Transcript Onions For Rupees

The Economy of India
Recent-Past Reform, and Near-term
Stagnation.
-By Ryan Morgan
[email protected]
Overview
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•
•
•
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
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
3
EM Handbook Overview Chapt 5
• “The How and Why of Economic Growth in India 19502012” –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
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Timeline of Average Growth Rates
Overall
1991
6.7%
4%
1950
1980
<1980
1980
<4%
5.4%
1990
2000
1991-1997
2010
2003
7.5% 5.4% 8.4%
2010-20012
5%
5
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)
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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:
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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,
Englishspeaking technical talent, transformed India into the outsourcing
capital of the world.”
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.
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Growth Vs Interest Rate
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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.
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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 rejects efficient
institutions and fiscal deficit as having a role.
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Legatum Article –Shikha Damalia
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.”
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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
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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 higher in the
130’s
• Fiscal Year
• April to March
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Current Standing
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Current Standing
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Sri Lanka (60)
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Pakistan (132)
Decline 2009-2013
Economic
Score Breakout
Overall Prosperity Index Change
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Changes
2009-2013
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Summary of Current Indicators
• Stagnation and Decline 2010-2013
• Room For Improvement
• Dream Team Failure
• Manmohan Singh (PM) Raghuram Rajan (RBI Chief)
• Indian Debt Rated Slightly higher than Speculative Grade
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How hard
is it
to do business in
Tata
Nano
India?
Tata Nano
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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
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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
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intervention?
The Result
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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.
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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
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Population Density WorldWide
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The Future
• Narendra Modi
• 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 34
Election Year”