ECONOMIC HISTORY : INDIA INC.(‘70s – early ‘80s)

• Family run business dominated - 95%

• Majority of Industry owned by Public Sector

• License and Red Tape bureaucracy

• Weak or nil project financing opportunities

• Absence of Domestic market

• Brain-drain

MACRO ECONOMIC CRISIS 1991

● Current Account Deficit: 3.2%● Debt Service Payment % of Current Receipts: 35%● Foreign Exchange Reserves: Down to 21/2 months

Imports ($1 billion)● Short term debt: 147% of ForEx reserves● Inflation: 17%● GDP Growth:0.4%● Economic Situation 1991: Possibility of Default on short

term loans and down grading of India’s credit rating.

In short : The Country faced a Fiscal and Economic Crisis

IS LIBERALISATION THE ANSWER?

● Yes?● No?● Maybe?● If?

LIBERALISATION DEFINED

Trade liberalisation

“The process of systematically reducing and eventually eliminating all tariff and non-tariff barriers between countries as trading partners.”

YES, LIBERALISATION IS THE ANSWER…

Centralisedmonopolystructure

Managedcompetitivemodels

OpencompetitiveMarket regime

A Phased Approach to Liberalisation

YES, LIBERALISATION IS THE ANSWER…

● Technology is developing exponentially ● Legacy, monopoly systems are not scalable to

meet demands● Need for modern, scalable, “future-proof”

infrastructure/services● Liberalised market has the potential to move fast

enough to meet demand

NO, LIBERALISATION IS NOT THE ANSWER…

● If not handled right, liberalisation can lead to “bigger”, “badder” problems

Public Monopoly

Private Monopoly

MAYBE LIBERALISATION IS THE ANSWER…

● When the process is undertaken as a result of consultation between government, consumers, and the private sector

● When national resources are protected, instead of permitted to become a hole through which vital capital leaks to other nations

● When emphasis is placed on the development of in-country capacity e.g. Technology transfer components on International tenders

LIBERALISATION IS THE ANSWER IF…

● Continuous review of goals/objectives with adjustments according to changes in the marketplace

● Neighbouring countries harmonise policy on a regional/continental basis

● Weight and incidence of regulation is adjusted according to the stage of liberalisation

LIBERALISATION = DEREGULATION

LPG PARADIGMPRE - 1991 POST - 1991

• LICENSING

• PLANNING

• GOVERNMENT

• LIBERALISATION

• PRIVATISATION

• GLOBALISATION

L P G PARADIGM POST - 1991

RECENT POLICY CHANGES FROM 1991 ONWARDS INCLUDE:

1. Progressive Liberalization and Privatization reforms

2. Reduced reserved list of businesses for PSU

3. Industrialization of economy

4. Huge growth of Domestic Industrial base

5. Govt. incentives to SSI (small scale industry)

6. Export orientation with incentives

7. Economic reforms opened up to foreign trade

8. Less restrictive rules for a low cost finance

9. More resources deployed for technology learning

STRUCTURAL CHANGES DRIVING GROWTH

● Progressively more sectors opened to private investment.

● Encouraged Foreign Direct Investment with equity stake

● Reduction in Red Tape and Regulations● Industry license requirements( barriers to entry)

reduced to encourage competition.● Trade Policy liberalized.● Capital Market Reforms

INDUSTRIAL POLICY DURING PRE-REFORMS LPG ERA

LICENSING PREDOMINATED

DURING POST-REFORMS LPG ERA LICENSES REQUIRED ONLY FOR A FEW SELECT

INDUSTRIES (CORE INDUSTRIES AND DEFENCE ENTERPRISES)

GREATER AUTONOMY FOR PEs

GREATER PRIVATE SECTOR OWNERSHIP

PRIVATISATION AND REGULATORY

REFORMS FIRST GENERATION REFORMS UNDER

IMPLEMENTATION SECOND GENERATION REFORMS BEING

FORMULATED AND IMPLEMENTED REFORMS POLICIES NEED TO INHERE

COMPETITION PRINCIPLES NEED FOR FLEXIBILITY TO PROVIDE FOR

NEEDS, ASPIRATIONS AND GOALS OF THE COUNTRY

TRADE POLICY REFORMS THIS INCLUDES (ESSENTIALLY WTO –

RELATED)– TARIFFS– QUOTAS– EXPORT RESTRAINTS – SUBSIDIES– ANTI-DUMPING ACTION– DOMESTIC CONTENT REGULATIONS

TRADE POLICY NEEDS TO CONFORM TO COMPETITION PRINCIPLES

CONSTRUCTION SECTOR REFORMS

● February 2005 Central Government Allows 100% Foreign Direct Investment in construction sector:– Hotels– Resort– Hospitals– Recreation– Educational Institutions– Hospitals– Regional Infrastructure

● Approval process streamlined with minimum hassles.

FINANCIAL SERVICES REFORMS

Banking Reforms:● Privatization of banking with growth in consumer credit● Growth of International banking institutions in India

Capital Market Reforms:● Capital Markets maturing● Growth in private sector mutual fund industry● Growth in Foreign Institutional investors driven by liquid and deep stock market

with promise of high returns (FII investment $45 billion 2005)

Non-banking financial intermediary Reforms:● Insurance sector privatized with major global insurance companies entering India● Insurance Premiums for 2005 approximately $70 billion ● Growth in Venture Capital and Private Equity Funds

GOVERNMENTAL POLICIES ON FDI

(INDIA) After independence (1947) – strategy of import substitution and

local capability improvement – FDI welcomed

Late 60s and 70s – restrictions on FDI

During 80s – FDI policy liberalized – import of capital goods and technology eased, tariffs reduced, export oriented units exempted from foreign equity cap

Post – 1991 LPG era – major track changes, liberal trade policy, capital market reforms, foreign exchange control relaxed and considerable increase in foreign equity cap, more industries opened for FDI and national treatment to foreign companies

GROWTH IN INDIA’S SERVICE SECTOR- POST ECONOMIC REFORM ERA (1991)

FOREIGN DIRECT INVESTMENT TRENDS

● Foreign Direct Investment:– 1990: $162 Million– 1992: $315 Million– 1999: $2.2 Billion– 2004: $4.5 Billion

● FDI steadily increased as investment regime progressively liberalized with less restrictions.– Fewer restricted industries– Easing of investment process– Removal of Investment Caps and Repatriation

Investment Flows India: Private Equity

THEN AND TODAY: INDIA INC.

● Till 1995 India borrowed from IMF

● Today India loans to many countries & US

● India foreign currency reserve US$150 bn

● Small is not beautiful, think medium / large scale.– India Inc. M&A in Eastern Europe, Latin America, South East

Asia, African countries, Russia, China & US

● Example of growth– India inc ordered 200 Aircraft (18 months) v/s 50 in 90s

– Stock market index crossed 12,800 v/s 2900 in ’91

– IT, Gems, Textile, Automobile industries grew at 35%

INDIAN INC. SCENARIO2005-2006

● SSIs - with 18 month order on hand● US$ 15 bn worth equipments ordered by corporate● New recruitments (all segments) -

– 9,000 new middle level managers– 35,000 Fresh MBAs– 375,000 Fresh engineers– 775,000 Fresh graduates

● Reverse brain drain– 335,000 people from various countries expressed their desire to

work in India ( source- monster.com)