The Economic Reforms in India - Term Paper Example

The Economic Reforms in India Introduction: India – an abode of more than 1 billion citizens with dominating middle of approximately 350 million has been the major attraction for foreign investers because of its potential of being the largest market in the world. One thing here is very important to be noted that the middle class population of India, that is 350 million people is even more than the entire population of USA. It is very close to the European Union. Goldman Sachs, renowned consulting group has researched four countries. Those countries are Brazil, Russia, India and China. They are known as BRIC. These are the major countries of the world that have already started influencing the global economy. A recent research conducted on BRIC, India would overtake most of the G-8 countries in a few decades time from now starting with UK, Italy, France and Germany by the year 2025. One such study commissioned by Goldman Sachs came to the conclusion as depicted in the following graphical representation: “A recent survey of over 1000 top international companies showed that the two major attractions of India were (1) the potentially huge size of Indian market, and (2) the availability of an educated, skilled, English speaking labor force at competitive wages.”[1] India has become the 4th largest economy in the world with a Gross Domestic Product (GDP) of over US$ 3.8 trillion (Source: World Bank), inching closer to take over Japan (US$3.9 trillion – Source: World Bank) How did this change occur? Before 1991 India was contempt for being the poor country from third world. The growth rate was very slow then how this change took place? It is because of the globalization and the liberal economic policies which were adopted by the Indian government in 1991. Till 1990 the situation in Indian economy was really very critical and the economic progress was very slow. Indian economy was deeply in trouble before 1991. It was a closed economy with lack of foreign currency, gold reserves. The license raj was the major constraint in the economic growth. Almost in all sectors the progressed was stopped or it was insignificant. The gold was put for security to many foreign countries to get the money. India was about to ruin. No jobs, no infrastructure, no availability of basic needs, no roads, no telephones, and no housing. But after 1991 the picture started changing and the new economical trend was set up in India. The winds of globalization and liberalization started blowing in India after the Indian government initiated some remarkable changes in the economy of the country. It basically included the encouragement to privatization, policy changes like deregulation of state enterprises, diminution in tariff barriers; create the environment of promoting the private investment in infrastructure as well as manufacturing. The visionary economist Mr. Manmohan Singh was appointed as the finance minister and he changed the entire picture of Indian economy. So he is in real sense the architect of the Indian Economy. The Indian government adopted liberalization to survive in global market and cut throat competition. The economic reforms in India took place on three major areas such as liberalization, privatization, and globalization. In the areas of liberalization the licensing procedure and requirements was curtailed. Liberalization means to lessen the government restrictions on trade. Most of the countries around the world have adopted the policy of liberalization to face the competitive world. The economic reforms basically changed the face of the banking sectors, capital market, and debt market of Indian financial system Banking sector and liberalization: The government of India initiated the fundamental banking sector reform package in 1992, because it was realized that success of economic reform was dependent on the success of the reform in financial sector. The banking reform policy was based on the proposal given by Narsimhan Committee Report (1992) According to the proposal the banking system needs to be market oriented and it will operate in the environment of prudential regulation and transparent accounting. Thus as soon as the liberalization entered in banking sectors it led to a competitive environment and it helped to increase the efficiency as well as the productivity of the banks and they started showing remarkable performance Many research found the positive impact of liberalization on banking sectors in India. Attaullah, Cockerill, and Hang state that the efficiency of banking sector improved after liberalization in 1991[2] In a research of Indian Public Sector Banks, Ganesan (2001) it is found that the liberalization of the banking sector has increased the profitability of PSB as measured by ROA. The main factor for the improved profitability was an easing of the priority sector lending requirements. [3] “For India and China these studies provide evidence that it is possible to positively influence the rate of growth through liberalization of the banking sector.”[4] The main reforms in the banking sector after liberalization included “1] interest rate liberalization; 2] reduction in reserve requirements; 3] Entry deregulation; 4] credit policies; and 5] prudential supervision” [5] Globalization and Capital Market: After the commencement of the process of globalization in India, the capital market liberalization took place. Capital liberalization is associated with the relaxation in Government’s restrictions in the market. In this process not only the government the private investors can participate and the investors around the world can invest in the shares and bonds of other countries. Thus the developing countries like India, after the adoption of the liberalized economic policies opened their doors for the foreign investors and thus the foreign investments and capitals were welcomed. Due to the emancipated exchange of goods and services within and between countries circulation of money started increasing. Thus its result was very positive on the capital market. Non-tariff as well as tariff trade barriers are removed, and avoidable legislations and taxes are not imposed as a result. The parties involved in the trade get the benefits from the impacts of liberalization. Thus the productivity rate increased and the economic efficiency of the country also maximizes. Now due to the globalization the entire capital market has become a common global market and because of this also India got tremendous benefits.[6] India’s equity market rate has boomed from $57 billion in the early 1990s to $1.1 trillion in 2007. The public sector debt market is also in process of raising from 20% of GDP in the early 1990s to around 35% in 2007. Still it is very low as compared to other developed economies. Below is the chart which can better explain India’s position of DCM. [7] India’s increasing graph of progress after globalization: A Review: According to the report released by Forbes, India is having 36 billionaires with the combined assets of US$ 192 billion, the highest figures in Asia. After globalization and liberalization the index of industrial growth in India increased remarkably. India is now also one of the major players in automobile sector. The total number of vehicles sold exceeds 9 million and is expected to grow further. The industry experts have predicted that if the current development continued, the Indian auto manufacturers will be able to sell more than 10 million. India is the 2nd largest two-wheelers market in the world and the 4th largest commercial vehicle market in the world. The current market size of passenger cars put India at the 11th spot which is expected to move upward to the 7th rank by 2016. Many world leaders in automobile industry have already settled in Indian market. Among them are Mercedes, BMW, Porsche, Audi, Bentley and Rolls Royce etc. German luxury car maker Audi AG is also preparing to enter as well. This is not including those companies which have manufacturing facility in India such as Nissan, Toyota, Honda, Hyundai, GM, etc. The Indian automobile major TATA is already in the Turkish market with Mahindra & Mahindra trying to do the same. Mahindra & Mahindra has emerged as the 4th largest tractor brand in the US in the 15-90 horse power segments. Some of the major Fortune 500 companies in India: ABB, Allianz, ABN Amro, Alstom, British Petroleum, BASF, Bombardier, CISCO, Coca-Cola, Citigroup, Dupont, Electrolux, Ford, Federal Express, GE, GSK, General Motors, HSBC, Honeywell, IBM, Intel, Johnson & Johnson, Lafarge, LG, Metlife, MICO, Microsoft, Nestle, Novartis, Pepsico, Philips, Pfizer, Prudential, Saint Gobain, Samsung, Sony, Shell, Siemens, Toyota, Unilever, Visteon, Volvo, Whirlpool etc. The German companies established in India are Adidas Marketing, Baerlocher Additives, Basf Baumuller, Bayer, Beiersdorf, Bosch Group, Braun Medical, Burgmann, Carl Zeiss, Suspa Pneumatics, DHL Express, DMG, Durr, Fichtner, Henkel, Kluber Lubrication, Knorr Bremse, Carl Bechem, Lahmeyer International, Lapp, Pharmaplan Schuler Steag Encotec Stollberg, Abicor Binzel, Bajaj Allianz, Wurth Zeppelin Mobile Systems, Zwick Roell, Daimler Chrysler, etc. The British companies in India are Standard Chartered Bank, Barclays, BP, British Telecom, Cable & Wireless, Cadbury India, Cairn Energy, GSK Pharmaceuticals, HSBC, ICI India, Johnson Matthey, Logica Marconi Telecom, P&O Ports, Reuters, Scope International, Marks & Spencer, Shell India, CMG, Tesco, Aviva, Unilever, Virgin Atlantic etc. Apart from this India is making remarkable development in textile industry. As far as the telecommunication is concerned the growth is also satisfactory. India is adding approximately 6 million mobile connections every month and the total mobile connections stand at approximately 150 million. India can boast of being one among the top ten global suppliers of aluminum and steel in the world. Around 35 million tone of steel is produced in India and India is the larges producer of sponge iron in the world. India’s private sector steel giant TATA Steel has acquired NATSTEL of Singapore, Corus Steel and has planned for further acquisitions in Vietnam and Thailand. All these have made it the 5th largest steel company in the world. Mittal Steel which acquired Arcelor is the fastest growing steel manufacturing company in the world. They have many more acquisitions planned in coming future. Another steel maker ESSR is also making new inroads by expanding its production capacity both in India and abroad. India is also growing active day by day in the field of research and development. The research and development process is going on into the major areas of satellite fabrication, mobile technology, nano technology, bio technology, IT hardware, pharmaceuticals etc 65 institutions in India are engaged in carrying out only the genetic engineering research. India is one of the 6 countries in the world to manufacture and launch its own satellite. India has launched satellites for other countries including Germany and Korea as well. Swedish bus and truck maker Volvo has opened the technology center and a product development unit in Bangalore. A number of semi-conductor companies, both fab and fabless have either set up or outsourced their research and development in India. Such work includes ab-initio design, CAD, simulation, testing and fabrication. New sectors growing at a fast rate include cutting edge technologies such as embedded software, nano-technology, avionics, etc. India’s health care market has also growing rapidly. India has become a key player in generic medicine. The healthcare market is expected to grow from US$22.2 billion at present to US$50 billion by 2012. The capability of Indian doctors and healthcare practitioners can be proved from the fact that a very large number of doctors and healthcare practitioners in both the USA and the UK are from India. Phase of Recession and India Weakening of American economy was really a bad news. The recession looms over the United States and it has affected the entire world because the world economy is based on US economy. Recession is the most hyped word of today. Recession means the slowdown of the economy of any country or the fall in the GDP rate. Recession is the result of the consumer’s unwillingness to spend the money because he loses the confidence in the economic growth. In short when the economic growth of any country is showing negative growth rate it is the period of recession. Many nations are affecting very badly due to this global recession and Indian Economy is not at all an exceptional case. Not as much as USA but somehow the adverse effect of the recession is there in Indian Economy also. The reason is the Indian economy is based on the US economy. The global recession started spreading when Merrill Lynch, the financial institution of US went bankrupt because of the sub prime crisis. Soon after the fall of Merrill Lynch, it was the turn of Goldman Sach. After that one by one many companies started collapsing. The consequence of this is that the US economy started shaking. It not only affected the US economy but the other countries of the world also. India is also affected by the financial crisis took place in US. India’s GDP rate was very much related to the FDI (Foreign Directive Investment), FII (Foreign Institutional Investors), and foreign investment in India. When these financial institutions collapsed the clients of FII, FDI took out money from Indian Stock Market and the BSC sensex dropped down significantly from around 23000 to 8000. The worst impact of this was the people who had invested exorbitant amounts in the stock market lost their money. It was really a great trauma for them. Some of these people couldn’t bear the shock and they committed suicides. This was an unexpected and sudden trouble that nobody could do anything and the government also became helpless and confused. The GDP rate suddenly came down substantially. The global economic recession has spread its precarious impact on the Indian economy. The consequence of it was the multi-crore loss in business and export orders. Lots of job opportunities were suddenly disappeared and even the skilled talented high salaried employees had to loss their jobs. The worst affected sectors were especially the IT, automobiles, industry and export-oriented firms. The investment regime has also been shaken up, which is being restructured, with the telecom sector likely to be declared off-limits for foreign investors. The financial meltdown was a great shock for import and export. The rate of employment drastically fell down. Before the situation of financial meltdown, there were more than 1500 software firms in the country, while the employee base of the sector had grown to 553,000 (from 415,000 in FY 06). In 2008 Tata Consultancy Services (TCS) asked its 500 employees to resign from the company due to non-performance. Patni Computer Systems (PCS) has already laid off around 400 employees, or nearly 3% of its 14,800 workforce, for the same cause. While IBM Corp. followed suit in the case of 700 freshers. Wipro, the country’s third largest IT exporter, is also planning to boot 3,000 employees over performance-related issues. The reason behind the strong effect of recession particularly in IT sector is that around 75% or more of the revenue the IT sectors get from the US and if fortune 500 companies cut their IT budget, the direct and adverse impact will be on Indian firms. But still as compared to other countries yet the Indian economy is in much more better condition because of the efforts of government. Economy growth rate of India is better than the other European nations, it is 2nd to China. Even United States and the European countries are suffering from the negative growth rate. The timely efforts have been taken by the government. Reserve Bank of India is striving to provide liquidity in banking market by cutting different rates such as Cash Reserve Ratio (CRR), Repo Rate, Bank Rate, SLR etc. Various provisions have been taken to facilitate the foreign investment in Indian market. Various cost cutting efforts have been taken. In such a critical situation of global financial meltdown the efforts which the Indian Government is taking are really appreciable. The stability in economy is already seen in India. One more important thing here I would like to mention is that when the Western countries are nationalizing banking assets, at the same time Indian government is not willing to sell more than 49% in its state owned banks. As a result there is a control of around 70% on the banking assets. Plus India has not yet started full capital-account convertibility which is useful to protect its currency. India’s economical policies today are designed in such a manner that they have complete hold on the foreign borrowings by domestic companies and as a result it is not much dependent upon the global financial system. Though recession has hit the Indian Economy there are still hopes of being recovered from this economic catastrophe. Conclusion: The Indian economy has now entering in the new era of globalization and has totally left behind the old and outdated policies which were once a time the major hindrance to the growth of the country. It is because of the visionary leadership of India. In the great trouble of recession also India is less affected as compared to USA and the European countries. These leaders and the expert economists of India has kept the economy stable as much as possible. But the corruption and bureaucracy is still there which needs to be removed. The Indian economy has shaken America also and America has to take into consideration the Indian policies during the phase of recession. So if the bureaucracy and the corruption rate decrease India can definitely fight with China which as of now is very difficult but not impossible at the same time. Sources: 1. Globalization and India – Some Issues by Professor R.K. Gupta, Aravali Institute of Management, The quotation he has taken from the Global policy Council 2001, Report, Website: www.globalpolicy.org 2. Attaullah, Cockerill, and Hang (2004), pg1916, Galindo, Micco and Ordonez (2002), Pg7f; Humphrey and Pulley (1997), pg 91 3. (Ganesan (2001), pg 36) 4. Christian Roland, (Pg. 97) “Banking Sector Liberalization in India,” by Springer Publication, 2007 5. Reports on Trade and Progress of Banking in India and the appendix, “Banking Sector Reforms,” to the keynote speech by Deputy Governor Dr. Y.D. Reddy at the Conference on Growth, Governance, and Empowerment: The Future of India’s Economy at the University of California, Santa Cruz, on November 20, 1998 6. Capital market liberalization, Finance, mapofworld.com http://finance.mapsofworld.com/capital-market/liberalization.html 7. BIS, Goldman Sachs, data of December 2006 8. “Recession in India” September 6, 2009 http://www.xomba.com/my_view_recession 9. Recession in India: Challenges and Opportunities Galore by M.H.Ahssan, published: December 22, 2008, Website: http://indianmuslims.in/recession-in-india-challenges-opportunities-galore/ 10. Indian Economy: An Overview by S. K. Sharma, http://www.mfa.gov.tr/indian-economy-_-an-overview-.tr.mfa 11. Sources also taken from World Bank. Read More