MEGWA (DB Shier rer CMANDL OK ma hd HARVARD BUSINESS |SCHOOL w MILY J, THOMPEON India on the Move ‘This Budget is of an “India that is on the move.” An India t ily advances to prosperity. It is bout an India that banishes poverty and builds on its great resoureeUWiBe, the strength of its human capital, ‘and the immense reserooir of its knowledge. —Opening Statement, 2003-2004 Budget Introduction ) In late February of 2003, Jaswant,,SinghMindia’s newly appointed finance minister, looked carefully over the latest draft ofthe 2008°2008UnlutBudget. A member ofthe Bharatiya Janata Party igo that would ensure his party's political control tly approved 10° Five-Year Plan. Although the 6%, any drastic cuts in expenditure could cost his party re importantly, the upcoming budget would serve as the serning whether it planned to back up the strategic vision (BJP), Singh faced the difficult task of while achieving the goals ‘government faced a fiscal the upcoming 2004 gene government’ first major scribed in the 10" Plan. \Minister Vajpayee, the Planning Commission had set forth India’s vision ‘and social growth for 2002-2007 (see Exhibit 10b). Among the highlights, a's growth rate of 5.4% (9® Plan) to 8%. The growth rate would need during the 11 Plan in order to create 100 million new jobs for India’s country’s per capita income (US$453 in 2002), according to the plan, would '9 address environmental concerns while meeting the needs of the growing Weyer, agricultural productivity would have to increase. More efficient contract, encouraged. Futures trading in all commodities would be allowed. Finally, for fes to take advantage of comparative advantage in their agricultural sectors, interstate a's official unemployment in 2002 was 9%, or roughly 35 million people.* But because more of India’s workforce worked in the “unorganized sector,” exact unemployment figures cult to calculate. Some analysts estimated it to be higher than 20%? In order to provide jobs, Profesor Ritard HK, Vir an Resurch Asal Emily J, Thompeon prepare thi cave HHS cts are develop olay a the sie ee ‘nes dicen Cass ate ol Intered to arve a endocmenty, soc of pinary data ornate elev or netiectve ‘panagement Copysight © 200-2008 President and Felis of Harvard College. T ode cope request permission epoice mats cal D055 "7685 wri Hara Baines School Paling, Boon, MA SES or got p/n hp arwardcs. Nop ofthis pueton maybe reproduced, sored + reer jst, wed in speadshoa. oe vananied In my fom oe Wy any mean~eeconc, mechan, ‘Photmcopyog recording or oterwioe—ithou the pertain of Hacvard Wosinas Seal03-050 India on speeding up “disinvestment”—privatization of the public sector—setting, a goal of 784 ee, (Rs) by 2007. In addition to raising money through privatization receipts, the plan more efficient fiscal management. The finance minister's advisor, Vijay Kelkar, had made nendlations| earlier that same year: downsize the government, widen the tax base, remdvgymany of the tax exemptions and incentives, and cut subsidies, Indin’s level of human development was a key focus of the 10 PlatlAs the economy developed, the plan envisaged a reduction in the poverty ratio, potable drinking Wgter in all villages, and a cleanup of all major polluted rivers by the end of the 10* Plan. 's population growth rale and increasing the country’s literacy rate to 75% would les in achieving, a higher standard of living (See Exhibits 2a and 2b). As it had been throughout much of its history, I political, and religious conflicts. Singh had to consider ca the necessary changes recommended by the Plannin, would be worthwhile if the extensive goals of the 1 in only 5 to 10 years? What measures would ucige! became a reality, rather than mere words on. in 2003 remained embroiled in social, ly the political ramifications of making jon and Kelkar’s committee. The risk reached. But, could they be attained ve to take to ensure the 10" Plan Country Background At 3.3 million square kil bortered by Pakistan, China, subcontinent is a fertile and India tightly bigger than one thied of the United States and , Myanmar, and Bangladesh (see Exhibit 1). The Indian jon. In addition to iron ore, bauxite, and natural gas, India has the fourth-largest ip’the world. While India has some oil reserves, it remains highly dependent upon import sum. Seven major ports along India’s 7,000 Kilometers of coastline serve the I trade routes. ! als population reached 1.05 billion in 2002 andl was expected to suxpass China’ 218° The Indian government, under Indira Gandhi, had made a bref effort to wth through forced sterilization in the early 1970s. The highly unpopular soon abandoned. ‘The ratio of women to men in 2002 was 933 to 1,000 as a result le infanticide, abortion, and neglect. Life expectancy had increased to 62 in 2002 from 32 in 1951, try’s literacy rate was 65% in 2001 but varied greatly by region and gender. For ‘example, the state of Kerala had a 90% literacy rate, while the state of Bihar was lower than 50% (see 5). While 76% of India’s males were literate, only 54% of its females could read. ough an urbanization trend was doubtlessly under way, India’s population remained jependent upon agriculture; 72% of its population resided in rural regions in 2001.6 Poor eather could severely affect a quarter of India’s gross domestic product (GDP). For example, the ‘of monsoons in 2002 threatened India’s agricultural output and thus its economic growth. Using $1 a day poverty line, the World Bank estimated that 36% of the world’s poor lived in India in 1. A total of 433 million people, or 44% of India’s population, were poor. Fifty percent of the country’s poor were concentrated within the states of Uttar Pradesh, Bihar, and Madhya Pradesh?Intent More x, An extremely diverse country with more than 650 dialects and numerous religio official languages. Hindi was the most prevalent language and was spoken by population. English, while only spoken by 2% of the population and language, remained the dominant language of government and bus largest religious group in 2002 (81.3%), followed by Muslim (12%), Christian id various others (2.5%)? In their religion, Hindus are bor into a specific “caste d hierarchy. The highest caste is the Brahmin (priest), followed by the Kshatria (warri ya (merchant), and Sudtra (peasant) castes. Bach caste is broken into sub castes with varying re i placed on both social and professional activities. The “untouchable” underclass lies at the boltGin of the hierarchy and is traditionally destined to a life of poverty and menial work. society. Diserimination, conditions for “scheduled st affirmative action program z@quired that a certain number of available for members of the By the end of the 20° century, caste had become less of an castes” and minorities, the Indian government instituted of “reservations” in its constitution, Similar to quotas, re positions in government and educational institutigns be ging from Alexander the Great to the Indian subcontinent was a fragmented land ia Company after a bloody mutiny. India was (1858. Under the leadership of a viceroy, the British idminister the colony but gave little authority to the {ell-serving, Britain did provide some benefits to the region. Although most of its tional system based on English standards. They also united ‘The British instituted a legal the fragmented exploitation and governance without representation of the Indian people, however, angered the'fippulace. The father of independent India, Mahatma Gandhi, led a tireless i G6 against British rule. Under Gandhi's leadership, the Indians promoted ‘or self-sufficiency, and boycotted British goods and services. After more by Gandhi's movement, Britain granted India full independence in 1947. 1930s, bitter disputes developed between the Muslim League and the largely 1 Congress. Upon its independence, India was partitioned into two secular, unity is i le, Iwill declare that it is perfectly possible.”"® Gandhi's protests, however, fell on fears. Ten to fifteen million Hindu and Muslim refugees moved elther to or from India amidst 1¢ violence that eventually claimed more than 600,000 lives.” Agreeing that Jawaharal Nehru be elected India’s first prime minister, Gandhi accepted no official role in government. He wed to foctss on easing tensions in the newly partitioned regions. In January of 1948, Gandhiss Indtaon ~ Troubles with Pakistan Pakistan believed that because the region was predominantly Muslim, i sho “Although Pakistan argues that Kashmiris should be allowed to vote ina refey over the region. The United Nations stepped in after the first war in 1948 andjggfiblished a “line of control” that gave Pakistan control over the northern part of the region. India, proposed resolution for Kashmiri self-determination. India believed that if it pe secede, “balkanization” of its highly fragmented country would result, second major war over the region was fought in 1965 and ended in another stalemate. After Pakistan accused India of supporting Bengali Pakistan, India and Pakistan entered a third war in 1971 that resulted in the sover angladesh. India tested its first nuclear device in 1974, Pakistan immediately followed suit own nuclear program. A bitter arms race ensued. India continued to accuse Pakistan of filing the Muslim militants in Kashmir. Pakistan, in turn, denied the accusations and délared that it only “morally” supported the cause of the Kashmniti separatists. The arms race culminatedyin the detonation of nuclear devices by both countries in 1998. In 2002, a US. defense a ‘that between 8 million and 12 million people would die instantly if nuclear war took tinent.”2 Domestic Issues fe was a common occuttence in India, For ahi and her son Rajiv (daughter and grandson of In 1984, Indira Gandhi attempted to crush jab. Troops were sent in to break up a militant group ‘oops not only killed the Sikh terrorists but also greatly Bf the same year, Indira Gandhi's own Sikh bodyguards ton their region In addition to foreign relations diff example, two of India’s prime assassinated hero avenge her rep Regional violence Wffinued after Gandhi's death. Indira’s son, Rajiv Gandhi, became primé minister in 1984. A\ Dbroke out in Sri Lanka between the Tamil separatists and the Fin Indian peacekeeping troops to put an end to the dispute, The ved. After losing his reelection in 1989, Gandhi began a new ting the Indian govemment’s earlier interference under Gandhi and ld not happen again, a Tamil suicide bomber assassinated Gandhi at a gss than three years after independence, India declared itself a republic. A constitution India a5 a secular, parliamentary democracy mocieled after the British system, Run by a ral bureaucracy, India was divided into 28 states and seven union territories. Executive, and legislative branches governed India at both the central and state levels, The states had sive right to directly tax agricultural income and land and to regulate property ownership. The United Nations passe reschtion (Resolution 47 (1548) to that effec calling fora plebiscite (United Nations, Document No.$/726) aIndia on the Move source of tax revenue. ‘The president and the Cabinet of Ministers represented the executive electoral college system fora five-year term, the president had no consi ‘The Rayia Sabha was made up of no more than 250 members and i by the president: The Lok Sabha consisted of 530 directly elected me members from the union territories, and 2 members nominated by the prébient. The president appointed whoever had the majority support of the Lok Sabha as pffime minister. The prime minister only remained in office for as long as he maintained majority Sjgport. Independent of all other branches, the judiciary interpreted the constitution and was re the Supreme Court at the central level and the High Courts at the state level. Politics Led by the Nehru-Gandhi dynasty, the Congr government for 33 of the 44 years following in ‘weaken after scandals were revealed. The first o emergency in 1975 and imprisoning her op, activities involving kickbacks from foreign g Party had uninterrupted control of the . The Party's power, however, began to ved Indira Gandhi's declaring a state of ‘scandal linked her son Rajiv to corrupt ‘ongress Party lacked a prominent leader. The 1991-1996 and was responsible for much of fier the Congress Party's defeat in 1996, Sonia After Rajiv Gandhi's assassination init aged P. V, Narasimha Rao led the Cafigress'® Gandhi, the ltalian-born wig mgnigfed the political arena as the new leader of the Congress Party. The Congress Party ts support in the past by remaining in the center on issues. ‘This neutral stance, however, eventually hurt its image. Sonia Gandhi's foreign origin also limited her popularity among sevei /jairam Ramesh, the advisor to the Congress Party, explained, "Pea ets tle ve et eons ep es Doel oe Sears ccanes cscs garters Seen tists es cnmnieomrener a As the Ci power waned, the Indian electorate fractured into regional and caste groups, ight national and two dozen regional partes, coalition governments became anorm in ibit 14). Staying in power for any significant amount of time proved difficult for many coalition members. Ramesh explained, “Indians vote out goverrments; they don’t vote in ejsimmmenty gy: don't care about who you are, they just care about voting whoever is in power out@hsThe BPP first appeared as a major party in 1991 when it won control of four states. The BJP political wing of the traditionally Hindu religious group Rashtriya Swayamsevak Sangh (RSS), whith was criticized for ite fundamentalism, Its most famous members included the prime ister and deputy prime minister in 2003. gain majority control of the goverment, the BJP had to join 25 other parties to form the of the National Democratic Alliance. Although the sheer number of disparate interests lerated the extremist elements of the BJP somewhat, efforts to reform the government amidst constant disorder proved difficult. In one account, “Opposition members sabotaged proceedings by crowding round the speaker's chair and shouting slogans until an adjournment was granted for the day.” In 2002, The Financial Times estimated that almost half of Parliament's days in session were forced to adjourn for seasons of parliamentary rowdiness.!*70-080 moh Economic History Import Substitution Impressed by the Soviet Union's centrally planned industrialization fan, fragmented Jand, Nehru dreamed of building India into a similarly industialized; soci P'The government iggued the Industral Policy Resolution (IPR) in 1948 to give the government e authority over tt! To etermine India’s infrastructure operations such as railroads, telecommunications, and the, ission in 1951. Accused economic objectives, Nehru chairecl and established the first P by some of suffering from the “East India Syndrome,” India's national fear of entering into the servile relationships created by a dep Five-Year Plan, therefore, focused upon remaining, independent ideals of swadesti national income. As 72% of the country was employed in\@griculture, the plan allocated 45% of its resources to the agricultural sector while industry rec ate than 5%.!7 By the end of the first five years, India had increased its agricultural product nised its GDP by 3.6% per year (see Exhibit 10a). industrial progress, and to secure to the Heasible, opportunities for weaker and under- privileged sections of our people and they ileveldpment ofall parts of the country.” After a foreign exchange crisis in 1957, t to limit outflow of foreign currency and to implement a strategy of imp lacing imports with domestic production. India would continue to model its ily successful Soviet Union by further industralizing, while remaining isolated jestment and trade. In theory, by creating a wall of protective measures, imports uncompetitive, and India’s domestic industry would be ‘given the opportunity to flourish, “Permit Raj” To encourage I sulficiency with respect to all products including raw materials, capital, and cons P instituted a number of controls in the form of licensing and westment restrictions. Nicknamed the “Permit Raj,” the colossal Indian it Raj] was inevitable, because in an economy where resources are scarce [andl] ‘many, you need rationing, you need controls, and therefore you need permit, se rights. In the initial stages, these controls were introduced in the name of introducing, xr rationality into the allocation process. But after a period of time, they became ents of corruption. They became instruments of delay. They became instruments of nty, and the economy simply could not geta clear sense of direction.” Special permission in the form of licenses had to be obtained through a complicated set of dures, usually involving several ministries. If they chose to follow the rules, private-sector firms ‘substantial delays and barriers to entry in the form of bureaucratic procedures. To import an Qiypfitem, a company had to prove an item essential and impossible to manufacture in India within “aIndi on the Move ~*~, involve negotiating 16 separate procedures. Severely limiting their competith policy often forced Indian companies to buy poorer-quality and more expensive da) A combination of high tariffs and quantitative restrictions (quota: all goods coming into the country. Almost 60% of taviffs were subject to rates F licenses and restrictive quotas, in particular, placed serious limitations 61 terms of the technology made available for running their businesses. Foribxample, Ambassador, India’s largest car manufacturer, inefficiently manufactured cars of the Jesign for 50 years. ‘Additionally, the government placed price and distribution controlgn many commodities including, coal, steel, sugar, and light bulbs. Specific consumer goods vétie, reserved for small-enterprise production, thus further limiting the quantities produced. larifis were placed on the Import of capital goods. One economist estimated India’s p capital goods sector to be in exoess of 200% in 1962” j-sector companies in Planned Development Having severely burdened the private sect issuing a second Industrial Policy Resolution ip ‘government expanded its reach by jovernment now had control of 12 more i, steel, chemical, and oil, With a ry, the Planning Commission directly uated Tastee! ering program essary” competition or duplication of effor's, continued focus on investing in agricultura) determined all public-sector investment. Wve the government almost complete control over the Indian ‘two top business houses, controlled one-fifth ofall private E re companies could be located, how much they could produce, what could purchase, and whom they could fire. All private-sector firms valued at ato obtain additional licenses for increasing their capacity beyond 125%. had to first be approved by the Monopolies Control Commission before ige of imported goods required for production. part of its measures to limit unemployment, the government actively subsidized failing companies deemed “sick units.” Instead of going bankrupt, filing companies received ans from government-owned banks. Companies first needed permission from the gaverament they could lay off any workers. Fostering inefficiency and complacency, permission was only bc after the companies met a number of complex requirements. By the 1980s, the government ci nearly half of India’s industsial assets and was subsidizing 90,000 sick units And it had dtionalized 100% of the banks. Agriculture remained a primary focus of investment in the third and fourth Five-Year Plan: Despite the government's continued efforts, however, food shortages still occurred into the 1970s. Both plans fell short of reaching their goals amidst the distractions of three major wars with Chinae050 moet (1962) and Pakistan (1965 and 1971). Beginning in 1967 under Indira Gandhi, India 1 f “Green Revolution.” New fertilizers and sirains of high-yield seeds were develo advanced methods of irigation andl farming, By 1979, India was exporting a portion 131 million tons of grain produced.” Export Policy In contrast to its growth in agriculture, India’s export growth declined over tiktydropping, from 6.5% of its GDP in 1950 to 3.6% in 1970. Realizing the need for incregied trade to alleviate India’s balance-of-payments shortfalls, the government had macle some to stimulate exports in the late 19605 andl early 1970s. Making India’s exports more competiti 57% in 1966, Two important incentive schemes, the Cash Assi exporters for indirect taxes, and the Registered Exporters Policy, otherwise restricted imports for use in their products, were al burden. , which compensated ited exporters to import help relieve some of the tise, the government made an effort in After the 1973 ol shock, however, including IBM, Mobil Oil, and try on financially unfavorable balance-of payments crisis in the Hoping to bring in foreign currency, technology, and 6 the late 1960s to encourage joint ventures with multina 1 40% cap was placed on foreign equity ownershiy Coca-Cola were forced to liquidate their a terms. Although the restrictions were later late 1970s, few of the foreign firms returned. defense against US. action. is, India formed both a military and economic partnership with the Soviet ion to supplying India with arms and economic aid, the riner in India's efforts to achieve export-led growth. The Tndia’s export trade in 1980 andl 19.3% in 19892 ced tremendous political and social instability in 1990. Various coalitions had liament to challenge the standing of the Prime Minister, V.P. Singh. Seeking support underclass, V.P. Singh released the Mandal Commission report on “Other Backward Castes.” The report recommended instituting “reservations” or quotas as high a 275% for in government and admissions to public universities for members of backward castes ly representing 50% of the Indian population).®” Students and members ofthe middle class loudly through a series of demonstrations that included one at which a student defiantly lit mn fire. After two governments fell amidst the 1990-1991 unrest, the newly elected Indian government of Minister Narasimha Rao (Congress Party) faced a severe balance-of-payments crisis. As a ult of high oil prices and its stagnant export industry, India’s current account deficit had risen above 3% of its GDP and its reserves had depleted to less than USS! billion. With only enoughIndia on the Move x, reserves to last two weeks, India was forced to tur to the Intemational Monetary Fi assistance. The IMF granted the loans but only on the condition that India ‘economic reforms consistent with the recently nicknamed “Washington coined by the economist John Williamson in 1989, the Washington Co for market reform: fiscal discipline, increased public expenditure on hea interest rate liberalization, a competitive exchange rate, the removal of to foreign investment, privatization, deregulation, and secure property aitempted under Rajiv Gandhi in the late 1980s, Rao's regime woul reforms. The primary focus of the reforms would revolve bureaucracy while stabilizing the country’s macro ‘support the reforms, former Finance Minster and HBS 196 J presented them the hard facts that unless all this was done t tariff rate was reduced from a peak rate went commission (later the Ministry of I reduction of the public sector. Reo 1g ownership stake and only sell its tariffs were simplified and lowered. For example cof 300% in 1990-1991 to 110% by 1992-1993.3894 ks ant? a limited number of foreign bank branches. licensed and controls governing takeovers were relaxed through the passag@of the T “Act of 1994. Total holdings of Fils, however, could not exceed 24% (10% limit {Br each siiile FID). Finally, the Securities and Exchange Board was attempted to reduce the country’s massive fiscal deficit by broadening the taiybage and reducing expenditure. India’s monetary policy was tightened to reduce inflation. At the e, the rupee was devalued 22% against the U.S. dollar in 1993 and became convertible on the yunt in 1994, of “Consensus” Reform: 1995-2003 terms, yes, growth rate has moved up to a 6% pail. That is significant but not dramatic ramitic once we moved to an 8% path. The result is that many sectors of India’s still not opened. The wnreformed sectors are as large as the reformed sectors and this is what is th. But clearly « 6% grow is. sharp improvement on a 3.5% growth or a5% growth, and about 5% to 6% here. And today, there isa sense of hope and confidence about the future among the generation. And we no longer penalize efficiency or enterprise; in fac, we reward it —P. Chidainbaram, Finance Minister 1996-1998 ‘As Chidambaram acknowledged, Rao's reforms had an immediate, although not dramatic, effect ‘on India’s economy. Surpassing the growth achieved under Rajiv Gandhi, the reformed economy ‘grew ata respectable rate of 6% in an environment of reasonably low inflation and interest rates (see[Exhibits 2 and 3) India’s investments in its higher education appeared to pay off inthe g technology sector. An entrepreneurial spirit took root in parts of India as privat investment increased. The largest change, however, was in the mind-set of the p row looked upon in a positive light by much of the country. The pace of ‘once the country seemed free of its initial crisis. Additionally, problems corruption, fiscal imbalances, and domestic/external contlict continued & from pushing through the necessary reforms. Growth of 1 system, in the past the focus of education had been on higher industrialize, the government realized it had to promote engi technical knowledge base. Pethaps to the detriment of Indi government funded 16 central universities made up of mo maintained a complete monopoly on higher education; years, India proved unable to recover much ofits highe Development Report estimated that India lost ‘emigration of computer professionals.% As govern ‘were raised as to whether or not India’s under of graduates. The director of the Indian I “{T)he quality of teachers and teaching has f ps inorder to bul India’s ry education system, the 12,000 colleges. ‘The state per year in resources due to the continued to be scarce, questions stem favored quantity over quality ‘Technology, Bangalore, explained, levels in many colleges." volume of educated workers in Indi With over 7 million enrolled stuc any other country in the work States, India still had more denis enrolled in technical programs in 2001. India’ slowly opening economy lobal boom in the technology sector and thus provided a valuable source of cheap, for the world market. By 2002, software exports and serviees made up 2% of Inlia’s analysts expected the sector to grow above 7% af GDP by 2008 and make up 3 i's foreign exchange inflows* Taking advantage wology-savvy, English-speaking workforce, American companies began outsourcing ‘logy (IT) and back-office operations to India. More than 40% of the world’s Fortund yanies outsourced a portion of their services operations to India in 20020 ith assumed American names, Indian customer service agents replaced tion of the price. Having the advantage of a nine-hour time difference, Indi ‘2-hour service possible. As an example of tremendous cost savings, Ernst & tax return services to India in 2002. Sharda Cherwoo, Eenst é& Young's Shared Sétyices CEO, explained, “We hire fresh-outof-college graduates with bachelors degrees in ith. On an average, we pay them from USS3,000 to US85,000 per year, including, General Electric had more than 11,000 Indian employees involved in back-office and operations in 2002. Looking beyond back-office operations, General Electric saw great tthe biggest thing India gives us is its intellect"®* Home to the prestigious Indian Institute of snagement and Indian Institute of Science, Bangalore, the “Silicon Valley of India,” offered an idealIndinon he Move *, cricket pte, the technology center offered an ideal place for outsourcing, GE's high-level 7 ‘medical, and aerospace designs. Rise of Indian Entrepreneurs Encouraged by the loosening restrictions on the import of technol soltware exports, Indian entrepreneurs began building their own TT fi absence of taxes on cluding such notable Explaining how Is busines utd Rots Indi none’ CEO, Nandan Nile impeded by goverment policy issues but encouraged. Ninety-eightpercent of omr reverie comes s s0 we don’t have to worry r problems. We are a unique set of businesspeople.” Foreign Direct Investment . In comparison to the US$50 billion FDI to have dropped to US§3.0 billion n most other couniries, Excluding any Equity listings, India’s comparable level of FDI Foreign direct investment (FDI) was slow reinvested ol orign profits and procude ‘was perhaps closer to USS8 billion in: ‘majo? multinational companies entered! the Indian id presences in the form of joint ventures with local fon foreign ownership. India’s substandard 3t to foreign investors. The 1998 Global Competitiveness ed India at the very bottom of the 53 countries studied. In particular, India failed to p juate power, transportation, and communications. Well aware of the country’s range of problems, many foreign investors remained wary of committing large sums ‘of money to projépi in India. For example, one prominent foreign investor explained, “The infrastructure int power, roads, seaports, and airports is not here. ‘The economy's slow rol privatization are also deterrents, Companies can’t take advantage of free trade and necessary infrastructure are not available to support it. You and itis no wonder why more foreign investors are not here.” As Indin’s economy slowly ops market, Most companies, companies due to the infrastructure proved to Report of the World Be Mumbai (1407 kilometers)* Although plans were made to create a “golden I" of highways to connect Delhi, Calcutta, Chennai, and Mumbai, India’s underfunded remained. in poor condition, Of the 3.3 million kilometers of roads in India in 2000, 6% ofthe roads carried 40% of the country’s traffic 3 bureaucracy continued to be a headache for foreign investors. GE India’s president that, “The reason our office is in Delhi and not Bangalore or Hyderabad is because of the tisteasity of an interface with the government. You simply can’t do business in India without it” ‘The cities of Bangalore and Hyderabad became the capital cities of India’s growing technology sector because their respective state govemments made efforts to facilitate the country’s complex bureaucratic processes. Comparing the southern states’ efforts to minimize bureaucracy to the lack of efforts in the north, one Delhi lobbyist stated, “[YJou are contrasting emerging, market best practice 7ms Indian iw with emerging market worst practice... That is why the South is attracting such lange ‘manufacturing investments.” Serving as a primary example for foreign investors to remain wary of d “ Ihdia, Enton’s majority stake in the Enron/GE/Bechtel’s US$2.9 billion Dabhol surrounded the lack of ansparncy involved in the saeane by a Alluding to a scandalous “education” fund, Enron employee ‘House of Representatives that Enron had spent US$20 mil ‘workings of capitalist business.®° Corruption Embedded within India’s bloated buremucracy, ranks of the Indian government. From paying trai og the other way to theft of almost 40% of the country’s electricity output, cormuption w; i India’s poor the hardest. While some of the poay ster of Disinvestment Arun Shouie commented, Refercing to India’s continuing fhis... the declining quality of our leadership is a “tt [corruption] is how you bri real part of it. Problems ster ‘general. The reason is simple! cons select third-rate persons. You do this for 50 years and you have serious problem: @Sntinued, “Candidates with criminal backgrounds should not be able to stand for election. Mei people who have to vote this legislation through are the very same people whp,haye such a background.” The legislation referred to by Shourie required candidates to disclose tele financial assets and criminal backgrounds. The bill was rejected by the Parliament in July of 120% of the MPs were believed to have criminal backgrounds as serious as kidnappi wurden Prioatizatio only survive if we are competitioe. Profit-making companies need to improve enlire world has privatized profit-making companies. We amnnot survive without this Ministry of Disiavestmenté® sny members of India's elite privatization seemed the answer to both reducing corruption omy about corruption when you have to interact with the government. Corruption is a of regulation . .. it isa factor of the current infrastructure. The less you have to do with ernment, the less that corruption is a problem.”®” Despite reform efforts to reduce the public r government-conirolled entities still accounted for 43% of capital stock in India and 15% of ronagricultural employment in 2001. India’s 10" Five-Year Plan specifically focused on promoting 2Indi onthe Move ke privatization track record was mixed. Forty-eight companies had be a total receipt of Rs 30,917 crore? between 1991 and 2000. The first m ort was the Common privatization of “non-core” and “terminally sick” public enterprises. foreign investment in the consumer goods industry, it encouraged filtinationals to invest in export and high-technology activities. Under pressure from the IMF, liberalization proceeded, picked up some momentum in the latter half of the deca stake foreign investors could own in Indian banks to 40% ater, reforms opened up the pharmaceutical and mining sectors to foreign investment. wr accelerate the process, the sing, from a predetermined prices band system rts in the early 1990s. It the government doubled the to a market-determined competitive bidding system. discount. In 1999, the government opened the ir 26% foreign ownership in joint ventures. The, banks to below 33%. Among the “fast-track iyi” wit the sale of 25% of the slate’s ownership esi Sanchar Nigam Ltd. (VSNT) to the enterprises were placed in private hands. Instead, sporations. When private companies did successfully lomestic. Explaining the reasons behind the predominance of acquisitions are done through competitive bidding. Foreign ‘would go through, so they aren’t always willing to fully foreign companies were buying everything, there would be youghout the country. It is better that most of it comes from green-field inttipelly responsible for increasing the pace of privatization, was appointed in 2000. Since coming to office, Shourie had privatized 22 more companies, a strong consensus was building in favor of privatization, the speed of the reform appeared to have slowed with the approach of the 2004 general election. Many politicians ‘that their parties would lose the electoral support of special-interest groups if they pushed the necessary reforms. Protests by politicians, unions, and the media stalled privatization “I'm disposing of bleeding ulcers ... but the allegation is that I'm selling the crown jewels,” Telated Shourie.® “Sick-unit” designation and other government subsidies had protected jobs in the past. Often guaranteed a job for life by the government, employees feared they would lose theit job 4 cores equivalent to 10 millon. ryreso wont management are against it [privatization]. They are currently benefiting, from subsid sector puts equity investments into these failing companies. Who gets the ber rent seekers." Discussing the necessity of reform, Shourie reinforced, “Ty state institutions are weakened, but society is made healthier. We need country’s GDP in 2002-2008 (see Exhibit 11). When combined wi red ink was believed to exceed 10% of GDP (see Exhibit 12) government's expenditure and thereby prevented both the rentral governments from. expenditure proved particularly ilitary expenditure rose to 10% of fanging from droughis to the 2001 Gujarat ture and energy subsidies additionally ‘be difficult to reduce without risking the ide up 0.7% of GDP in 2001.4 A report by the iting the state electricity boards would save the to almost 1.5% of India’s 2001 GDP.” fagriculture and property sectors, the central government ‘could not easily broaden its ta ¢ revenues. Additionally, the central government ‘excluded all of the TT igdystry and small-scale manufacturers from taxes. The deputy governor of the RBI related, “We have fit ourselves in the foot in terms of the number of exemptions given. ‘The direct taxes that the tgctually assesses, people are just not paying, Our fax base has gone ‘up, but so has tax e “fin many cases, it is the rich who are not paying their taxes.” Less than 2% ofthe Indjh popdfition paid income tax. a difficult time collecting revenue. McKinsey estimated that Mumbai's roperty tax amounted to only 0.002% of the estimated value of the city’s lect sufficient taxes, the government could not recover costs spent on period, challenging obstacles remained in its difficutt in light of continuing difficulties wit earthquake required additional governin ‘made up 11% of the government's exp. loss of electoral support. Fe i MeKinsey Global Institute ‘May 1999, a quasi-war erupted between India and Pakistan over the disputed state of [Afier two months of intense fighting, military leaders from both countries agreed to The conflict resumed in December, when Kashmiri rebels held 154 Indian Airlines ssengers hostage for eight days. In March 2000, a cease-fire was ordered. Vajpayee and Pakistan’s ‘The ration developed countres is around 1%-2%, 4Ind on the Move x”, General Musharaff met in July 2001, hoping to resolve the Kashmir issue, The lea failed to reach a consensus. ‘Tensions flared again in December. Terrorists belonging to a Kashmiri militant group stormed the Parliament of India, leaving, 12 dead. Following the attack, there was talk of war. Musharaff promised to crack down on terrorist groups, but many of his efforts proved ineffective. While more than 2,000 Islamic militants were arrested in Pakistan in January, three-quarters of them were released by March. In May 2002, militants killed 34 soldiers and civilians on a Kashmir army base and heightened tensions further. More than one million troops from both countries lined up along the shared border and the Kashmir Line of Control. Worried about the chance of a nuclear war breaking out, the United States put serious. diplomatic pressure on both countries to avert war. Unlike the rest of the world ‘and even the country’s own media, India’s leaders downplayed the likelihood of a nuclear war. One Indian corporate executive stated, “Pakistan is completely irrelevant in the daily life of India. Neither side is going to fire a missile, so long as an extremist is not in power.’f° Or as India’s external affairs minister, Yeshwant Sinha, further exclaimed, “Were we al ash nuclear weapons on each other? Total bundeurn!””! Adding, to India’s strife religious tensions continue bol to the surface of Indian political lie, Hatkening back to India’s pastition, one of the nigalyvidlbt periods in history, the Ayodhya temple dispute, caused intense unrest. Before a grovy supporters from Hindu Pariahad (VHP), i it down in 1992, a 16% century Babri Ke to be the birthplace of the Hindu god Byed the previous temple devoted to him. Riots resulting in the deaths of an estimated 2,000 in broke out in the state of Gujarat and put in doubt the . In March of 2002, Muslim militants firebombed a train, ig from the Ayodhya site. In retaliation, extremist Hindus slaughtered arr estimated ‘nd left tens of thousands of people homeless in the state of Gujarat” As ownership of id been disputed since 1853, following the 2002 riots the Supreme Court baled all religious activities on the site. The site governgad polce were etelzed for her lack of ation in ending the sot. During 8 BJP Chief Minister Modi remarked, “Ihe five crore people of Gujarat restraint under grave provocation.” Making maiters worse for the have shown tee een cea arenas’ iand by right-wing Hindu officials.” The central government, too, appeared. Se eee ree ere ns P ‘Manipur, the BJP did not want to risk losing its coalition support as it headed into the 2004 election. Arguing it owed its power to the Ayodhya temple campaign, far-right elements of the BJP plished for the government to publicly back the building of the Hindu temple. Caving to in early 2003, the government planned to petition the Supreme Court to allow the building lu temple. First Step to 8% Growth? Singh surveyed the piles of reports stacked on his desk. The Planning Commission had provided a road map for achieving growth, but to achieve ils priorities, significant reforms would have to be 7 63-050 pushed India into reforms. Although another war in the Persian Gulf threatened to India’s economy was reasonably stable in 2008, with the exception of a bur had comfortable reserves and a positive current account balance for the ‘S Although its economy was not meeting its targets, India was still o economies in the world, growing at close to 6% from 1992 to 2002. If Singh decided to follow the Planning Commission’s guidelines, the new first step toward making the plan’s vision a reality. On the one hand, Kelkat’s strong argument for firm fiscal discipline. Cutting back on highly unpopular. Many of India’s citizens had become highly ‘@@pendent upon government ubsidies and employment. Politics having polarized, India exi and external unrest: Right-wing factions pushed for “saffron Hindu values—and gained more power with each election. Wor be receptive to change? Could it afford not to be? Ja of the future continue to 16Tha on the Move Exhibit! Map of India ast me ee ine of Control ‘Under Chinase Control Sri, ‘rosso Source: Casewriter. anwci, i 0 1 brea ‘Aadamen Mob lune 7“Téehane mane os 1000p) ‘Tostere mane be 1.00 poe) yo ante Cater mt coon 200 per. 13 Serr laene Cataract 0 peop), 209 aoe ‘eee oe rs Docent Popa NDA, Senne Sy of Ras Cone ea INDP aeoS omen ni, mo nf 223 “ht a! nh Si Shh ene 202 Cope nrg meeePo A@uuEUE Spee ae yO Ss Or.riage et ene ie Ta ee ets Mo 5g m2 ee 97 93 7s ou ‘em mm me ioe ‘sas tale ase arate ean oa Sot Ofte age Grn fl Come‘ee Ap ete Te Gets ip” Mey Si Soi toca | ea Sreon 2O o Penny pi sy a Sec he ‘so Sect Adid on “ate Ti th npn May il tn, SpeierLo as SEEeses ee fon) one moe ce REE 40; SSSSgE pe os tyr: ie dey ioe aoe a SS SS pe eesrants Reps in Ida's Balance of Payments [Baiei0s Groweh Peformance in ie Yu Pact a Pas asta At Ey Pan estas at a0 0 boPen ase a i anren tweets? 208 is snPan Weak ie i" onPan —sseotses 82 554 f Tahun ses oa < onran sme? om ie Ra ek fn Rpt 0-2 RICOH Mighights of 00 Five Year Pan een Sec Pat camPitonavertien ‘Stave "abr sae an {Simonetti acon hee Inova lope me 7 2007 cerns enone Foyer grime ‘Senet nny er ony 207 cmos Pa ey rit, Simpeioonne ring Resor tenes ans ecsergantngmad co eu T 1 Cen sy he ‘eget ty mt 2 207 sere 1 Sheet ot ate onan ‘Senate cero spe Sc ae 3% 1 itm nga Se , Romeattotenparin 30% = Fei cy een ate en 1 tmecme anew re 1 Stetgert apr pnans nce 1 Soamsnmgs tant 1 Secatmpsan nae 1 payin trent oe 1 Sewn tee Siercrocessnacan 1 Senet pmo 1 RescernGommnet eninge 4 iaeen soy tee nn em 2 Rieeetmate am ctaany aor ‘nee ang oy {mney ecient ane Se see Pare Coin Gore Tl D-T SA AnP P Cag in, d Onther SSIndl onthe Move Exhibit 11a Past Union Budgets (Rs Crore’) 1998-1999 1999-2000 2000-2001 Rovenue 149,810 101513, 1449 “Tak rover 104652 vena 002 Nontax rover 44,858 3242 on787 ‘capil rocapte 11054 ocoveries ot oane Other receipts “Total eceits \Nonplan expenditure Plan expendi? Total expenditure Flcal dict ‘bof GOP Source: Ministry of Finance, Government of India: Apaajia Saha, ‘What Bag." . {:Plan” expenditures ae estimated after dgcussions tween respegiveministies an the Planing Coramission, Nonplan” expenditure accounts for te budgets of central goveginent minstes,lnchuding Interest payments, sbi, government exployee salaries, grants {0 sat snd union governments, pensions, police, economic services in ‘various vectors, eer gneral serves, socal servee and governments. Nonplan capital expenditure mainly includes defers, loans to public enterprises loans to tate, and forelgn governments A crores equivalent to 10 milion. Exhibit 11b Estimated 2002-2003 and, Budgets (Rs Crore) 2002-2003, 2003-2004 “evived Fatimates stimates Revonue: 736,996 253.095, ‘ross tax 2ooi8 2siso7 ‘Exc 87,389 ‘96,791 Gusloms 45,500 49,350, Corporation tax “44,700 5100 Income tax 97,200 M070 r ‘000 000 ‘40 ‘7 1495 1,200 4600 3,000 6.144 63758 164.17 184,160 72,769 62,700 4s ___sizza_ 250547 206,158 200,904 317821 1500 ‘eaiz2a 41,080, 4347 44618 49.007 4a9t 15.466 ‘Socal sorvices 8.979 ‘820 Economie senicos (agrcuitur, indus, power, et.) 11570 nati Other 35,030 sari pends 114,080 foxpendiure aotni3 Fiscal deficit 148,400) (153687), ‘%ol GDP ‘5am, ‘55% Source: Ministry of Finance, Government of fala.mas Exhibit 12 Combined Fiscal Deficits for Center and States Source: Resarve Bank ofa, Armia Ror 2001-2002 Exhibit 13 Composition of Gross Capital Formation i IM Public sector Tamme "vot tes 1m sot 1988 98979 apa Sonrce Rete ankot nla, Anne! Sag. iti; Saini Mp Feil Communist Pary ota "panna Omer Lon Front, $6 26India on the Move ~*~, Endnotes 2.0 Five-Year Plan (2002-2007),” India Planning Commission, p. 144, 2 "Deep Cracks in India’s Ruling Coalition,” Business Werk Online, Dousinesoweek.com>, access April 2, 2002. ® Gautam Naik, “A Global Journal Report: Global Population Boom Goes Bust,” The Aun Wal Stee Journal, January 27,2003. “Country Profile: India 2002," Boonomist Intelligence Unit, p16, 5 “Country Profile: India 2002,” Beonomist Intelligence Unit Census of India 2001 Web site, chitp:/ /www.censusindia.net 7 India: Country Assistance Plan 2001,” The World Bank Group, JXR@2001, pl ® Teaching English the Indian Way,” BBC Online, , May 17,2000, “Country Profile India 2002," oonomist int 21, G. Tendulkar, Malatna (Deli: a, 1260) Volume 2, p 236. 1 yvdia parttime as Raj Withdraws,” Vol. 47, No.8. ZCasualics in Nudear Exchange 8 and 12 Million,” Associated Press Newswires, May 28,2002. 19 Lerview with Jira Ray a Affairs Department, ll dia Congress Committe. anid. 15 bawaed Loe, Lover the Fone in World’s Most Poptlous Democracy,” The Financial Ties, ‘April 20,2002. 7 “nda in 1986," HBS Case No, 796-065 (Boston: Harvard Business Schoo! Publishing, 1998), p.5. Tiss Five-Ye ip Infoline Web site, . 8 and Fivesfear Plat Planing, Commission of India Web ste, , ppt tne wh a gi HE We eG Max Weston, and Waived Iskander, “India (A)," HIBS Case No. 793-112 (Boston: Harvard 1998), p.5. “India's Bconomie Reforms,” Asian Development Bank: ERD Policy Brief Series, % Anne Krueger, The Benefits and Costs of Inport Substitution in Indin (Don Mills, Ontario: Burns and Macher, 1975), p.23. hid p.127.India on the 2% Robert Kennedy, “India in 1996” IBS Case No, 798-065, p 5. 2 -The Green Revolution,” India Onestop Web site, citp://www indiaonestop. 2 Pradeep Agarwal, Subir Gokarn, Veena Mishra, Kirt Prikh, and Kunal Se ‘Competitiveness (London: Macrllan Press, 2000, p. 252. 2% Arvind Virmani, “India's BOP Crisis and Extemal Reform: Two Paradoxes,” Ch September 2001, p. 12. Ashok Malik, “Resérvation: How Do We Untangle the Knot? India Tod October 7, 2002. 51 John Williamson, “What Washington Means by Policy Reform,” in Latin AMeiaam Adjustent; How Much “Has Happened? (Washington, DC: Institute for Intemational Heonomies, 19 2 “Commanding Heights: 2/6/01 Interview with P. Chidarnbaranl VIGBETWeb site, chitp,/ /swww pos.org/wabh/commandingheights>. ® Arvind Virman,p. 2 % Thm Callen and Paul Cashin, “Assessing India’s B Crossrouds: Sustaining Groth and Reducing Poverty (Was 2 *Commanding Helghts: 2/6/01 Interview wit WGBH Web site. © United Nations Development Programme Press, 2001) p. SI. pk escent aaNet ae es ar Trdstriat ax Occasional Paper, ition,” Reynolds and Tovre, Inia at the 2 2001),P. 35 Finance Minister of Indi, 1996-1998," Report 2001 (New York: Oxford University pS ness Line, June 11, 2002. Interview with executive, GE India, 48 EAin Lace, “india Stirs” 2 sheila McNulty and Khozem Merchant, “Enron Issues veiled sanction threat to India," The Financial Times, , 201 0 hozom Merchant and Robert Sheimsley, “The Enron Afar,” The Financial Times, January 12,2002. 51 "India: The Growth Innperative," McKinsey Glaal Insitute, September 2001, p. 5.India on the Move *, 8 naward Luce, "Hands-On Politis: Integrity Has Given Way to Greed and Cri 7 ) Life” The Financial Ties, October 12,2002. £8 Transparency Intemational Web ste, Interview with Arun Shourie, sinister, Ministry of Disinvestment, Gov a 8 award Luce, "Rowdies Lower the Tone in World's Most Populous 2" The Financial Ties, Apuil 20, 2002 S% Lok Sabla, “Presentation on Disinvestment to Committee on tions,” Ministry of Disinvestment, tober 7002 Interview with Aroon Pusle, editor-in-chief, Te india Today Gy 8 Indios The Growth Imperative” p.5- ® Lole Sabha, "Presentation on Disinvestment to Committee on Pe Interview with Arun Shouie, A Poesion For Privatizing,” Business Weel July © Lok Sebha, *Prese Von Dishavestment A Passion For Piva," Business Wee interview with Pradip Baijpal, secret © interview with Arun Shout, 1 & Acvind Panagasiya, “gt February 2002, p-8. © “Aula The Growth Imprate" Moise Global Insitute, September 200, p.6. © tnterviow with Rakesh 1 overnor, Reserve Bank of India, ‘© stndia: The Gibyith Insp. ative.” MeKinsey Global Institute, September 2001, p. 4 ”” Asian Development Bank: ERD Policy Baief Seri, *®nterview with ME Silane chairman, Hindustan Lever Li. 7 Inecvew aval Si, [>t nal fae Minister, Government of ni 72 We HaveNo Ordgie to Save You" Sinte Participation and Complicity in Communal Violence in Indie,” Human alin 14, No.3, April 2002 p. 4.