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The Indian Economy
An Overview and Analysis
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Class Exercise: What else could havehappened? What else can happen?
Counterfactuals & Scenarios
Where would Indias economy be todayif:
Liberalization had not occurred at all
What all could still go wrong with India
on the economic front? Different doomsday scenarios
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How Has the Indian Economy Evolved?
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4
25%
23% 24%16%
13%
9%
4%
3%
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What Happened?
We missed the Industrial Revolution
Impact of British Rule
Positive
Stable economy, stable polity, legal system
Fiscal conservatism
Infrastructure (Rail, ICS, Data Collection)
Negative
Traditional industries decimated (Textiles)
Did not invest in industrializing India
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In the 1800s, The British Empire
produced a new territorial domain forthe evolution of the economy
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Aurobindo & Naoroji on British Rule
Sri Aurobindo
One great fact the terrible poverty of Indiaand its rapid increase during British rule, that is
economic imperialism
Dadabhai Naoroji
The cost to India of British colonization was,contrary to rhetoric, to the vast benefit ofBritain and the extreme disadvantage of India
The evils of foreign rule involved the triple loss
of wealth, wisdom, and work
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Economic Strategy Pre-Independence
Congress did not have a clear economic
strategyAgreement on problems:
Povert
Threat of famineNeed to maintain economic independence
Inequalities within society
Drain Theory:
Dadabhai Naoroji
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Congress: Strands of Thought
Bombay Plan (developed by leaders of industry)
Economic development through growth oftextile and consumer industries
State to provide infrastructure, protect
industry, invest in expensive industriesPlanned Modernization
Advocated by Civil servants and Thinkers
from princely states Influenced by Japan
Pragmatic view of roles of industry, state
Expert panel to provide intellectual brain
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Congress: Strands of Thought
Nehru & Bose
Imperialism propelled by capitalist expansionState to develop mother industries
Ownershi in ublic sector for redistributive
and security reasonsGandhi
Industrialize and perish
Caste (and consequent occupational roles)can be dissolved through moral persuasion
Decentralized, independent development
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The IndianArguments &
Pressures &Claims of
Influences on IndiasEconomic Development
EconomyIntellectuals
DemocraticPolitics
Social &culturalnorms
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Four Phases of Indias EconomicGrowthPanagariya (2008)
Phase I (1951-65): Takeoff under Liberal Regime; Open foreign
investment policy; relatively open trade policy untillate 1950s; investment licensing tightens only towardsthe late 1950s earl 1960s
Phase II (1965-81): Socialism struck with vengeance
Phase III:
Ad hoc liberalization during 1975-79, 1980-84 andthen more substantial liberalization during 1985-86and 1986-87.
Phase IV (1988-present):
Systemic and systematic liberalization
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Figure 1.1: Average Growth Rate
4.8
6.3
5
6
7
.
3.2
0
1
2
3
4
1951-65 1965-81 1981-88 1988-06
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Features Common to the Four Phases
Reasons why India escaped prolongedstagnation or decline
Macroeconomic stability
Political stability Gradual and predictable policy
changes
Capacity to implement policies
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Post-Independence: The Agenda
in the Early Years (Phase I)
Multipronged Development => Self-reliance
Rapid industrialization; import subsn; K goodsPrevention of foreign capital domination
Land reforms: abolish zamindari; land to tenant
Introduction of CooperativesGrowth with equity: therefore positive
discrimination and reservations for SC & ST
State to play central role through directparticipation in the economic process => activepublic sector
Planned rapid industrialisation within a democratic
& civil libertarian framework (an uncharted path!)
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Nehruvian Activist Agenda
Constitutional democracy
Economic & social redistributionState-directed industrialization
State to create conditions for economic expansion;
Forego quicker growth (through consumer industries) forlong-term development
State industrial investment would be a counterweight tocyclical swings and fashions of private investment
Productive public sector => resources for redistribution
(1947 AICC Committee: transfer from private to publicownership should commence after a period of five years)
Nehru does not push fully due to lack of consensus =>
Mixed Economy prevails
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Nehruvian Perspective:Theory & Practice
Economic planning within mixed economy Unique combination of democracy, markets and economic planning
Industrial licensing system More restrictive after Industrial Policy Resolution 1956
Tariff policy (infant industry protection) Emphasis on import substitution
Foreign exchange shortages justify such regulation Mahalanobis Model: Heavy + Capital Goods Industries Public Sector captures commanding heights of the economy Small scale industry protection; expected to address unemployment Significant investments in health and education; neglected by British
Science & Technology: Atomic Energy, National Labs, CSIR => Indias scientific manpower
In practice, pragmatism rather than doctrinaire approach; notmuch opposition from organized business, which was activelyconsulted; lays the foundation for Indias physical and human
infrastructure, the precondition for modern Indias development
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Problems Nehru faced
Unequal distribution of land ownership
defended by a powerful social orderPower to legislate regarding land reforms
given to states
Low eve s o pro uctivity
Great inequalities of social order largelypreserved
Bureaucracy to push developmental agenda
Industrialization based on PlanningCommission for strategy, & bureaucrats forimplementation
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Nehrus Achievements and theImmediate Post-Nehru Period
Moderate growth
Democratic legitimacyEconomic stability through prudent financial
management
Undermined by crisesPolitical discontinuity Shastris early death
Wars with China (1962) & Pakistan (1965)
Successive monsoon failures 1965, 1966Devaluation of currency to get IMF aid
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Indira Gandhi Early Years(Phase II)
Fears about Indias external vulnerability
Had to establish herself politically Used economic policy as active instrument
Success of green revolution created bullockca italists as economic and olitical force
State subsidies to gain their support Other interest groups flexed their muscles Economic populism to gain support of poor
Leftward shift bank nationalization Constraints on pvt. industry (e.g. MRTP) Indirect taxes to fund populism Fiscal conservatism broadly maintained
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By the late 1980s (Phase III) Protectionist system of controls primarily to sustain
state, not support development
Huge bureaucracy to rein in business
Deficits increased, fiscal prudence slowly declined
fund deficit, more conditions put by foreign lenders Rajiv Gandhi enters and moves toward liberalization
Lowers taxes and tariffs, introduces computers
Telecom Revolution Even though teledensity does not rise that much, the Public
Call Offices make communication available to all easily
Fiscal crisis in 1991
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The Indian Economy grew at more than 5% per year for the last 25years (1980-2005). It rose in the early 1980s because of improved
efficiency of capital use and again after 2001, because of higherinvestment. Liberalisation in 1991 was a less significant break foreither investment or efficiency of capital use.
0.30
0.35
0.40
6.00
7.00
8.00
0.10
0.15
0.20
0.25
1955-56
1959-60
1963-64
1967-68
1971-72
1975-76
1979-80
1983-84
1987-88
1991-92
1995-96
1999-00
2003-04
2.00
3.00
4.00
5.00
investment rate GDP growth 5 years
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The Public SectorGrew larger than envisaged, and in more areas
Over-zealous bureaucracy
Compulsions of electoral politics
Performance below expectations
Lack of requisite autonomy Constant interference by administrative ministries
Excess manpower due to political interference
But did achieve variety of social objectivesPSU sales decline from 45% to 37% Seven of top 10 firms in 1998 are PSUs (six in oil)
Privatization slow: Modern Foods, Sterlite
Navratna privatization or disinvestment now opposed
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Sectoral Growth
Agriculture grew consistently slower
than the GDP
Industrial growth picked up in Phase I
u r r y Services showed a more stable
pattern with growth accelerating
particularly in Phase IV.
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Growth Rates of Sectoral GDP (atfactor cost)
Period Agriculture & Allied Industry Manufacturing Services GDP
1 2 4 5 6 7
1951-65 2.9 6.7 6.6 4.7 4.1
1965-81 2.1 4.0 3.9 4.3 3.2
1981-88 2.1 6.3 7.1 6.5 4.8
1988-06 3.4 6.5 6.8 7.8 6.3
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Sectoral Shares
The share of agriculture declined
consistently
The share of industry rose initially but
The share of services roseconsistently
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The Composition of the GDPYear Agriculture and Allied Industry Manufacturing Services
1950-51 57 15 9 28
1964-65 49 21 12 31
-
1987-88 33 26 16 41
2004-05 21 27 17 52
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Liberalization (Phase IV)
Dismantling of licensing system
Removal of MRTP
Removal of technology import restrictions
Reduced tariffs
Reduced taxes
FERA FEMA & Current accountconvertibility
Divestment in public sector
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Changes in Indian Macroeconomics
Old Indian Macroeconomy New Indian Macroeconomy
Sequence of Agricultural Shocks Conventional Business CycleClosed Economy Open economy, removal of trade
barriers, de facto convertability
Distortionar Tax Polic and Tax distortions eased and fiscalFiscal Crisis
crisis in check
Primitive financial markets withilliquidity, government control,and lack of speculative pricediscovery
Equity market a success, withgenuine liquidity, and nogovernment control over prices
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Political Economy of Liberalization By or on behalf of elites who have been in revolt against
earlier model of state-directed economic development
Liberalization also helps children of government servants (IIMs?) Crisis of 1989-91 offered elites a window of opportunity to
renegotiate states relationship to private capital Governing elites thought liberalization would offer new sources
o patronage to compensate or t ose ost ue to s r n age oregulatory role successful ones managed to do this (DeveGowda, Sharad Pawar, etc.)
Not yet run counter to the interests of the countrys mostpowerful social groups
No role of vision, success due to stealth; reformers perish Sequencing influenced by political considerations Increasingly being implemented in successive micro-reforms
at state level
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ConcernsUnaimed liberalization could:
Widen the gap in social opportunity between rich & poor Sharpen rural-urban divide Increase regional imbalances
Number of poor large in absolute termsconomy as o e eva ua e on e as s o w a appens
to poor & dispossessed Is growth all that matters? What about quality of life?
Is India drifting dangerously towards a state ofindebtedness and economic dependency in an uncertain
world economy? Is Indian policy to be dictated by World Bank etc?
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Liberalization: Dalit Perspectives
State and public sector are emancipators
Even this benefits only a small portion of Dalits
Dalit communities, due to history, are less preparedfor marketplace competition
,
oriented initiatives will result in a new exclusion As basic stepping stones to developmenteducation,
healthget privatized, exclusion of Dalits will worsen
What applies to Dalits also applies to numerous
historically disadvantaged groups 60 years after Independence, people Below Poverty
Line still constitute more than 25% of India
Now SEZs, (earlier development), displaced poorwithout making them benefit from progress
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The reforms are not simply about the renegotiation ofIndias relationships with the global market-place, nor evenare they about the relationships of private capital with the
Indian state in the formal economy; the reforms are alsoabout the reworking of the idea of the State itself and ofthe states capacity to work on behalf of those who standoutside Indias (expanding) social and economic elites.
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Todays and Tomorrows India
http://www.youtube.com/watch?v=pr
MwTWOYDz8&feature=related
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India is growing!Source: Economist
India will be the third largest economy by 2040
India will be the 5th largest consumer market by 2025
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China
India
Russia
UK Germany Japan US
Italy France Germany Japan
Italy France Germany
Italy France Germany
The BRICs Verdict on the Indian Economy
Overtaking the G6:When BRICs US$GDP will exceed G6
G-6, Brazil, Russia & China expected to slow down over the next50 years, Indias growth rate to remain above 5% throughoutIndias GDP to outstrip Japans in 2032
India per capita income to rise to 35 times current levels by 2050GS BRICSs Model Projections
Brazil
BRICs
2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050
G6
* dots indicate when BRICs US$GDP exceeds US$GDP in the G6
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GDP growth (%)
Strong growth in the last few years
7.5
9.5 9.79.2
6.77.28
10
12
0
2
4
6
2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 AE
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Annual Percentage change
India set to grow faster than other regions
Economies 2008 2009 Projections
2010 2011
World 3.0 -0.8 3.9 4.3
Advanced Economies 0.5 -3.2 2.1 2.4
United States -
Source: IMF, January 2010
. . . .
Euro Area 0.6 -3.9 1.0 1.6
Japan -1.2 -5.3 1.7 2.2
Developing Asia 7.9 6.5 8.4 8.4
China 9.6 8.7 10.0 9.7
India 7.3 5.6 7.7 7.8
Brazil 5.1 -0.4 4.7 3.7
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Integration with Global Economy
Gross Flows (Current and Capital Accounts)
Year Billion USD % to GDP
1957 5.2 19.5
1967 9.6 20.7
1977 20.4 22.0
1987 53.0 23.9
1997 177.3 49.9
2007 909.3 110.0
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India's trade performance..
195
252.3
312
414.3
450.5
200
300
400
500
US$ billion
Over the six year period 2002-03-
2007-08, average annual growth
in
Exports 25%
Imports 31%
42.268.5 95.1 95.2
114.1
141.9
-100
0
100
1990-911995-962000-012001-022002-032003-042004-052005-062006-072007-08 2008-09
Exports Imports Total Linear (Total )
Source: Reserve Bank of India
Government envisages to double the share of India in global trade by
2020. Indias total share in goods and services trade was 1.6% in 2008
Trade 28%
However total trade grew only by
10% in 2008-09 due to the global
slowdown
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Indias forex reserves..fifth largest
in world
141.5151.6
199.2
309.7
252.0
150.0
200.0
250.0
300.0
350.0
US$ billion
Largest holders of forexreserves1.Peoples Republic of China2.Japan & Euro zone3.Russia4.Taiwan
42.354.1
76.1
113.0
0.0
50.0
100.0
2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09
Source: Reserve Bank of India
.
6.South Korea7.Brazil8.Hong Kong9.Singapore10.Germany
Source: Wikipedia
Forex reserves touched an all time high of US$ 314.6 billion in May 2008
Forex reserves for the week ending March 26, 2010 stood at US$ 277.0
billion
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Inflation level.
7.9
7.1
3.73.4
5.4
6.4
4.4
5.4
4.7
8.4
4.0
5.0
6.0
7.0
8.0
9.0
Wholesale Price Index (in percent)
0.0
1.0
2.0
3.0
Average
1991-92 to
1999-00
2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09
Source: Reserve Bank of India
Inflation touched a peak of 12.8% in August 2008 due to increased
pressure on global commodity prices
Wholesale price index for the month of February 2010 was 9.9% (y-o-y)
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Index of Industrial Production
6.2
5.36.0
7.4
9.2 9.1
12.5
9.0
6.1
5.05.7
7.0
8.4 8.2
11.6
8.5
4.0
6.0
8.0
10.0
12.0
14.0
(in percent) Manufacturing sector has
witnessed a perceptible slowdown
due to
(i) Global meltdown and
(ii) Contractionary monetarypolicy stance of RBI
IIP Growth inApril09 - 1.2%
2.9
2.52.7 2.6
0.0
2.0
Avg
growth
1990s
2000-012001-022002-032003-042004-052005-062006-072007-082008-09
Manufacturing General
Source: Central Statistical Organization
For the economy to clock 8-10% growth, manufacturing sector
needs to grow by at least 12%
May09 - 2.2%
June09 - 7.8%July09 - 7.2%
Aug09 - 10.2%
Sept09 - 9.1%
Oct09 - 10.3%
Nov09 - 11.7%
Dec09 - 16.8%
Jan10 - 16.7%
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Increasing Discretionary Income
Increasing discretionary income
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Given the demography & rapidly growing middle class, Indiahas huge untapped market potential..
17
2
6
5
9
713
80%
90%
100%
Share of Average Household Consumption
Discretionary Discretionary
Indias middle classconstitutes 50 million
people at present. Likely to
go up to 583 million people
Growing middle class..
42
25
6
5
12
10
3
3
8
11
20
0%
10%
20%
30%
40%
50%
60%
70%
2005 2025
Food, Beverages, and Tobacco Apparel Housing Utilities
Household Products Personal Products & Services Transportation
Communication Education & Recreation Health Care
xpen ure
(52%)
Necessities
(48%) Necessities(30%)
Expenditure
(70%)
Source : McKinsey Global Institute
by 2025
Households that can
afford discretionary
spending likely to go up
from 8 million at present to
94 million by 2025
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Higher disposable income, easyavailability of credit and high
exposure to media and brands hasincreased the average propensity toconsume
77
104
153
225
326
562
0 100 200 300 400 500 600
2004
2005
2006
2007
2008
2009*
*Upto 31st Dec 2009
Telecom subscriber base (in millions)
The domestic market is growing
over 500 million and is currentlyadding around 8-10 millionsubscribers every month; about 50%penetration is expected by 2012
Automobile production now exceeds
10 million units per annum includingpassenger vehicles, commercialvehicles, two- and three-wheelers
6.37.2
8.59.7
11.1 10.9 11.2 11.4
0
5
10
15
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10*
Automobile production (inmillions)
* Apr-Jan 2010
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India has the advantage of being one of the youngest countries
Size of 15-59 age group
in 2007 (in million)
Size of 15-59 age group
in 2050 (in million)
Growth of 15-59 age
group ( in million)
India 696 1020 324
United States 191 225 34
Japan 76 45 -31
What sets India apart..
In the year 2006, about 52% of Indias population was below 25 yearsMedian age would be 30 years even as late as 2025
Indias work force (15-59 years) would go up by around 324 million by 2050.
Germany 50 36 -14
United Kingdom 36 36 0
France 37 35 -2
China 895 755 -140
Source: United Nations
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INDIAS DEMOGRAPHIC DIVIDEND WILL CONTINUE TILL 2025(% share of age groups)
36
60
33
62
30
6568 69 68
40
50
60
70
80
5 5 5 6 67
0
10
20
30
0-14 years 15-64 years 65+
2000 2005 2010 2015 2020 2025
India will remain a young nation with the median age going up
from 21 in 2000 to 26 in 2025
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Strong knowledge base.
1989000
0 500000 1000000 1500000 2000000 2500000
Graduates
Availability of Graduates
Indias educational infrastructure
Over 380 universities (11,200 colleges)1,500 research institutions and around9,000 PhDs
Over 200 000 en ineerin raduates
What sets India apart..
258000
9000
Post Graduates
PhD's
Source : A.T. Kearney
Over 250,000 post graduates and2,000,000 graduates
India has a significant English speakingpopulation
India has the third largest scientific and technical manpower in the world
The number of MNCs undertaking R&D activity in India has gone up from 100
in the year 2003 to 300 in 2007
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Factors Driving Indias Growth
Population & demographic trends:
Every two years, India would be adding all of Germanyslabor force!
Human capital English-speaking skilled workers: scientists, trained IT
specialists, technicians and engineers
Rising integration into global trade and investment Can also capitalize on Diaspora, especially in USA
Investment trends: huge potential ininfrastructure PPP to finance and execute infrastructure projects (rail,
airport, seaports)
Policy and institutional determinants of growth Macro policies Institutional and regulatory environment
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Drivers of Economic Transformation Spirit of entrepreneurship
Unleashed with the IT revolution and emergence of BPO/ outsourcing industry
Rise of knowledge based industry, taking cue fromsuccessful entrepreneurs in the Silicon Valley
IT industry leveraged on Modular Development and Global
Delivery Model Benefits from 24 hr work day and productivity gains
Technology drove outsourcing of business processes Indian IT Cos devising strategies to move up value chain
Other sectors transforming are Pharma and Auto-ancillaries Huge opportunities seen in improving supply chain
efficiencies and catering to domestic market across sectors Telecom revolution unleashes tremendous economic impact
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India Growth Story
Several constraints still exist
Infrastructure remains a critical bottleneck Quality of education archaic; not innovation-oriented How can we educate 500 million youngsters properly?
PSUs still hold mono ol in some sectors Aerospace, defense production & nuclear power prodn.
Reforms slowed due to need for political consensus Capital markets still not very efficient Slow growth in agriculture, occupation of 60% people Urbanization at a rapid pace, but not planned or
managed carefully Can lead to huge impacts on environment & efficiency
Challenge to ensure inclusive growth, Economic gains to be equitably distributed while
evolving right incentives for growth
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INDIAS BOOMING MIDDLE CLASS
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How many? India's 200m-strong middle class is the
most economically dynamic group on theplanet, but is largely uninterested in politicsor social reform
300 million Indians live on less than 1 adaya quarter of the world's utterly poor
Yet since 1985, more than 400m (out of atotal population of 1bn) have risen out ofrelative povertyto $5 a dayand another300m will follow over the next two decadesif the economy continues to grow at over 7per cent a year
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Who are they? According to the National Council of Applied
Economic Research, the term "middle class"applies to those earning between $4,000 and$21,000 a year ($20,000-$120,000 inpurchasing power parity terms).
But this definition suits only about 60m (under6 per cent) of the population. Nevertheless,there seems to be an underlying intuition aboutthe "middle class-ness" of those moving upfrom $5 a day to $10
People who employ household help are middleclass?
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Impact? The shifting of expenditure from needs to wants is
what distinguishes the Indian middle class most
sharply from the middling social groups of the past The average middle class consumption per capita per
year works out to Rs 12,546
ew researc rom e c nsey o a ns u e
(MGI) shows that within a generation, the country willbecome a nation of upwardly mobile middle-classhouseholds, consuming goods ranging from high-endcars to designer clothing.
In two decades the country will surpass Germany asthe world's fifth largest consumer market
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A new breed of ferociously upwardly mobile Indians isemergingyoung graduates of India's top colleges
who can command large salaries from Indian andforeign multinationals
Their tastes are indistinguishable from those of -
luxury cars and wear designer clothes, employ maidsand full-time cooks, and regularly vacation abroad. B
By 2025, there will be 9.5 million Indians in this classand their spending power will hit 14.1 trillion rupees20 percent of total Indian consumption
Consumerism spurred by advertising, easy access tothe Internet and plethora of media options
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Value-conscious consumers Before India embarked on its program of economic
reforms, the country had only 0.8 fixed telephones
per 100 people, and virtually no mobile phones. Now, mobile phone subscribers are expected to reach
211 million by end-2008.
n a s mo e mar e s curren y grow ng even as er
than China's, and overall communications spendingwill grow at a very rapid 13.4 percent per year overthe next two decades.
Other fast-growing categories will include transport,education and health care.
But Indias mobile telephony costs are among thelowest in the world (and companies still make profits!)
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How the Indian Consumer Really Behaves
http://www.youtube.com/watch?v=P
6NoYjf4--Q&feature=related
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Consumption Patterns The character of consumption will change
dramatically over the next 20 years. A hugeshift is underway from spending onnecessities (food, clothing) to choice-basedspending on categories such as householdapp ances an res auran s
Households that can afford discretionaryconsumption will grow from 8 million todayto 94 million by 2025
Companies have to understand the psycheof those classes which are beginning to jointhe middle classes -
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Growth of Middle India Much of the consumption and income growth is not in
the metros, its in the Tier II and Tier III cities
51 districts in India have at least one town with apopulation of more than 500,000. Together, theyhave twice the market potential of the four metros
, , .
Swamy BBDO) Towns such as Chandigarh, Ahmedabad, Jaipur,
Lucknow, Indore and Pune have three-quarters ormore of the affluence levels of Mumbai. On growthpotential they do even better. That small-town urban
India is attractive in terms of purchasing power, timespent on media, and product consumption comesacross clearly.
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Myths & Realities Myth: The Indian middle class lives in the metros. Reality: Of the 80 million households that constitute the
Indian middle class, only 25 million are in Tier I cities. Closeto 55 million belong to the smaller towns. Mercedes sells morecars in small-town Ludhiana than it does in Mumbai.
M th: India is a " rice sensitive" market. Reality: For products such as Vim Bar dishwashing detergent
and Head & Shoulders shampoo, the Indian market easilyabsorbed price hikes of 13% and 18%, respectively, in 2007.Yet for years, candy manufacturers have been trying in vainto increase prices from 50p to Re 1. Value sensitivity, notprice sensitivity, is the buzzword.
Myth: Imported is always premium. Reality: Euro RSCG's brand momentum study in 2004 showed
that eight of the top 10 brands in the country were of Indianorigin. The days of "imported equals premium" are long past.
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Tapping the Bunty Syndrome Confidence: Grasim, a brand of suits, through the message
of "be self-made," has saluted the "We'll get there no
matter what" spirit of the youth. The message is enhancedby the use of a celebrity (the actor Akshay Kumar) whohas made a name for himself on his own in a field whererelatives already in the profession are seen as aprerequ s e or crea ng equ y n e n us ry.
Gandhian values: Idea, a mobile-services brand, haspropagated caste equality, while Tata Tea has tried toappeal to the young in Tier II cities with a call to "wake upto the issues."
Pride: Durables brand Voltas has challenged the monopoly
of Korean brands in the air-conditioner space by projectingitself as "India's own AC." Family values: The concept of being able to give back to
parents has been used to good effect by MasterCard andHDFC Bank.
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Tailoring Products to These Consumers
Smart companies know that old consumer habits die hard.
For generations, rural Indian families have either madetheir own clothes from bolts of cloth or had the local tailormake their garments relatively cheaply.
Many remain suspicious of ready-to-wear clothes.
Arvind Mills, India's leading denim manufacturer,
overcame these misgivings by offering a "ready to stitch"jeans kit to local village tailors.
It also distributed sewing-machine attachments forstitching the heavy denim and trained the tailors to use
the kits. Within two months, more than a million of these Ruf 'n Tufkits were sold
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Middle Class Politics Middle-class skeptical about the capacity of
the state Behaves more like the contemporary
consuming classes of the west, relentlessly
lifestyles while taking political parties to beas bad as each other and non-party politicsto be hopelessly idealistic
Rarely mobilize politicallybrief exceptions,the Anti-Reservation Movement
Or as part of Resident Welfare Associations
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Global Outlook Keen on expanding frontiers: supported nuclear tests,
Indian economys liberalization
Now, post-nuclear tests, take Indias new status forgranted; they simply assume it is India's due to betreated as the "equal" of the US and the rest, andmove on to talk of economic opportunities
Commitment to an India which plays a decisive role
on the international stagebut now, instead ofthrough "non-aligned" solidarity and ancient history, itis through software and finance
Sense of citizenship is weak: they do not, on thewhole, extend a sense of solidarity to the poor; they
often do not acknowledge the role of the state in theirown rise or its capacity to solve any of the country'sproblems
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Entrepreneurial Indian middle class also marked by
entrepreneurial spirit focused in thought,global in outlook, proactive in approach,and meticulous in execution Rishikesha T.
,
Represented by companies such as Infosysand Bharti Airtel
All have been global in outlook in terms ofadopting global standards, the besttechnology and operating on global scales
Examples of middle class to billionaires
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The Formal Corporate Sector
Indian Entrepreneurship Before
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Independence1800s
Opium Trade with China--Jamsetji Jeejeebhoy, etc
Inter-War Period
Heavy IndustryTatas, Birlas, Dalmias, Walchand, SinghaniasMaharaja of MysoreSteel (Vishweshwarayya)
Textile Mill Magnates
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Indian Business Houses in
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Pre-liberalization Era Expansion & consolidation (in spite of constraints of
industrial policy) expansion of industrial base Acquisition of British business houses in India Growth in 1914-47 due to British focus on World Wars;
Great Depression
Strategic use of industrial licensing system Corner icenses to prevent competition
Expand into unrelated lines just because license is obtained Compete easily in political markets of corridors of power Precious little innovation
Dependent on State Funds Industrialists often owned small % of shares; LIC, etc. rest
Global expansion by far-sighted houses (e.g. Aditya Birla) Third generation splits weakened many houses
External pressures on joint-family Availability of funding from FIs and banks
Indian Business Houses in
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Pre-liberalization Era
Weak on technology, quality
Control remained with familymembers, though family members
Forward-looking houses high onprofessionalization
Business became more respectable,
but few could attain the status of pre-independence business leaders!
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Impact of liberalization on Business Liberalization => competition => technical change. But Indian
business also now more ambitious & efficient (better K/output)
Existing business houses invested in new product lines, tended tobe more focused
Tatas sell TOMCO to HLL; SRF sells finance arm, buys core biz
ome e or s a ec eve opmen ; more esp. arma
Import of technology (Auto: unpacking; i.e., different sources) Nicholas Piramal buys entire R&D lab of Hoechst
Entry of multinationals challenges Indian cos.
Lots of JV, M&A, acquisition of Indian firms (Parle)
New class of entrepreneurs
Educated, informed, ambitious, progressive; not old money
IT Success
No products; efficient processes; leverage educated rawmaterial & labour cost arbitra e untouched b overnment
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Now, the Indian Multinational? LN Mittal: does his empire qualify?
Bharat Forge, Moser Baer, Wipro, TataSteel, Aditya Birla, all busy buyingcompanies abroad
Aditya Birla overseas expansion since license-
permit raj days, to avoid dealing with Indiangovernment restrictions on growth
ONGC Videsh: a PSU playing in
international markets The Entrepreneurial Success of the Indian
Diaspora and its demonstration effect
India: Some Complexities and
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Contradictions
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India: The Cold Statistics
More than one-third below poverty line
42% of rural population spend just Rs 447a month on food, light, clothing, etc.
(53/1125) Literacy 65-70%
More than 20% lack access to potable
water
Only 36% households have toilets
Life expectancy at birth 61 years
77
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India: Corruption An Endemic Problem
India is ranked at #84 out of 180 countrieson TIs Corruption Perception Index 2009with score of 3.4 10
New Zealand #1 9.4 / 10
Germany #14 8.0 / 10
France #24 6.9 / 10
China #79 3.6 / 10
Indias rank slipped by 14 positions in last4 years!
78
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India: Governance Indicators
79
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Whos Losing Out? Whos Ignored?
The Other Side of India Shining
Indias Informal Economy
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Indias Informal Sector Low level of organisation; small in scale usually employing
< ten workers and often from the immediate family;
Heterogeneity in activities;
Easier entry and exit than in formal sector;
between labour and capital; informal capital sources Mostly labour intensive work, requiring low-level skills;
usually no formal training as workers learn on the job;
Labour relations based on casual employment and or
social relationships as opposed to formal contracts; Due to their isolation and invisibility, workers in the
informal sector are often largely unaware of their rights,cannot organise them and have little negotiating power
with their employers and intermediaries (ILO 2000).
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Magnitude of Informal Sector Larger than the organized sector in terms of the
relative share in GDP as well as the workforce.
Produces about 60 per cent of Indias GDP and alsoprovides livelihood to nearly 93 per cent of the
.
Whereas a report by National Commission forEnterprises in the Unorganised Sector (NCEUS)
estimated the un-organised/informal sectorworkers as comprising about 86% of work force in
the Indian economy in 2004-2005 and informalemployment both in the organised and unorganisedsector as 92%
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Social Regulation of Indian EconomyGender
Caste
Religion Spatial Clusters
Labour: in dependent alliance with caste patrons
Capital: rise of Intermediate Class; dominate non-metros
State Regulation: doesnt go below surface
Huge untaxed, unregulated, externality-driven economy
Tremendous corruption at implementation level Reforms create more opportunity for market
exploitation of rents and labour
Conversion of black to white
Monthly incomes of cultivators have declined in thelatest period. All other workers incomes have
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increased, especially in the organised sector.
12000
15000
18000
1993-94
0
3000
6000
9000
ag-wages
nonag
wages
self-emp
agri
self-emp
nonagri
private
salaries
govt
salaries
1999-00
2004-05
The gap between organised sector salaries and self-employed/wages started at the end of 1990s and has beengrowing thereafter. Real incomes of self-employed in agriculture
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have declined since the onset of agrarian crisis after 1997-98
Indices of per worker income (1999-00 series)
380.0
430.0
480.0
ag-wages
nonag
wages
self-em
80.0
130.0
180.0
230.0280.0
330.0
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
agri
self-empnonagri
private
salaries
govt
salaries
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Inequality Among States
YET POVERTY LEVEL HAS DECLINED SIGNIFICANTLY IN 1990s
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54.951.3
44.538.9
36.026.1
30
40
50
60
0
10
20
1973-74 1977-78 1883 1987-88 1993-94 1999-00
Poverty ratio (%)
H i ll ?
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Has it really? Professor Utsa Patnaik, in her study of nutritional status
and hunger in India, showed how 76% of families or 840
million people in India do not get the requisite dailyintake of calories -- ie 2,100 calories for urban and 2,400calories for rural residents.
According to the Arjun Sengupta Committee Report on
Unorganised Sector Workers, about 77% of people in thecountry subsist on under Rs 20 per day.
Further, the National Family Health Survey-3 states thatin India, 46% of children under the age of five are
undernourished. The Right to Food campaign registered more than 5,000
starvation deaths in different parts of the countrybetween 2001 and 2005.
The desperation on the farm
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Human Development Index:
I di d H N i hb (2005)
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India and Her Neighbours (2005)
Thus, New Government Estimates:
E Thi d I di I P
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Every Third Indian Is Poor
The Suresh Tendulkar committee has revised the poverty line in terms ofmoney spent per person per month. From Rs356.30 a month, this hasincreased to Rs446.68 in rural areas. In urban areas it has risen fromRs538.60 to Rs578.8. At present, the Centre measures poverty by
measuring calorie intake.
Ab f S i l S f t N t
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Absence of Social Safety Nets People Fall Into Poverty Too!
The World Bank estimates that one-quarter of all Indians fall into poverty as
event of hospitalisation
Other factors: excessive spending onweddings and deaths
Indians investment in gold is partly atraditional social safety net
Ambedkar
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Ambedkar On 26th January 1950, we are going to enter into a life of
contradictions. In politics we will have equality and in socialand economic life we will have inequality. In politics we willbe recognized by the principle of one man, one vote andone value. In our social and economic life, we shall, byreason of our social and economic structure, continue to be
, . How long shall we continue to lead this life of
contradiction? How long shall we continue to deny equalityin our social and economic life? If we continue to deny it forlong, we will do so only by putting our political democracyin peril. We must remove this contradiction at the earliestpossible moment or else those who suffer for inequality willblow up the structure of political democracy which thisassembly has so laboriously built up.
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