Thirty years ago, the world saw the Indian and Chinese economies as being comparable. Both were considered engines of global growth. Today, the view looks different. China’s GDP and per capita income are nearly five times those of India. Meanwhile, India’s economic engine is sputtering — GDP growth today is the lowest it has been in six years.
In order to prevent the situation from worsening, the Modi government should pay undivided attention to getting growth back on track, says Duvvuri Subbarao, former governor of the Reserve Bank of India, and a research fellow at the Center for Advanced Study of India (CASI) at the University of Pennsylvania. He recently gave a talk at Penn titled, “Will the Indian Elephant Dance Again?”
Knowledge@Wharton interviewed Subbarao about his views on the Indian economy and how it can get back on track, among other issues. An edited transcript of the conversation follows. (Listen to the podcast at the top of this page.)
Knowledge@Wharton: Why is the elephant an apt metaphor for the Indian economy?
Duvvuri Subbarao: In development economics parlance, the East Asian economies — Taiwan, Korea, Singapore, Hong Kong — are referred to as the tigers. The next generation of fast growing Asian economies — Thailand, Philippines, Malaysia, Indonesia — are referred to as the cubs. China is called the dragon. All these countries delivered a growth miracle in the last 40 years. The first off the block were the East Asian tigers which moved from poverty to prosperous societies in just one generation even as they defied the Washington consensus and adopted a model of state-led capitalism. China accomplished an astonishing feat in the history of development economics, growing on an average at double-digit pace for about three decades on a trot.
The next growth miracle, hopefully, will be from India. India is referred to as an elephant because it is a strong animal with enormous potential but it moves at a lumbering pace. The hope is that it will start dancing and deliver the next growth miracle.
Knowledge@Wharton: Why hasn’t it been dancing so far?
Subbarao: Growth in India has slumped to 5%, or in fact less than 5%, on an annualized basis, causing a lot of anxiety both to the government and to all of us Indians. Growth has declined sharply because all growth drivers have petered out. Growth comes from private consumption, government consumption, investment and net exports. The investment driver petered out some years ago. Our net exports are actually deducting from growth. They used to contribute positively to growth, but they’re not doing so anymore. Over the last five years, the single growth driver has been consumption, both government and private. Government is unable to expand spending further because of fiscal constraints. Private consumption has slumped because credit is being choked and households have run down their savings. The net result is that not only is the elephant not dancing, it’s barely able to walk.
Knowledge@Wharton: Could you put India’s growth trajectory during the past 20 years into perspective? What major factors since 2000 have brought the economy to where it stands today?
“Growth has slumped because all growth drivers have petered out.”
Subbarao: That perspective is important. Twenty years ago, a remarkable confluence of circumstances generated and strengthened the view that India had arrived. There was a structural upturn in the economy triggered by an unprecedented investment boom, accompanied by an unprecedented credit boom. Huge investments were made into production and into infrastructure. Investment as a proportion of GDP went as high as 38%. The India growth story started unfolding. In the five years before the global financial crisis, we clocked 8.5% to 9% annual growth on average. We weathered the global financial crisis reasonably well and came out of the crisis sooner than most emerging economies.
Things started unraveling around 2010 when many projects got delayed. Investments soured. Bad loans mounted. The financial sector came under stress. In popular perception, this reversal in prospects is associated with crony capitalism. While there certainly was a bit of that, it will be misleading to attribute the entire downturn to crony capitalism; there were several other factors at play. For example, much of this investment went into infrastructure, which was an uncharted territory both for the corporates investing and for the banks lending to them. The projects were based on demand projections far into the future assuming a high-growth scenario, which was simply unrealistic. Then there were delays in projects because of delays in clearances and permissions. Court orders cancelling some government decisions added to the delays. As a result of all these factors, the investment engine switched off. With investment and net exports not contributing substantially to GDP growth, during Prime Minister Modi’s first term in office, the economy was firing on a single engine, the engine of consumption. But even that consumption engine has now petered out with the result that growth has declined sharply to 5%.
Knowledge@Wharton: People often compare India and China. Why didn’t India follow the path blazed by China, as was widely expected?
Subbarao: If you go back 30 years, India and China were roughly at par, whether you compare by per capita income in terms of PPP [purchasing power parity] or by current market prices. Starting 1990, China zoomed whereas India just lumbered along. Today, China’s GDP is five times that of India. China’s per capita income is nearly five times India’s per capita income. The number of poor people China lifted out of poverty in the last three decades is unprecedented in human history, whereas India still has hundreds of millions of poor people. China is a middle middle-income country. India is a low middle-income country. China’s fear is that it will get locked into a middle-income trap. India’s fear is that it will get locked into a low-income trap. Growth in both India and China was driven by investment. But China’s investment boom continued, whereas India’s investments petered out.
Of course, when you compare India and China, you should not ignore other vital differences between the two giant economies. China is an authoritative regime; India is a democracy. China produced and exported with not much of the benefit ploughed back into domestic consumption, whereas India produced and passed on the benefits to the domestic economy, which boosted consumption, especially of the poorer sections of society. They were different growth models.
Knowledge@Wharton: Do you think India can replicate the Chinese model of export-led growth?
Subbarao: I do hope so, but it’ll be difficult. Prime Minister Modi has talked about engineering a manufacturing revolution in India, because we need to create jobs, hundreds of millions of jobs. We need not just growth, but job-intensive growth. Towards that endeavour, we need to engineer a manufacturing revolution because only the manufacturing sector can generate jobs of the type and in the numbers we want. Sure, we need to maximize exports as well, but whether we can be an export powerhouse like China is a different proposition. There are important differences between 1990, when China started its export drive, and 2019 — when India wants to be an export powerhouse.
“The original sin of not implementing reforms has caught up with us and the economy is down to 5% growth.”
In 1990, globalization was seen as a benign phenomenon, improving welfare in rich countries and in poor countries. Today, there’s a backlash against globalization; it’s viewed as a disruptive force that destroys jobs and erodes welfare. In 1990, world demand was expanding at a scorching pace. Today, world demand is subdued, and is unlikely to revive to the pre-crisis levels because of what is termed ‘secular stagnation.’ In the 1990s, global value chains were becoming the cornerstone of manufacturing. Today, the global value chain model is eroding because of advances in machine learning, artificial intelligence and robotics. Because of all these headwinds today as compared to the 1990s, it will be difficult for India to replicate the China model of export-led growth.
Knowledge@Wharton: When the first Modi administration took office in 2014, it inherited a structural downturn whose roots go back to 2010. Since the Modi government enjoyed widespread business support, hopes were high that the economy would forge ahead. But that didn’t happen. Why did the process of economic reform stall?
Subbarao: I wish I had a credible answer. It is true that there was a lot of business support for Prime Minister Modi when he first came into office nearly six years ago. In fact, in 2014, Modi campaigned mainly on an economic platform — that he would create jobs and revive investment. There were high hopes and expectations that he would plunge headlong into implementing structural reforms to redeem these campaign promises. That required political capital, and he had plenty of that. Arguably he had more political capital than any other recent prime minister. He had a rock solid majority in the Parliament. More than two-third of the states, accounting for over 80% of India’s GDP, were controlled by the BJP, his party.
Regardless, Modi seemed disinclined to invest his enormous political capital to implement the ‘politically’ difficult reforms. Sure, some important reforms got under way during his first term such as the implementation of a nation-wide GST (goods and services tax), the enactment of the bankruptcy code and the inflation targeting framework of the Reserve Bank. But he initiated none of these reforms; these were all initiatives that he inherited. It’s happenstance that they culminated on his watch. On his own, Modi did not initiate any notable fresh economic reform. Early in his first term, he attempted land acquisition reform, but when there was a backlash he quickly gave up.
Modi somehow seemed to have succumbed to the mistaken belief that the economy will run on autopilot without any policy intervention. The original sin of not implementing reforms has now caught up with us and output growth is down to 5%.
Knowledge@Wharton: Since you are a former governor of the Reserve Bank of India, what is your view of the demonetization exercise that the government undertook in 2016? What are the reasons that prompted it? And what impact has it had on the Indian economy?
Subbarao: According to the government, there were several objectives behind demonetization. It was to attack black money. It was to attack counterfeiting of currency and financing of terrorism. It was also to shift the economy from a cash intensive to a cash-light mode. Whether something as draconian as demonetization was necessary to achieve any of these objectives is questionable. Even allowing for the benefit of the doubt, only the first objective, of attacking black money, justifies something as extreme as demonetization. But even there, the justification is weak. The argument is that people who hoarded black money wouldn’t be so stupid as to retain it in the form of cash. They’d have already converted it into gold, jewelry, real estate or moved it into Swiss bank accounts.
Looking back, now that the dust has settled, the economy paid a heavy price. Hundreds of millions of low-income households who operate in the informal sector, where transactions are almost entirely in cash, suffered enormous losses. Many of them lost jobs; even their livelihood. The economy lost up to 1.5 percentage points of growth.
“[It] will be difficult for India to replicate the China model of export-led growth.”
It’s not clear that the objectives have been realized. All of the Rs.15 trillion ($211 billion) of cash that was demonetized had come back into the banking system. On the face of it, no black money has been unearthed. Undaunted, the government claims that there will be long term sustainable benefits. How will they materialize? They will materialize through, for example, the tax-GDP ratio going up on a structural basis because of the fear of getting caught. It will materialize through a decline in corruption, which will improve the ease of doing business, drive investment up which, in turn, will boost growth. These are hard to measure benefits, and in any case will take time to materialize.
Knowledge@Wharton: What are the biggest risks the Indian economy faces at present? If you were the RBI governor today, what advice would you give the Modi government about how to turn the economy around?
Subbarao: The biggest risk, I think, is that India will slip into a new Hindu rate of growth; get locked into a low-growth spiral. That’s possible — but not probable and certainly not inevitable. India has the potential to grow faster, indeed significantly faster. To realize that potential, we need to raise investment, and implement policies to improve the productivity of investment. And in order to convert faster growth into poverty reduction, we need to address agricultural distress, create jobs, improve outcomes in education and health, and deepen the skill endowment. As much as the objectives are clear, the agenda too is clear: [We need] structural reforms addressing the real sectors of the economy, and governance reforms to improve the ease of doing business.
What advice would I give the Modi government? I am sure the prime minister is not handicapped by lack of advice. For sure, he is getting a lot of advice, and very competent advice at that. Anyway, since you asked, should I have the opportunity, I will tell the prime minister, “It’s the economy, sir.” What Prime Minister Modi should do, in my view, is to wholeheartedly embrace responsibility for reviving the economy. He should make an unequivocal statement that repairing the economy, putting it on track to a five trillion output as quickly as possible, will be his single-point agenda, and will receive his undivided attention, to the exclusion of all other social and political concerns. To be credible on that, he should back up that statement with an action plan and a roadmap with clear milestones and measurable outcomes.
Knowledge@Wharton: India’s financial sector — both the shadow-banking sector as well as the mainstream banks — is in trouble. What needs to be done to turn that around?
Subbarao: You are right. The financial sector, both the banking sector and the shadow bank sector — what we in India call the non-bank finance company (NBFC) sector — are deeply stressed. The banking sector stress is a result past investments having soured for the reasons that we discussed earlier. The mechanisms for recovery were feeble, and in any case, banks were reluctant to enforce even those feeble mechanisms because a perverse system of incentives was at play. The system of rewards and penalties was such that there was an incentive in not recognizing a bad loan, and instead to camouflage it by evergreening it. As a result, the bad loan problem grew in size, festered and eventually became explosive.
“[We need] structural reforms addressing the real sectors of the economy, and governance reforms to improve the ease of doing business.”
The problem on the NBFC side roughly paralleled that in the banking sector. The loan default by the umbrella infrastructure finance company — IL&FS — last year had a huge knock on impact on the entire nonbank finance sector. Note that with banks in distress, it was the non-bank sector that was lending for consumption, which in turn was fuelling growth. But with the NBFC sector coming under distress too, the credit channel got choked, consumption slowed and growth slumped.
It’s now become common parlance to describe India’s financial sector problem as the “triple balance sheet” problem. The balance sheets of banks, of non-banks and of the corporates are all in distress and need to be repaired.
The task is clear and so is the action plan. Public sector banks need to be capitalized. Given its fiscal constraints, the government simply does not have the resources to capitalize to the full extent necessary. It’s time to stop treating public sector banks as holy cows, and own up to the fact that at least some public sector banks need to be privatized. On the NBFC side, those that are not just illiquid but insolvent should be allowed to die under the bankruptcy process. And, finally, now that the ambiguities in the bankruptcy code have been resolved, the process must be expedited so that confidence revives and new investments come on stream.
Knowledge@Wharton: Has the integrity of institutions like the Reserve Bank of India been compromised because of political and economic pressures? If so, what can be done?
Subbarao: That question defies a binary yes or no answer. Although your question is about institutions in general, let me talk about the Reserve Bank because I’m familiar with the RBI.
At the end of 2018, there was an acrimonious spat between the government and the Reserve Bank of India that played out in the public domain for several weeks. Differences, or even spats, between governments and central banks are neither unique to India nor are they new. There was a spat here in the in the U.S. with President Trump tweeting that the Fed had gone crazy. There were similar spats between governments and central banks in Turkey, in Europe and in Japan. So what happened in India was not unique. Such spats are not new either. There were differences between the government and the RBI before me, during my time, and after my time. What was different this time around was that the differences played out in the public domain. And they got politicized.
All of that is behind us now and things seem to have settled into a new equilibrium.
“Modi should make an unequivocal statement that repairing the economy … will be his single point agenda and will receive his undivided attention.”
For the long-term, I think it’s important for the government to recognize the significance of the autonomy of the central bank and respect that, and it’s equally important for the central bank to recognize the limits of its autonomy.
After all, why is it that a central bank should be autonomous? Let me spend a minute on that. Around the world, central banks are accorded a certain amount of autonomy because it is believed that an autonomous central bank is necessary for sound macroeconomic management. Preserving macroeconomic stability, which is a necessary condition for sustained growth, requires taking a long-term view of the economy and taking decisions that might run counter to short-term compulsions. Such decisions might inflict pain in the short term, but they deliver long-term gains. You cannot leave such decisions to politicians, who typically have a short-term outlook driven by electoral cycles. Mind you, here I am talking about all countries, not just India. Everywhere, especially in democracies, politicians tend to compromise long-term sustainability for short-term gains. It is to manage these horizon differences that it’s important to have an apolitical central bank, with autonomy and with a mandate to take a long-term view of the economy.
Going forward, in India I think it’s important to institutionalize a code of conduct both for the government and the RBI with regard to autonomy. Government is sovereign and there are obvious limits to the central bank’s autonomy. The government, on its part, should realize that its job is only to set the mandate, but not to tell the RBI how to deliver on that mandate. RBI, on its part, should realize that it is limited by the mandate set by the government. In other words, that it has no goal independence but only instrument independence. And that, I think, will be a Goldilocks relationship.
Knowledge@Wharton: You were the governor of the RBI from 2008 to 2013. It was a very critical period when the global financial crisis ravaged the world economy. You even wrote a book about leading the RBI through five turbulent years. What challenges did you face leading the RBI during that time? How did you deal with those challenges and what lessons can others learn from your experience?
Subbarao: I went in as governor of the RBI on September 5, 2008. On the 7th, Fannie and Freddie went into conservatorship. On the 8th, Countrywide Financial went down. On the 10th, AIG came to the brink of a meltdown. On the 13th, Merrill Lynch vanished. And on the 16th, the big bang — Lehman Brothers collapsed. The global financial sector came to a near-death experience. The global economy plunged into the biggest and deepest downturn since the Great Depression of the 1930s.
Virtually every country in the world was affected by the crisis – and so was India. But in India, there was dismay, disbelief and denial that we could be affected by the crisis. The story going around was that ‘this new governor came and he brought on the crisis.’ I had no option but to go along with that. Wherever I went — within the country or outside — people used to ask me, “Why is India affected by the crisis and when we will get out of it?” My stump answer was, “Since you say I brought on the crisis to India, that the crisis started with me, it will end only when my term is over.” And for good measure, I used to tell them when my term would end. But here’s the thing: The week after I left the Reserve Bank, the crisis ended. Growth started going up. Inflation started going down. The rupee stabilized. If there was one prophecy I wanted to be wrong on, it was this.
It was baptism by fire for me.
Regarding your question about leadership, the crisis threw up lots of leadership lessons, but I will talk about just one, which is how important it is for a leader to have credibility. When I went in as governor, I was an unknown civil servant who suddenly became governor. In other words, I abruptly shifted from being an unknown unknown to a known unknown. But the governor has to be a known quantity. The markets and other stakeholders need to be able to interpret the governor’s style and stance and understand his nuance and body language. This process inevitably takes time, but such time was denied to me. There was a lot of anxiety in the markets about whether I, a greenhorn governor, could manage the crisis. The markets did not have confidence in me. That was bad enough. But what compounded matters was that I had no credibility. There was this view that I was sent into the Reserve Bank by the government to act at the government’s bidding, that I would compromise the Reserve Bank’s autonomy to implement government instructions.
“Credibility is not given to you on a platter. You have to earn it.”
All these doubts and suspicions swirled in a time of crisis when governments and central banks had to work together. Everywhere around the world, governments and central banks were working together and in close coordination – here in the U.S., in the U.K., and in Europe, Japan and China. But in India, when the government and the Reserve Bank were working together, it was interpreted as my taking instructions from the government and in the process compromising the Reserve Bank’s autonomy. The sum and substance of all this was that circumstances conspired against me to deny me the credibility required of a leader. And that in turn threatened to erode my effectiveness. The lesson from my ‘crisis’ experience is that to be effective, a leader needs to have credibility. And credibility is not given to you on a platter. You have to earn it.
Knowledge@Wharton: How did you earn it?
Subbarao: Well, you must go through the slog. In a situation like mine, I couldn’t have earned credibility simply by declaring that that I am independent, that I will preserve and protect the autonomy of the Reserve Bank of India and that I will not succumb to pressures. Credibility has to be earned, not through words, but through actions and behaviour. And that inevitably takes time. I can say with some satisfaction that when I look back on my record, I believe I have earned a reasonable reputation for standing for the autonomy of the Reserve Bank of India. And that I believe came through an evaluation of my actions.
Knowledge@Wharton: There has been a lot of discussion these days about central banks launching their own digital currencies. Do you think this is a good idea?
Subbarao: I’m not sure there is a clear-cut answer. As of now, opinion is divided.
Money, as we know, has three functions. It’s a unit of account, a medium of exchange and a store of value. Money issued by central banks, which is the norm around the world, performs all these three functions. Such money is uncontested legal tender.
Technological advances over the last 10 to 15 years have made possible crypto currencies. Bitcoin was the first into the market, but now there are possibly 50 to 60 crypto currencies. What is common to all of them is the underlying block chain technology and a decentralized management. None of them is obviously legal tender; in other words, one can refuse to transact in them.
A central bank digital currency (CBDC) is a different proposition, different from these commercial crypto currencies, because a CBDC will be able to perform like money. It will be able to perform all the three functions of money that I listed above. It will be like traditional money except that it will be in a digital form. The main advantage will be that a CBDC will make payment systems more efficient. For example, at present if I have to transfer money to you, we need the intermediation of a commercial bank; but if there was a CBDC, you and I could transact directly through our central bank accounts. It is also argued that a CBDC will make monetary policy transmission more efficient, especially in a situation of negative interest rates, which is now the case in some rich countries.
On the other hand, a CBDC is not costless. For example, if there was a CBDC, it’s possible that commercial banks might be undermined. Commercial banks, after all, perform an important function of financial intermediation. That might be undermined. Also, the central bank might expose itself to credit risk, and should that risk materialize, the cost will be borne by taxpayers. So, it’s not as if a central bank digital currency is unambiguously good. Let me also add that it’s not as if central banks currently don’t issue digital currencies. They do, but they issue them only to commercial banks. So, the question is, how do they expand the realm of CBDCs? Open up CBDCs first to nonbank financial companies, then to nonbank nonfinancial companies, and eventually to ordinary people like you and me? Can that be managed? Is it necessary at all? What implications will it have?
These are all important questions without clear answers as yet. I think central banks are now in a wait and watch mode. They want to understand the full implications and have a better understanding of the costs and benefits before moving forward. But some central banks, like in Sweden and China, are going forward at a rapid pace.
Knowledge@Wharton: If India were to try and launch a digital currency, how would it be done there? And how might that process differ from the way it could be done in, say, a developed economy like the U.S.?
Subbarao: I heard the governor of the Reserve Bank of India recently comment on whether the Reserve Bank will issue a digital currency. He said that they’re watching the situation. He didn’t close the option, but he did not also say that the RBI is going to adopt a CBDC soon. India’s main motivation for launching a CBDC would be to promote financial inclusion. Technology has been the main force behind the deepening of financial inclusion in India over the last 10 years and a CBDC can potentially help accelerate and deepen the financial inclusion.
To your second question, about how it might differ from a digital currency issued by the Federal Reserve — I’m thinking on my feet now — you’ve got to recognize that the dollar is the dominant reserve currency today. If the Federal Reserve were to issue a digital currency, it will very soon become the currency for the international payment system whereas a digital currency issued by the Reserve Bank of India will not enjoy that status.
Knowledge@Wharton: To end with the question with which we began, when will the Indian elephant start dancing again?
Subbarao: I hope it will start dancing soon. The elephant, you must recognize, is a strong animal and has great potential. Once it starts dancing, it can go on and on for a long time.
The economic development in India followed socialist-inspired politicians for most of its independent history, including state-ownership of many sectors; India’s per capita income increased at only around 1% annualised rate in the three decades after its independence. Since the mid-1980s, India has slowly opened up its markets through economic liberalisation. After more fundamental reforms since 1991 and their renewal in the 2000s, India has progressed towards a free market economy.
In the late 2000s, India’s growth reached 7.5%, which will double the average income in a decade. IMF says that if India pushed more fundamental market reforms, it could sustain the rate and even reach the government’s 2011 target of 10%. States have large responsibilities over their economies. The average annual growth rates (2007–12) for Gujarat (13.86%), Uttarakhand (13.66%), Bihar (10.15%) or Jharkhand (9.85%) were higher than for West Bengal (6.24%), Maharashtra (7.84%), Odisha (7.05%), Punjab (11.78%) or Assam (5.88%).India is the sixth-largest economy in the world and the third largest by purchasing power parity adjusted exchange rates (PPP). On per capita basis, it ranks 140th in the world or 129th by PPP.
The economic growth has been driven by the expansion of the services that have been growing consistently faster than other sectors. It is argued that the pattern of Indian development has been a specific one and that the country may be able to skip the intermediate industrialisation-led phase in the transformation of its economic structure. Serious concerns have been raised about the jobless nature of the economic growth.
Favourable macroeconomic performance has been a necessary but not sufficient condition for the significant reduction of poverty amongst the Indian population. The rate of poverty decline has not been higher in the post-reform period (since 1991) . The improvements in some other non-economic dimensions of social development have been even less favourable. The most pronounced example is an exceptionally high and persistent level of child malnutrition (46% in 2005–6).
The progress of economic reforms in India is followed closely. The World Bank suggests that the most important priorities are public sector reform, infrastructure, agricultural and rural development, removal of labour regulations, reforms in lagging states, and HIV/AIDS. For 2018, India ranked 77th in Ease of Doing Business Index. According to Index of Economic Freedom World Ranking an annual survey on economic freedom of the nations, India ranks 123rd as compared with China and Russia which ranks 138th and 144th respectively in 2014.
At the turn of the century India’s GDP was at around US$480 billion. As economic reforms picked up pace, India’s GDP grew five-fold to reach US$2.2 trillion in 2015 (as per IMF estimates).
India’s GDP growth during January–March period of 2015 was at 7.5% compared to China’s 7%, making it the fastest growing economy. During 2014–15, India’s GDP growth recovered marginally to 7.3% from 6.9% in the previous fiscal. During 2014–15, India’s services sector grew by 10.1%, manufacturing sector by 7.1% & agriculture by 0.2%. Indian Economy Grows at 7.6 & 7.1 in FY 2015–16 and FY 2016–17 Respectively as Major Reforms had Been Taken Place like Demonitisation and Implementation of GST in FY 2016–17 the Economic Growth has Been Slow Down in 2017–18 as it is Expected to Grow at 6.7 and Forecasted to Rebound by 8.2% in 2018–19 .
GDP growth rate
Since the economic liberalisation of 1991, India’s GDP has been growing at a higher rate. The following table has been collected from public data archives with data from the World Bank:
Year Growth (real) (%)
GDP growth rate is unequal within India. For the year 2015–16, GDP growth rates of Andhra Pradesh (10.99%), Bihar (10.27%) and Madhya Pradesh (10.16%) were higher than Maharashtra (8%), Odisha (6.16%) and Punjab (5.96%).
47 Indian companies were listed in the Forbes Global 2000 ranking for 2015. The 10 leading companies were:
World Rank Company Logo Industry Revenue
(billion $) Profits
(billion $) Assets
(billion $) Market Value
142 Reliance Industries
Oil & Gas Operations 71.7 3.7 76.6 42.9
152 State Bank of India
Banking 40.8 2.3 400.6 33
183 Oil and Natural Gas Corporation
Oil & Gas Operations 28.7 4.4 59.3 43.7
263 Tata Motors
42.3 2.7 34.7 28.8
283 ICICI Bank
Banking 14.2 1.9 124.8 30
Utilities 12.9 1.9 35.4 20.2
463 Tata Steel
Materials 32.77 3.08 31.16 2.46
349 Indian Oil Corporation
Oil & Gas Operations 74.3 1.2 44.7 14.6
Banking 8.4 1.4 84.3 41.6
Information Technology 15.1 3.5 11 80.3
Pre-liberalisation period (1947–1991)
Indian economic policy after independence was influenced by the colonial experience, which was seen as exploitative by Indian leaders exposed to British social democracy and the planned economy of the Soviet Union. Domestic policy tended towards protectionism, with a strong emphasis on import substitution industrialisation, economic interventionism, a large government-run public sector, business regulation, and central planning, while trade and foreign investment policies were relatively liberal. Five-Year Plans of India resembled central planning in the Soviet Union. Steel, mining, machine tools, telecommunications, insurance, and power plants, among other industries, were effectively nationalised in the mid-1950s.
Jawaharlal Nehru, the first prime minister of India, along with the statistician Prasanta Chandra Mahalanobis, formulated and oversaw economic policy during the initial years of the country’s independence. They expected favourable outcomes from their strategy, involving the rapid development of heavy industry by both public and private sectors, and based on direct and indirect state intervention, rather than the more extreme Soviet-style central command system. The policy of concentrating simultaneously on capital- and technology-intensive heavy industry and subsidising manual, low-skill cottage industries was criticised by economist Milton Friedman, who thought it would waste capital and labour, and retard the development of small manufacturers. The rate of growth of the Indian economy in the first three decades after independence was derisively referred to as the Hindu rate of growth by economists, because of the unfavourable comparison with growth rates in other Asian countries.
I cannot decide how much to borrow, what shares to issue, at what price, what wages and bonus to pay, and what dividend to give. I even need the government’s permission for the salary I pay to a senior executive.
— J. R. D. Tata, on the Indian regulatory system, 1969.
Since 1965, the use of high-yielding varieties of seeds, increased fertilisers and improved irrigation facilities collectively contributed to the Green Revolution in India, which improved the condition of agriculture by increasing crop productivity, improving crop patterns and strengthening forward and backward linkages between agriculture and industry. However, it has also been criticised as an unsustainable effort, resulting in the growth of capitalistic farming, ignoring institutional reforms and widening income disparities.
In 1984, Rajiv Gandhi promised economic liberalization, he made V. P. Singh the finance minister, who tried to reduce tax-evasion and tax-receipts rose due to this crackdown although taxes were lowered. This process lost its momentum during later tenure of Mr. Gandhi as his government was marred by scandals.
Post-liberalisation period (since 1991)
The collapse of the Soviet Union, which was India’s major trading partner, and the Gulf War, which caused a spike in oil prices, resulted in a major balance-of-payments crisis for India, which found itself facing the prospect of defaulting on its loans. India asked for a $1.8 billion bailout loan from the International Monetary Fund (IMF), which in return demanded de-regulation.
In response, the Narasimha Rao government, including Finance Minister Manmohan Singh, initiated economic reforms in 1991. The reforms did away with the Licence Raj, reduced tariffs and interest rates and ended many public monopolies, allowing automatic approval of foreign direct investment in many sectors. Since then, the overall thrust of liberalisation has remained the same, although no government has tried to take on powerful lobbies such as trade unions and farmers, on contentious issues such as reforming labour laws and reducing agricultural subsidies. By the turn of the 21st century, India had progressed towards a free-market economy, with a substantial reduction in state control of the economy and increased financial liberalisation. This has been accompanied by increases in life expectancy, literacy rates, and food security, although urban residents have benefited more than rural residents.
While the credit rating of India was hit by its nuclear weapons tests in 1998, it has since been raised to investment level in 2003 by Standard & Poor’s (S&P) and Moody’s. India experienced high growth rates, averaging 9% from 2003 to 2007. Growth then moderated in 2008 due to the global financial crisis. In 2003, Goldman Sachs predicted that India’s GDP in current prices would overtake France and Italy by 2020, Germany, UK and Russia by 2025 and Japan by 2035, making it the third-largest economy of the world, behind the US and China. India is often seen by most economists as a rising economic superpower which will play a major role in the 21st-century global economy.
Starting in 2012, India entered a period of reduced growth, which slowed to 5.6%. Other economic problems also became apparent: a plunging Indian rupee, a persistent high current account deficit and slow industrial growth.
India started recovery in 2013–14 when the GDP growth rate accelerated to 6.4% from the previous year’s 5.5%. The acceleration continued through 2014–15 and 2015–16 with growth rates of 7.5% and 8.0% respectively. For the first time since 1990, India grew faster than China which registered 6.9% growth in 2015. However the growth rate subsequently decelerated, to 7.1% and 6.6% in 2016–17 and 2017–18 respectively, partly because of the disruptive effects of 2016 Indian banknote demonetisation and the Goods and Services Tax (India). As of October 2018, India is the world’s fastest growing economy, and is expected to maintain that status for at least three more years.
India is ranked 77th out of 190 countries in the World Bank’s 2018 ease of doing business index, up 23 points from the last year’s 100 and up 53 points in just two years. In terms of dealing with construction permits and enforcing contracts, it is ranked among the 10 worst in the world, while it has a relatively favourable ranking when it comes to protecting minority investors or getting credit. The strong efforts taken by the Department of Industrial Policy and Promotion (DIPP) to boost ease of doing business rankings at the state level is said to impact the overall rankings of India.
India’s resource consumption
India consumes the second-largest amount of oil in the Asia-Pacific region behind China. The combination of rising oil consumption and fairly unwavering production levels leaves India highly dependent on imports to meet the consumption needs.
As per the Oil and Gas Journal, India had 38 trillion cubic feet (1.1×1012 m3) of confirmed natural gas reserves in 2004.
India imports small amounts of natural gas. In 2004, India consumed about 1,089×109 cu ft (3.08×1010 m3) of natural gas, the first year in which the country showed net natural gas imports. During 2004, India imported 93×109 cu ft (2.6×109 m3) of liquefied natural gas (LNG) from Qatar.
As in the oil sector, India’s state-owned companies account for the bulk of natural gas production. ONGC and Oil India Ltd. (OIL) are the leading companies with respect to production volume, whilst some foreign companies take part in upstream developments in joint-ventures and production sharing contracts (PSCs). Reliance Industries, a privately owned Indian company, will also have a bigger role in the natural gas sector as a result of a large natural gas find in 2002 in the Krishna Godavari basin.
The Gas Authority of India Ltd. (GAIL) holds an effective control on natural gas transmission and allocation activities. In December 2006, the Minister of Petroleum and Natural Gas issued a new policy that allows foreign investors, private domestic companies, and national oil companies to hold up to 100% equity stakes in pipeline projects. Whilst GAIL’s domination in natural gas transmission and allocation is not ensured by statute, it will continue to be the leading player in the sector because of its existing natural gas infrastructure.
Regulation and public sector
India ranked 77 on the Ease of Doing Business Index in 2018, compared with 137 for Pakistan, 46 for People’s Republic of China, 146 for Nigeria, 109 for Brazil, and 73 for Indonesia.
India’s labour force is growing by 2.5% every year, but employment is growing only at 2.3% a year. Official unemployment exceeds 9%. Regulation and other obstacles have discouraged the emergence of formal businesses and jobs. Almost 30% of workers are casual workers who work only when they are able to get jobs and remain unpaid for the rest of the time. Only 10% of the workforce is in regular employment. India’s labour regulations are heavy even by developing country standards and analysts have urged the government to abolish them.
From the overall stock of an estimated 458 million workers, 394 million (86%) operate in the unorganised sector (of which 63% are self-employed) mostly as informal workers. There is a strong relationship between the quality of employment and social and poverty characteristics. The relative growth of informal employment was more rapid within the organised rather than the unorganised sector. This informalisation is also related to the flexibilisation of employment in the organised sector that is suggested by the increasing use of contract labour by employers in order to benefit from more flexible labour practices.
Children under 14 constitute 3.6% of the total labour force in the country. Of these children, 9 out of every 10 work in their own rural family settings. Around 85% of them are engaged in traditional agricultural activities. Less than 9% work in manufacturing, services and repairs. Child labour is a complex problem that is basically rooted in poverty. The Indian government is implementing the world’s largest child labour elimination program, with primary education targeted for ~250 million. Numerous non-governmental and voluntary organisations are also involved. Special investigation cells have been set up in states to enforce existing laws banning employment of children (under 14) in hazardous industries. The allocation of the Government of India for the eradication of child labour was US$10 million in 1995–96 and US$16 million in 1996–97. The allocation for 2007 is US$21 million(Wikipedia)..
About 1.2 billion people in developing nations lack clean, safe water because most household and industrial wastes are dumped directly into rivers and lakes without treatment. This contributes to the rapid increase in waterborne diseases in humans. Out of India’s 3119 towns and cities, just 209 have partial treatment facilities, and only 8 have full wastewater treatment facilities (WHO 1992). 114 cities dump untreated sewage and partially cremated bodies directly into the Ganges River. Downstream, the untreated water is used for drinking, bathing, and washing. This situation is typical of many rivers in India as well as other developing countries. Globally, but especially in developing nations like India where people cook with fuelwood and coal over open fires, about 4 billion humans suffer continuous exposure to smoke. In India, particulate concentrations in houses are reported to range from 8,300 to 15,000 μg/m3, greatly exceeding the 75 μg/m3 maximum standard for indoor particulate matter in the United States. Changes in ecosystem biological diversity, evolution of parasites, and invasion by exotic species all frequently result in disease outbreaks such as cholera which emerged in 1992 in India. The frequency of AIDS/HIV is increasing. In 1996, about 46,000 Indians out of 2.8 million (1.6% of the population) tested were found to be infected with HIV.
To make India a $ 5 tn economy by 2030, and to achieve consistent 8% growth, NITI Aayog has released a comprehensive document titled ‘Strategy for New India @75’. Its main objectives are –
1. Doubling farmers’ incomes.
2. Creating an all India talent pool for the entre and States together – such as the All India Services.
3. Providing a major boost to the ‘Make in India’ campaign.
4. Achieving 22% tax to GDP ratio by 2023 – up from the current 17%.
5. Achieving 36% of investment rate by 2023 – up from the current 29%.
Guided by unwavering democratic credentials and strong government leadership, India is an emerging superpower with a vibrant economic climate. Under Prime Minister Narendra Modi, India’s growth rate in the last quarter has been pegged at 7.7%. And with an ever – expanding middle – class base and youth demographic, the opportunity for business has never been better(INVEST INDIA).
“Indian Economy, which was considered the world’s fourth fastest-growing economy, is now facing a deep slowdown. It seems the economy has lost its sheen in the year 2019 says writer Daniel Moss in a piece on slowing down the economy in Bloomberg’s opinion.
The article says that it is rare to see such a humbling turn in fortunes of a major economy like India. According to the latest indicators, in the third quarter, India’s gross domestic product rose 4.5 from a year earlier. Consumer confidence has tumbled to the lowest level since 2014. The labor market, a vital indicator in a country with a population of 1.4 billion, is fragile: The jobless rate has climbed to a 45-year high of 6.1%.
If we compare the growth of India’s economy with a smaller country like the Philippines and Indonesia, they grew quicker than India last quarter and Malaysia was just a hair behind. China, grappling with its slowdown, logged a respectable 6% and Vietnam was way ahead at 7.3%.
In the last few years, Indian banks are struggling with bad loans. The condition can be understood by the fact that one of the most prominent, Infrastructure Leasing & Financial Services Ltd., defaulted last year, setting off a liquidity crisis.
While the government took control of the company to contain the damage, their work was just beginning: Last month, the central bank removed the management of Dewan Housing Finance Corp., a big player in mortgages, and sent it to the bankruptcy court. Lenders have pulled in their reins across the board.
The article of Bloomberg talks about Reserve Bank of India’s approach in curbing the slowdown. In difficult times, central bankers usually keep a firm and credible hand on the rudder. But the RBI has surprised investors a few times this year. An unusual 35 basis-point cut in August, rather than the quarter percentage point economists anticipated, looked frivolous rather than clever. A reduction this month seemed like a sure thing until officials balked. That was a shocking mistake.
Unreliable statistics are also a matter of concern for the Indian economy. An academic paper by a former aide to Prime Minister Narendra Modi reckons growth over the past few years was a lot closer to the third quarter’s 4.5% figure. Repairing data during a slump is tough because even incremental progress will be overshadowed by unflattering year-ago comparisons.
The defenders of India usually give the argument that India is a democracy and it is unfair to compare the country with China. India has a federal system and an independent judiciary, they argue. This system males impossible the kind of sweeping that Deng Xiaoping forced on China, which transformed the mainland into export and manufacturing powerhouse. Fair enough; during good times, however, Indian leaders said little to rebut the comparison.
However, this article also talks about the positive signs for the economy in the future. It says the slump doesn’t have to be the end of India’s run. India will always be more important to the world economy than the Philippines or Malaysia. Even if its economy grows at a slower pace, the contribution to the world economy would be larger due to the size of the Indian economy.
According to Shilan Shah of capital economics, as soon as next year, India’s monetary and fiscal stimulus will begin to kick in. The economy will likely grow by about 5% this year and pick up to 6% in 2020.
India may yet reclaim its mantle as the next big thing, albeit a toned-down and more durable version. The country and the world could be well-served by this brush with reality.”( Indian economy is suffering but the future is bright, Biz,indica News).
“”The Nikkei/IHS Markit Services Purchasing Managers’ Index rose to 53.3 in December from November’s 52.7, holding above the 50-mark that separates growth from contraction for the second straight month.
“It’s encouraging to see the Indian service sector continuing to recover from the subdued performances noted in September and October,” Pollyanna De Lima, principal economist at IHS Markit, said in a release.
“More importantly, the news of sustained job creation, robust new order growth and a pick-up in business confidence suggest that expansion can be maintained in the early part of 2020.”
A sub-index tracking new business climbed to its highest since October 2016, encouraging firms to increase headcount. Service providers were more optimistic about growth in the year ahead and international demand continued to rise.”
(Buoyant demand boosts India services activity to 5-month high in December, January 06, 2020 01:35 PM IST CNBC TV18).
Source: Strategic Study India
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