of October 2003 ( Wilson and Purushothaman: 2003), Vijay Kelkar's April 2004 Narayanan oration at the Australian National University (Kelkar: 2004) and Rodrik and Subramanian (2004) in EPW (henceforth referred as RS). While these papers vary substantially in their scope and emphasis, they share a very bullish outlook on India's medium and long-run growth prospects.
The main factors on which such growth optimism is based are: India's demographic outlook for the next 40 years, past and projected trends in productivity, the country's institutional strengths and underlying optimism about reforms. Let us consider each of these factors.
Table 2 - Income, Growth and Population: Major States
States
Per-capita NDP,1999-2000 at current prices
(Rs Thousand)
GSDP Growth 1992-2002
(% per year)
Percent of India's Population
Population Increment 2001-51 (millions)
1971
2001
2051
Low Fertility
Kerala
18.3
6.1
3.9
3.1
2.2
4.2
Tamil Nadu
19.1
6.7
7.5
6.0
4.4
9.9
Andhra Pradesh
14.7
5.0
7.9
7.4
7.4
44.2
Karnataka
16.3
6.7
5.3
5.1
4.8
25.3
Maharastra
23.4
6.8
9.2
9.4
9.1
50.6
Sub total
33.9
31.1
28.0
134.2
Medium Fertility
Punjab
23.0
4.6
2.5
2.4
2.2
11.4
West Bengal
15.6
6.6
8.1
7.8
7.5
41.7
Gujarat
18.6
8.2
4.9
4.9
4.5
22.4
Orissa
9.2
3.6
4.0
3.6
3.3
17.2
Assam
9.6
2.5
2.7
2.6
2.6
15.4
Sub total
22.1
21.3
20.2
108.1
High Fertility
Haryana
21.1
4.7
1.8
2.1
2.5
20.0
Madhya Pradesh
10.9
5.2
7.6
7.9
9.1
66.8
Bihar
6.3
3.1
10.3
10.7
11.6
78.2
Rajasthan
12.5
5.5
4.7
5.5
6.6
49.6
Uttar Pradesh
9.8
4.5
16.1
17.0
20.8
162.5
Sub total
40.5
43.1
50.6
377.1
India
15.6
6.0
100.0
100.0
100.0
619.4
Sources: Economic Survey 2001/02, Tenth Five Year Plan, and "Long Term Population Projections for Major States, 1991-2101" by Leela Visaria, Pravin Visaria (EPW, 8 Nov. 2003). Data are for undivided Uttar Pradesh, Madhya Pradesh and Bihar.
Demographic Dividend: Capital
Labour is not the only possible component of a demographic dividend. There is also capital, through higher savings. As Kelkar (2004) observes, "Children and old people tend to save less; savings is highest in the working years. So the demographic projections which clearly point out that India will have a bigger fraction of the population in the age group 15 to 64 simultaneously predict a higher savings rate in the future." RS (2004) boldly claim that the 14 percentage point decline predicted in India's dependency ratio between 2000 and 2025 will "translate into a roughly equivalent rise in private and aggregate savings, from about 25 percent of GDP to 39 percent". This will lead to a rapid growth in capital stock and correspondingly higher growth of GDP. They base their highly optimistic claim on some rather dated work on savings behavior by Muhleisen (1997), which is far from definitive.
If we look at the trends in aggregate savings and investment in India over the past two decades (Table 3), we find only mild support for the views propounded above. This is despite the fact that the demographic trends projected over the next four or five decades have also been at work over the past fifteen years or so. It is true that household savings (including unincorporated enterprises) have risen from around 16 percent of GDP in the late 1980s to about 22 percent in 2000-2003. Private savings have risen even more from 18 percent of GDP to 26 percent over the same period. However, public savings have gone from plus 2.4 of GDP to minus 2.3 percent , reflecting a decline of 4.6 percent of GDP, mostly because of sharply rising revenue deficits of central and state governments. In effect, the large increase in private savings has been substantially offset by the fall in public savings. There has been a modest increase in gross domestic savings since the late 1980s of about 3.5 percent of GDP, but almost all of it has been neutralized by the decline in foreign savings (current account deficits in the balance of payments) from around 2.5 percent of GDP to nil or marginally negative in recent years. As a result of these trends in savings, the "bottom line" of aggregate investment shows only marginal increase between the late 1980s and early 2000s. And this is the item that matters for the growth accounting exercises of RS and Kelkar.
Table 3 : Savings and Investment
(As percent of GDP at current market prices)
GDCF
GDS
Public
Savings
Private
Savings
Household
Savings
Corporate
Savings
Average 1985-90
22.7
20.4
2.4
18.0
16.0
2.0
1990/91
26.3
23.1
1.1
22.0
19.3
2.7
1991/92
22.6
22.0
2.0
20.1
17.0
3.1
1992/93
23.6
21.8
1.6
20.2
17.5
2.7
1993/94
23.1
22.5
0.6
21.9
18.4
3.5
1994/95
26.0
24.8
1.7
23.2
19.7
3.5
1995/96
26.9
25.1
2.0
23.1
18.2
4.9
1996/97
24.5
23.2
1.7
21.5
17.0
4.5
1997/98
24.6
23.1
1.3
21.8
17.6
4.2
1998/99
22.7
21.7
-1.0
22.6
18.9
3.7
1999/00
25.3
24.2
-1.0
25.2
20.9
4.4
2000/01
24.4
23.7
-2.3
26.1
21.9
4.1
2001/2002 (P)
23.1
23.5
-2.7
26.2
22.7
3.5
2002/03 (Q)
23.3
24.2
-1.9
26.1
22.6
3.4
Source: Economic Surveys, 2001/2, 2003/4
Notes: P : Provisional Estimates; Q: Quick Estimates
GDCF: Gross Domestic Capital Formation
GDS: Gross Domestic Saving
Looking ahead, much depends on the success (or failure) of efforts at fiscal consolidation at both central and state government levels through fiscal responsibility laws and reforms in revenue and expenditure policies. If the currently high revenue deficits can be reduced in line with fiscal responsibility laws and other guidelines, then the prospects for improvements in aggregate savings and investment could be better than the modest expectations of my earlier paper (Acharya:2002b): "the considerations above suggest a moderate improvement in the rate of gross domestic investment in the medium term, perhaps to the levels attained in the mid-1990s."
However, while there was a reduction of the role of the British government in settlement colonies through the introduction of self-government, at the same time there was also a greater involvement of the British government in India, resulting from the Indian Mutiny. While the immediate cause of the mutiny was a revolt by Sepoys in the Indian army in 1857 owing to a dispute about loading the Enfield rifle in a manner against their religious beliefs, the underlying causes focus on political and economic grievances.
Impact on foreign trade
Although foreign trade does help an economy, it also becomes vulnerable to external shocks as has happened with the US financial crisis which has now affected India's key sectors including information technology, banking and commodities. As foreign trade rises, more and more products are imported. Much of our value-added spices exported are based on raw spices imported into the country in large quantities. It is true that the government has always provides sops to boost the agricultures and allied businesses, but the major focus was sometimes on imports.
Exports fell by 12 percent in October and the government has cut its export target for the year to 175 billion US dollars from 200 billion.
Impact on manufacturing sector
ยท
India's industrial production contracted for the first time in 15 years in October. The index of industrial production shrank 0.4 percent in October, due in part to falling production of consumer goods. From April to October, the index grew by 4.1 percent versus 9.9 percent during the same period last year.
The weaker-than-expected data adds to growing skepticism that the government stimulus package announced over the weekend will prove effective.
More fresh evidence that India, while still growing faster than most economies, is not exempt from the global slowdown comes from its troubled auto sector. Many international carmakers have stormed into India as they try to counter falling sales in more developed markets.
Impact on automobile
Sales of passenger vehicles in India, which averaged 17.2 percent annual growth over the last five years, plunged 23.71 percent in November, according to the Society of Indian Automobile Manufacturers. Indian automakers slowed production by 6.11 percent in November, and many have slashed prices to attract more buyers.
Anti Crisis Actions
Monetary measures
The monetary policy of the Reserve Bank of India and the government has been very appropriate and substantial for the welfare of the country. The country ahs been making many in roads in every aspect in order to ensure that it services the economic shocks which is very true. In the sharpest reduction ever, the CRR has been cut from 9 percent to 5.5 percent, thus injecting almost Rs 150,000 crores of primary liquidity in less than a month. In addition, the SLR has been reduced, effectively, to 24 percent (from 25 percent), with 1.5 percent points of the reduction earmarked for liquidity support by banks to mutual funds and NBFCs
The monetary policy response by RBI (and government) has been prompt and substantial. (since some of these entities had been experiencing substantial liquidity stress over the past month). The Repo policy rate has been reduced from 9 percent to 6.5 percent its reverse repo rate, the rate at which it borrows overnight, to 5.0 percent.. The RBI has also announced a plethora of other measures to enhance liquidity, liberalise terms for NRI deposits and external commercial borrowing (ECB), augment export credit refinance and (somewhat dubiously) reduce banks' provisioning norms (tightened during the earlier upswing in the credit cycle) for loans for housing, real estate, personal loans, credit card receivables and capital market exposure.
To facilitate credit flow to small units, the Reserve Bank of India recently announced a refinance facility of Rs 7,000 crore for the Small Industries Development Bank of India. The government has also said it will issue an advisory to public sector enterprises to ensure prompt payment of these units' bills.
Fiscal Policy
The following are the highlights of the fiscal stimulus package unveiled by the government Sunday to contain the impact of global financial crisis on the Indian economy:- Plan, non-plan expenditure of Rs.300,000 crore (Rs.3,000 billion/$60 billion) in four months
IMPACT OF THE MEASURE TAKEN ON THE ECONOMY
Interest support for exporters
The measures for exporters, who saw a decline in shipments in October for the first time in five years, include an interest support of two percent for labour intensive sectors like textiles, handicraft and handloom.
This apart, additional allocation has been made towards various incentives for exporters, guarantee of export credit, full refund of service tax to foreign agents and refund of service tax under the duty drawback scheme.
Both Kelkar and RS are bullish on further reforms spurring growth in productivity and hence output growth. RS claim that "Reforms are thus going from being crisis-driven to success-driven which makes it more likely that they will be sustained and not be subject to major reversals." Kelkar also foresees major productivity gains to be reaped through continued reforms in " four big areas: globalization, infrastructure, privatization and the financial sector." Is such reforms optimism justified? Let us briefly review each of these areas.
To label India as a "willing globaliser" (as Kelkar does) seems a trifle excessive. The phasing down of quantitative restrictions on imports that occurred in the late 1990s was largely under WTO discipline following unsuccessful resistance to a challenge to such restrictions that had been brought by trading partners led by the United States (see Acharya:2002c). It is true that the tariff reductions since 1991 have mainly reflected unilateral trade liberalization. But the tariff structure remains complex and high by standards of even developing countries. As for foreign direct investment (FDI), after an initial bout of opening up in the early 1990s subsequent liberalization has been hesitant and sporadic. Progress on this front under the new UPA government has been slow and likely to remain so. The fact that India accounts for only 0.8 percent of world exports and about 0.4 percent of the world's total foreign direct investment flows is more suggestive of timidity than willingness. The services export boom of the last decade is a real success and likely to continue. But it cannot substitute for our policy failures in nurturing a much larger internationally competitive industrial sector.
During the NDA government (1998-1994) there was significant forward movement in privatization policies and practices, especially in the later years. The medium-term outlook is much less promising. The Common Minimum Programme (CMP) of the UPA government indicates that "generally" profit-making, public sector companies will not be privatized. This seriously stalls the previously ongoing disinvestment/privatization programme. Certainly, the stock market took this view in mid-2004 and substantially reduced stock valuations of most public sector companies. As for loss-making enterprises, the chances of successful sales by government are bleak given that reserve prices are unlikely to be set low enough to allow successful transactions.
Expected Results (AD-AS Curve)
Both the fiscal and monetary measures taken by government will acts as complementary to each other and help the sliding economy to grow. This can be shown through the Aggregate demand-supply curve (AD-AS).
In the backdrop of the forthcoming general elections, allows the government to become pro-growth once again should it choose to do so.
Impact on US Labour
The cause for concern among the white collar U.S. workers is the long-time and specialty employees are being excused at an increasing rate. For example, "Cynthia Chin-Lee of Palo Altobegan looking for work after she was laid off in the summer of 2002 from her job as a documentation manager at a software firm, but after several months she landed a full-time position as a technical writer with another software firm. The problem is she is bewildered and worried, because she sees more technical writing jobs moving overseas. She wonders if she should develop some other skills" (Ridder, "High-Tech Workers Nervously Eye Work", 2003). What has become increasingly interesting about outsourcing now is the growing rate of occurrence. "Tech jobs are moving to Indiafaster than manufacturing jobs moved overseas in decades past" (Ridder, "High-Tech Workers Nervously Eye Work", 2003). The result is the creation of an unemployment line of white-collar workers. The problem is the vast majority of white-collar workers have mortgages, school loans, car loans, and families that require money. Many companies did not realize that the rate of jobs moving to India is surpassing the new jobs being created in the United States, thus creating a backlash against the companies. What is intensifying this backlash is the "employers are asking the workers they are laying-off to train their foreign replacements" (Armour, 2004).
Conclusion
Recent financial sector policies have been less reformist than Kelkar depicts. While there has been real progress in capital market policies, banking sector policies have been much more mixed. The final years of the NDA government saw significant policy reversals in the form of bail-outs of financial intermediaries (UTI,IDBI and IFCI), the resurrection of interest rate subsidies and the expansion of directed credit interventions. The legislative intent to reduce government equity in public sector banks to 33 percent withered in Parliament committees. Judging by its policy pronouncements, the UPA government will not revive this bill, leaving open the question of whether a public sector dominated banking system , vulnerable to political interference and behest lending, can meet the needs of a fast growing economy. The policies of directed credit and interest rate subsidies are likely to expand. Regulatory forbearance by the central bank (presumably at government behest) is on the rise. So the medium term prospects do not bode well for financial sector reform.
