Economic Liberalization in India Past Achievements and Future Challenges

1. Economic Liberalization in IndiaPast Achievements and Future Challenges 6 August 2011 © Confederation of Indian Industry

2. Economic Reforms • The early burst of reforms in the early to mid nineties made sweeping changes such as • Reduction in tariff barriers • Removal of barriers to entry in industry • Removal of controls in the financial sector • Encouragement to foreign investment and technology • Rationalization of tax structure • These have ensured macroeconomic stability and driven the economy towards greater competitiveness • These measures have also helped India in emerging as a resurgent, vibrant and dynamic nation, leading global growth • India is the second fastest growing economy in the world after China • India was able to withstand the repercussion of the global economic crisis • India’s participation is required in all global negotiations ranging from global trade to climate related deals

3. CII’s Role • Post-1991, CII worked on multiple fronts to facilitate liberalization: • Engaged with administration to calibrate policies to sequence reforms and minimize industry adjustment pains • Sensitized officials and Members of Parliament for reforms through sustained interaction • Worked with industry to build consensus recommendations • Organized seminars to disseminate awareness among industry • Interacted persuasively with different stakeholders across society to create buy-in • Globalisation was a key plank of CII’s endeavours since 1991. Some of CII’s pioneering initiatives that helped industry to align with global imperatives include: • Arranging outward missions through networking with international governments, industry associations, institutes and academia for opening new avenues for Indian industry • Initiating Quality Movement in India; Sundaram Fasteners first company to get ISO9000 certification (1991) • Organising exhibitions/shows to showcase Indian products • Initiating debate on key economy/ industry issues • Laying thrust on Corporate Governance: Developing Code of Corporate Governance

4. Robust GDP Growth GDP • GDP has surged from 5.7% during 1991-00 to 7.7% during 2001-11 Per Capita Income • Per Capita Income has more than doubled from Rs. 15,826 in 1991 to Rs. 41,129 in 2011; has been increasing at an average annual rate of about 7% since 2004 Source: Economic survey 2010-11 and CSO

5. Structural Change in GDP Composition • GDP has undergone a marked structural change over a span of two decades • Agriculture contribution has shrunk to 16.6% in 2011 from 34.0% in 1991 • Share of tertiary sector has increased commendably, in fact is becoming engine of growth • Flat growth in Secondary sector is however, a cause of worry given the reducing employment elasticity of agricultural sector Source: Economic survey 2010-11 and CSO

6. Savings and Investment (as % of GDP) • Savings as a proportion of GDP moved up by more than ten percentage points from 22.8% in 1991 to 33.7% in 2010 • Investment to GDP ratio also jumped from 26.0% to 30.8%, however expected to declined to 29.5% in 2011 due to rising interest rate Source: Economic survey 2010-11 and CSO

7. Merchandise and Service Trade Merchandise Trade • Merchandise exports soared to cross US$250 bn in 2011 from US$ 18.5 bn in 1991, about 14 fold increase • Service exports went up to US$132 bn in 2011 from mere US$ 4.6 bn in 1991, registering a CAGR of 18.3% • Backed by robust exports of IT and ITes services; close to $60 billion in 2010-11 • Merchandise and Service imports grown at a CAGR of about 14.0% and 17.1% respectively • Faster rise in imports over exports have undoubtly widened trade deficit yet it has helped in keeping global demand alive in the wake of the global economic crisis • Trade as a proportion of GDP has increased magnificently from 9.0% in 1991 to 87.9% in 2011 Service Trade Source: RBI

8. FDI Inflows • FDI inflows have grown multiple fold from just US$ 97 mn in 1991 to US$ 30.4 bn with an average annual compound growth rate of 33.3% • FDI inflows as a proportion of total foreign investment inflows has fallen from 157.8% in 2008-09 to 49.1% in 2011 due to faster rise in portfolio investment • Indian companies have made an outward investment totaling US$80 billion in the first decade of the century mostly in developed economies Source: RBI

9. SENSEX • Steps taken over the last two decades have resulted into maturing of nascent financial market. Further, robust economic growth and fast pace of globalization has led to buoyant investors’ sentiment • SENSEX has increased from a level of 1908.9 in 1991 to 18518.2 in 2011 at a CAGR of 12.0% Source: BSE, bseindia.com

10. Move Towards Inclusive Growth • While the first phase of reforms had unleashed economic growth, it was felt that the benefits of growth must be more equitably distributed • Starting 2005, the UPA government has shifted the focus to inclusive growth through greater allocation to socially beneficial schemes and programmes • Total Plan Allocation increased markedly from Rs. 9.6 thousand crore in 1991 to Rs. 335.5 thousand crore in 2011-12, nearly 35 fold increase Some flagship schemes • Bharat Nirman - Total Budget allocation for 2011-12: Rs. 58,000 crore • NREGA - Total Budget allocation for 2011-12: Rs. 40,000 crore • JNNURM - Total Budget allocation for 2011-12: Rs. 49 crore Source: Budget and Government Sources

11. CII’s Initiative on Socio Responsibilities • Corporate Social Responsibility • Set up Social Development and Community Affairs Council in 1995 • Developed Action Agenda for Affirmative Action and worked to generate awareness and intensify industry efforts • Facilitates industry interventions in society through NGO partnerships • Undertakes public health and community welfare activities in factories • Spearheaded the India Business Trust for HIV/AIDS • Environment Management • Set up Environment Management Division after Rio Summit in 1992 • Initiated Green Building movement in India through its Centre of Excellence Green Business Center • Engages in climate change mitigation efforts

12. Social indicators Literacy Rates • Overall literacy rate has gone up from just over half to almost three-quarters during 1991 and 2011 • Literacy level among female folk which constitutes about half of the population has nearly doubled • Among young people, the rates are higher as the Right to Education law kicks in Source: Economic Survey Poverty Estimates • Overall, poverty has declined by eight percentage points from as high as 35.6% in 1991 to 27.5% in 2005 • Decline was more pronounced in urban areas as compared to rural areas • Urban poverty fell by double digits. Rural poverty came down by seven percentage points Source: Planning Commission

13. Major Plans for Infrastructure Development Source: Planning Commission

14. Power and Road Installed Capacity: Power • Total installed capacity has more than doubled during 1991 and 2011 • Even after 20 years, thermal power remained the most dominant form • There is a need to change the present composition in favour of hydro, nuclear and other bio-produce power to conserve coal for industrial purposes Source: CMIE, Industry Analysis Service Road Length • Public-private-multilateral partnerships have been successful in implementing highways programme • NHAI to award 7,994 km of highway projects in the FY 2012 • Going to generate demand for cement, steel, and bitumen of worth Rs 42,000 crore • Though the sectoral performance has improved, yet to be enhanced considerably to ensure optimal utilization of resources and to avoid overrunning of cost Source: Ministry of Road, Transport and Highways

15. Steel and Telecom Finished Steel Production • Steel production has surged nearly five fold in last 20 years • India fourth largest steel producer in the world and is expected to become the second largest producer by 2013 • Steel production capacity to touch 120 Million Tonnes by 2013 and over 150 Million Tonnes by 2020 Source: CMIE, Industry Analysis Service Telecom • Private sector participation has lead to sharp reduction in tariffs and rapid increase in penetration of basic/mobile telephones • Registering a CAGR of 29.0% during 1991 and 2011 • Teledensity improved from 0.6 (per 100 person) in 1991 to 66.2 twenty years later Source: Department of Telecommunications, Ministry of Communications and Information Technology

16. Challenges • High inflation level above comfortable zone – 9.4% in June 2011 • Industrial slow down – IIP has grown by 5.6% in May 2011 as compared to 8.5% in May 2010 • Falling investment - 30.8% in 2010 to 29.5% in 2011 • High interest rates have impacted credit to MSMEs in manufacturing sector as well as key industries – Non food credit growth to MSMEs declined from 21.1% in April, 2010 to 20.6% in April, 2011 • Inadequate infrastructure continues to be a major structural bottleneck • Shrink in FDI inflows due to structural bottlenecks – In 2010-11, FDI inflows shrunk by 28% to US$ 27 billion from a level of US$ 38 billion in 2009-10 • Weak enforcement and monitoring • Likely overshooting of fiscal deficit – Though fiscal deficit is budgeted at 4.6% for FY 2012, however, developments in recent months like deceleration in growth, high crude oil prices, high subsidy and rising interest rates are casting doubts

17. Agenda for further reforms • Investment Climate: • FDI in sectors such as retail, insurance, defence, etc needs to be expanded drastically • Rapid clearance of large projects • Financial Sector Reforms: • Liberalize financing guidelines • Facilitate increased access to international debt markets • Encourage development of the corporate debt market • Agriculture Sector Reforms: • Allow FDI in food retailing to integrate distorted supply chain • Encouragement to PPP model in strengthening agriculture research and extension programmes • Exempting horticulture produce from APMC Act • Move towards unified national market and allow free movement of produce • Infrastructure: • For greater investment in infrastructure policy framework needs to be made more friendly • Social Sector: • Much better delivery of government services to the poor with the support of state governments CII has been a strong partner to government during the reforms period and will continue to build the partnership of Government and industry to make India a developed nation in the next two decades

18. Thank You