The Economy of India

1. The Economy of India Recent-Past Reform, and Near-term Stagnation. -By Ryan Morgan rrmorgan@nps.edu

2. Overview • Brief History • Emerging Market Handbook Chapter 5: • Legatum Article • Current Indicators: • Global Competitiveness Index, Human Development Report Findings, Prosperity Index • Case Study: • The Tata Nano: What is it like to do business in India? • Future Projections

3. In the Beginning… • 1947: India and Pakistan are split from British Indian Empire • India= 28 States/ 7 Federal Territories. • Prior Kingdoms with different ethnic populations that speak different languages • Two states are still disputed border areas with Pakistan and China respectively • One state is in the process of splitting now. The link between the historical past and the economic present and future, is that integration between states is hard-earned, and obstacles for intra-national trade exist in the form of language barriers, mistrust between separate ethnic populations, and wide-spread political uncertainty

4. EM Handbook Overview Chapt 5 • “The How and Why of Economic Growth in India 1950-2012” –Surjit S. Bhalla • Explains the unexpected trends of growth and stagnation in the Indian Economy • Higher than expected growth in the 80’s • Lower than expected growth in the 90’s • Stellar performance in early 2000’s • Declining Performance from 2010

5. Timeline of Average Growth Rates Overall 1991 6.7% 4% 1950 1990 1980 2000 2010 1980 <1980 2003 2010-20012 1991-1997 5.4% 8.4% 5% <4% 7.5% 5.4%

6. 1950-1990 • License Raj • Mercantilism • Socialism • Odd increase in Growth in the 1980s: Author attributes to increase labor allocation to the Industrial sector. • But Industrial Sector still lagged way behind that of other similarly populated and agricultural leaning countries (China)

7. The 90’s • 1991 Balance of Payments Crisis • Could not pay for needed imports, notably Oil • IMF structural Adjustment Loan Applied • Manmohan Singh, then finance minister and now prime minister (for another few months) • Takes action to right the wrongs: • Revalue Currency to Appropriate Level (20% reduction) • Reduction of tariffs 300%-110% • Encourage private competition in sectors dominated by government • Reduces tax burden on wealthy (formerly at 93%) • From Legatum Article: “The liberalization, coupled with an abundance of low-wage, Englishspeakingtechnical talent, transformed India into the outsourcing capital of the world.”

8. The 2000’s • Reversal of High Interest Rates and High Rates of Savings Investment Led to the Good years 2003-2010 • Bhalla Rejects the “Rising Tide” theory, that global liquidity overheated the Indian Economy from 2002 to the Great Recession. Others point to the collapse of growth 2010 as proof of this rationale. • Per Capita Income Quadrupled from 1990-2010 • But this growth in income came from elites and middle class.

9. Growth Vs Interest Rate

10. Chapter 5 Conclusions • “The sharp rise in real interest rates, induced by very tight monetary policy at a time of falling inflation rates in the mid- to late 1990s resulted in industrial (and GDP) growth being killed before it reached its potential.” • India still Capable of 7.0 – 8.5% growth but only with sound monetary policy: low interest rates and an undervalued currency.

11. Chapter 5 Conclusions • Why Did growth Lag for so Long? • Import Substitution Industrialization • Inappropriate Monetary Policy • Low Industrial Growth Rates • Author finds Currency Valuation and Interest Rates more significant to high rates of growth and rejectsefficient institutions and fiscal deficit as having a role.

12. Legatum Article –ShikhaDamalia In her view, they [reforms] were designed by and for the country’s middle-class, and have therefore not offered India’s poor the manufacturing jobs they desperately need and the liberation from corrupt bureaucrats they deserve. It is thus sad—but no surprise—that politicians representing India’s have-nots have slowed reform to a crawl.”

13. Legatum Article Summary • Delayed Growth has delayed movement to the Middle Class. Still 1/3 of population lives below $1.25 a day • From HDI, 54% of population is in some form of multidimensional poverty (lack of clean water, education, housing) • Further Reforms Needed but unlikely to happen • Tax Reform • Open Capital Markets (Bond Markets closed to Outside buyers) • Labor Market Reform

14. Current Standing • Economic Freedom Score: • 50-59 (Mostly Unfree) 25th in Ranking of Asia Pacific Region Above Nepal, Bangladesh and Pakistan, but below Sri Lanka • Human Development Index Rank: • 136 (Medium Human Development) • Timor-Leste, Iraq Guatemala, Morocco Ghana all rank higherin the 130’s • Fiscal Year • April to March

15. Current Standing

16. Current Standing

17. Sri Lanka (60) Pakistan (132)

18. Decline 2009-2013 Economic Score Breakout Overall Prosperity Index Change

19. Changes 2009-2013

20. Summary of Current Indicators • Stagnation and Decline 2010-2013 • Room For Improvement • Dream Team Failure • Manmohan Singh (PM) RaghuramRajan (RBI Chief) • Indian Debt Rated Slightly higher than Speculative Grade

21. Tata Nano How hard is it to do business in India? Tata Nano

22. Case Study: Tata Nano • In 2007, Tata Motors took on a lease of 997 Acres of land In West Bengal, near Kolkatta • Tata Motors was looking for a new factory for the Tata Nano, a car that would cost $2500 new and would have a huge market in India (GDP per capita about 4000) Factory Site

23. Problem: The Land • Well, the land was handed over to TATA despite the 10,000 farmers who inhabited the area. • That’s 0.1 Acre per farmer on average; that’s roughly 4300sqft or a space that’s 66 x 66ft . • The Government of West Bengal at the time was a controlled by a Maoist party, that had been in power for 35 years. Finally realizing that Industry was the only way to grow the economy, the Maoists did what all good communists do and expropriated land from the people citing a holdover British instituted eminent domain law. • “Market Value” compensation was offered for the land but approximately 2,000 farmers holding some 400 acres refused the governments offer. • Consider this: How would a foreign company, let alone a domestic one, go about negotiating with 10,000 local farmers individually for land without government intervention?

24. The Result

25. Business as Usual • The outcry of the people became a political opportunity for an upstart politician named Mamat Banerjee. • With her leadership, the protests and rioting proved too much for Tata (and the Maoists who were booted from office after 35 years in charge). • She offered a conciliatory land deal to Tata that was rejected because it separated the supply warehouse land from the factory land. This arrangement would have raised the marginal cost of production and Tata would have been unable to deliver on it’s $2500 car promise.

26. How Was it Resolved? • Short Answer: It hasn’t been. • All 997 acres of land have are still held and only slightly developed by Tata, despite the factory being securely planted in Gujarat. • Various court battles are ongoing, including a piece of legislation written by Ms. Banerjee to reacquire 400 acres of the land to give back to the farmers. • In the meantime, Tata is making Nanos in a more industrial friendly state, while the land in West Bengal goes unutilized by either the Tata’s or the Farmers. • They have also stated interest in returning to West Bengal and making the factory work. • l

27. Population Density WorldWide

28. The Future • NarendraModi • The Good: Mr Investment • The Bad: Mr. Sectarian Violence • Political Uncertainty (Populist Politics) • Corruption • The Agrarian Divide • Suicides as Political Statements • Reform Labor Markets: • Make it more attractive for investment in labor intensive manufacturing (factor-driven economy • Reuters Feb 25: “India to Block US Trade Probes, ready for a fight at WTO” anti-imperialism, anti-trade, anti-globalisation • Reuters Jan 31: “Chidambaram Faces Mounting Deficit in Election Year”