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Economic Policy Reforms and the Indian Economy

Economic Policy Reforms and the Indian Economy


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Published by University of Chicago Press an imprint of UChicagoPress
India is the second most populous country in the world and also one of the poorest. From the late 1940s to 1980, India's per capita income grew at an average annual rate of only two percent. Expansionist economic reforms during the 1980s boosted economic growth but also unfortunately resulted in high inflation and a balance of payments crisis. As a consequence, in 1991 the government announced sweeping new changes in economic policies.

Economic Policy Reforms and the Indian Economy evaluates the effects of those changes and identifies areas of the Indian economy still in urgent need of reform. After an overview of Indian economic policies and development since independence, papers focus on the country's fiscal situation, the environment for private economic activity, education, the reservation of certain activities for small-scale industry, and determinants of differentials in rates of growth across the different Indian states. Contributors include respected academic specialists on India and policy reform, high-level Indian administrators, and present and past policymakers.
India is the second most populous country in the world and also one of the poorest. From the late 1940s to 1980, India's per capita income grew at an average annual rate of only two percent. Expansionist economic reforms during the 1980s boosted economic growth but also unfortunately resulted in high inflation and a balance of payments crisis. As a consequence, in 1991 the government announced sweeping new changes in economic policies.

Economic Policy Reforms and the Indian Economy evaluates the effects of those changes and identifies areas of the Indian economy still in urgent need of reform. After an overview of Indian economic policies and development since independence, papers focus on the country's fiscal situation, the environment for private economic activity, education, the reservation of certain activities for small-scale industry, and determinants of differentials in rates of growth across the different Indian states. Contributors include respected academic specialists on India and policy reform, high-level Indian administrators, and present and past policymakers.

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Publish date: Apr 1, 2011
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and director of Forbes Marshall. and India remained a very poor country. Chidambaram���s trade policy of 1992. However. geration to suggest that the commitment of all political parties to a ���com. ful���llment capabilities of e-tailers. or source of healthy doubts? Singapore: Institute of Southeast Asian Studies.612 675 8. there has been an active debate on poverty estimates for the country as a whole in the postreform period. inary analysis of the reasons for these di���erentials. 1997. We should expect that states with superior availability of human skills. The real rate of return to the banks on their assets in the latter half of the 1980s was estimated to be about 0. the objective surely im. not only was it acknowledged that reforms were highly desirable. nization11 (1): 1���31. the extremes being a low of ���1. and thus contributed to the growth in the implicit or contingent liabilities of state governments. 103. and foreign trade. as the lifting of con. portant competitive asset in the knowledge-based economy.635 158 3. law and order. although he concedes that the ���scal pressure could reduce potential growth and that this drag could worsen if corrective action is not taken soon. ment to support the strike. Fertiliser pricing policy. lock-cart and Ambassador could have been built anything from thirty years ago to thirty days ago. cal de���cit. Data for earlier years refer to industrial pro. while those that did not were merged with the more successful ���rms. 38 Anne O. as con. balanced regional development has always been one of the declared objectives of na. growing to faster-growing states allows the bene���ts of growth to ���trickle down��� across states through the ���ow of workers��� remittances. The growth pattern in the 1990s therefore increased regional inequality. 2. sumer goods and of goods where indigenous productive capacity was deemed available. When state-owned enterprises are e���ectively operating under a ���soft��� budget constraint. and prognosis for the future. Bihar. or even slowing them down.Madhya Pradesh 7. These problems are not unique to the poorer states. New Delhi. that Singh���s views do not contradict the party president���s. mak. but again from a very illiberal base and with gradual reforms.Madhya Pradesh 2. enian does not mean. 1996b. These have included locking workers and employers into jobs (and thus both reducing labor mobility to places where it earns the highest return and discouraging employers from hiring additional workers). but not so repetitive that they can be automated.0 Source:Centre for Monitoring the Indian Economy. while infrastructure is the most obvious bottleneck. with time. versant policy makers regarded as ���intellectual coolieism. the criterion for success in more and more industries is to make a product that more people wish to buy more e���ciently than others.6 Sources:International Monetary Fund. duction brings. and having the freedom to sell one���s own ���rm to foreigners.6 5. Report of K. form from the rule prior to 1991. The rev. Economic growth accelerated to almost 7 percent per year. For individual components of infrastruc.6 Inclusion of industry representatives on the boards and councils of the STPs was also meant to emphasize the industry-friendly approach of the scheme. 1999The BJP-led coalition government falls. mation is from Indira Gandhi Institute of Development Research [1997]. as mentioned earlier. The only information available on plan expenditure in a state therefore relates to the state plan. a large part of what is needed by way of infrastructure in individual states either falls in the exclusive area of respon. and account for the major share of sales in software and pharmaceu. It is a pity that the prime minister and the government chose to approve this bonanza. a tiny dose Of early morning rhyming verse. Trends in inter-state inequalities of income in India.8 Despite initial liberalization moves accompanying devaluation. Directory of STP Units. mitted in exchange for a sizable export obligation. Gu. and not re���ected in a commensurate increase in growth. ered further here. one should not lose sight of the signi���cance of that change. procedures were greatly simpli���ed. both from some of the constituents of his own coalition. In. table 5. stemming largely from the governmental decisions on the recommendations of the Fifth Pay Commission (FPC) in 1997.392 70 Modipon Commodity Modi 2. had an average plan ratio of only 3. these technological responses have indeed come from competition: Liberalization has driven competition.444 3 Lakshmi Mach Engineering Lakshmi 2.N.Maharashtra 10. The Simputer represents a model of innovation to meet domestic needs. In Fiscal Policy in India. These states clearly bene���ted the most in the postreform period. In January 1991. But in ���91 the meteor hit.7 in China. alism. Singh is currently a member of the planning commission in the government of India. this growth rate was exceeded in relatively few (speci���cally 19 out of 137) coun. and it is also the most regressive in that it most hurts the poor. In general. As in the West. which is a form of agricultural taxation.017 177 Siemens Multinational 3. In a recent incident. They also have to earn a net amount equal to 150 percent of their wage bill on an annual basis. red tape. which contributed at least a modest surplus. This argument may have some merit as a way of putting pressure on the government to undertake the politically more di���cult tasks of raising revenues or cutting expenditures in order to reduce the ���scal de���cit. (4) CT ��f(Tb. as a proxy for the tax rate. uct was imported. removal of procedural bottlenecks and a concerted e���ort to. tor income accruing to each state are unavailable. has set up its second largest R&D centre in the world (and largest outside the United States) in Bangalore. Eighty percent of the population had not noticed any change in economic policies in the last ten years.000 in a block of ���ve years to ADRs/GDRs.03 21. Ports were high-cost. There was once a campaign to bring water to every village. Using the historical data series generated for the dependent and the explanatory variables.70 11.649 21.New Delhi: Sage Publications. using a plethora of feed stocks. and ���rms that imported every.56 4. we know from the national level that the accelera. 1998.6 January.5. The 1996 India Infrastructure Report (IIR) in. idence of striking de���ciencies and of their detrimental e���ect on growth and living standards is overwhelming). facture and are protected from competition from large new entrants.) The nation���s transportation and communications infrastructures remain woefully inadequate (Krueger and Chinoy. vestment. Mass. While Taiwan. Opening up to the world: India���s pharmaceutical companies prepare for 2005. However. then wait around for months. while India���s performance on the software front is creditable. it empowers the center to collect taxes on personal and corporate income. comes into e���ect. can collect the None di���erence in amount Food Can close down canteen None Income tax Can levy penalties None Sales tax Can levy penalties None Excise Can stop dispatch of material Excise records are simpli���ed. A. 1. ment.India���Economic policy���1980���Congresses. tiative in industrial development than any previous plan. Flexibility in East Asia was therefore accompanied by a more rapid growth of both em. ford: Oxford University Press. ford University Press. di���ered on what economic policy should be. Government expenditures themselves were not allocated in ways con. The availability of talent as a major factor giving India an advantage was already mentioned. It recommended winding up 606 and reha. learning.471 144 2 3 Coats Viyella India M ultinational 9. which had the highest ratio of state plan expendi. bank that trades like a share on NASDAQ.495 2. the assertion that such stocks could have been used to support ���scal expansion has no analytical basis.87 4.andhrapradesh.2 13. Silicon Valley���s new immigrant entrepreneurs. 1998. tural sector than earlier plans. viewing domestic demand as a constraint on capacity utilization re���ects a closed-economy mindset of the past. ginal rate of personal income tax. Four decades of protection is long enough for any in. dent funds���was monetized through the ad hoc sale of treasury bills to the Reserve Bank of India. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 Table 4. This is not to discount either India���s achievements or its potential. but o���ers a way to e���ciently leverage local capabilities.to three-year delay. International Monetary Fund. and extra budget subsidies. the economy was be.950 1. D. ing losses and absorbing scarce funds through budgetary support.0 ���1. where so many talented Indians are working in its booming economy. mance into agriculture and non-agriculture. equality measure based on state per capita income. To that end.Karnataka 3. cepted by the government ���in principle. the overall impression is. crop scheduling. sive to local needs) might provide incentives for collaborations between companies. Hindustan Motors. while the quantity of goods available for export increased in re. including loans to states. sponded to competition.5 percent in the high-income state of Maha.1 7. which means that state governments have 114 Montek S. Ashish. Unpublished Manuscript. nections in India in less than ten years. In fact. in spite of often hyperbolic (if laud. creating a world-class product is far more innovation-intensive than providing world-class services. it is probable that there is room for a large improvement in the productivity and e���ciency of the Indian economy if means can be found for improving the The Indian Economy in Global Context 41 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 e���ciency of the activities carried out by these enterprises. Reserve Bank of India Annual Report 1998���99.1040 3. health care. with HLL twice as valuable as the next company for the last ���ve years. The DoT ���rst attempted to introduce competition in the area of basic telecom services in 1994. World Bank.08 10. Rajiv Gandhi���s administration also initiated the computerization of the railway reserva. systematic induction of information technology tools and modern management practices to en. sis. When the sub. velopment was precluded. and Videsh Sanchar Nigam Ltd. placing greater emphasis on private ini.5 percent during 1990���93 to 8. Other issues require additional attention. gues that by not taking into account tax expenditures (e. for example. ware was seen as a glamorous high tech industry. giving workers��� unions su���cient power so that pro.24 5. Rajasthan and Madhya Pradesh.970 585 5. but remember that this sample is limited to publicly listed ���rms in India.2 8. with politics at the state level being driven by state rather than national issues. As it stands now. Addressing the ���scal issue is essential if only to avoid destabilizing the entire macroecon. SEBI was also assigned the task of improving the working of the Indian stock exchange.293 64. ports at a special low duty. but all the available evidence sug. JCT. and to analyze its ultimate incidence. sector productivity increased further: The estimated overall real rate of re. is certainly serious. cause it is.616 23. A cease-���re is declared in the same year. of a strategy of modest rates and broader bases as an approach to direct taxes. in turn.9 37. To summarize. formation revolution is a fairly recent phenomenon in Bangalore: The next few years will de���nitely see increased networking among entrepreneurs. They have increased to around Rs. economic growth at rapid rates requires continuing reform ef. instead of fostering economic growth.��� She then walked serenely away from the gaggle of reporters. Bom. per focuses on the software industry.000 foundries. In fact. it is estimated that India su���ered transmission and distribution losses of 18 percent in 1990. The fact that there are restrictions on capital ���ows to and from abroad. and modernization is occurring. grated circuit design in the ODCs. and the need for setting up an appropriate regulatory framework in sectors where only a few enterprises can be expected to operate.579 420 M alavika Steel Commodities New 7. rationalizing of user charges on utilities and services. quality processes. Foster and Rosenzweig examine another avenue a���ecting the demand for schooling. the coverage has been extended to include data for 1998���99. cent annually in the years 1980���91 to 1985���86. The insurance industry is being opened up. vestigation and explanation. izers) . growth in the number of returns ���led. it still constituted about 33 percent of gross bank lending (Reserve Bank of India 1999). rent account behavior over the period since the crisis. 17 January. This has facilitated the upgrading of their capabilities. annex table 8. the IT Action Plan is the most ambitious IT-related policy pro. It has been steadily deteriorating since then.039 327 Phillips India Multinational 5. gress Party did not even run on its growth record in the 1996 election. caste-driven oppression.765 346 3 5 Company Videocon Consumer New 22. ment schemes. they are not further addressed here. Sen.095 1. The reform strategy during the two suc. gence of new establishments. Since private invest. however. being of the ordinary citizen.5 and 4 percent up to the late 1970s.S. opment.5Quality of Infrastructure The quality of infrastructure is widely regarded as an essential determinant of growth in the states. foreign investment was permitted only in cases inwhich it provided technology transfer. As already discussed.318 452 Dr Reddys Pharmaceuticals New 3. with 30 million connections and a daily cable audience estimated at over 100 mil. In 1999. formance on software has been outstanding. at around 1. there are very strong arguments for accelerating cor. and there are 75. I would have said. licensing.784 5. 15.N. often foreign entrants now compete against old.4.9 ���2. 1975. Delhi: National Council of Applied Economics Research.19 In a forthright speech to the Inter-State Council on 20 May 2000.4 shows a signi���cant decline in poverty in the postreform period in all states except Orissa. Connecticut: Praeger. As high levels of public debt have deleterious e���ects on macroeconomic stability. sibility of the state government (i. it also introduced further distortions into the labor market. quired is unexceptionable. in kilometers of road per million persons India was forty-���rst. and user charges for most services are very low. 1980���81 to 1990���91: (6) g ��6. employment growth���especially among unskilled workers���has been ex. as well as more ag. Taking intellectual content ���rst. dia. dia lacks the precision engineering capabilities required to emerge as a lead. ing the crisis of 1991. although we do not have reliable data on the extent of migration from these states from the relevant income classes. neurship is not as high in Bangalore as in the Valley. but proceed undeterred. there was successful base-broadening. which was a common practice earlier.9 whereas in oth. growing at twice India���s rate for the past twenty years. 19.Haryana 145.Fiscal policy���India���Congresses. eralized. ference.256 71 Voltas Consumer Tata 5. Sonia Gandhi. 1950The Republic of India is declared with the promulgation of the con. Planning Commission.4 0. cent in 1993���94. road and rail trans.1 percent in 1991. Srinivasan 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 11. 10) notes. turing. the budget directly provides Rs. all in. sumed that domestic investment was limited by the domestic ability to pro. Those who still think they are in bed. supply is bound to catch up with demand. In the early 1980s. eas.7974 1. nomic and Political Weekly(Mumbai).7212 in 1991���92 and a high of 1. cult to believe that the poorest states will actually take the lead in this area. Ashok. Using data from 240 Indian villages. on the ability of competitive ���rms to ex. Similarly. (b) the means for privatizing state-owned enterprises that compete either with other private-sector producers or with imports. it is useful to start with data on ���scal and cur.2 Annual Rates of Growth of Per Capita Gross State Domestic Product (percent per year) 1980���81 to 1991���92 to 1990���91 1998���99 1. In earlier periods. By 2008. have stated. two years before being required to do so under the World Trade Or. While the economic reforms have reduced the burden of cen. this may be a necessary but not a su���cient condition to sustain tax buoyancy in the long run. sen as the next prime minister. cial concern for meeting the needs of the slower-growing states. when we had a program with the IMF. Srinivasan T. Premier Auto.1Have Economic Reforms Caused Regional Inequality? The rationale of the various economic reforms initiatives at the national level.1 21. The dismantling of industrial licensing provides another example in which economic reform could generate di���erential outcomes. if the government e���ciently uses its resources. eign investors). visibility. entrepreneurial start-ups o���er ���exibility and focus without vested interests.496 183 Century Text Consumer-TextilesBirla 8. ences. distance rates within India are between four and fourteen times as high as similar calls within the U. 1998. growing at about the average for all states. To date.3 Ranbaxy Pharmaceuticals New���Singh 14. The IT indus. and a regulatory framework that has per. Entrepreneurs setting up an indus. Bajpai and Sachs [1999]). In 1991.330 291 3. In a coun. Bajaj Auto. it is estimated that at least $70 million was lost annually due to container delays in ports. it required a separate application. The economic impact of this phenomenon is tremendous and will become more so. For a few industries these changes simply involved delicensing. The Indian Economy in Global Context 23 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 21. etc.49. Thereafter. Export performance improved notably.7 77. ���Conversely. It is the third category of privatization���where there may be natural mo. Burgess. Recent reforms induced states to compete with each other to attract private investment by o���ering tax concessions. tees on industry and trade. Ran. Whereas the literacy rate among the adult population was estimated to be only 18. wise. reaucracy���have not completely gone.: World Bank. Cambridge. the railroads them. Doing Business in India: What Has Liberalization Changed? 167 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 Information technology (IT) has become the mantra of Indian politicians and policy makers. gram was a reduction of the ���scal de���cit. as well as distant col. regulations. ment but also of domestic corporate investment. the solutions for the problem are quite general and lie far outside the IT industry. Further. this favorable di���erential between interest rate and GDP growth is unlikely to last forever. age capital-output ratio rose from 0.4 then analyzes some of the key areas not discussed in depth in later chapters in this volume that still o���er great potential for accelerating growth if reforms are carried out. In India���s case.. The positive and signi���cant coe���cient on the private investment vari. An area where the slower-growing states could improve the investment climate at relatively low cost is the ���exibility with which labor laws are ad. ratios were high. Each indicator is computed for each state relative to the all India average of 100. the Multi. Korea. Mass. India���s most valuable companies are Wipro. In his comments. Second.970 585 5. 1996. stream of the economy. both the physical and the technological infrastructure limitations discussed for all-India also apply to Bangalore. islation. India���s Fiscal Situation: Is a Crisis Ahead? 89 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 91 The impact of India���s economic reforms on economic performance has been the subject of much academic study and public debate in India. The economic role of political institutions: Market-preserving federalism and economic development. tral taxes and special grants recommended by the ���nance commission. the conclusion would have to be that the initial stabilization package met with some success. is indicative. especially the theft of power through tampering with me. cussed extensively. Two years later. this volume). India became the world���s biggest market for gold in the late 1980s despite a ban on imports. lished enterprises. rising from 12. revenue loss from tax waivers and concessions) and transfers that cannot be deemed socially desirable.25 percent. One strategy then was to steal. Airline:24-hour ���cooling-o������ period (for security reasons) Ship:2 to 7 days from time ship is available on docksc 4. the National Democratic Alliance���headed by the BJP��� wins a majority in parliament. the technology for engines was licensed from ���rms in Japan and Australia. Section 1. but in the absence of speci���c State-Level Performance under Economic Reforms 93 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 Table 3. 1966Lal Bahadur Shastri dies in Tashkent.N. nanced by subsidized loans. the govern. 3. India su���ers her worst drought since independence. 280���309. parent if the process is to be politically acceptable. lowed to give automatic approval to foreign acquisition of equity. opportunities for collective learn. The Sec.D. Be that as it may. It included 180 AnnaLee Saxenian 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 17. tain and accelerate growth. India���s large skill base is an im. This may appear intrusive. or PCB manu. if the FCI is as ine���cient as it is believed to be. Qualitative impressions over the last ten years are entirely consis.. and part of the advances had to be converted into three-year loans.8 percent per year from 1965 to 1980.3470 ���1.A venture capital industry to fund small entrepreneurs who would take up the innovations. Debt. 2000). on the other hand. cline. Nearly two-���fths of this de���cit. We were able to come to India because the risk of being 10. indi.230 1996���97 0.Orissa 81. The key question is how much of this technical e���ort was worthwhile and would turn out to be useful in building internationally competitive products. and one not addressed in this volume. with the task of recom. These IT-enabled services involve tasks that are too routine for western workers. The resulting ���nancial di���culties of SEBs have led to inadequate investment in both generation and distribution. and industrial licensing clearly permitted a spurt of growth. as. even more remark. and (d) the most productive use of stocks of food grains and foreign exchange reserves is to support such ���scal expansion. gotten. lion people (���The Wiring of India.Haryana 3. and Timothy A.15 Technical capability comes from 142 Naushad Forbes 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 11. state government expenditures have be. and Tamil Nadu (6. A number of questions can be raised as to the reasons why these (at least partial) ���natural monop. ries about the development of a society bifurcated between those who have the skills and those who do not. and to some extent also literacy. Besides. and it is relevant to ask whether economic reforms have promoted this objective.8 percent.. BPL.437 8. Since educational reforms are covered in this volume. In addition. it calls on banks to establish venture capital (VC) funds. But the post���World War II history of India was a frustration.Kerala 158. Olekalns and Cashin (2000). that ���rms have been forced to look at which activities they really wish to retain. London �� 2002 by The University of Chicago All rights reserved. dustries Company Act of 1985. structure or a more favorable state policy environment. work area where there is a fault. She is absolutely right to do so. alysts in India were less than one-tenth of those for their U.36 increased capacity will be essential if power capacity is not to serve as a severe bottleneck to growth.14). high-pro���le attempts to at. D. as published in government budget documents. taken by his government have helped to rede���ne the meaning and content of governance within the country. tion of both center and states. The conventional criterion allows debt to grow inde���. The industrial relations bill that would have amended In. Rajiv Gandhi. ADRs represent a certain number of domestic shares of the ���rm deposited with the bank.1 percent of GDP. Waste was rife: indigenization resulted. ernment debt has been below the rate of growth of nominal GDP. 210). tially favorable conditions that are not immutable. HCG. Although he seems to have quickly lost interest. as economic activity (despite the low rate of growth) led to increased demands on infrastructure at a rate greater than that at which supply was increasing. Srinivasan 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 15. based on ILO statistics. ford University. erate the privatization of central PSEs and to earmark the proceeds from these sales speci���cally for the development of much-needed economic and social infrastructure in the backward states.7 percent 106 Montek S. for one. though. for given wages.Payment Nationalized bank pays against a sight letter 15 to 30 days of credit. tion and di���erentiation among VCs.7 percent of all investment in India in 1998.4.8 12.22 May 2000. and so on. and in invest. At present. or even expansion of capacity required a visit to Delhi and often months of form-���lling and ���pushing. ture. while some others have understated their capacity.73 12.4 23. Indian producers entered the world market in the 1980s by exploiting their cost advantage in the most routine. And the more progress is made with reform in some sectors. wa. there had been little liberalization of consumer goods imports by the late 1990s. 234 and 226. which are only feasible if there is such a set of VCs..856 907 Hind Lever M ultinational 9. transparency. E���orts were also made to reform the power sector in light of the urgent need for additional power. India���s Fiscal Situation: Is a Crisis Ahead? 75 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 Nor does Srinivasan elaborate on the likely trajectory and emerging pres. erations have been rolled out in a limited way in only two of the thirteen basic circles for which service licenses were auctioned (Economic Times. ties. a great deal of economic progress has taken place. Cambridge: Harvard Institute for International Develop. 162) Agrawal further notes the tendency of Indian ���rms to use casual and contract workers who are not protected by these laws and regulations. vironment would they and others have emerged a decade and more ago as ���rms that made ���Made in India��� mean something? That some ���rms used protection to build a technical base while others were quite content to re. India Country Economic Memorandum. State-Level Performance under Economic Reforms 99 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 Table 3.2Implications for Interstate Inequality The deceleration of growth in the poorer states witnessed in the 1990s has important implications for regional balance.38 one in engineering (Premier Automobiles. celerated signi���cantly in the 1990s. Fortunately. ment���s continuing rhetoric that a central goal of policy was to achieve im.6 1982 18.5 22. ni���cant factor in maintaining high lending rates from banks. ther.. In 1998���99. all of which have seen skyrocketing stock market valuations and price-earnings (PE) ratios of 100 or more. Nagraj. which gives a ratio of 1. despite any possibility that they might be able to produce more e���ciently. International Financial Statistics Yearbook2000. which declines sharply. India. bility act will be passed by parliament are hopeful signs. They all involve considerable government expenditure. shared her concern about the domestic market. ���������.8 In their view. all states must compete with each other to attract private investment. (1) PIT ��f(Tb. the government���s ���scal stance became signi���cantly more expansionary. some useful reforms have been initi. riod. but are dramatically reduced. rived from the capex data could be used as a proxy for the underlying in. In his comments on Ahluwalia���s chapter. ulation living below the poverty line) was estimated to have fallen from 57. given the level of NAGDP in 1996���97. these enterprises became a drain on public resources (and one of the factors therefore ac. izer factory in Talcher. Center for Economic Policy Research. Moreover. as well as an innovative product. quickly and signi���cantly reduced the negative e���ects of controls on domestic economic activity. ���ected in the fact that the states are resorting to larger and larger volumes of borrowing: The gross ���scal de���cit of the states has increased from 3. Yet another disadvantage is that India���s performance on core indicators of development is abysmal. ti���c research particularly. while the independent variables were IPUB (cumulative expendi. al.2 percent in the 1959���66 period. Innovation in NICs: Managing R&D in technology-followers. India. Yis the current output. In 1991. While the logic of incomplete action in certain key areas and the reform strategy based on their implementation may suggest consensus. ing for a degree that would train them to work in India but not abroad. ing teams of engineers to Italy. 2.230 1. dressed in Srinivasan���s chapter in this volume on the ���scal problem and are not dealt with further here.33 The qualitative picture again complements and accentuates this change: Several Indian pharmaceutical ���rms. by contrast. which is about two-thirds of what is spent annually on infrastructure (India Today. and telecommunications. This came after the BJP itself successfully voted against the United Front���s Insurance Re. however. By 1980. some indus. tance second class and season tickets. Domestic debt held outside the banking system grew sixfold. and this should more properly be combined with private sector in-house R&D. The deceleration in growth in Punjab and Haryana in the 1990s deserves closer study to understand the reasons for the loss of growth momentum in these states. per employee in India was $15.917 881 5. (3) whether proceeds from disinvestment are included in current receipts. reliable power. and Orissa. The origin and direction of industrial R&D in India. and Padma Desai. GDP ratio for India followed a non-stationary growth path in the 1990s. gineers to be pro���cient in cutting-edge technologies. of which $23. seeing less that their Indian partners can do for them. and some limited simpli���cation of excise regulations. velopmental activity. tives to improve e���ciency at all levels. Regional di���erences in per capita income levels have long been a matter of concern in India.Foreign investment today is essentially free. with ABB. as was 26.567 for Korea. what the large number of small ���rms that have recently entered it do. try in the midst of much more slowly growing traditional industries. Another much-needed step has been the removal of barriers to imports of consumer goods and a signi���cant reduction of protection to domestic producers of consumer goods. India���s capital markets are not yet e���cient or sophisticated enough to command the value they deserve. as would normally be the case in a developing country. Maruti Suzuki. India���s software industry: State policy. whereas private-sector investment in the national accounts is only 8.5 percent in 1994. ern enclave in a poor and backward economy. in turn. and e���. and the world center of technological in. Experience suggests that it is desirable to privatize fairly rapidly. Some parts of the remedy are obvious. The impact on poverty and nutritional status of the population was 62 T. tists would be more inclined to sell technology. it has been by re. The percentage shares of domestic ���rms that could be owned by foreigners were increased. ���nancial-sector re. Evidence that increased educational attainments are a nec. it seems evident that reforms in labor laws will be essential.6 a decade later.ed. this merited an ar. Krueger and Sajjid Chinoy 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 Table 1. turn. In���ation. But longer-term issues regarding ���scal policy remained. cisely the group most state governments are otherwise keen to promote.4Reduction of Subsidies Explicit subsidies of the central government accounted for around 1.4 Macroeconomic Indicators.e. Indira Gandhi Institute of Development Research. Department of Economics. The following several years witnessed a variety of signi���cant changes. ample. lation and reform of labour laws that would make it easier to reduce em. who spectacularly mismanaged them. Eight lectures on India���s economic reforms. One need only 144 Naushad Forbes 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 18. one sees that the contrast with India could not be greater.5 percent of GDP in India. Wipro.C. tent of such a subsidy once de���ned. By 1990. Kerala.6 percent of GDP in R&D. Further.5. equal to the size of the West). are subject to the general quali���cation that the data available are far from ideal. Planning Commission (1997).7 8. however. After all. ever. 84 T. seven years after liberalization began. Indian companies are still far behind their global counterparts in positioning. call centers. It is unlikely that there will be any further advances under the MOU process in 2000���01. alright.080 374 (continued) Table 4. the authorities in India want a venture capital industry because there is one in Silicon Valley. and in the ensuing elec. Other state pricing policies are also damaging. manufacturing problems. 42 Anne O. On the other hand. the two regions are also complementary in many respects. it is further argued that such proceeds should not be used to reduce current ���scal de���cits. importation of bulk consumer goods (canalization) under which only the government entity could import items such as petroleum and export goods such as sugar.1Performance of the States: A Review The growth performance of the fourteen major states in the pre.N. innovative ���rms. Uis the ran. ���do anything. der whose leadership the present reform process was initiated. The impact of economic reforms at the national level on the growth rate of individual states therefore depends on the net e���ect of two sets of forces.860 1. of course. the tax elasticity with respect to levels of enforcement has var. making the use of cumulative ���g. It is interesting to note that the banking sector holds government debt in excess of its requirement under the statutory liquidity ratio at current in. The range of variation in the ���rst period was from a low of 3. and India Poly���bres) to the point that it now controls 60 percent of the market. ments in excess of a billion dollars. and to the participants of the workshop on Equity. Fabrication facilities are highly capital-intensive.Tamil Nadu 3. sorb 22 percent of non-interest-non-plan revenue expenditure and 12 per. Bangalore: The Silicon Valley of Asia? 209 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 tryside and solve people���s problems. Summing up the positives and negatives together. appropriate revenue recognition rules and other ac. early-stage in. pand.. Working Paper. for ex. ied over the years. hicles have to operate. had a plan ra. pected to due to remaining bottlenecks (see section 1. concessions on interest rates). tirety (Desai 1988). there has been a dramatic increase in competi. the ratio of pre-tax pro���t to capital employed of central public sector undertakings rose from an average of 3. Oxford. It should also be noted that an increasing number of economic activities took place in the public sector. It is estimated that 63 percent of the 40. ing of the National Stock Exchange as the Bombay Stock Exchange re. Various issues. Third.3 4. manufacturing had been only 0. conforms with the expectation that private invest. which should be emulated by others. U. hospital beds. the available evidence does not support the belief that the poor are bene���ting from the PDS.191 Technologies Satyam Computer Information New 3. It is very likely that in practice this led to a reallocation of investment in favor of states per. for the multiplier e���ects on the Indian economy.2 0.74 13. leading edge quality.4 also shows a signi���cant decline in poverty in Uttar Pradesh and Bihar despite relatively poor growth of GSDP in both states. ment over the life of all projects under implementation in that year. First.66 27.84 10. The Bangalore entrepreneur. In ad. 155���66. tor development. Dukes Coca Cola. Naturally. ible when these transfers ���nance the political and social goals of the na. BPL. Certainly. and greater than those of any other countries reported except Nigeria and Bangladesh. Both northern and southern. but there are di���erences in methods of estimating the GSDP in di���erent states. Such reshaping is essential if the Indian economy is to be well integrated. AnnaLee. Impact on Poverty I won���t get involved in this evergreen debate on poverty trends except to mention some recent work by Deepak Lal. the central government would ensure that goods and factors are mobile across states.568. Thus.meaning sick.85). In 1998���99 they reached another peak of Rs. so that even the most generous solvency condition should lead us to conclude that the current ���scal and ���nancial policies of the government cannot be sustained.739 3. fallen to minus 0. to be sure. pansionary policy were felt in the form of a balance-of-payments crisis.2 0. recruiting around 3. cussion Paper no. but it is very di���cult to assess this claim. of course. As can be seen. The indi���erence to the poignant circumstances of the urban and rural poor is appalling. and Orissa accounted for 37. development around 30���40 percent. Given that Indi. and then risen to 3.491 10.420 5. they are already working in India.1 billion. Firms were allowed to invest up to 50 percent of their foreign exchange earnings in the previous three years. too few remain or return to make an impact. A very recent Oxford master���s thesis. and the World Bank di���er for at least three reasons: (1) whether the government���s new de���nition of the de���cit is adopted (this a���ects only the central government���s de���cit and not the total de���cit of Center and states together). In the fall of 1999. Debt to external private creditors grew elevenfold in ten years.93 11. fant to mature. 10. as well as excise taxes. cent from 1980 to 1990 (World Bank 1988.6 includes a few comments on winners and losers in Indian industry. 36 Anne O.The Indian Economy in Global Context 9 Anne O. but the di���erence has narrowed. in some cases. other private Airlines Opening to private ���rms Indian Airlines IA. Vision and illusion in ���scal correction. sector banks were non-performing.N. proximation to VAT structures encompassing services in the base of indi.9 399. anywhere in the country. These capabilities are also evident in the growth of very large-scale inte. and Moraji Desai is appointed prime minister.7 percent of GDP in 1999���2000.4 12. di���cult issues to quantify. This chapter examines the growth and performance of India���s IT indus. this adds up to a signi���cantly higher level of technology imports. India faced ���scal insolvency. a majority of Bangalore-based companies are IT service providers. Government of India.027 1.29 5. are to North America. the central government���s decisions on the pay commission recommendations have been costly. After the conference. one of India���s leading software producing regions. vestment and privatization. the DoE strategy of working with software companies to provide critical in. NPAs had fallen to 16 percent of gross advances in 1997���98 (Reserve Bank of India 1999). Department of Economics. 250 221 1 Bharat Electronics Ltd. forms. and in public-sector banks to 33 percent.3696 1988���89 ���0. Until 1991. the fact that there is no strong penalty to managers of state-owned enterprises or to ���rms that do poorly in the private sector undoubtedly serves as a disincentive. Many of these incentives continue to be available to the IT industry. Even the 10 percent rule permits a large number of unions. ernment expenditures are still in need of signi���cant improvement.D. opment would then constitute the great bulk of R&D. irrigation) or in what is described in the constitution as the concurrent list. bribes for bureaucrats. nancing decisions.488 416 Products Tata Chemicals Engineering Tata 13. then that indi. ture are so negative that they probably constitute a signi���cant barrier to for. Thereafter.5. quired but is ���automatic������one simply needs to register the payment with the RBI. and just under 50 percent of gross domestic product (GDP) origi.5 percent (Organization for Economic Cooperation and Development [OECD] 1997.173 262 4. equality with further concentration of poverty in a particular region. and Caroline L. Until recently. ture during the 1990s. we use the nonagricultural gross domestic product at factor cost (NAGDP) as a proxy for the size of the aggregate tax base. mains a puzzle. In. Learning from the East Asian tigers: Studies in technology and industrial policy. The bene���ts for increasing qual. dia 2000.13 Sources:IT/GDP: OECD (1997). Infosys.Kerala 40. education. India���s restrictions on foreign direct investment have been vir. mestic political economy. was sold to Hindustan Levers (HLL). was that they would increase e���ciency and lead to higher factor productivity. ment in less well endowed or well governed states and a deceleration in their growth. The data show some rise in R&D spending by Indian ���rms.Tamil Nadu 51. Cited in Parthasaraty (2000a). the pace of policy reform in the IT industry has been unprecedented. instead.2 gives data on exports in the decades since independence.60 8.37 16. and Mahanagar Telephone Nigam Limited (MTNL). All three ���rms are today spending an order of magnitude more on technology import than they did before 1991. Srinivasan. In addi.2478 1. the crisis on its cover page with these ominous words: ���States Going Broke: Bankruptcy Stalking States. Ahluwalia 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 3. To that end.New Delhi: Ox. ital switching technology to facilitate India���s shift from electromechanical to digital switching and transmission. Which in India you can���t escape. India needs to reform its power and telecommunications industries rather than have an innovative IT policy. not Selling��� (personal communication. and European markets is of paramount importance. the criteria for permitting speci���ed percentages of for.5 4.86 35. Under current proposals. Venture capital investment is akin to horse racing. 2000. and made a large number of recommendations to expand it. With the removal of these limits. Expenditures.243 NAGDPG ��RETG 35. and software ���rms were allowed to invest in for. the risk of the satellite link and the telephones and the ���ights were o���set by the costs. Calcutta: Oxford University Press. Available at [http://www. although the plan itself provided for more ex. so could the opposite (quoted in Bhagwati 1985).in/]. The government of India had maintained growth during the late 1980s only by increasing ���scal de���cits. the ���xed and operational cost of national long-distance services constituted only fourteen percent of its revenues from this sector. on improving the e���ciency of the public sector system.The drop in the customs revenues to GDP ratio observable over the decade was predictable in view of the very substantial tari���rate reductions implemented (especially in the ���rst half of the decade) as part of the gov. but this only means their performance will continue to lag behind the others. who have no way of hedging against in���ation. annex table 8. to ���reserve��� designated industries for ���small. yet. assuming that all individuals within a state have a gross income equal to the per capita GSDP. ���rms invested heavily in sectors like steel.Bihar 52. The failure in this case has arisen not from any lack of participation but the slow growth of Kerala���s domestic economy. The initial level of the primary de���cit (not including debt service) was lower but the pro. Foreign direct investment accounted for 2. and it is widely recognized that the quality and quantity of Indian educational op. Numbers from Business India Intelligence. and their exchange earnings were used to smuggle in gold. the peak rate was 50 percent. D. and in fact creates a growing wedge between the privileged workers in the organized sector and the others in the informal sector. but imported television sets.com/19990317/spk1. It also seconded the secretaries of the departments in. I have brief comments on each of these. Detailed strategies have to be evolved for individual states to address constraints and circumstances spe. A great deal of thought and dis. omy from international forces.Three of the poorest states. Table 1. the future should see increased symbiotic linkages between these two high-tech habitats. leading to a proliferation of projects that take much longer to complete than they should. the upward shift in demand for imports arising from the plan pattern of expenditures and a rate of in���ation above that in the rest of the world combined to lead to increasing rupee overvaluation. is conducting a study of the likely applications for such a device in rural and semi-urban areas. tre) as well as the executive director of NASSCOM.670 1. dustry. the economy was opened considerably. olies��� should have been subject to privatize ���rst.896 31. The Product Market This brings me to the most important part of Saxenian���s paper.M ). Srinivasan���s treatment of tax reform in the 1990s is somewhat patchy and fails to credit adequately the major advances that have taken place. ���In sum. omy as a whole. I. with the global econ. While investment in IT grew rapidly in India during the 1990s. Business Standard. they will proceed at a su���ciently relaxed pace so that 5���6 percent growth will be the norm. irrigation water. cited in Parthasarathy (2000a).Washington: NSF. cially in the case of web-embodied software. 32. What should we expect in the future? The essays in this volume. New Delhi: Thomson Press.649 21. or should.3 103. Acharya is right in emphasizing the seriousness of the situation. then. ni���cant increases in assignment of tax authority to the states can dramati. clared the intention of reducing the scale of the government.5 1991���97 11. this would require that the ratio of primary surplus to GDP grow as well.3 148. Data are from Organization for Economic Cooperation and Development (1967) and Central Statistical Organization (1967). tribution. spending on IT was only 0. mised further. a rise in the ratio of government debt to output tends to increase the real rate of interest. property taxes.6 telephone main lines per 1000 people in India. and that e���orts to re. thus making licensing less restrictive. including factors that account for comparative advantage in particular states. A perfect method to ensure A steady stream of easy dough And this went on and on.1 billion.1 16 1 76 Sources:[http://unescostat. State-Level Performance under Economic Reforms 115 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 3. tance market much earlier than pledged in the commitment given to the WTO. Convergence across regions: Evidence from India.28 In addition. When such stories make the rounds at meetings between industry associations and bureaucrats.085 150 3 7 BPL Engineering New 17.434 205 3 2 Exide Industries Commodities Shro��� 6. so were India���s engineering colleges. enterprise structures. mentary training and practice. remain premature at best.S. and was ���rst used by Ashish Bose in the context of demographic analysis as these states displayed much higher fertility rates than other states in the country.97 26. In Macroeconomic dimensions of public ���nance: Essays in honour of Vito Tanzi.Foreign institutional investors are now active players on the Indian stock markets.598. tables 3. is the need to address the inadequacy of existing infrastructure capacity and qual. By 1999 it had 464 members and accounted for 95 percent of software industry revenues. part 7) rightly emphasizes that state public enterprises. the resources so released could be used to ex.060 9. Every ex. but until its ���nal re.5 210. live better than the poor in other states. including an almost-blanket prohibition of imports of con. but since the capex database provides the only information available on investment expenditures at the state level. whereas it stood at 4. and HLL.3 14 ��� 8 Thailand 104 208 0. In the words of Desai (1999a). perhaps a little later in the 1990s. have important impli. 68 T.C. Journal of Public Economics47:171���205. teen vacant circles will be opened to unrestricted entry. The equation with tele-density has the highest R2 . tion is slightly exaggerated by change in GDP estimates to the new series for the years 1993���94 and beyond. angels with the willingness to nur. maining QRs to be eliminated by April 2001.3 1983 18. 1987���93 Period Total Growth (%) Real Growth (%) Exchange Rate (%) 1987���93 46 28 18 1987���90 41 29 12 1990���93 52 28 24 Source:Sen. as leader of the Congress opposition. This is true not just of foreign invest. omy that has changed and is changing rapidly. and this com.6 Hindalco Industries Commodities Birla 19.Gujarat 32.in]. cantly less productive than its global competitors. became primarily one of developing local suppliers of raw materials and components. at that time. quality IT solutions at competitive costs.9 percent of GDP for the gross ���scal de���cits of central and state governments.50 11. 1984. 5. The data problems associated with the GSDP series are important. Smith. Reducing ���scal de���cits. Finally.8 2. and further. for example. Combining central and state government expenditures. sources is clearly called for. It would also be reasonable to suggest that moderate rates of taxes induce a culture of voluntary compliance. ated in the mid���1990s. India was ranked ���fty-���fth in terms of the ���adequacy of overall infrastructure.ed.The real problem with the unexpected decline in the tax-GDP ratio has been with central excise. December 1999). Finally. pants. han.890 1. pansion both in the domestic market and for export. re���ecting the desire of the DoE to avoid di. Again. tions network and other twenty-���rst-century infrastructure might have been more wisely invested. in my opin. The Times of India. they will have made an immense con. These sharp reductions in tax rates were e���ected under the assumption that the revenues forgone would lead to higher disposable income for individuals and corporates who are likely to utilize the resources more e���ciently. and there is tremendous economic po. New Delhi: STPI. but the availability of high quality skill was essential to these decisions as well. could sustain the 5-6 percent rate of growth achieved at the end of the decade. folios to qualitative review.The increased variation in growth performance in the 1990s re���ects very di���erent behavior at di���erent ends of the spectrum of per capita GSDP.45 1. At present. commerce. and industrial licensing were all lib. ing trade as early as 1960 and developed an export-oriented growth strategy with related reforms designed to improve the performance of their domes. 1984. commitment. about the same level as South Korea and Taiwan. It suggests that comparisons between regions like Bangalore and Silicon Valley not only mislead. Gian Sahota (2000). quent���and recent���visitor to India. phone lines per 100 inhabitants and investment in telecommunications per 100 inhabitants. vices sector. These numbers are based on the Planning Commission���s criterion that monthly total per capita expenditures of less than Rs 49 (rural) and Rs 57 (urban) in 1973���74 prices constituted poverty. Thus the pace of change remains di���cult to predict. Current revenues of the central government exceeded current expenditures.10 Source:Planning Commission. and state laws must be consistent with central laws.638 21. Mahalingam. and the level of enforcement. tutes that have mushroomed in India in the 1990s (NASSCOM 1999).. ital and intermediate goods at more competitive rates in a timely way.7 lists the winners. Clearly. This was re���ected in an increased share of exports of goods and ser.218 ��� 0. Bangalore has gained international recognition as being among the hottest tech places in the world���a distinction that places it in the same league as Silicon Valley. ture variable. vestment that would require substantial resources. the Taiwanese ���rms Acer.4158 1. and un. 100 percent subsidiaries. Altogether. and thoughtful comments were an invaluable guide to policy pri. and Indira Gandhi is appointed prime minister.1 billion in 1991). Interview with S. food consumption by the poor. The catalogue of ���hard decisions��� (Government of India 2000. 1971. forgers. but the 94 Montek S. while having only a limited e���ect on reducing the costs of carrying stocks. The trade union arm of BJP has opposed the amendment to the Industrial India���s Fiscal Situation: Is a Crisis Ahead? 69 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 19. stress the quality of venture capitalists rather than the supply of venture capital. When the economy seems to be at last on the verge of achieving sustained and rapid growth. Asia/Paci���c Research Center. prices.2478 ���0. 8 percent in 1995. oped world has enthusiastically embraced the e-business paradigm. graphically and in terms of their initial income levels. D. under which states will State-Level Performance under Economic Reforms 119 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 15.220 435 2. 122 Montek S.: Clarendon Press. The Bangalore: The Silicon Valley of Asia? 185 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 26.877 408 61 9.Losers (1991 Super 100 ���rms that dropped more than 50 places by 1999) Century Enka Commodity Birla 5. at least for those enterprises that are competing with private enterprises. the former chief minister of the abysmally poor and poorly governed state of Bihar: ���De. but also distract attention from the deeper challenges and opportunities that IT o���ers for the Indian economy. which is the ability to compete in the long term. the IT sector is expected to be the largest Indian exporter. At the top are designers who conceive and plan software projects. mercially viable computer following IBM���s departure from the country meant that Indian users relied on imports of a wide range of models and vintages from di���erent manufacturers. Monetization of the de���cit could be in���ationary.0621 0.Rajasthan 5. Indian ���rms had no alternative to providing contract programming on-site (at the customer���s facilities). 1996c. she was the Herald L. ence with which to review the state of ���nances of the union and the states.97 6. Cashin. and tele. over one-fourth of the population. and PCB indus. This variable alone explains almost one-third of the variation in growth across states. The rec. portant given the earlier history of extortionary tax rates. hardly re. pricing of public enterprise output such as electricity. conducted periodically by the National Sample Sur. While the growing tra���c of managers and policy makers between India and Silicon Valley has obvious bene���ts for India. Working Paper. instead of being constrained by pricing determined by a government regulator. also government owned. The task for R&D has moved from indigenization to developing products with technology that is distinctive and proprietary to the ���rm. I would like to say a word about what I think Sax. They personify the new opportunities in both countries that can be based on mutual respect and progress.R. themselves a carryover from the heyday of socialism and heavy industry in the 1960s. cent statements of four former prime ministers who had headed coalition governments and even of the prime minister who was in o���ce in 1991.820 451 5. get for 1998���99. More. Sanjaya. She would like Indian IT professionals to work in India and solve Indian problems instead of gravitating to Silicon Valley. each ���rm did much the same thing.ed. 3. Little.asp]. The major. subject to a maximum of $25 million. and foreign exchange reserves were falling. India���s Fiscal Situation: Is a Crisis Ahead? 67 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 ing share of government expenditure available for essential functions such as defence. the banks were all nationalized. and maintenance.New Delhi: Government of India Press. in any case. tions serve as an even more serious bottleneck. The distinction of the delegation showed a tradition of respect. All the confer. were to be subject to Indian labor laws. Likewise. timate losses for what is not there. where it gets its man. those countries whose economies are most ���exible will best be able to cope.026 Exports 93 177 35 286 201 4 Total 583 767 1.607 316 Mukand Commodity Shah 5. the personal tax collections in any given year are a function (f) of the size of the aggregate tax base. 206 AnnaLee Saxenian 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 Finally.6 12. the search for explanations appears to un. The change in R&D investments is particularly dramatic in the pharma. It should be noted that these estimates are costs to existing importers and exporters and do not include the exports and imports that do not oc. convergence and levels of income: Evi. Additionally. and of labor reform. For example. It can be expected that the pro.8 percent estimated by the ���nance ministry. and its long-term e���ects. ment occurs in STPs that are insulated from the day-to-day challenges of doing business in India by dedicated communications links. more than double that of the other poor states.. which permitted foreign investment in insurance companies (up to 25 percent of equity) and otherwise began liberalizing insurance law. are seen to evolve a set of policy measures and incentives to provide special support for the encouragement of small-scale enterprises. As a result. and capacity expansion. an incred. Onewould. which together account for about one-third of the population of the fourteen states. duce costs and increase e���ciency have to date been limited. K. Second. which for forty years has made essentially the same 1960 Morris Oxford.e. stands in marked contrast to earlier years in Indian economic policy making. it is increasingly recognized that existing labor laws will require signi���cant changes if growth is to be maintained and accelerated. Nestle. The introduction of the STPs coincided with the initiation in 1991 of the economic liberalization process in India. In particular.and inter-���rm porosity. the Ministry of Finance.410 1. ing the discussion of infrastructure. mained peripheral to world markets throughout most of the 1980s.��� The 18th Anniversary Lecture of the Center for Bank. have increased the already high share of em. grammers and not product development skills. Moreover. especially for the typical technically trained.162. Further. are of Indian origin.668 10. provements to India. Perhaps the biggest contrast between Bangalore and Silicon Valley.the di���cult but largely successful transformation of a multiple rate (more than a dozen rates as recently as 1997) excise structure to a nearly single-rate manufacturing level value-added tax. Even with permission. all of the discussion in this volume focuses on areas of Indian eco. and analysts questioned whether the halfway house. Table 3. and that this requirement hobbles the ���nancial sector and results in ���. and others to host ���ber-optic backbones. achieving further re.1 Impressions of Change in Ten Industries Leading Players Industry Sector Major Drivers of Changes 1991 2000 Pharmaceuticals Signing WTO. Nevertheless. constrained technological up. except that the postreform acceleration of GDP in the national accounts is much sharper. Noll 7. gets are almost exhausted after paying the salaries of a bloated bureaucracy.1Introduction: Much Change. the powers of the recently created regulatory agencies in telecommunications and electricity sectors are be. sources to the states.1The Evolution and Structure of the Indian Economy There are many good economic histories of India���s economic evolution since independence. and Smithkline Beecham all representing the liberalized environment in which they can operate. six be.1 percent of central government expenditures and 1.640 5.39 35.World Bank. small changes were made. 1984���98 The post-1984 policy changes were crucial to the growth of the Indian software industry because they allowed domestic producers to exploit do. The poorer-performing states have generally lagged far behind the others in this dimension.��� in which dollars earned from a narrow sector like IT (which remains under 1 percent of gross domestic product) sustain an increasingly strong Indian rupee and hurt the competitiveness of other less productive sectors of the economy (Mukher. The subsidies given to the loss making ���rms sometimes help to keep the product prices arti���. The constitution has assigned exclusive responsibility to the states for most matters concerned with the life and welfare of the population. ent state. Bihar. The next largest groups of H-1B visa holders were from the United Kingdom and China. in fact. dia���s limited success on the products front.8 ���1. would have resulted in a crisis at some point. reforms that resulted in the government���s borrowing at mar. While the devel. While it is more di���cult to es. India had only 0. and Ronald Fernandes. Irri. 1999a. present research re. supplemented by poverty alleviation programs directed at iden. as opposed to packaged. metal products. the gen. cult to perceive. If the ���rm I work for in India wishes to export something from our base in Pune. investment data from p. There is an accumulation of evidence that many public expendi. The suc.16 8. ment���s recent commitment to reduce its equity in nonstrategic PSEs to 26 percent or less. dustry in India has been highly visible as a rapidly growing.5 Corporate Tax Elasticities Corporate Nonagricultural GDP Fiscal Year Tax Rate at Factor Cost 1984���85 ���1.930 1. are tied into processes that have not changed.150 2. and ���nance ventures in the 1993���95 period. Overall. how can it be made so? What policies would ���encourage producers to experiment with developing new products and services for the domestic market���? The examples she gives suggest that she has in mind products and services not very di���erent from those serving industrial markets.San Francisco: Public Policy Institute of California. All the products she mentions require electricity. petition changed with liberalization. The as. The results of the 1999���2000 survey.. India infrastructure report: Policy imperatives for growth and welfare.S.405 19.1a).1Development of Economic and Social Infrastructure The most important instrument through which government policy can help to accelerate development in a liberalized economy that relies upon private investment to achieve growth is the provision of basic economic and social infrastructure. Washington. though in a growing economy debt-GDP ratio could grow inde���nitely without violating the conventional solvency criterion.85 3. resulting in higher revenue collections.45 35. One hundred twenty members of parliament ranging across party lines have asked for a discussion in Parliament of each and every PSE to be sold to private parties. neers newly enriched by the industry would emulate the lifestyles of their peers abroad.052 R2 0.36 Mexico 0. Krueger and Sajjid Chinoy 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 44. which limited demand and hence the volume of production. we must note that other entrepreneurs have been forward. at the national level it is gener. portance. Germany. tor was publicly owned. The contrast was clear. inated by the Department of Telecommunications (DoT) and two govern. if India is to achieve anything approaching her growth po. Acharya (see comment) notes that. Krueger and Sajjid Chinoy 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 Table 1. and. can change and states initially excluded from acceleration can catch up.1). 2 This includes collections under the amnesty scheme.8 11. tax and expenditure reform. Singapore. bor legislation. modular work. The de���cit was estimated at 6.7 Software producers bene���ted from general policy changes such as the devaluation of the rupee and the growing openness to foreign direct investment.25 percent of GSDP. and all growing in volume at 20���30 percent annually. Doing Business in India: What Has Liberalization Changed? 157 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 Table 4. is another factor generally re. The total resources devolved from the center to the states in the form of the statutory devolution of the states��� share of cen.6 Hero Honda M otors Engineering M unjal 15. Foster and Mark R.560 769 Essar Steel Commodities New 21. 1994 (%) People. India���s labor laws are often criticized because retrenchment of labor and closure of units both require the permission of the state govern.18 What was unusual about the government���s response to the 1991 crisis was that the prime minister and ���nance minister began addressing the under. vatized serves any social purpose: For example. targets were to be implemented through in.Super 100 ���rms that increased pro���ts 400% or more since 1991 Hindustan Lever M ultinational 97. developed a new digital signal processing chip that has become a standard. Of this. The devaluation of 1966. sion remains at an aggregate level and ignores some noteworthy elements: 1.Punjab 3. ployment. The solution to this problem does not lie in backtracking from reforms. outs from the center in the form of ways and means advances from tax transfers and grants due to them. 1998.340 788 9.1 96.7 SPIC Commodities Chidambaram 24. telecommunications. compared to the price of gas in West Asia. who participated as a policy maker in the initial period of reforms and is now a prominent journalist and economist. the RBI issued revised standards for income recognition. and access to the top echelons of their clients. resulting in heavy reliance on railway transport for goods. dom disturbance term. and the advantages for the industry I have already listed are a potent mix. placing greater priority on the agricul. but the availabil. are available at lower wages. Tax expenditures (i. which produce software in India and export it through satellites. stricted the debate over IT policy.1. illiteracy.16 (1. and the lead has been taken by the better. Thus. you know. the appetite for risk among ���nancial institutions. had a GSDP growth rate of only 3. All this while. eral new players enter. rious e���ects on other producers. ists on India and on policy reform. we can identify eight. license new technologies.658 10. Thirty-seven ���rms of the Super 100 in 1991 were owned by six business families. Sonia Gandhi. and both levels of government o���er implicit subsidies (e. Not only will there be gains to Indian con. Ritch Professor of Economics. 66 per cent are aware of the issue.org/en/stats/stats0. Logically. See for example. Tr to the tax rate. ble guidelines within which the relevant departments would act on these matters. However. ernments. but re. References Ahluwalia. dustry.6 6.686 685 5. Ronald. and police���are being computerized in order to both reduce cor. 1/2 to 1 working day port dispatch must be personally authorized by an excise inspector. such as Punjab. Sachs. ing importance of petroleum and telecom enterprises. ment. The stationarity tests adopted by Buiter and Patel (1992). Consequently. appointed in July 1998. but their importance emerges repeatedly in the chapters by Forbes.8 6.5 (continued) Sales.379 123 3 19 M ahindra Sterlite Industries Commodities New 18. buyers are likely to seek alternative sources in this competitive world environment. which is about 33 percent of total investment in the economy.Mahanagar Telephone Nigam Ltd.618 65 4 6 Products and Commodities Smithkline Beecham M ultinational 5.Kerala 3. successful Indian economy. the states cannot directly monetize any part of their de���cits. cially in the larger states. Today India is at a stage where. ducive to rapid growth.830 145 6. Sahota. Peoples��� Republic 113 4. paper) 1. mented with this possibility thus far. its underestimation of cost recoveries in publicly provided ser. If no query raised.New York: Oxford University Press.23 12. See Nayar (1983) for a background on India���s approach to science. Ahluwalia 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 Table 3. Narasimham (known as the First Narasimham Committee). Ahluwalia 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 11.16 All 14 states 43. the provision of health and education services. the supply of venture capital in India remains very small by in. World Bank atlas. which can be expected to increase growth further.0021 �� INF R2 ��0. (SEBI). A 1999 McKinsey study projected that revenues would grow to $87 billion by 2008. or software in the 1990s. capabilities both useful and useless developed si.95 7. reduction of subsidies (section 2. bution to poverty reduction in the country. Indeed. There was much publicity when the ���rst PSE was privatized in December 1999: Mod.2 211 1. It has the right sign in the second period. and De���cit. Of course. The inclusion of future investment in un���nished projects in particular is likely to introduce a larger error the more poorly managed the investment program. In the case of food. Doing Business in India: What Has Liberalization Changed? 141 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 sion in no more than a little table in a side column of the daily newspaper (rather like the weather report). most consignments are not physically checked. the best being a pioneering e���ort by Ashok Desai in 1969 with a follow-up in 1980. It is time Indian industry found out which it is. real estate is far less expensive in In. accord. however.8 8. Doing Business in India: What Has Liberalization Changed? 143 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 16.5 Seven of the top ten ���rms by sales in 1998. since small ���rms are often labor-intensive.467 4. there are portfolio investors in the United States who are so wealthy that they want to gamble on the fortunes of small. They span the entire spectrum from being world-class IT solutions companies to providing sta���ng solutions to o���er. Shultz Acknowledgments xi Abbreviations xiii Chronology of Major Political and Economic Events xv Introduction 1 Anne O. and venture capitalists in the region. ing that underlying economic policies would be altered.85 13. the R2 obtained from equation (10). Suresh. ports that the participation of the poorest quintile in the population in PDS as compared to the average is lower at 92 percent and the next two quintiles participate at a slightly higher rate than the average. This intense competition is manifested in state-level policy initiatives: Today nearly twenty states in India have announced IT policies. tures and revenues. bor is against privatization. Videocon. Thus.022 8. Eleven of the seventeen ���rms are in traditional commodity businesses. At the time of editing this volume. international data show India to have been well down the list in terms of the number of tele. riousness of this commitment and its impact on the size of the bureaucracy can only be evaluated over time. Especially in the latter case. and manage the process by which companies interconnect with each other so that multiple systems can still op. ter for Research on Economic Development and Policy Reform. the center should levy the VAT and share the revenues with the states. There are no objective measures of the quality of governance. The current charges do not even cover the costs of operation and mainte. and even kidnapping in parts of some states. sionals have easy access to the latest developments in their domains.8 7. ing manpower-intensive-IT-enabled services using local employees. try was never subject to licensing. forms.135 71. and J. ���Managing External Economic Challenges in the Nineties: Lessons for the Future. this volume. Its annual strategic review provides the only detailed and up-to-date ���gures on employment. 170 AnnaLee Saxenian 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 Table 5. ciency-reducing e���ects.b If no 1/2 day problem. Videocon. The industry is currently regulated by three di���erent regulatory bodies: the Securities and Exchange Board of India Bangalore: The Silicon Valley of Asia? 183 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 24. 45 (processed). There is no doubt we have the brains. Last.17 63. can venture capital industry in India.Stanford University. risen to a peak of 0. ment. eas where reform is clearly desirable. to technology import. The prime minister rightly emphasized that the Inter-State Council. eral government de���cit was back up above 9 percent of GDP by 1999���2000. and liberal rules for investment and taxation.17 Clearly. especially for the IT industry. together with em. and where appropriate measures can signi���cantly accelerate economic growth. the prime minister has embraced Dr. And now I live at Stanford.Aldershot. The information technology Doing Business in India: What Has Liberalization Changed? 135 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 Table 4. The section on ���IT for all by 2008��� calls for development of e-commerce or cyber law. India: Macroeconomics and Political Economy 1964���1991. to Indian software houses in the 1990s. such as cod. sequences does not imply that they are sustainable. Joshi and Little (1996) concluded that ���In June 1991. once heard an economist start a comment with the phrase ���In a country like India. was regarded as having been less satisfac. Bombay: Oxford University Press. in an industry whose demand levels are in.S. are concentrated in the non-commodity industries37 ���consumergoods. bor markets work. While action on these fronts is clearly desirable.85 1998���1999 2.892 1. the thrust of the IT revolution in the city is heavily tilted toward services. ticals. nated.51 Source:Capex database.770 405 2.The ratio of direct taxes to GDP improved markedly during the 1990s. and technology into new ventures. 146 Naushad Forbes 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 22. The government intervened directly to ensure that ���rms that did grow up got more subsidies. and in part to the fact that because public-sector projects are typically underfunded. Honda.78 15.086 13. puts it: With a waiting list of ���ve to eight years for a scooter (or car. The acronym BIMARU. W7260. eign ownership. Table 1. this provides a strong basis for an expansionary ���scal stance. and. are lobbying the Indian government to permit them to purchase foreign ���rms for $1 billion with no prior approval. in 1999 SEBI convened a com. S. the 125-percent rule was amended to 133 percent of best past production. stantial part of their revenues are spent on wages and salaries alone. raised ance given to bring goods to docks. Re���ecting import liberalization. it is evident that increased educational opportunities and attainment for young people will be crucial. Naushad. See. Joshi and Little (1996. As pointed out earlier. model Morris Oxford). IT has the potential to play an important role here. In 1991. She notes that the software boom is concentrated in the south. and Malaysia. As in the case of personal tax collections. ���I did not come all the way to Washington to criticize the United States. however. Without reliable telecommunications links. state. will require both the continuation of liberalization and regulatory reforms as well as in. twice reduced long-distance rates in 1999���2000. Rina Rosenberg helped coordinate conference invitations and correspondence. India: economic development and social opportu. it is clear that much infrastructure expenditure must be ���nanced by the government. centives facing the states and encourage more prudent public-sector ���. in April 2000. Roads were highly congested. Selected Asian Countries. tives in an attempt to attract investment. tal stock market capitalization.2 23. Weingast. tential that could be tapped through proactive initiatives by policy makers to attract investment in this area. Rao and Nath (2000) point out that reducing ���s. has been reduced over the years to negligible lev. ���nally. and all other notations are as de���ned previously. prietary technological base. had dried up. Turning now to the contrasts between Silicon Valley and Bangalore. For example. Mahatma Gandhi was a hero and had a great following among students in the United States. erational (interest-inclusive) de���cit of the consolidated public sector has re. Thanks are due to Shankar Acharya.878 581 Dabur Pharmaceuticals Burman 9. Kanwal Rekhi���s sage advice improved both the organization and participation in ways that added greatly to the outcome. 3.13 9. That is. 1958. He read out this poem at a breakfast meeting of the World Economic Forum/Confederation of Indian Industry���s annual India Economic Summit in December 1999.420 3. the re. machine tools. Venture Capital Saxenian���s concern about venture capital has been widely shared in India. Soon after taking o���ce in 1998. and market share for the software and other IT industries. In India���s economic reforms and development: Essays for Manmohan Singh. with one state chief minister comparing any link between devolution and ���scal performance with IMF conditionalities! The commission submitted its report in June 2000 on its initial term of reference. The losers: Of the 100 ���rms in the Super 100 of 1991. 2000Liberalization measures are initiated in the areas of insurance. spite high levels of ���scal de���cit in both decades. First. and in a competitive envi. Suntory-Toyota In. For merly. ization? While the Indian example demonstrates so clearly the dangers of autarchy and import-substitution.��� 2. and owners in the private sector were not permitted to produce more than their licensed amount without amending the license.233 from about 0. 338 billion.389 1.C. ments. Proceeds of disinvestment. contrasted with China���s 173. ch. dered. See [http://www.S. (1141) In his view. the ���scal situation was in fact improving until 1996���97. posal in India since the Computer Policy of 1984 and the Software Policy of 1986. He notes the widespread belief that the reforms Introduction 3 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 have bene���ted the elite. which operates local telephone ser. Center for Research on Economic Development and Policy Reform. NASSCOM���s data includes only the numbers provided by its members and thus over. which pro. high real interest rates and reduced growth. formance.450 862 6. Notes:Abbreviations are explained in chapter text. ties. as the quantity of imports de. The e���ectiveness of the tax administration is determined by its ability to deal with non-���lers. which pioneered indigenous dig. Similarly. Silicon Valley operates in a vibrant market economy that reveres innovation. Tax Policy Reforms In the area of tax policy. one of the most corrupt and ine���. Prognosis The title of Srinivasan���s paper suggests an impending ���scal crisis. It is reported. In part because governments were not secure and in any event consisted of coalitions. involving changing the entire role of in-house R&D.382 1.000 crores in 1999���2000. and so on) that in���uence the productivity of labor. Sajjid Chinoy was a doctoral student in the department of economics at Stanford University. cial public sector.0 98. sonal computers.The most striking feature is the growth of competition. and the slow-growing states su���er from a severe competitive handicap in this area.Gujarat 27. design and Indian experi. Indian programmers also had the unanticipated advantage of familiarity with the Unix operating system in the 1990s. The hi-tech boom has the potential to bring unprecedented economic prosperity to the Indian populace and to help raise living standards for people across all classes of society. 1997. tral public sector enterprise (PSEs). it is di���.in its 14 February 2000 issue. and society. it is not just a matter of being in the right business: It is even more a matter of management.43 All India 44..3098 0. could have o���set���at least in part���any decline in investment. table 8. coverage and exemptions. a de���cit that is normal for a developing country. in all four of the low-income states of Bihar.C.4 Products Asian Paints Consumer New���Choksey 9. eration of the PSE to private hands. Firms such as Posco. He notes that the recent increase in civil servant salaries earlier in 2000 (without the commensurate reduction in force advocated by the pay commission) had several ill e���ects: Not only did it worsen the ���scal situa.693 509 9. is a prime source. nies. teriorating during the latter part of the 1980s and 1990. manded fell in response to higher import prices. 6 percent per year. Rama. Since state plan expenditures amount to about 4.29 55. Intergovernmental transfers: Rationale. subject to an entry fee and a net-worth require. since hinterland states may su���er from disadvantages be. However.N. with overmanning and high sta���costs. she rightly stresses the bureaucratic and legal obstacles to the emer.200 1. sults of policy. and this survey provides a broad and comprehensive overview of the current ���scal situation. Krueger and Sajjid Chinoy 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 31. might not ���nd these argu. design. which restricts the degree to which they can self-���nance maintenance. 2000. and keyboards���all separately. That has the e���ect of keeping resources in low. Some manufacturing activities were reserved for small-scale businesses. and present and past policy makers were invited to explore a number of topics of particular concern at a conference held at the Center for Research on Economic De. It also requires the center to share the revenue from certain taxes in proportions recommended by the Finance Commission. sociated with doing business in India. Krueger and Sajjid Chinoy 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 balance. These are ad. aged export production and exporting. India: Policies to Reduce Poverty and Accelerate Sustainable Devel. V. Historically.686 ��0. stance. Most Indian markets have always been com. and for Brazil. fuse Tatas permission.370 6. concurrency and competition in Indian Feder. To be sure. given that more than half of such expenditure consists of revenue (or current) ex.630 1. Fortu. ing from the implementation of the Second Five-Year Plan. tainly operating at.K. 78 T.1 Comparative Per Capita Incomes and Growth Rates. vestment permitted.1 percent of GDP in 1991���92 to 8. We turn our attention next to the importance of these reforms. its level in 1990���91 just before the macroeconomic crisis. and customer���s problems���absorbing the rest ofcorporate R&D e���ort (Desai 1980. ployee services. re. ology of the NIFP study for its conceptual weakness. Nonetheless. made it to the top six in terms of growth of GSDP in the 1990s.Karnataka 5. came something good to do. sure that the resources provided for this purpose are well spent. dence from states in India.5 and 5. Likewise. 1995. COM [http://www. at the beginning of the crisis. in or.4. 1990V. Through 1991. land reforms. sity. to develop a mass market at India���s lower income levels. despite improvement in acquisition guidelines. What makes the scene distinctively Indian is that both the bul.35 9. Orissa. volving twenty-year-old technology) and a moratorium on capacity expan. The center has the responsibility to provide crucial public goods.06 (0. Tel Aviv. the Ambassador. led by the Bharatiya Janata Party (BJP).168 for France. a domestic market forthem. bor market regulation in India discourages the growth of employment. it is worth examining in some detail. and was allocating government resources to activities that in many instances were detrimental to growth. but in fact they have not used the powers available in many areas. remaining quantitative restrictions (QRs) on imports by tari���s. 10. and names of local programmers (Heeks 1996). Even after the pace of liberalization slowed in the rest of the economy in the mid-1990s. However. but this conclusion needs to be quali���ed: The 1999���2000 survey may not be fully comparable with the earlier survey because of certain modi���cations in the method of collecting information on consumption.80 28. Furthermore. In other words. greater attention to in-house R&D. the reforms do not hurt any states.989 534 Arvind M ills Consumer��� Lalbhai 9. structure to improvements in the quality and accessibility of education. der to set the stage for an analysis of policies and policy changes that can enable even better performance in the future. Tb to tax base. Because what the central government pays its employees inevitably extends to institutions ���nanced by the central government and central public-sector enterprises. Nayar. ticfertilizer production. The same document is explicit on the need for ���hard decisions and many fronts . Delhi).C. warn. both geo. and Suhas Patil for sup. These states not only improved their position relative to the average. that one of the major objectives of (then) ���. ducted just before the 1996 election. counterparts. and slow-growing states must therefore place special importance on identifying the factors that would stimulate private investment. vide quality IT education. as they would crowd out investment.1 5. and of the potential for improved performance were these bottlenecks addressed. pliers than the SEBs.3500 1994���95 ���0.3. become more knowledgeable about local capabilities. dustry (as had been advocated by Gandhi) to provide employment.35 to transfer one rupee to the poor. as discussed in section 1. The bulk of the demand is for the last category���support workers���and as IT applications in the economy grow. 1. At any event.86) (2) g ��4. dations for linking performance on implementing ���scal reform with trans. watt hour to agricultural users. India���s Unix programmers had a skill that was extremely scarce elsewhere in the world. and universities. quire a sustained attack on the political and bureaucratic obstacles to the adoption of IT in both public and private sectors. faced with growing globalization and competition.686 Corporation M adras Cements Commodities 5. formerly semi-annual. Birlas from twelve to nine (six of the nine remaining Birla ���rms belong to the Aditya Birla group). ther the government���s annual Economic Survey. which were among the good performers in the 1980s. tional resources if user charges are raised to eliminate the need for cross. Subsequently. in which there is underfunding of public-sector investment proj. in particular. Ahluwalia 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 with a population exceeding 300 million is obviously not an easy task. and not one con���ned to IT. In the case of India. The issue was not state ormarket. Also. Customs agent physically examines goods. and the next few years may see even more progress in this dimension. 1980. Banks are still primarily government-owned.5 1997 4. and India���s share of world markets fell. high-risk. cause other states will have an incentive to side with the center if any individual state deviates.56 5. uct from Bangalore. arresting opposition leaders and rescinding some civil liberties. There are both theoretical reasons and historical evidence to justify rewriting the ���scal arrangement between the center and the states. Improvements in urban infra. 35 percent of the world���s population below the poverty line (World Bank 1999). Industrial growth. Economic Survey. tion. Srinivasan 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 Srinivasan suggests just such an approach following the notion of mar.5 1981���90 6.182 4. a price that adds up to among the worst development records in Asia. it hurts itself by taxing its exports to other states. D.4The Role of the Central Government The resources problem of the poorer states and their consequent inabil. This. While conditions for private economic activity have improved markedly.06 13. ducive to rapid growth. The government of India has. Surely one should then seek these links at the state level. never an attempt to minimize cost. industrial value added originating in public sector en.69 8.3. The content of R&D in industry. He continued. cent of the variation in the income-tax collections. but its growth performance is very poor. and the response had been a traditional stabilization program: The most notable had been those of 1966���67 and 1981. When poor infra. continue. Little. 1996a.79) (9) g��4. ���Only 7 per cent of the very poor have heard of the reforms. penditures on subsidies will obviously reduce the resources available for ���nancing the expan. employers hire fewer workers at high wages at the expense of other workers who might ���nd employment. the process of reform was initiated as early as 1985. suggests that to the extent reduction in de���cits re. comes���the Indian people are considerably better o���than they were a half. of course. 76 T.���3 Seshagiri was able to push through his policy. sidies were simultaneously removed. Section 1. They recounted descriptions of send..8 In 1997. Instead. However. especially for production of capital goods. and sug. lem for ���scal management and a major challenge for ���scal reform. The central government alone spent more than Rs.3 percent in 1995. Long. Even though these requirements have been reduced in recent years from even higher lev. The composite explanatory variable is signi���cant but does not add to the explanatory power of the investment variable. or the rate of in���ation would have accelerated rapidly. petro. The importance of both qual. State-Level Performance under Economic Reforms 105 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 10. as with the state of infrastructure. In a related issue.135 423 Baroda Rayon Commodity Gaekwad 2. one to ascertain the true state of the banks��� assets and liabilities.Andhra Pradesh 5. ment expenditure reported in the capex database for government projects and private corporate sector projects in each state at the end of the fiscal year 1995���96. Let me hasten to add that although such a change would help to improve e���ciency in the use of scarce resources at the disposal of governments at all levels. Heinz School of Public Policy and Management.690 349 5. the combined impact of the ���scal tightening and the ex. and inconsistent. ceutical ���rms has doubled in the last ���ve years (to US$70 million) as ex. indus. Major subsidies of the central government are budgeted to ab. multaneously. health. Take another example. and supports the proposition that the states must increase their own ���scal performance along a number of lines. Sen writes that ���until 1991���92. tries.30 Further gradual reforms are taking place in the ���nancial sector as well.810 426 CIPLA Pharmaceuticals New 6. tation from Nehru. the telecom sector in India has been dom. and this freedom combined with a strong feel-good factor of op. tivity grew at an average annual rate of 5. International ���nancial statistics yearbook. In fact. where Indian con. and the restructuring of state-owned enterprises. Indian programmers thus learned to work on a variety of platforms. was relatively modest. erating in a new era that could only be good for industry. outlined below. p. much less a higher one.898 8.310 399 5. but that intention was not realized. Between 1991 and 1993. rectly. Doing Business in India: What Has Liberalization Changed? 159 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 34. in 1995 the comparable ���gures were 448 for India. be an area of priority attention for state govern. and the perceptible trickle-down of economic prosperity are compelling reasons for continued optimism. There simply is not so much capital belonging to rich Indians who are prepared to make a throw. which abol. that some of the factors that make for greater competitive advantage are immobile in the short run. By 1990. 104 Montek S.. ers. greater the larger the literacy variable. could have a signi���cant im. ductivity has fallen (with random and unpredictable strikes). and for the year ending March 2000 should be around 35 percent of total na. they will make investing in India. More. Moreover. in part because small-scale industry is normally labor-intensive and could poten. ment���s reliance on a closed domestic capital market for ���nancing public expenditures.. Soft. or about the same as in 1990���91 just prior to the crisis and reforms! Among countries with over 20 million in population. These results certainly suggest that private investment is one of the principal drivers of growth.02) 1991���92 to 1997���98: (5) g��6. Malaysia.54 24. That is exactly what India achieved. it seems evident that a ���nancial collapse may have been imminent. it sets $50 billion in software ex.Bureaucracy in the states has proliferated to a much greater extent than in the center. Srinivasan 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 and suggested that they could become the basis of a consensus (The Hindu. Since the relation of corporate tax collection (CT) is nonlinear in the tax base variable (NAGDP). Electricity shortages and voltage ���uctuations impose considerable costs on ���rms (and even households that buy electric generators). availability of venture 202 AnnaLee Saxenian 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 capital. Her remedy to avoid these ill-e���ects is threefold: 1. ores.7 ���1. over a period of time. India already has the design capabilities for developing such products. M. where success depends critically on speed. This implies. sistance provided to support state plans is not subject to speci���c perfor.820 821 ISPAT Industries Commodities New 13. National Association of Software and Service Companies (NASSCOM). however. gests some topics for further research. In addition. to insure that these businesses bene���t from the tax exemptions currently granted to software exports. the FIPB. ning Commission. N. In an attempt to address these limitations. ment has always been stated as an objective in India���s plans. or cement factories and sugar plants. and. sets up a framework for electronic commerce in India. Fi. and Thapars have been in the public eye more for family feuds than for what they have been doing to restructure their ���rms. duce less than they otherwise would have. in which MNCs are strongly represented. It was only as growth fell and pro���t margins were squeezed that ���rms started to seriously restruc. Both the number and value of technology collaborations have risen sharply since 1991. In addition. and power supply. and others. Hence. At any given time. The World Bank (1998.2 Trend of enforcement e���ectiveness in India where CT refers to corporate tax.8 percent of GDP (Reserve Bank of India 2000. dian leftists su���er. the ten largest ���rms account for more than 50 percent of software exports at the same time that they represent a small proportion of the total ���rms in the sector.324 149 4 4 M RPL Commodities Birla 26.0 percent in 1998���99 (Government of India 2000. 1980The Congress party returns to power in the seventh general election. contrasted with private and central power sector plants. Moreover. mented by borrowings to ���nance state plan expenditures. and it became evi. ports. neered the computerization of land records. toilet paper and household utensils. section A. ward foreign investment struck a chord with the BJP government.C. it will certainly not be possible to sustain the growth achieved in the postreform period. IT also o���ers potential e���ciencies in a wide range of private-sector ac.1. increasingly.N. Moreover.690 1. in spite of the incentive structure. fertilizer. In contrast to Silicon Valley���s vibrant economy and the American gov.119 320 Indian Aluminum M ultinational 10. now of the Indian Institute of In. ISBN 0-226-45452-5 (cloth : alk. cent. Srinivasan ���rst shows the causes for concern about the size of the prospective de���cits and then assesses the current structure of expenditures and revenues in or. For adequacy and e���ciency of road infrastruc. sire to pander to employees who were threatening to go on strike against the corporatization of service-providing units of the DoT. tainly.Haryana 6.612 675 8. which ruled that all nationals had a right to a passport. Similarly innovative applications of IT can help develop lo.611 706 9. which is certainly indisputable. The need for an articulate and public lobby for liberalization is best seen by this illustration of its absence.4 The Software Technology Parks (STP) scheme introduced by the DoE in the early 1990s insured that the infrastructure and administrative support for exporting were available inIndia. Issues such as whether. cutting social and technical networks that. and Silicon Valley. if any.3 in 1960���61. their scien. Agencies responsible for delivering economic and social services face a situation in which their bud. Total software revenues of $3.263 232 2. 1998. First. These statistics point to a substantial di���erence between the quality focus of Indian companies and their counterparts in other countries. but also its current consump.08 8. The role of technology in telecom expansion in India. randa of Understanding for ���scal reforms in states. However. cially low which in turn may spread sickness to other ���rms in the industry as well.5 percent. ing the price of gasoline to the consumer. and enhanc. some enterprises will simply have to be closed down. frastructure by the government. develop.895044 23. royal. forms. Bangalore. In most countries in these cir.668 332 5. employee stock option plans have become fairly commonplace. the president of my university. The stabilization itself entailed several measures.013 65 Modi Rubber Consumer Modi 5. taken from the initial letters for Bihar. annex table 8.G. India was the most au. able tax administration to detect and penalize noncompliance more e���ec.29 Some of this rise has come from a fall in interest payments. but also helps to attract more investment. versus the 6. ues in the number of private ���rms performing R&D (about 1. ence of Indians in it. In addition. for example. standard products. tional resources for investment. 839 for China. year period from 1983���84 to 1993���94 saw a relatively modest reduction of about 7. but private operators were burdened with licens. 1999b. there is no discussion of other dimensions such as liter. Extending this approach to the state level implies that poverty reduction in the major states requires rapid growth of GSDP. for example. out government interference. This section also recommends an overhaul of ���nancial regulations to enable the accelerated expansion of IT.94 13. This is not likely to happen. The di���erence in time zones facilitates e���cient project execution. New Delhi: NASSCOM. (Electricity information is from India Today. Overall. During that period. India���s talent pool is a unique asset.3013 T R2 ��0. Millions of Indians who live in poverty have a tremendous stake in the improvement of India���s economic performance. The result has been an ambivalent attitude to foreign investment by Indian ���rms. with a greater multiplier e���ect.850 518 Laboratories Proctor and M ultinational 4. and become almost universal by the early 1990s. Ahluwalia 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 3. the FPC deci. That enabled us to take the lead In processes that succeed.7 Novartis India M ultinational 7.22 52. however. table A3. However.060 141 Castrol India M ultinational 9. and e���orts to privatize existing national entities (beyond selling minority equity. wealth and exports. While there were some further changes in the control and regulatory environment and the role of the public sector.16 or invested as much. the country with the longest re. and Lupin. The ���rst few years after 1991 were a honeymoon: The sudden freedom to enter new ���elds. and at 4. because of Kerala���s low population growth. ing public expenditures away from other activities that are better left to the private sector. cient in the country. and India has a great advantage on this front. The sector���s compound annual growth rate (CAGR) for 1994���99 exceeded 40 percent. tion���the magazine India Today. However. dence suggests that banks are still relatively high-cost. given its numerous overseas participants. in. and re���ects the di���erence with which the government pursued a policy of self-reliance. It is argued here that such de���cits are unsustainable given the current stock of outstanding govern. for data collection. were falling in dollar terms. perimentation and innovation.171 258 2. or only about 10 percent of the total investment in the economy. Government of India. ment-run companies: Videsh Sanchar Nigam Limited (VSNL). A ���nal advantage is attractive ���nancing opportunities. India had only 2.. and resources in order to play a growing role in coordinating and facilitating local experiments across India. there are indeed similarities that have facilitated the emergence of knowledge econ. This would be especially useful in the area of education and would also help voluntary organizations and village com. Second. Srinivasan is the Samuel C. Andhra Pradesh. 1987. forms will increase the payo���s from those reforms already undertaken.917 881 5. by the de���cits of only three countries: Nigeria. Narayan Murthy. what had begun as ���reform by stealth��� became almost imperceptible reform. xvi Chronology of Major Political and Economic Events 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 1989A coalition of non-Congress parties comes to power after winning the ninth general election.020 140 2 5 Glaxo M ultinational 7. salaries make up almost 89 percent of total non-plan expenditures.It is not true that all the richest states got richer relative to the poorest states. In this view. This chapter re���ects on a few areas of this change: Section 4. Charan Singh leads a new coalition as prime minister but soon loses support. political. Geneva: ITU.24 6. b). The question is not whether further reforms will be on the agenda: It is whether reforms will take place quickly enough to ac. the ���scal de���cit was not reduced as much as had been announced at the outset of the reforms.075 1. The adverse e���ects of large ���scal and revenue de���cits on virtually every important dimension of macro-economic performance are well known. gression equations.��� This quality makes all the di���erence. Finance Minister Singh addressed the stabilization measures rapidly.0 percent during 1995���98. More important. Some refer to this business as ���resum�� selling��� be. it had been decided that certain industries (the ���command. ground reports: This is the ���rst time in India that representatives of so many ministries. the need for raising tax revenue as a proportion of GDP is evident. In an age in which money is a com. vey Organisation (NSSO). in the new environment. chief ministers of states line up to beg him to invest in their states.318 452 Siemens M ultinational 10. and loans of less than Rs 2 lakh (Reserve Bank of India website). as regards more aggressive privatization. The software industry in India: A strategic review. cal e���ort by industry and built a wide-ranging manufacturing base. icy of high tari���s. ommendations in only thirteen cases were or are being implemented. (Economic Times. the actual increase granted by the government was even more generous than that recommended by the commission. and the banks hold no more government paper than they are required to hold.6 150.2The Problem of State Finances As recently as 1990���91. and Caroline L. but it is impor. Directed lending. Park. Mukherji (2000) describes historic examples of Indian breakthroughs in mathematics and metallurgy that largely bypassed the general population and economy. Krueger and Sajjid Chinoy 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 29. section Bof table 4. In spite of the sector���s rapid export ex.965 648 2. ���������. These naturally include. the poor growth performance of these states cannot be explained solely by the low levels of literacy. ac. the tax rates. It proposes the exemption of public and private infrastructure pro. doubling the rate of growth for the slow-growing states. Desai. The Information Technology Park. such as Cummins with Kirloskars or the HLL-Tomco buyout mentioned earlier. limited government-industry interaction. since it has been in India so long). and make a much bigger contri. such as defense and a common currency. with more than 70 percent of the population deriving its livelihood from agri. it is important to identify the rea.Exports and imports as a percentage of GDP represent exports of goods and services. which run close to 70 percent. However. 86 percent ���nanced by the state.820 451 5. industry associations.5. frastructure development. There were also a number of other areas in which the gov.131. tax. notably: 1. It might be a jungle out there. Mimeograph. Finally. and the extent to which controls sti���ed economic activity had been reduced. vantages in export markets).0869 0. Glaxo. and H. Improvements in access to education have probably reduced the severity of that bottleneck.5 95. The task of reforming the complex set of taxes. the government has also decided to introduce compe. e���cient agri. Public-sector road transport services incur large losses. However. ily. Food pro. Second.710 2. havior over the 1980s. it has subsequently fallen further and is put at 1. and there is considerable scope for further improvements. We therefore estimated a regression equation relating growth to a composite variable obtained by multiplying each of the capex investment ratios with the literacy rate in the base year of the postreform period. 63). continued to be decently pro���table even in 1995. and a capability for designing and fabricating industrial plants and machinery. 113). state. excise. clude IT-enabled service exports such as data entry. States are thus encouraged to attract such projects.33) The absence of any signi���cant impact of plan size on growth is sobering. 1980���81 to 1990���91: (4) g��5. The other leading industry associations are the Federation of Indian Chambers of Com. cused ���rms. and as early in science and technology as India. relation. the wholesale price index rose 11. Per Capita Income Country 1950 1950���74 1974 Burma (Myanmar) 57 2. erty taxation is urgently needed.9 percent of GDP in 1990���91. mote the domestic software industry and facilitate a ���quantum jump��� in software exports by providing Indian ���rms with liberal access to the latest technologies and software tools to enhance their global competitiveness and to encourage higher value-added exports.340 ���4. well un.8 93. debt 20 Anne O. cant increase. and sales. By 1990.2lists the inspectors that one medium-sized engineering ���rm (and an engineering ���rm experiences far 138 Naushad Forbes 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 fewer regulations than. Despite the agenda discussed in section 1.org/]).52 Singapore 1.9790 As expected. and then accelerated in the post-1991 period. for example. government support (through 66 T. and steps through which businesses have to go has diminished. (1145���1146) Although India as a large importer would face a rising supply price of im. and often as equal partners with their parent organiza. portant part of the growth acceleration strategy for poorer states. that delays in getting permissions and clear. structure. I knew that. Balakrishnan and Ramaswami (2000) state that the de���nition of subsidy in government ac. Even in the 1970s and 1980s. ers of growth in this environment will be private investment and improve. In this paper we are concerned not with convergence in the sense of underlying long term trends.822 194 2. Balasubramaniam and D. vested interests have formed in ensuring that they are not touched. Though the STP scheme was meant for 100 percent export units. Industry revenues grew in excess of 50 percent annually after 1991 and aggregated US$5. mundson also ably contributed to preparation of the volume for press.4 percent of GDP in 1991 to 18. 19. Data are from Tendulkar (1998). have pioneered a potentially far-reaching.2). smaller enterprises and individuals are nowhere close to tapping the potential e���ciency gains from e-commerce. productive. Consequently. This is simply not true: For every HLL that has thrived. ity.R. etary Fund. Sahota. Ra. It also sponsors high-pro���le conferences and studies. The central government has tended to ���nance state government de���cits over the past several years. and that participants��� several needs were met.000 people with research facilities for at least three GE companies���GE plastics.000 households���but the sample size is too small to provide reliable estimates of poverty for individual states. lock-cart being overtaken by a Hindustan Motors Ambassador (a 1960s. which is certainly needed if there is to be a signi���cant reduction in poverty in these states over the next ten years. Because of the constitutional division of powers between the center and the states. but simultaneously will increase the payo���s to be achieved by still further liber. Grieco.8 percent of GDP in 1990���91 to 3. It is possible that growth rates of income may be higher because of remittances from mi.100 698 5. ture in public discussion in the performance of individual states.02 9. Chan. can now be paid in a ���ve-year lump and can issue penalties sum.0724 ��� 0. as does Ahluwalia. Tata Tea. in ���scal and ���nancial policies.55 11.013 144 4 3 Products Jindal Strips Commodities Jindal 10. quate reporting in prospectuses and requiring restitution when false infor. has laid out an ambitious plan for upgrading its overburdened roads and other in. Forbes documents the extent to which the number of permits. with disinvestment. The change in industrial products has been even more dramatic: Essentially all capital goods can be imported at a nominal tari���of 20 percent (and an e���ective tari���that is negative in some sectors). However. geoning revenue de���cits of Central and State Governments. One of the positive developments in recent times is that many states have taken initiatives in this area and have introduced simpli���ed procedures and one-window arrangements to improve the business climate. nance and food and agriculture minister. BPL. Parochialism is not limited to India. tors that were formerly ���nanced entirely by the government. and Caroline L. Public sector enterprise (PSE) sales may have declined from 45 percent to 37 percent of total sales. the reforms generate potential gains for each state.39 However. 3. the gross ���scal de���cits of the center and states together were 356. failure to cover them in depth is simply a re���ection of capacity limits as to what can be accomplished at one con.340 747 4. duced in scale by 50 percent. India was poor even by standards of developing countries. dia has largely removed quantitative restrictions and scaled down tari���s. the constitutional limitation that con���nes excise tax. economic locations) or by reorganizing production in a more e���cient man. b Today. this means that investment in the state plans is only about 2. It was only after GDP growth accelerated in the 1980s that a trend re. India���s $4 billion in software revenues in 1998���99 repre.4 185. It seemed appropriate. There are also contrasts in business domains. tributed primarily to the ability of these two states to provide an environ.V.97 1995���1996 3. largely due to the creation of cross. the garment industry was removed from Introduction 5 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 the industries reserved for small-scale enterprises by parliament. conditions for strikes. but as long as the design of the pro. 204 and 210). It is due to a shortage of labor in an industry with high gestation lags for training.000 e-mail messages providing pol. A distinction is drawn between competitiveness in the short term and technical capability. the corporate tax elasticity with respect to corporate tax rates and the tax buoyancy with re. Little. ment���HLL. the FPC decisions led to a direct wors.097 918 5. requiring upfront invest. First. This assertion needs to be modi���ed to the extent that migration of labor from slow.780 190 2 4 Duncans Industries Commodities Goenka 10. Further. communications sector. ports a strike against liberalization. ample. This metropolis of around 5 million people.3. Cashin and Sahay (1996). IT producers typically must work closely with cus. A similar large-scale e���ort is needed to modernize the railway system. Published 2002 Printed in the United States of America 1110090807060504030212345 ISBN: 0-226-45452-5 (cloth) Library of Congress Cataloging-in-Publication Data Economic policy reforms and the Indian economy / edited by Anne O. Contrasting the evolution of the labor markets in India and in East Asian countries is instructive. Instead. 1997. Of course. The opposition parties have condemned these proposals. 3. vice providers could. grant labor. with the re. bitious roadmap for India in the IT sphere. It will exacerbate regional in. However. gether businesses and venture capitalists.5651 1986���87 ���0. high-quality. 30 Anne O. India���s producers face increasing competition from other low-wage. where future IT growth depends either on continued supplies of low-cost skill or on shifting into higher value-added activities. collaborate with established IT producers to take advantage of their respective strengths.various issues. Annual report. V. selves are nondiscriminatory. the period starting in 1991. nance the plan.8). and present prospects for expansion and improvement. This would ensure per capita GSDP growth of around 4 percent. Shankar Acharya seeks to un. (b) termination of the VSNL mo. In sum. which is surely a recipe for political instability. In fact. and S. and Orissa have initiated the ���rst steps toward privatization. M.A. as already mentioned. health care. and in part by the appreciation of the real exchange rate. ment action. or the willingness to take risks. and yet there are very good reasons why such an analysis should be of special interest. is roughly as follows: 1. Times Computing Online. countability for the use of these resources should be left to the normal po. and Orissa. Stanford University. For the ���rst time. the composition of government expenditures has not been altered to increase their e���ciency. telecommunications: In 1997 there were only 18. There are a number of ways IT can help. cussed in section 4. because of resistance from bureaucrats who fear the loss of control) or because they are far too ambitious���at least in the short run. We ���nd a signi���cant relationship between growth and three of the individual indices in the second period.97 percent. ceeds is used to reduce the stock of debt or the de���cit.7 1994 7. row at administered low interest rates is appropriate. In Continuity and change in Latin America. tio about equal to the average. tries for 1950 and 1974.West Bengal 3. or primary health centers per hundred thousand of the population. tor between a good VC and an also-ran. oriented software producers. The e���ects of reserva. Employers cannot be induced to employ workers when the wage is above the (marginal) productivity of those work.46 40. increasing the ratio to 2. In a ���rst chapter. which have caught the fancy of the stock market.com/ItspaceAlpha/features/print/Itpolicy/ seshagiri. at least in select urban areas. b) the continuation of too many product-speci���c exemptions. Second. You must admit. the proceeds from such a sale should be used to reduce the government���s liabilities by the same amount through reduction of public debt. ment.000 new professionals every year. it is quite possible that. and Rs. cent of total debt in 1990���91 and was four times the stock of external re. ally fall. 1999b. and K. the National Front coalition forms the government supported by the Congress party. electricity. ately kept very simple: It is the number of villages with water. 30b. terest payments on domestic and external debt (World Bank 2000. like the state electricity boards and state road transport corporations. How much of this technical e���ort has been useful.5. the intro. Four decades of protection and inward. peaking at 6. The material in this section is drawn from Agrawal (1997). multi-user operating system) even though foreign companies were developing proprietary systems at the time. but the people���s access re. but also low labor and cap. By accelerating the deregulation of telecommunications and other key sectors. the evolution of a more rational policy in respect of state PSEs. capital���rich countries like the Philippines and China. Discussion Paper no. 661 705 1 DRL 212b 31 7 Source: Research and Development in Industry1992���93 and 1998���99. Silicon Valley is the seat of innovation in several technology domains: The region has attracted prod. and ine���ciently run. Under MPF. This would be a better system than the existing one. agriculture���s share in national income had fallen from around 50 percent in 1960 to 32 percent by the mid 1980s. well above the international standard of 10 per. one can sum up India���s technological achievements by 1991 by recalling Nehru���s ���practical proposition��� of making second-rate goods in the country instead of importing ���rst-rate ones. 1996���97. world environment to the demands of ���rst-world corporations. so that the ���scal de���cit fell from around 7 percent of GDP in 1993 to 5.3Tax and Expenditure Reform In the decade of the 1990s gross (i. it is hard to judge how ���rm and enforceable its recommen. 199). Long-run growth trends and convergence across Indian states. Within a year. tion have not been raised for several decades. Stanford University. mestic resources in global markets. independent reg. The Indian Economy in Global Context 19 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 ing into account the e���ect of quantitative restrictions and import prohibi. and now compete head-on with Pepsi. 1996. the headcount ratio (the proportion of the pop. providing new products.430 94 Hoechst Multinational 2. especially chapter 6. Electrical Can issue a notice and levy None penalties ESIS Can levy penalties None Octroi In case of default.Bihar 2.e. ments need to be replicated in the slower-growing states.3. Madhya Pradesh. the Indian opposition organized a national strike against liberalization.5. formerly paid every year. nine years after liberal. comparable to the pre-crisis level of 1990���91. where India was ranked twenty-eighth of ���fty-nine. Interestingly. ital productivity. as it is the sector in which an innovative policy regime has stimulated a di���erent developmental dynamic. im.M. Korea. Pro���ts 1999 1995 1991 Growth Growth M ultiple M ultiple Company Industry Ownership Sales Pro���ts Sales Pro���ts Sales Pro���ts (1999/1991) (1999/1991) Essar Shipping Services New 4. idated public-sector de���cit stood at around 10. tremely sluggish.250 529 3. dicated that in 1994���95 seven of the eleven major ports were operating at capacity levels above 100 percent. Richard. 81). hardly exists in India. and declared 6 to be no longer sick (Government of India 1999. it is noteworthy that the manufacturing sector as a whole had increased employment at annual rates of less than 4 percent prior to 1980. though. parable rates in industrial countries. cial system. uniform open examinations should be developed so that their training can be standardized. omy. and I. Joshi. The ine���ciency in the distribution segment is a major problem. and o���ers multiple connectivity options. foreign invest. Would Ranbaxy and Dr. and risk appetites of some of the leading VC funds in the Valley.Calcutta: Oxford University Press. the Federation of Indian Chambers of Commerce and Industry). cent of Indian re���ning capacity. At the same time.06 10. but leaving management control ���rmly in the hands of the Indian partner. Gandhi���s ad. typically within a localized community (Saxenian 1994). ni���cant structural reforms.65 7. India���s past experience at the na.3 100 China. Import liberalization no doubt served to enable Indian busi.Doing Business in India: What has LiberalizationChanged? 129 Naushad Forbes 5. there are heavy penalties. In chapter 2.N. Since addi. For example. foreign partici. In practice. the cost of procuring. and they train only technicians. 100. arate chapter in this volume. veloped hand-in-hand with this inward-looking industrial policy regime.2 1985 22.5 STP ���rms are also allowed to freely repatriate capital investment. chapter 2 and Srinivasan (2001. However. ciency. con���dence that did not exist before���largely because India and Indians have participated in the information technology revolution.��� and ���ftieth of ���fty-nine in the importance accorded to in. nance in the public-sector distribution system can be improved signi���. dicrous.4449 0. tion of the overall ���scal problem. with relatively low rates of growth for Uttar Pradesh.. Deve Gowda resigns as prime minister and is replaced by I. the public sector has acted as a brake on private sec. on the other hand. Additionally.1 ���1. revenues. particularly ���scal policy and policy toward small-scale industry and regional disparities. which not only were suboptimally located but also could not bene���t from economies of scale. in my view. formance criteria that would be designed to address the factors constrain. sion. ation of earlier decades. ence. Unfortunately. tential market into a very sizeable customer base. vices.7 percent of GDP in 1992/93. ety. reduction of protection through tari���s and the re. The average target achievement rate every year has been an abysmal 10 percent.��� while simultaneously encouraging cottage in. Sixty-four public-sector enterprises had been referred to the commission.4 13. 1996.3Implications for Poverty The di���erence in growth performance across states.Punjab 5. The alliance between the large software industry and the government has re. thus building in a positive interaction e���ect. What is worse. Agrawal (1997) reports that. proved health to this enormous population makes this economic perfor. but the two leaders agreed on the centrality of economic developmental goals as a top priority after inde.161 1988���89 0. it shares the funda. New Delhi: National Institute of Public Finance and Policy (processed). in addition to the fact that tradi. Gandhi���s party. external borrowing was largely on con. In the past year.5). At the time of writing this article.25 1997���1998 3. However. It would also require a serious change in focus to include the agriculture sec. tion to the transfers recommended by the Finance Commission. their post-tax return has to be compared with similar re. Personnel costs are a key determinant of pro���tability..601 2 2 Hindustan Lever M ultinational 97.Cambridge. in his conclusions. even pro���table ���rms in technology-intensive in. but those situations. analysts and policy makers alike became convinced that growth rates of 7 percent and more were achievable.50 Source:Planning Commission. power. due in large part to the stimulus provided by the reforms themselves.56 6. then. and 30 percent.94 All 14 states 5. 2. Octroi clearance 1/2 day takes place based on shipping bill. table 11). it is useful to pause and assess the state of the Indian economy as of the early 1990s. O���cial data show enrollment rates in primary school to have risen to 74 percent by 1965. which should increase the growth potential of each state. It is generally recognized that a signi���cant part of what is included under the heading ���food subsidies��� in the budget re���ects the ine���ciency of the public sector enterprise Food Corporation of India (FCI). The pol.234 325 Coromandel Fert Commodity Professional 2. based on the recommendations of the Narasimham Committee. This reallocation may be driven by natural comparative advantage. in 1988���89 and 1989���90. inputs. Why the emperor���s new clothes are not made in Columbia. Sajjid Chinoy made valuable contributions both as an author and conference participant. A general lack of access to imports forced much Doing Business in India: What Has Liberalization Changed? 145 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 19. and Australia to work alongside the foreign design consultants hired and to absorb the tacit knowledge that is so essential to building technical competence.370 327 6. again unlike the situ. commodity ���rms like those in cement. Her early work was more on the Silicon Valley end���on the growing pres. portation. oly.11 Estimates of poverty rates. This tech. calling the blu���of na. rather than sale of equity to private investors.) that constitute the cen. Bhagwati. the leaders and professionals in Bangalore have to transition twice a day from a third. and the time goods and drivers are in transit increases.146 510 2. Rates of protection were extremely high even for those goods whose importation was permitted. the private investment ratio proves to be highly signi���cant and has the expected positive sign. but while there is no other country like India. where ���. We have already mentioned that as of the mid-1990s.000 jobs fail to materialize over an eight-year period because of limitations of the telecommunications infrastructure (NASSCOM 1999). ���In rural areas. India generated 143 kilowatt hours per capita. Shultz is the Thomas W. Government Expenditures include center-lending to states. In its second incarnation. The states bear responsibility for social welfare spending under the constitution but receive a large share of their resources in the form of transfers from the center. The three important sectors that are yet to be fully integrated into the tax base are agriculture. State-Level Performance under Economic Reforms 117 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 The general condition of law and order is another aspect of governance at the state level that is relevant for creating an environment conducive to in. a grouping originally proposed in the context of observed com. Both the center and the states can legislate in these areas.8 percent per year. The large NRI community in Sil. free pricing of initial public o���erings. ���Reducing the commission���s power and delay. NASSCOM is also the sole source of IT indus. tional government.0 and 13. 50 billion. The average Indian software professional with two to three years of experience would command a salary of around $10. Tata Infotech. ports have tripled (to US$1. uates ine���ciency and sluggishness in the system. it came up apologetically in a ���we���re sorry we hadto do this��� tone. munities exchange best practices. vasan makes a valid argument that increasing the tax capacity of the states and reducing transfers from the central government to the states as much as possible will improve ���scal policy-making in India. Third. See the chapter by Forbes in this volume for an analysis of how the private sector was a���ected by the elimination and/or relaxation of some controls. but issues of corruption and evasion will need to be addressed. ernment controls over economic activity. The 28 percent of the un. World Bank 1983. which are owned by the center.427 173 National Organic Commodity Mafatlal 5. tremely unlikely to arise. satellite links are readily available up to a capacity of 512 kilobytes per second (although the costs are relatively high contrasted with other countries with which In. There are many determinants of labor productivity. ations total up to six. and P.7 Total Literacy Rate 1981 1991 1997 Bihar 26 38 49 Rajasthan 24 39 55 Uttar Pradesh 27 42 56 Orissa 34 49 51 Madhya Pradesh 28 44 56 Andhra Pradesh 30 44 54 Tamil Nadu 47 63 70 Kerala 70 90 93 Karnataka 38 56 58 West Bengal 41 58 72 Gujarat 44 61 68 Haryana 36 56 65 Maharashtra 47 65 74 Punjab 41 59 67 All India 36 52 62 Source:Planning Commission. Such a setup would approximate the market preserving federalism (MPF) of Weingast (1995). Simply raising the load factors by 10 percentage points would increase the supply from SEBs by about 18 percent.830 145 6. 3. 402) address to Congress in 1936: ���I believe in the rapid industrialization of the country. cent of net revenue receipts of the central government (Government of In. the Indian trade and payments regime was substantially liberal. they could continue manu. prise sector. and that comparisons of growth rates and other indicators economy-wide may be misleading given India���s size and diversity. appears to have improved markedly in the postreform period. it is shortening value chains and cutting into distribution costs. and a consortium of Singapore ���rms. In addition. stantial bureaucratic and regulatory constraints continue to hinder the modernization of the private sector. The government���s economic survey for 1999���2000 does not provide any information on the so-called ���sick enterprises��� (public and private). external relations. NCAER (1999). as discussed above. The coe���cient of variation of the growth rates increased from 0. She came determined to put our relationship on a stronger and more constructive footing.38 However. and improvements in the functioning of any market has spillovers to other parts. Nonetheless. and Orissa. Each of the three auto-industry ���rms mentioned above has sharply increased R&D spending in the last ten years. An interesting feature of the performance in the 1990s is that the popu. and between 1980 and 1990 it was 2. commodate an 8���10 percent annual rate of growth. given that banks are constrained to place such a high fraction of their resources in government paper.164 775 2 8 Grasim Industries Commodities Birla 38. agricultural production had grown considerably. timely. cies. tem). Under the present system. In some of these cases. additional secretary at the Department of Electronics (DoE). 3 State-Level Performance under Economic Reforms in India Montek S. In so doing. nesses to compete more e���ectively abroad. Pune was subject in 1991 and the changes a���ected by 2000.2). 41).2 13. There are a number of skill levels in the industry.4 percent by 1971. over the last decade the government has consistently fallen short of disinvestment targets by signi���cant proportions. Notes:Growth rate of exports and imports was computed using a volume index based on data for export and import values and unit value indices given by the International Monetary Fund in various issues of International Financial Statistics. structure must.387 139 2.630 1. and it seems likely that only those that are able to develop higher value���added products are likely to survive. 2000). Brazilian. turns for their private counterparts. India had not corrected the underlying structural problems of the relationship between the public and the private sector..45 per. 1973The Foreign Exchange Regulation Act. Modis.7 5. They can attempt to enforce higher wages only at the cost of lower employment (at the least) and they may drive economic activity ���underground��� or to the ���informal sector��� at even lower wages. The SEBI board adopted the report in January 2000. as no single party could command a majority in Parliament and coalitions were short-lived.12 The values of composite index for di���erent years are summarized in table 3. no major new initiatives were undertaken. Srinivasan 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 There is a lot to be said for the view that the center���s roles should be con. Total plan ���assistance to the states��� was 12. The main hopes here must lie with closer ap. On one hand.Orissa 2. two-wheelers. one consequence is that the educational attainments of the young diminish. We note that the many limi. For example. hra Pradesh. The esti. Even if the ���scal pressures were allowed to go unchecked. this may have been a cause for In. the Indian economy of the late 1980s was markedly di���erent from that of the 1950s. Given that the largest market for any po. This includes not only the bandwidth and physical infrastructure already discussed.5 1996 7. The term of the commission expired in 1999 and was not renewed. riers to inter-state movement of goods arising from state taxes and controls need to be removed. tively while rendering service to taxpayers for facilitating voluntary com. The per capita GSDP of Punjab. tion that it is better to have a second-rate thing made in one���s own country than a ���rst-rate thing one has to import. Taiwan. most of the recommendations are yet to be implemented.C S E 1. employees continue to re. this constraint is binding on all of them. let alone implementing further reforms. get. set classi���cation. on a relative scale we have slowed down. paragraph 62). India���s labor cost advantage is eroding. ing in new process plants���including the previously dormant textile indus. we need to have some idea of the critical determinants of growth at the state level.88 Thailand 0. See Kim (1997) for a series of such case studies from Korea. Kletzer. ining what the appropriate level of food or foreign exchange stocks would be in order to reduce volatility in food prices and contain any sudden out. which are currently developing the sophisticated intellectual prop. In India. The approach of the ���rst (1951���56) to eighth (1985���90) ���nance commis. Indira Gandhi. Delhi: Oxford University Press. 40. For the primary eq. a recent survey ranked India���s bureaucracy as the worst in Asia in terms of e���ciency and integrity (Mukherji 2000).930 1.Andhra Pradesh 21..7Conclusion What do we know about how Indian industry has responded to liberal. He also argues that there is an urgent need for administrative reform and for the removal of discretionary powers in a country where ���bloated governments have bled their exchequers dry. de���ned as ���rms that are in the 1999 Super 100 index but were not in 1991 (sectionA) and as ���rms that have increased their pro���tability by more than four times since 1991 (section B). table 4. WTO World Trade Organization xiv Abbreviations 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 Chronology of Major Political andEconomic Events xv 1947India becomes independent. Srinivasan and others suggest that the center should condition transfers on the past ���scal policies of each recipi. As competition increased and foreign ���rms began to put together more active India strategies. and in other factors a���ecting the ���nancial environment in which businesses undertook their activities. the imperative for Indian ���rms was to produce everything locally. There were 33. 24 percent of the advances of public. and on the domestic ���nancial sector.603 121 5 13 Laboratories W ipro Information New 18. the public sector still dominated economic activity. China. have not yet had the end of the cold war brought to their attention. In 1992. (d) provision of free permits for last mile access. Table 4.900 263 7. Swaminathan Aiyar. the growth of the 1990s had already pushed infrastructure utilization well above the optimum. tion package. However. can impose Discretionary power greatly reduced penalties (pay ���rst. In fact. Reserve Bank of India (2000. cated a considerable reduction in the proportion of those below various poverty lines: For example. ter. It will account for $4to 5 billion of foreign direct investment into India and will create 2. Gujral. tween the period just prior to reforms and the late 1990s. larly the poor among them.670 221 5.207 1994���95 0. are precisely those in which such public investment expenditure as does take place is also infruc. sion. the current account de���cit absorbed some of the excess demand created by the ���scal expansion. 5.7 4.S. South Korea. an assessment of the impact of those reforms on education and business.: World Bank. for example. it can have only a limited impact. the small aggregate change conceals major change in some industry sectors and ���rms. ���nanced if necessary with borrowing from the central bank. I will not touch on the broader issues of disin. There is little doubt that the ���scal de���cits of several states have become unsustainable. facture locally have had to become e���cient and to introduce new products. as everywhere in the world. although greatly improved.224 1.0 143. Srinivasan���s paper provides a useful survey of some current ���scal problems facing India.3.K. See. utilities. The better positioned states must therefore be allowed. South Korea and many other rapidly growing countries began liberaliz. 19471-IN.B. The task force secretariat also reportedly received some 8. quence. cations for poverty reduction in India. an aspect discussed at greater length in the next subsec. Unlike its earlier experiment at liberalization. support for entrepreneurship. is the scope for improving the development e���ectiveness of central assistance to the states by linking it to performance. P.7 8. she describes the steps taken by the government to facilitate its emergence. Had the ���scal de���cit remained at earlier levels. A.8 Super Losers and Losers 1991 Company Industry Ownership Sales TurnoverPro���tability A. tion system and several government processes. dian bureaucrat is being cast in a new mold. 1964. 34. customers by accessing their computers after regular users had ���n. upgrading the physical infrastructure. The average annual growth rates of real GDP under the sixth and seventh plans (which covered the 1980s) were 5. the e���ciency gains may well be more impor.480 ���227 8.Rajasthan 74. but in���ation nonetheless accelerated. The small states of Goa and Delhi have also been excluded.7 in the United States and 46.1 Ahmedabad Utilities Professional 8.Karnataka 18. ���dent that Saxenian does not share the export phobia from which many In. ferred overseas. In-depth analysis of particular policies then fol. have launched their own drug-discovery programs. they may have to compete with loss-making ���rms that do not pay a penalty for cutting prices. Indeed. Ironically. use of preprinted. wala. table 3. and then consider some of the indicators of the extent to which India���s in. is necessary. ment had had e���ects opposite to those intended and had inhibited eco. Whether some or all of these decisions will be taken depends on ���determined political commitment. This section also calls for IT in rural India.26 (2. as it must be. Naidu and Sheshagiri (currently director of the National Informatics Cen. and ���t.��� The Economist.31 What is not so often recognized is the extent to which even the exist. omy. 161).80) (10) g��3.g. As this paper was being presented on May 31. Here. Little. M. a customer in Sri Lanka wanted to buy a valve we had in stock. While there is some evidence that in 1998 and 1999 the stimulus to growth had di. Increasing the capacities of the states to raise revenue should reduce the adverse ���scal in. dia���s restrictive labour laws has yet to be approved by parliament. The situation in Madhya Pradesh.e.: Oxford University Press. could provide a rich source of technological opportunities if their boundaries were opened up and skill and know-how were allowed to ���ow more freely within the region. liberalization of trade policy. sionary ���scal policy would result in its utilization and generate growth. their expansion would provide for greater employment growth.34 3. on occasion. We note at the outset that there are severe data limitations that limit our ability to explain inter-state variations in per. the immediate responses to the emergency were accompanied by announcements and actions signify. Based on the estimated functional relationship above. tural problems of ine���cient expenditures and inelastic sources of revenue could be tackled. searched. dur. band. and for other reasons. This is one of many areas in which it is clear that policy makers could bene���t from a great deal of additional economic analysis. comes for many Indians are still so low that more rapid growth is manifestly desirable. and the market is considerably more transparent than it was previously.467 4. ularly the removal of licenses on imports of industrial equipment and the establishment of the STPs. While measures have been taken to encourage private investors in the power sector. and the government responds with stabilization measures and structural reforms (see chapter 1). the evidence suggests that the ���scal e���ects of economic reform have put the government in a state of paralysis with respect to triggering growth and reducing poverty.3. The real reason is said to be that Jet Airways has in���uenced each government to re. These super-losers see the old predominate.665 2. Good governance a���ects growth in several ways. at 2 percent of GDP. tral government in 1999���2000 promising ���scal reforms in return for bail. The budget for 2000���01 cut subsidies on food and fertilizers. 6 Anne O. been counter. with Gujarat (8. and competition has driven technical change. Similarly.950 1.196 France 45.Central Bank of Sri Lanka. Therefore. which now account for nearly half the investment and generate more than two-thirds of the net internal resources of CPSs. let���s innovate. India���s federal democracy is increas.042 in 1992 before falling back to 0. which now have to compete with ���rms operating in countries like Singapore. The report is wide-ranging in coverage and sober in its assessments of the current constraints on IT development. ture.. ing ���scal arrangements between the center and the states. He might point to the reported statement of the inimitable Laloo Prasad Ya.062 212 5. How. many ���rms have improved manufacturing e���ciency.000 crores. and U. as has al. workers of a public-sector bakery have recently moved the courts to block its sales to a private enter. On ���scal-federalism. a nonstatutory body established by a resolution of Par. in which banks account for a very large proportion of ���nance for economic activity.��� even imports averaged only 5. The IIR reports that the number of units handled per crane per hour is seven in Mumbai ���fteen in Chennai. Swaminathan Aiyar. 18 February. If roads are badly maintained and full of potholes. Krueger and Sajjid Chinoy 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 15. as recommended by the World Trade Organization (WTO) will put severe pressure on India���s IT manufacturers. table 3. over. a number second only to the United States. which has always been more parochial. Balanced regional develop. was the central challenge for raising the rate of growth from earlier very low levels to satisfactory levels in all developing countries. Some would argue that this process has already been in train over the last few years. 2. this must arise from other factors. ume).2The Determinants of Growth in the States In this section.4 5. changes to Indian Glaxo. Center for Economic Policy Research. In 1975.1 0. The Janata Party coalition wins the sixth general election. 1985. 2000.954���dc21 2002018129 oThe paper used in this publication meets the minimum requirements of the American National Standard for Information Sciences���Permanence of Paper for Printed Library Materials.5The Micro-View The level of the individual ���rm points. with a rise in spending on both technology import and in-house development. some of the infrastructure needs fall exclusively in the area of the central government. Singh���s views 64 T. If. and some poor and some rich states im. Research Policy. typically in the United States). 719. the high level of real interest rates prevailing in recent times is largely due to high ���scal de���cits . it has hap. 1996.61 9. Thus. there are options other than supporting ���scal expansion for the use of stocks of food grains (e. Deaton. 26 Anne O. The states have been assigned large responsibilities in crucial sectors such as ed. organized sector. but supply was not increased commensurately. and Ma. ���������.7 percent of GDP in 1990���91 to India���s Fiscal Situation: Is a Crisis Ahead? 49 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 3. As a result. the op. ���������.420 5. ing Indian brand Thums Up.4. N. She notes the contrasting absence of such rela. The DoE also provides basic infra. software ex. ment expenditures at the state level available at present is the capex database compiled by the Centre for Monitoring the Indian Economy (CMIE).5. for example. such as natural gas in India. deliver them late. Rajasthan. are yet to be dis. growing much more slowly than the average.27 in the second.1217 1997���98 0. better labor skills and work culture.860 1. passed a noti���cation requiring that foreign ���rms that wished to set up a new Indian operation get a no objection certi���cate from any existing Indian partners or licenses.58 percent. Not only is there a data error in such cases.0513 �� L R2 ��21 (1. although Indian laws have evolved to make them IT-friendly. the Indian central government���s average ���scal de���cit during the 1987���97 decade was exceeded 50 T. References Agrawal.62 billion in 1995���96. however. [P]roducts on a particular hardware platform come from here as opposed to an application for a customer. with compressed time frames. ity board in early 2000. By that time.8 340 South Korea 146 5. therefore.16 This allows them to take on a greater range of soft. and Gonsalves 1998). and its exports are negligible. for United States and Mexico for 1995. compared to 294 in Korea. too. trols for steady state income determinants of education. While it would be fair to say that the election manifestoes of most political parties in the general elections that followed the defeat of the congress in 1996 had a broad measure of similarities. A government concerned about the likely impact of a pay increase on the ���scal de���cit would have planned for reductions in other expenditures in order to absorb any anticipated pay increase. There has been much public talk by Indian industrialists of ���level playing ���elds��� as an argument for continued protection. and Natarajan (2001). fertilizers. term underlying economic policies relatively unchanged���especially those policies regarding governmental regulation and control of economic activ.1 provides a brief survey of the evolution and structure of the economy prior to the 1990s. fertil. Unless this is done. Foster and Mark R. The rapidity of its growth indicates the urgency of understand. See Kim (1997) for several such descriptions.509 10. which has not proceeded as far as did ���nancial deregulation. For ex. Software Industry. the investment ratio de. Both of these e���ects represent real costs that must be deducted from the price received by producers when goods are sold in the market at their point of delivery. and started by producing a series of reverse-engineered drugs. and to the Honorable Yashwant Sinha. They argue that a healthy VC industry will stimulate new entrepreneurial entry. the changes are cumulative: The ���rms raising spending on in-house R&D are to some degree a subset of those that have invested in higher technology imports. All other activities could be left to the states. that of a market-oriented indi. and of the way the la.900 441 3. twenty-six in Co. the developmental potential of the current trajectory is quite limited. these subsidies give perverse incentives to become ���sick��� and to remain ���sick���.286 18. none of these restrictions apply. the National Association of Software and Ser. industries. India country pages). The increase in the Gini coe���cient State-Level Performance under Economic Reforms 97 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 6. Buiter and Patel (1992. 58 T. particularly tari���s. Six are software ���rms and four pharmaceuticals. rective ���scal action.26 It is also re���ected in the grow. let alone accelerate it further. One reason for this could be that it is the investment com. ability of service. It is their task to innovate. or us. rationalized the rate structure. nology: The Asian region. The evidence from the United States suggests that such spatial agglomerations of IT produc. and specializations. the government chose not to accept the ���fth pay commission���s recommendation to reduce government employment by 30 percent over ten years. Table 3. 3. the greatest debt is to the conference participants. The absence of any signi���cant relationship between growth and infrastructure is somewhat dis.-based com. however. export controls were removed in some cases and relaxed in others. however. Bihar.Orissa 48. and some were eliminated. Asia/Paci���c Research Center. In the 1999���2000 survey. uation well: ���Thus. ister. formance. the crucial reforms lie outside IT.) per month provides around forty channels. George P. This amounted to 55. we use the maximum marginal rate (MXR) of personal in. and every major international player now competes with Indian ���rms. which in turn is a legacy of the autarkic industrial policy of the prereform era. clusion.070 0. most head. The group���s mission is to make possible 25 million internet con. India and the computer: A study of planned development.N. By any measures���life expectancies. The taxation of agriculture. 70 percent of the gross subsidy would not be needed. 27. and imposes excise taxes on alcohol.New Delhi: Government of India. even. Anne O.8 0. 7. the PDS and other con. the level of poverty in these states is still high and.��� 7. deal was important more as symbol���the national bread company being sold to a multinational���than as reality: The value was $20 million. mainly through retiring debt as working capital has been better managed.4 14. and indeed even encouraged. the impact of the growth process on regional inequality in the 1990s is best seen by constructing a Gini coe���cient for the total population of the fourteen states. be. but. Indeed. eas.G A 6.5 1981 17. Baldev Raj (1983). India lacks the envi. would lay the charge Quite squarely on our Licence Raj. change for business expenses was di���cult. However. Now . Srinivasan pointed out that the Disinvestment Commission had achieved little. Subbarao.2 percent growth recorded by the combined GSDP of the fourteen states. World Bank. C. he was a Visiting Research Fellow at Merton College. 53. export growth in this period was based exclusively on bodyshopping on site (with Indian programmers working at the client site. The revenue loss from these exemptions and concessions is not negligible. A key shift has been the move to involve industry representatives actively in the policy formulation process. and one that needs to be ex. irrigation.5 6. dicate. S. which has discovered ���the passenger. Although he did not say so himself. uity market. 137 Indian companies had obtained either ISO 9000 or SEI-CMM level two certi���cation. India negotiates a loan from the IMF under its Extended Fund Facility.6). For example.38 6. social security. from 1991 to 1994 or 1995. but also on technology import and foreign investment. the software industry continued to bene���t from a series of sector-speci���c policy reforms.42 31. Olekalns. with poor valuation practices leading to very low revenues. However.400 373 3. defense outlays and transfers to state governments.R. Worker productivity rose by almost a third. Ours was half the price of our Singa.965 Exide Industries Commodities Shro��� 6. with her bearing.3 percent of GDP. These are the domestic counterparts of loans from multilateral agencies conditioned on structural reforms. and second. Infosys. Yet. However.: National Bureau of Economic Research. The economic survey of 1998���1999 reported that between its inception in May 1987 and the end of November 1998. but to date these have not had as much of an impact as they were ex. dation and policy change and India���s quest for technological independence: The re. its 4500 employees have been told that only 700 will be retained. Note:These are the inspectors/inspections to which Forbes Marshall. 4. dertake volume production and distribution. We expanded because of the skills. active term. London School of Economics. termined political commitment to truly e���ective expenditure manage.New Delhi: Government of India.170 10. state guarantees given to borrowing by state PSEs have become an easy way for states to circumvent the ceiling on borrowing imposed by the central government. namely the level of invest. The re. When compared with other countries. ucators have long since sought better-quality schooling as a mechanism for improving the e���ectiveness of former students later in life. tis the annual time index. interactive media.���23 The infrastructure section of the IT Action Plan calls for the liberaliza. Indian merchandise exports were 0.3500 1992���93 ���0. 1950���97 Average Annual Growth Rate over Period Percent of GDP Share of India���s Exports in Period Exports Imports Exports Imports World Exports (%) 1951���60 0.704 405 3. The software sector has attracted the greatest publicity. gether local producers. Mimeograph.8543 in 1989���90. Fiscal correction: Illusion and reality. Even the marginal odds of participation���that is. that is driving changes in technology. In other words. technical consultancy services in software development methodologies and quality. including those presented at the annual R&D summit jointly held by the DST and the chambers.4976 ���7. Since a great deal of attention is focused on the size of state plan expendi. a more aggressive privatization pro. Infosys second. West Bengal. Hindustan Levers is a case in point. but the necessary expansion is not possible. clude that the last ten years have seen a continued national consensus on a predetermined reform strategy. The Indian ���rm Nicholas Piramal (NPIL) bought the entire R&D laboratory of Hoechst Marion Roussel as a way of jump-starting its own R&D e���ort. tage if allowed to expand (and small-scale ���rms su���er a number of disad. An examination of the sustainability of Indian ���scal policy. though still below the national average. tions governing the industry.171 1991���92 0. dian context. ern Foods. buyers are seeking low-cost sources. but it is especially so for the poorer states. Indeed. counted for nearly half of all visas issued in 1999 (forty-seven percent). ernment was fully cognizant of di���culties but unable to address the issues. 23. the Telecom Regulatory Authority of India (TRAI). ���������. sults that shed some light on these issues.29 November 1999. is basically correct. tors.8543 1.2 per. estimates are that about 270 mil. A visit to the ���nance ministry convinces one that the In. To provide perspective and place these topics in the context of other ar. if not unwarranted. Rajasthan.389 1. 100 billion is again set for 2000���01. Urban infrastructure is also an important precondition for attracting private investment. rated signi���cantly during the 1980s (Joshi and Little 1996. in this case in India. tively tap the expertise of successful Indian technopreneurs in the United States. through over 30. for ex. India and China engage in a month-long border war. He has been a vocal proponent of national pol. Of course.70 4. which re���ects public opinion reasonably accurately.052 12. (Parthasarathy 2000a) The growth of o���shore facilities also allowed some established Indian companies to begin building a base of in-house knowledge and to develop internal training programs. It is better that they should be in India. one suspects. propriate signals to users and for raising resources for investment.5 percent in 1993.6 13. based on the thin sample surveys. And stirred things up quite a bit. Chandrasekhar (2000) argues that. terests. ing public health.036 56. National Institute of Advanced Study. 2000). such as Uttar Pradesh. gous to the framework governing the national long-distance sector. Eliminating subsidy programs is not easy. signs or acquiring engine technology.2 EID Parry India Consumer M aruguppa 9. 210 AnnaLee Saxenian 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 III Government Activity 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 213 6. ganization (WTO). ���������. plement projects. or liaison men in Delhi. does not have easy ac.org/publications/ PPIC120/ppic120. The World Bank estimates that the cost burden to importers and exporters because of these and other ine���ciencies is about $250 million per year. D. Linsu. The factors contributing to the decline are the fall in PSE investment from 4. while rendering growth even less employment-intensive. this translates to land and infrastructure at very low prices. ���fteen engineering industries were granted automatic approval for increases in licensed capacity at the rate of 5 percent per year. it registered 157. Latin America and Japan compared. nity. Bangalore: The Silicon Valley of Asia? 193 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 Comment on Chapters 4 and 5 N.220 435 2.024 ITOTR2 ��0. and Srinivasan 2000). we be. In spite of widespread illiteracy. as well as ���fteen days��� wages for each year of service with the employer.II.nasscom. bility for productivity and higher-value added activities. Consequently. if the economy is to be able to attain and sustain a growth rate of 7 per. for example. ture projects at the state level are ine���ective in promoting their stated eco. 2000. the states that have not bene���ted from the re. and those whose ���nancial support made the en. it would have to begin with high volume. rose to 41. perative to reduce excess demand and bring down the rate of in���ation in 1991 even if there had not been balance-of-payments di���culties. the government attempted to jump-start the liberalization process with the New Telecom Policy (NTP) of 1999. for the reason that most banks are publicly owned.213 2 0 Indo Gulf Corp Commodities Birla 14.6 0. many of which are introducing courses in information technology. But more rapid growth of output and employment will also increase the returns to improving the quality and availability of education. conventionally measured ���scal de���cits understate the ���scal imbalance. serves. sustainable��� (Reserve Bank of India 2000. Budgetary aspects of stabilization and structural adjustment. have performed reasonably well. World Bank 2000. The growth rate is then calculated as r��(antilog b)���1. and there were prohibitions against imports of many goods. China began growing rapidly. vision were to a���ect some states more than others. Hence. but from all users of power. who cannot compensate with electric generators. ���������. especially when one recognizes that the share of customs revenues is likely to continue to decline as tari���s are brought down closer to East Asian levels. The revised estimates for 1999���2000 show a de���cit of 4.49 1994���1995 2. improving the function. In India. It is tempt. 1999. The growing political in���uence of the software indus. Given that industrial licensing led to fragmented capacity in many industries with a dozen or more small players. Indian companies have not been very successful in leveraging this quality focus to command higher price points for their work. Gujarat. Srinivasan. They were motivated by the labor cost di���erence. Hence.5 ���2. The pressure on the ���nance minister. in particular Ranbaxy. Srinivasan 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 by the implementation of the recommendations of the Fifth Pay Commis. as exports grew more rapidly than world trade as a whole. Comment Shankar Acharya I found this a very stimulating paper. pli���ed and reduced to only three rates. there is a Siemens or Philips that has struggled to restructure just as many Indian ���rms have.759 334 1 1 EIH Services Oberoi 4. sure of the damage India has done to its other exports by its continuing pol. increased literacy. Today Andhra Pradesh and the other southern states where the software industry is concentrated are well ahead of the government of In. The high transaction costs are particularly onerous for small business.1 6. let alone convincing. controls a large part of international communications. solved.Kerala 5. Or they might facilitate associational activities that bring to. The reasons for this include severe constraints on bandwidth.731 1. icy reform process through its aggressive lobbying while helping to de���ne aminimally interventionist model of industrial promotion. Entrepreneurs don���t hesitate.01 14. and provi.26 To the extent that labor market regulations and failure to privatize the banks account for these high costs. great climate.S. enue surpluses turned into de���cits. A target of Rs.9 percent. nies were to source it locally. mestic product. and expand capacity meant that everyone was happy. Infrastructure in this context is clearly a multidi. sig. over time. though it is clear that the existing mix of policies was unsustainable and 16 Anne O. the improvement.5 percent by 1993. ural monopolists. we assume it to be constant over time for the purpose of this analysis. the state-owned fertilizer factory. ernment���s laissez-faire approach. Plan expenditurein Indian parlance refers to expenditure on new projects taken up dur. would also increase the distribution subsidies. In addition to reforms in the ���nancial sector and in the trade and pay. nating such long distance partnerships. which in turn has generated a rising interest burden. Automatic approval for investment upto 74 percent is permitted in all except four industries. for example. were carried out and the Indian economy were to achieve an 8���10 percent growth rate over the next decade. Agarwal. Can information technology help transform India? Madras: Indian Institute of Technology. Seshagiri. mainly (but by no means solely) due to the wage-bill (including pensions) consequences of the FPC. And this process of policy reform continues. ture. mained heavily controlled and provided a di���cult environment in which to do business. with no discussion of performance of major sectors. The customs refused to clear the consignment because of this discrepancy. There have been several analyses of India���s ���scal situation. Next. the three states of Bihar. It proposes phasing in the zero-duty regime earlier than was agreed to at the WTO Information Technology Agreement 182 AnnaLee Saxenian 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 22.7 Table 3.3 Sources:International Monetary Fund (1999. entering ���elds like pharmaceuticals. References Arora. etary Fund.��� having to borrow simply to continue debt-servicing obligations at an increasing rate. Indian export growth rates were below world rates.Oxford: Oxford University Press.2. velopment prospect of the poorer states.13 The states have the right to impose sales taxes. spect to the nonagricultural GDP at factor cost are indicated in Table 2C. However. sciously. In the ���rst two years of the reforms. a crisis should be forestalled by anticipatory corrective actions of the type discussed above. were years of signi���cant changes in regulation.08 12. For those of you who swear by prose. an Indian NRI. Table 4. other key aspects of an entrepreneur-friendly environment. By the late 1970s. however. which means pharmaceuticals within the country will be protected by product patents by the year 2005. They also note that the software industry���s per.50 Source:Planning Commission.4An Overview of Priorities for Reform as of 2000 As of 2000. 1996. facturing in India over a long period of time. Waiting time for a phone (in months) in 1995 was 12. The performance of Kerala in the 1990s also deserves special mention. defaulted on its payments to the local subsidiary of the U. Radhakrishna. 46. cially for the more disadvantaged parts of the population. moval of discretion of customs regulations.106 4. First. current account de���cit is around 1 percent of GDP. on a revenue. and director of the Center for Research on Economic Development and Policy Reform at Stanford University. once one con. Howes. and the need for attention to public-sector enterprises and their transformation into more productive entities. ated. uct companies. R.1 61 7 ��� Indonesia 154 187 0. Bangalore: The Silicon Valley of Asia? 187 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 Table 5. ing IT policies that include investing in infrastructure.25 percent of GDP.900 1. ter Nehru as its chairman. which was low to begin with. however. corporate tax rates were also rationalized.3 66 8 18 Malaysia 36 226 0. However. the STPs provide a decentralized.R. ture talent. However. the infants had to grow up and compete internationally. Change has been dramatic in some sectors. most importantly. I think. up from 25 percent in 1991. Ashok Desai.826 484 TELCO Engineering Tata 57. tion of the telecommunications market. Gian Sahota. and Eto the level of enforcement.100 173 8. a suc. Data are from United Nations. Trickle down theory revisited: The role of employment and poverty. live in poverty. ernment began to reform its economic policies. nomic e���ciency and economic growth. The collaboration between the IISc and Encore. and the ways in which those began the reform process. If a prod. a PSE. the variable representing the aggregate tax base should be representative of the real tax base. and investment rates would have to be increased to sus. It is di���cult to imagine any signi���cant acceleration in economic growth without a signi���cant improvement in this aspect of governance. development-stage ���rms. ���scal and monetary policy became signi���cantly more expansionary. Krueger 1 It is well known that India is the second most populous country in the world. Roads. P. and IT-related education. The results are reported below (t��ratios in parenthe. especially di���erences in policies followed by individual states. Ministry of Finance. istry of information technology to oversee its implementation.Madhya Pradesh 36. This illustrates and suggests that the macroeconomic side of the story may need to be told in greater detail. 100 Montek S. and the import of technology has shown a signi���. What evidence I can piece together from a combination of newspaper and magazine reports.780 728 Technologies Finolex Industries Commodities New 5.14 First.6 shows R&D spending for the top twenty ���rms performing R&D in Indian industry in 1998���99 versus 1992���93. was a failure in several re. tricity boards and of the transport sector. which is achieved over the next ���ve years at the cost of increasing ���scal imbalance. Signi���cant gains have also been made in Tamil Nadu.05) (15) g��3. which accounted for slightly more than 10 per. Cipla. To students of economic policy. ity and insulation of the economy from foreign producers and investors with high walls of protection.5489 1. centives for investments in innovation to meet domestic needs. sidy was eliminated. ing shifts of some commodities to open general licenses. Orissa is a coastal state. during the 1980s. gressive.B.7 February 1998.unesco. It is even possible that young Indian engineers would return in far greater numbers than in earlier generations if they saw viable economic op. pendent variable in each case was g ��growth of GSDP in 1991���92 to 1998���99. teachers. especially for individual users. Cam. which was less than one-third of the national average. published Manuscript.5 concludes. ilies had received gratuity and pension bene���ts! 2. contributed to the industry���s decline. country variations. counting implies that the higher the stocks held by the PDS.70 2. Whether they can be better dealt with head on. Moreover. views the evolution of the software industry. 5. However. Kenneth Kletzer. that is. spectable growth rates in future.608 5. erate together as a single national telecommunications system. Olekalns. and Veganzones (1998). and the largest democ.86 2. Amartya. management. ing Studies.44 Of course.1Introduction India has been among the fastest-growing economies of the world in the last two decades. too much should not be made of it���both imports and in-house investment have risen over a small base. In its ���nal stages.4 percent by 1997 and 17. Moreover. Noncompliance has shifted according to the change in the focus of the tax administration. per capita GSDP growth was a little less than 1. water. See Bhagwati and Desai (1970). Part of this loss resulted from the large subsidies implicit in the low price of electricity to farmers and other consumers: for example. They are increasingly being used to ���nance rising levels of non-Plan expen. However. India has become a leading force in the global IT arena. I believe that the national consensus on the direction and content of the economic reform strategy has been somewhat erratic. The trends in poverty in individual states in the pre. der to analyze the policy alternatives confronting the government if a future ���scal crisis is to be avoided. especially from the 1980s onwards. India invested 0. [For the old establishments] their aver. and it is therefore appropriate to consider whether inter-state di���erences in growth are associated with di���er. number two and number three. cal networks which support innovation and bring them to fruition. Ahluwalia 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 7. much of this technical e���ort turned out to be useless. age productivity of labor grows. is indeed a remarkable achievement. this measure eliminates the distortionary incentives embedded in the earlier non-uniform structure. nancial press (in an article titled ���Government Figures of 7. dot-coms. Ramamurthi. University of Melbourne. including the lack of a signi���cant relationship in some cases. source their IT requirements to India. See Ronald Dore���s many wonderful pieces comparing Japan���s early development after Meiji with that of developing countries. Hobday. IT human resources development. creases in living standards. what the import intensity of its ex. At this price it would be a���ordable to 20 percent of the Indian population (which is a very large market. clines. Several foreign ���rms. compared to 406. and 44 per cent approve. The Simputer project represents an important model that should be replicated across India. Mitsubishi. real per capita income was doubling every seven years. Mass. TVS Suzuki. A start-up in Pune imported a bio.1048 14. Less was accomplished in the early 1990s with respect to development ���. they probably come close to measuring investment activity over most of the postreform period.8 Relative Infrastructure Development Index 1980���81 1991���92 1996���97 1. although much needs to be done to improve access to secondary education and quality of primary education. Most private ���rms were quite happy with this state of a���airs. Development planning: The Indian experience. the result is that the quality of ser.6 Sources:International Monetary Fund. tal central government expenditure. baxy and DRL have recently licensed patented molecules to MNCs. but State-Level Performance under Economic Reforms 95 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 4. 12. most of India���s IT hard. Substantial reductions in tari���rates.N. The early phase of economic reforms saw the abolition of widespread industrial licensing. ity and debt dynamics. false recording stopped and so recorded exports dropped. competition is likely to spur increased e���ciency of consumer goods pro. Pepsi. trial unit typically need as many as thirty separate permissions from vari. Table 2C.104 2. facturing and grew more than 55 percent per year in the late 1990s. Indian workers today are contributing to the development of software to modernize foreign govern. All relevant coe���cients have the expected signs and are signi���cant at the 0. ition fees at state-supported institutions of higher learning would help. dustry.4). ac.The BCR is the surplus of current revenues over nonplan current expenditure. following the software lead. 116 Montek S. a leading Indian software company: Indian [software] corporations are at a crossroads. This led some to obtain licenses in order to preclude their competitors��� in.India. 3.Karnataka 5.256 6 14 Larsen and Toubro Engineering Professional 69. 1994. Dis. if we measure PSE performance by the de���cit in their plan expenditure (mainly on investment) relative to their net internal resources. ommended a ���at rate subsidy. Of the 21 companies worldwide that have a Level 5 certi���cation on the Capability Maturity Model (CMM) of the Software Engineering Institute (SEI) at Carnegie-Mellon University. in which P ��average ratio of plan expenditure to GSDP in the relevant period. We note that if such a re. Notes:All numbers are percentages. duction in the price of wheat issued to distribution outlets. tential. but the process must be followed nonetheless.153 224 2 1 Products Indo Rama Commodities New 11.31 January 2000).7 14.India has one of the world���s most e���cient cable TV systems. remains im.67 6.15 12.4 in 1980���91. if they are possible through realignment of existing policies. and both have bought foreign ���rms as a way of entering international markets. but it is also de. While standards of gover.February 2000. India���s macroeconomic policies were conservative. Fees in higher educa. Andhra Pradesh. Kletzer is right in rejecting the conclusion that these facts re���ect a convergence of risk.9 5. India spent US$1. Both Ran.5 percent share of world IT exports in 1995 was less than the coun. ized technical communities with di���ering specializations related to their in. if they can help improve the basis on which future policy reforms are made and strengthen economic performance.182 4. insisting on ade.200) and their concentration in industrial sectors: Transportation. Going forward. The In. There is also the entire gamut of policies that sustain or boost agricultural growth.19 4. the cost advantages cited for India pertain es. 2C. and this trend continued through the 1990s. Conditional convergence is of course quite consistent with di. considering the attention focused on the size of state plans as instruments of development. The inability of governments to refuse to take over the debt obligations of private banks and corporations. tion resist decentralization due to powerful supply-side externalities in the provision of skill. tion and emphasis by pressing current problems and recent policy reforms. India devalues the rupee by 36 percent and receives food and monetary aid under an IMF-World Bank program. Note the jump in R&D spending for several private sector ���rms���up two to twenty times in six years.630 from 1991 to 1995 (DSIR 1995).60 5. Further.01 percent of the total PSE stock. Nonetheless. and it would be folly to ignore them. the number of post o���ces. The growth between 1991���2 and 1995���6 came partly from the growth of old establishments and partly from the emer.6 1. Finally. As long as it is crisp and terse.1Growth Performance Table 3. of course. The team���which is drawn from the Department of Computer Science and Automation at the Indian Institute of Science (IISc) and a local design company. Brazil. ciencies the public sector cannot (as.80 39. ousness of the situation has dawned even on policy makers. Following the 1991 crisis. therefore. laborators. this may not be feasible.45 1 The GDP ���gures for the various years are under the new series. the share of government spending in GDP (including ���lending������much of which is not repaid���to the states) rose rapidly during the decade. investment. shed additional light on the cir.163 1.. Y. 3. 45. tive costs. its workers went on strike (one wonders from what). opportunities to ex. New Delhi: National Council of Applied Economic Research. have created disturbed conditions in some of the slow-growing states. Narayana Murthy and SandeepRaju Comment:Ashok Desai III. the commitment to the reform had already began to sag. ware were not enthusiastically received (Subramanian 1992). a rate normally asso. Indian compa.059 Textiles TVS Suzuki Engineering Iyengar 13. lar characterization of the so-called BIMARU states (Bihar. Understandably.C. but also perpet. but one that is implied by the conventional solvency criterion when all tax instruments are distor. Such an environment is emerging from an R&D group led by the Telecommunications & Computer Networks Group at the IIT Madras. The am. which went on to trounce Revlon���which withdrew from the market and re-entered more cautiously. justment would adjust growth rates upward across all states. Department of City and Regional Planning.02 South Korea 1. Software and related IT services companies now comprise 20���25 percent of India���s to. Import pro.5 Technologies Sources: Author���s analysis drawn from Business India. cause of lack of opportunity (due to low growth) to use the skills that come with education.5065 1985���86 ���0. The result is that Indian ���rms.West Bengal 2. and accelerate the country���s move into higher value-added activities. bought Tetley Tea of the United Kingdom. the government���s continuing borrowing has kept interest rates rela. Determined action in these areas should make it possible to achieve this target. with 6. Ed Shea. part four).2. including newspaper accounts and press releases. to say nothing of capital charges. come a hub around which smaller noncorporate investment also ���ourishes. relying on ���import substitution��� and gov.765 184. Tamil Nadu.860 1. Few countries can match India���s combination of low-wage.N. Ahluwalia 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 Table 3. These data su���er from a number of problems. while in the larger cities cellular phone services from international players vie for billboard space with signs proclaiming Citibank���s sleep dis.S. dertook economic activity and controlled and in���uenced the pro���tability of alternative activities in the private sector. leases resources for investment in infrastructure. Cambridge. tively high.7. and 4.8 2. To assess economic growth.152 1981���82 0. since all states pay the same rate of interest on loans from the central gov. the excellent infrastructure. Arora. The overall ���scal de���cit of the central and state governments is an indicator of borrowing by the government. and the like. And the suc. It certainly cannot substitute for acceleration of growth of the domestic economy in these states. velopment of own SUV and car. it appears that the software boom has exacerbated the ���brain drain. sharing basis. hospital beds. While low living standards and the absence of a safety net may make to. All these features are stressed by Murthy and Raju. 2000.6 665 The Philippines 168 2.Karnataka 38. These estimates are reported in the IIR. Railroads As indicated above. This section tells a story.2847 1. sumers and an allocation of resources to more e���cient uses. appoints Manmohan Singh as ���. Gulati. Lack of growth trickles down. is not yet operational. Under this policy. S. IT is still a very small piece of the Indian output and exports.Bombay. Turning ���rst to the factors leading to the success of Indian IT. proved living standards for the majority of the people.574 37 Birla Jute Commodity Birla 5. He concludes. Comparable networks can be created in other regions. A Compilation of Foreign Collaboration Approvals(Government of India Publications. ommended increase could not have been fully anticipated.061772 ���6. a very large volume of resources under the direct or indirect control of the central gov. while the Indian Institutes of Technology produce among the best engineers in the world. the paper does not give the reader any sense of the evolu. London: Routledge.T. This collaborative process in itself re���ects an im. and more. Indeed. The total cost in foreign exchange of importing such PC components exceeded the cost of buying it whole! See Mahalingam (1989).2 1991 0. educational institu. and this could lead to a deceler. 4. Srinivasan for helpful comments on an earlier draft. whose early ideas helped shape the conference format and top.4087 1990���91 ���0. un. between ���rms and uni. ing fees that the government companies did not have to pay. nomic growth. Three separate regression equations were estimated in which the de. Journal of Law and Economics and Orga. For example. ers were allowed more ���exibility in the use of their own capacities. and for marketing and water management. and that vast disparities would emerge between them and the rest of the population. but controls over private-sector economic activity had intensi���ed. indeed. plications from potential investors.0 percent per annum. is that the success of the software sector could ���nally be in jeopardy because the government has ���nally recognized its importance and created a ministry for it. some indus. This was still below the average.839 824 Kesoram Consumer-TextilesBirla 3. India���s Fiscal Situation: Is a Crisis Ahead? 71 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 Comment Shankar Acharya T. 37. racy in the world as measured by numbers of people. Thus.Uttar Pradesh 20. nutri. Mimeograph. is unlikely to be realized in the foreseeable future. 6.Octroi clearance Goods entering Bombay for shipment out are 1/2 working day exempt from octroi. ists.2Relatively Untouched Areas While it is clear that infrastructure needs will have to be addressed and that the ���scal gap must be closed. despite isolated e���orts Bangalore: The Silicon Valley of Asia? 197 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 to build brand equity. ments had to be withheld for noncompliance on occasion. Then. and 0. But Saxenian���s dissatisfaction is not on the same grounds as that of In. India���s exports averaged only 4. tion are not analyzed in detail in this chapter because they are the focus of the chapter by Rakesh Mohan in this volume. this points to the criticality of lateral thinking and the need for early-stage IT education. on the other. They constitute the core of this volume. Deborah Carvalho and Dafna Baldwin were indispensable in making conference arrangements. we do that with a very broad brush. issues of governance are also important.3 10. The rail.. He also argued that for India to become a major software exporter. NASSCOM. though they run a company which would bene���t from this type of govern. Its relative position has also deteriorated over time. of changing the system of center-state ���nance. There are reports of urban ma���as engaged in extor. It also tried to control the remittances of Indian workers abroad. The availability of engineers trained in Unix was important. Forbes. in an as yet unpublished paper. is clearly called for. new.Kerala 2. and the identi���cation of milestones for implementation.12 However. It is probably higher today. It is an intriguing hypothesis. and the one to raise subsidized fertilizer prices. with whom one will have to compete. Organization for Economic Cooperation and Development (OECD) Development Center.5 billion). rail. Shultz vii India has been very much in my consciousness for at least half a century.Westport. added programming services. State-Level Performance under Economic Reforms 123 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 It would be helpful if Montek wove this literature and its ���ndings into the body of his paper. Bangalore and Silicon Valley are similar in many respects���as. Farm. Nonetheless.12). fosys. the structure of the ���nancial sector.310 1. as is indicated in chapter 1 of this volume. regional inequality would con. implicit interest subsidies on concessional loans. and development. largely because of their concentration of engineering manpower.31 January 2000. Krueger and Sajjid Chinoy 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 Ahluwalia.2 mil.387 139 2. ening of the general government de���cit by about 2 percent of GDP by 1998���99. Gulati (2000) points out that part of the high cost of domestic fertilizer production is due to the higher cost of feed stock. with a view to down-sizing government. Addi. 92 Montek S. it is interesting that these have not been the subject of considerable economic analysis in prior years. In fact. a dual exchange rate system was introduced under which a free market was used for most transactions and a controlled rate for certain categories of im. some ���rms have not responded to liberalization with any substantive change. First. sponse to the strict import licensing regime at that time.965 648 3 9 ITC M ultinational 36. Such high wages make growth less employment-intensive than it would otherwise have been. encour.8 2. With liberalization of investment control and much stronger pres. Infor.100 698 5. etc. Srinivasan advocates a wholesale reengineering of the structure. dian industry is becoming normal. Ahluwalia (1991) estimates that the total factor productivity growth rate (which takes into account increases in both labor and capital inputs) in 18 Anne O.Geneva.5 Fiscal Stance after the Reforms Government Government Fiscal Current Account Year Expenditures ��GDP Revenues ��GDP De���cit ��GDP De���cit ��GDP 1991 20. I���m sure that you will understand. has recently argued that ine���ciency is being subsidized. World telecommunications indicators database. but the return may be high if investments are wisely done. chemicals.01 (0. and 6. He makes sev.3 12. but failed completely. litical process at state level. in the 1980s to 4. However. B. Recommended by the Chelliah Tax Reform Com. Srinivasan 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 8. Wealth and poverty: Essays in development economics.0049 �� P R2 ��0. Georgetown University. subsidies as a proportion of central government expenditures had reached 11.Delhi: Lancers International. Mahindra. Foreign trade and invest.372 Technologies Phillips India M ultinational 16. almost half the Super 100 consisted of ���rms in traditional commodity industries or textiles. 161). as incomes in the software sector increase.45 11. cuses only on the inequality that arises because of inter-state di���erences in per capita GSDP. As an insightful recent study of Indian industry by the National Council of Applied Economic Research (NCAER) says. ner.Haryana 6.488 1. En. they will likely con. GDP growth accelerated to 6. New Delhi. keeping them functioning by covering their losses from government revenues not only causes ���scal problems (as discussed by Srinivasan) but also has delete. Tamil Nadu and Karnataka. At ���rst. India���s Bureau for Industrial and Fi. In���a. between 98 Montek S.296 3. with very low electricity tari���s for farmers and household consumers cross-subsidized by very high elec. and additional ���scal incentives.21 That in it. try. it also prevented policymakers from taking decisive steps to actively promote the software industry. 2000.1gives estimates of per capita incomes of selected Asian coun. Comment Ashok V.619615 ���2.703 106 2 6 M adras Cements Commodities 5. However. Second. It has provided the con���dence that India has a future in the new economy. which exceeds the total central assistance provided by the central govern.033 in 1990���91. States often complain that they do not have su���cient taxing power. inequality does not arise from the rise of a single export industry. Department of Electrical Engineering. mance-based or zero-based budgeting to subject public expenditure port. stitute of Technology just after World War II many of my fellow students were from India. would we not expect to ���nd higher productivity from existing capital stock (both physical and human) and other factors of production? It is not at all clear that investment is a good proxy for this. The state has dominated R&D in India since independence as both funder and doer (table 4.S. beginning by corporatizing the board into three companies. his ���rst full year as ���nance minister.4 82.10 percent in the 1990s. academic special. Singh resigns as prime minister after the Bharatiya Janata party (BJP) withdraws support. formation Technology-Bangalore. Government of India.0532 1. prise. Srinivasan 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 Kenneth M. the government also resorted to borrowing from abroad on commercial terms. form required. Washington. for ex. re. the minister of telecommunications announced that all employees of the Department of Telecommunications (DoT) would be pro. they were doing great. New Delhi: National Informatics Centre. have now set up R&D labs in India. vices provided has deteriorated. In addition to the traditional (and necessary) stabilization measures.5 percent in 1991 to 7.83 percent. England: Edward Elgar. liance with the large. signi���cant changes to the Reservation of Small-Scale Indus.7212 1. The sector has not grown in the past ���ve years. at an average annual rate of 2.00 (0.C. 204 AnnaLee Saxenian 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 plications sail straight through. while explicitly avoiding more detailed regulation or interven. and so forth. thegreater the payo���s to reforms elsewhere.926390 D. most analysts did not regard the results as having signi���cantly reduced the regulatory bur. but inter. 1998. and never involves the number of people or the quality of supply. in the high-income state of Maharashtra. ued.4.World Bank.9242 1.S.14 These rates were relatively low both in contrast to rates achieved in other countries and also given the resources devoted to invest.000 a year. including la. 114) suggest that in India. thing that would have been vigorously contested only a decade earlier.13 internet hosts per 10. 1995.152 1982���83 0. The consequence was a high cost and glob. hardware development and manufac. will face adequate competition. dated by time series data and to determine the impact of aggregate tax rates and enforcement level on the overall tax realization. and by delays in imposition of user charges for a wide variety of inputs in the agriculture sector.Indian ���rms now compete against imports in several industries. It is the purpose of this chapter to provide an overview of the strengths and weaknesses of Indian economic policy and performance to date.840 1. and an evaluation of critical problems in some key areas.��� including the transport of mass consumption goods such as sugar cane.1 percent from 1980 to 1990. any move in this direction would require a major overhaul of the constitution. 1964���1994.52 4. Plainly Speaking. Five companies account for close to 50 percent of software industry exports: Tata Con. cheerfully supervised the e���ort. or other equivalent certi���cation.505 4. India has had liberalization-friendly regimes that have acted as a catalyst for economic growth. technologically independent ���rm. Department of Fertilisers. I am not convinced that changes in IT education are necessary or would be su���cient to generate indigenous innovative solutions to local problems. This export success is particularly striking for an industry that re. and refer to 1950���51.4 9. The Indian ���rm often sought this technology from its foreign partner. drasekhar committee on venture capital. and the lessons learned from their success should be spread elsewhere. 1997 10.164 61. some of them new ones. The percentage constituted by Indian exports of world exports was calculated as an average over the period.020 1. Further. more to the point. cement. As was later discovered.370 6. Oversta���ng of administration and public enterprises was the norm in all states. Although Srinivasan has been guided in his selec. a team at the Indian Institute of Management. in the words of one of the back. the consol. which was intended to protect workers. Economic and Polit. 70 T. and Tamil Nadu (Chennai). This reorientation will have to take place within a framework de���ned by the evolving economic reforms. reviewed brie���y below. Two caveats accompany the analysis that follows. One project will facilitate integrated delivery of eighteen services (such as payments for water. Some suggestions in this regard are o���ered in the next two sections. mained slow and its economic policies unchanged. The data on literacy are summarized in table 3.372 Technologies Technologies NIIT Information New 4.B. were still living in desperate poverty in 1974. ible oils. The net e���ect was positive (negative) in years in which the positive impact on non-���lers and stop-���lers was greater (lower) than the negative e���ect on tax evaders and delinquent ac. India���s four largest cities are among the ���ve worst in terms of water availability. are the winners and who are the losers? To approach this question some. tax and expenditure reform (sec. dustry representatives and analysts agree that a dynamic venture capital industry will be critical to the long-term development of Indian IT. and sees venture capital primarily as a means to encourage the emergence of small. much of this was wasteful.120 5.��� Policies a���ecting technology de. cerns about the security of e-transactions. clared show sales rising 15 percent and net pro���ts 27 percent.. while simultaneously helping to improve e���ciency of resource use in the poorer states and hopefully leveraging a greater ���ow of private in. But now is the time for me to speak Of areas where it can be said That Indians are a bit ahead. annex table 4. Ahluwalia 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 14. Gupta. A few years ago.Successful Indian software ���rms like Infosys.4 18. velopment. the ratio of direct taxes to GDP has increased. and Ranbaxy has even started a modest R&D e���ort in the United States as a way of ���monitoring��� new developments���shades of Japan and South Ko. companies are certi���ed).Karnataka 94. 204. As of March 1999. xii Acknowledgments 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 Abbreviations xiii ARIS Additional Rural Incomes Survey ASI Annual Survey of Industries BJP Bharatiya Janata Party CBDT Central Board of Direct Taxes C-DOT Centre for Development of Telematics CII Confederation of Indian Industry CMIE Centre for Monitoring Indian Economy CSO Central Statistical Organization DOE Department of Electronics DOT Department of Telecommunications FCI Food Corporation of India FERA Foreign Exchange Regulation Act FICCI Federation of Indian Chambers of Commerce and Industry FIPB Foreign Investment Promotion Board FPC Fifth Pay Commission GDP gross domestic product GOI Government of India IDA International Development Association IIR Indian Infrastructure Report IMF International Monetary Fund MOU Memorandum of Understanding MRTP Monopoly and Restrictive Trade Practices MTNL Mahanagar Telephone Nigam Ltd.Greenaway. ter situation would occur and that interstate competition in tax rates and in the provision and pricing of infrastructures services will in fact be a race to the top rather than a race to the bottom. ment. total investment in technology by In.3 5. is adopted. so these numbers should be interpreted with caution. (b) the beginning of a program of tari���reductions. Lately this has been realised and some ex. and 100 percent subsidiaries are permitted by speci���c approval.West Bengal 110.��� The Economist. such as modalities of sale of equity. the range increased from a low of 2.58 48.690 200 3. and will not deal with suppliers whose deliveries are tardy or unreliable. both practices that involve much technological change. including core computer facilities. That was not a risk you could have taken ���ve years ago. however. for dissemination ofagricultural information. Under the new de���nition. Tata Industries. The greatest challenge for Indian companies in the 1980s was the lack of the international telecommunication links that are the necessary infra. but virtuous from the point of view of growth. and M. we should note that the reforms that were implemented were. Mahindra & Mahindra have hired a head of R&D from GM and a presi. This will require more far-reaching attention to development of the in. with the lowest plan ratio of 2. compared with prereform behavior. became a self-ful���lling prophecy. There are some estimates as to the costs of this poor infrastructure. Grasim Baroda Rayon. since independence. a number of measures were taken to attempt to improve that performance. with West Bengal showing very strong growth. by contrast. such as primary education. 5.0 Videocon Consumer New���Dhoot 22.71 percent in 1998���99.5 percent in 1998���99 (World Bank 2000. This is a pity. or at least been miti. dustrial development.770 ���913 8. The pa.150 396 5. operation of state-owned enterprises. Naidu was also instrumental in raising the issue of IT at the national level. trols over the private sector. auc. However. Sometimes it is our many ���aws Such as the lack of patent laws. The picture that emerges of Indian industry after nine years of liberaliza. by and large the major changes had taken place in the ���rst half of the decade.2 percent) and Maharashtra (8. Star. do not mention it among the government measures they feel are required.32 Research and development spending by Indian pharma. consistent equilibrium. has drawn attention both in India andaround the world for his entrepreneurial. Krueger and Sajjid Chinoy 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 22. and both worker productivity and pro���tability increased��� (NCAER 1999. waste enormous amounts of money. omy companies in both places. we should use per capita state income and not per capita state domestic product for constructing the Gini coe���cient. This evidence is based on a small pilot study of the changes liberalization has brought to technology in Indian in. References Greico.. Pradeep. This strong growth was led by the software industry. Johnson. as labor costs rise. they result in a sizable tax on ���nancial intermediation. be. come internationally competitive if India���s computers had continued to cost50���100 percent more than its competitors���.3 percent in 1998���99.1 percent and 29. Many industrialists re���ect that the period from 1991 to 1996 was one in which the sudden burst of freedom meant one could simply do more. Thanks are due to those who enhanced the intellectual content of the conference. one by Anjini Kochar and the other by Andrew D. ���������. because any change in MXR is also accompanied by appropriate changes in tax rates at all other lower income levels.397 2. a India���s Fiscal Situation: Is a Crisis Ahead? 61 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 substantial reduction in implicit and explicit subsidies. and the rekindling of in���ation. India���s gross domestic product (GDP) growth rate accelerated to an average of 5. vastly restricted domestic and import competition.1 percent of GDP during the 1990s (World Bank 2000. Coupled with the major increase in direct for. and Orissa. 1983. ization began. and love the fabulous earnings that software pro. The most critical issue facing the government at all levels is the unsus.S.New entrants to the Super 100 Asea Brown Boveri M ultinational 8. Apart from the emergence of IT as an issue of economic interest at the federal level. water.19 15. let alone resolved. or whether the VAT should be completely in state hands with each state choosing its own rates.1 0.2 percent of GDP in 1990���91 to 4. Whether growth at the rates of the late 1990s is sustainable without further reforms is questionable. as well as to correspon. Obviously. especially education and health. the process involved removing or breaking twenty-���ve di���erent govern. e���orts are on to resuscitate the competition into the basic telecom services through easier entry norms.9 per. Mo. Ritch Professor of Economics. Ronald McKinnon.820 821 EIH Services Oberoi 4. The dinosaurs that roamed the land. and laid down much of the strategy that was to be followed in Indian economic policy until the 1990s. how their own perspectives on reform evolved. 1980s and 1990s Rate of Growth of Rate of Investment Current Account Year Real GDP In���ation �� GDP De���cit ��GDP 1981���85 5.7 12. It is useful to recall the assumptions underlying this approach to testing public sector solvency. was greatly intensi���ed by poor harvests. Datt 1999. while the rest of the country enjoys robust growth.090 559 2. It then turns to the formation of the National Information Technology and Software Development Task Force in 1998 and its policy recommendations that aimed at making India the number one provider of IT products in the world. I have argued that they have not made a plausible. that there are many Indians without access to the necessary education and training to be able to become productive in these industries. see Shankar Acharya. sponsibility of the central government.4 8. Delhi: Oxford University Press. suggests that the pattern is somewhat more nuanced.658 10. the record was better but. road transport. the government could create condi. even without tak. it may be fea. Natarajan 1998). delays in transport and communica. Finally. In the case of Bihar and Uttar Pradesh. From the ���gures reported in Table 2C. the software industry���s growth was driven primarily by exports. the situation of the states is not much better��� revenues from their own taxes have stagnated at about 7. the opening up of the policy debates to include new actors. contrasted with 0. is that the reforms since 1991 have unleashed change that is increasingly self-perpetuating.. mar���in Asia). annex table 8. were successively lowered until. India has yet to see a single large investment by any of the global leaders in this area. one cannot rule out the possibility that ���scal de���cits crowded out private investment. should provide the basis for identifying the critical ingredients of success in accelerating growth. varied from 2. and director of the Center for Research on Economic Development and Policy Reform at Stanford University. IT-focused venture capital.3What has Changed for Technology after Nine Years of Liberalization? Competition from New Firms and New Products The change in the last nine years in the availability of products that are at or close to the international frontier is dramatic.6 percent in 1995. with high-quality regulation.21 The action plan addresses the two concerns that are most frequently ar. 5. Indian labor regulation. sulting process resulted in a vicious bidding war between companies to acquire the license in each calling circle. wherein it said. ized control over the programs with much greater people���s participation. are initiated. Stanford University. since the en. It is necessary to down. The Indian communist parties continue to be Stalinist and against most reforms. ated . in Bangalore. The ���rst category. as we all know. would prevail (Srinivasan 2000. Dr. These proposals are important.1 percent of to. The crisis.1Looking Ahead: Strategies for IT The new communications technologies have generated important new opportunities for India that should not be overlooked. privatization is fairly easy and can be achieved in a reasonably short time. ments and corporations while their counterparts at home remain woefully backward. with slow turn. That overvaluation. SRF in bay Dyeing.750 1. Isher.Boston: Beacon Press. It is possible that the on.010 251 8. What emerges is that. wealth. Meanwhile. ���ne its own pathway in the IT era. Without exam. particularly capital spending.There is strong evidence for conditional convergence.2537 ���3.Andhra Pradesh 28. although it is not clear from her paper. commitment. and Stern (1993. and HLL third. for. serving certain industries for the public sector. but also grew faster in terms of per capita GSDP than they did in the 1980s. of the de���cits. The growth rate for each state in each period is estimated based on a log-linear trend. colleges. Kirit Parikh. Foreign ���rms���as the NCAER study shows���stayed out of the commodity businesses that Indian ���rms domi. But smaller ���rms faced disruption: They���re harder hit by corruption And more entangled in red tape.Oxford University Press. Reform of domestic trade taxes in India: Issues and options. duce capital goods. sumer subsidy programs accounted for less than 2. nancial policies of the public sector sustainable? Srinivasan shows us that the de���cit reductions of the 1990s were short-lived. porting freight over long distances at attractive rates. erty components for semiconductor design. the data exclude investment in the unorganized or household sector. for example. grams. ending March 2000.63 percent of world exports. targets were established for production levels. The negative tax elasticity with respect to levels of enforcement in some years implies that deterrence due to enforcement e���ort had a positive impact on non-���lers and stop-���lers. and others that lead to a rapid adoption and di���usion of innovations. What the liberalization of the 1990s has done is to bring them���and indeed all labour exports���into the main. Of course. nessman. they are complemented by trans. A number of American venture capitalists have already made forays into In. There were disquieting signs on the ���scal front. there seems to be ex. which have a combined population exceeding 300 million. if the center���s commitment is the result of an agreement between all the states and the center.2The Content of R&D through 1991 More important than quantitative indicators is the qualitative issue of just what we mean by R&D: What was the content of Indian R&D? Very few serious studies of R&D in India have examined this question. equality arising out of the unequal distribution within each state. with a large part of the states��� ���scal resources increasingly being spent on nondevelopmental activities.288 4. it is still not glamorous to get rich in Bangalore. we therefore acknowledge the problem. When crisis struck in the early 1990s.html]. ture over the life of the project. It is worth repeating the McKinsey-NASSCOM estimate that as much as $23 billion in IT export revenues and 650. This is a sig. namic that is forcing change in every sector as ���rms are ���nally compelled by new ���rms and by the availability of imported products to provide con. He ���nds that the dispersion in state growth rates has increased. much less to ���nance new capacity.10 5. Kletzer argues that linking policy reforms of states and central transfers to them runs the risk of time inconsistency. ���������. propriate valuation of enterprises. 6 percent. and what is relevant for the development of a state is the volume of plan expenditure in the state by both the center and the state. it contributes (along with borrowed resources) to ���nance the plan. Core infrastructure areas are largely state-owned monopolies. Annalee Saxenian considers the growth of the Indian software industry. London: Macmillan. namely.070 170 3.791 259 2. the combination of longer life expectancy and improved access to schooling itself signi���es an increase in well-being for much of the population. Although both are dream places for hi-tech entrepreneurs. Since the current expenditure com. dian ���rms compete). with the objective of patenting their own molecules. I. and often a bene���ciary industry encourages them. The remarkable performance of Gujarat and Maharashtra. for example. to borrow to ���nance the negative BCR and then borrow even more to ���.Bihar 83. This was largely due to aggressive lobbying by the industry association.860 1.itspace. gross irrigated area as a percentage of cropped area. ing India into the third-largest car market in Asia (after Japan and South Korea). welfare loss to the rest of the economy) and what are needed to sustain its appropriately de���ned role in the economy. [I]t is becoming di���cult for them to compete only on one di���erential���the cost advantage.Super losers (1991 Super 100 ���rms not in the 1999 Super 250) Ballarpur Commodity Thapar 7. reaching 7. in the e���ciency of resource allocation in the economy and the more rapid growth that might be brought about by the shift of ownership to private hands both indirectly a���ect government revenues. clave in an otherwise backward economy is to develop a wider range of in.12 10. Here. In.3 13. the growth rates of all seven states would exceed 6 percent. tor entrepreneurs to be nostalgic for the good old days when they did not face serious external competition: The prime minister���s advisory commit. such as coding and testing. polity. B. trialists think that scientists are unreliable and unworldly. following similar awards by the central gov. with the exception of much simpli���cation and re.059 Textiles South India Corp Services New 17. and the success in international alliances of Indian soft. aged capital-intensive production and discouraged employment generation that was further constraints by the high costs of hiring and ���ring imposed by our restrictive labour laws. industrialists���can intercept with pro���t. 2. New product development and R&D in general.85569 6. there are at least three major reasons for the weak performance of excise collections: a) the generous exemptions for small scale industrial units.4). edu. the major factor is the high demand for bank loans relative to supply. ment to the states in support of their plans. dia���s economic reforms and development: Essays for Manmohan Singh. 2000.5 21.740 1. Millennium budget. ���rms in the STP are allowed to import all equipment without duty or import licenses. restructur. ters with the connivance of the distribution sta���. Interest. It is di���cult to estimate how much bene���t would come from these re. ciated with ���miracle growth��� economies.646 231 Premier Auto Engineering Walchand 5. and other investment in agricultural develop. 4. Krueger and Sajjid Chinoy 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 11. Research Paper 748.1 Tax-GDP Ratio in India (1984���85 to 1999���2000) Fiscal Ratio of Direct Ratio of Indirect Ratio of Year Taxes to GDP1 Taxes to GDP Tax to GDP 1984���1985 2. and despite signi���cant reductions in tax rates during the pe. tural growth to 7 percent. However. The ���nances of the states pose a serious prob. When Sonia Gandhi stands up in parliament and sup. and a range of other scientists. Estimates of National Income. metals. ���ed activities. if any. Economic survey 1998���1999. nomic growth.9 24. But the strategy virtually ignored considerations of scale economies. tions in 1996. The re. 1. E) where PIT refers to personal income tax. which is almost at the 6 percent level.1 Nadir Godrej Industry in India is characterized by contrast. investment process.774 14. 32. there is also a potential reallo. 3.119 320 Infosys Information New 5. and that this may. In fact. in the area of ���scal policies. The remainder of this pa. some goods whose export had been permitted only through government trading companies were decanalized. The Second Five Year plan (1957���1962) articulated a philosophy of state responsibility for development. quality. This is a step in the right direction. The disappointing performance of the Mul. In December 1999. a lot remains to be done���the next ten years are crucial. if slowly weakening. Moreover.3. which grew even more slowly. ernment about promoting bodyshopping. See Ahluwalia (1985) and Government of India. and revenue is earned per line of code. the commitment to drive detailed change through at the local level. (d) a number of export restrictions were removed or relaxed (al. vestment ratio. it permitted the unfreezing of interest rates without undue increases in them. Mukherji. of public sector privatization. form in India today is the recent e���orts to facilitate the growth of the VC in. discour. sets are used. for example. State-Level Performance under Economic Reforms 125 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 II Private Economic Activity 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 4 Doing Business in India What Has Liberalization Changed? Naushad Forbes 129 What is the reason that our nation Is not well known for innovation? We spend so little on R & D. economy and society���and supported a virtuous cycle of technological innovation to meet the needs of local producers and consumers. the reforms have been perceived in India to be elitist-driven and designed primarily to bene���t the corporate sector. there are now three di���erent. try. there was a signi���cant improvement in access to schooling. Thus. do it. The se. As in most developing countries. For example. This is re���ected in the high cost and limited availability of credit. These include especially the prospects for in.0 100. While the socioeco. commercial taxes. but there is still a chasm between the haves and have-nots in India. Table 4.220 727 Bhushan Steel Commodities New 6. gins increased signi���cantly. The continued operation of sick PSEs is a ���scal drain. Ministry of Finance. mation is provided. he was a member of the Planning Commission in the Government of India. have apparently recommended further restrictions on foreign investment and the reimposition of quantitative restrictions and tari���s on textile im.170 10. tions: Annual report. The study of Radhakrishna and Subbarao (1997) is very revealing. then in India one should see greater ���scal discipline in the states. The ���Disinvestment Fund. Additionally. success increasingly comes from making a better product more e���ciently than anyone else. particularly in the tele. Estimating a regression 108 Montek S. 338 212 2 Bharat Heavy Electricals Ltd. to ���nance software in local languages. ter has a redistributive role in making transfers to the poorer states. Stern. but probably not of such pressing importance as beginning to change the labor market and state-owned. The concluding section steps back to address the role of the IT industry in India more broadly.New Delhi: Government of India Press.) from six di���erent departments. Products developed in the West are 188 AnnaLee Saxenian 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 28. ployment and real wages. those investors too are likely to be deterred by the ability of SEBs to price electricity at uneconomically low rates until the problem of pricing is realistically addressed. E���cient ���rms have bene���ted. The quality of road connectivity is also poorly captured by the road density within a state. ment rules (Parthasarathy 2000a).740 808 2. N. During the conference. there is no doubt that the ���rst round of reforms was ���just in time.7 14. has been the introduction of competition into the banking system. cur because of the port situation. The pagers available in India today are produced in the West and sell for approximately Rs. but they were by no means the only bene���ciaries of the growth acceleration witnessed in the 1990s. two are in consumer products (Dunlop and Shaw Wallace). 1989. which was the second fastest growing state. Indo Imports and tari���reduction. these policies were designed to encourage new entrants and to protect small-scale ���rms from what was believed would be unfair competition from established ���rms. table 9. were 196 per hundred main lines in 1995. senior executives from Infosys and Wipro. to. lies in the socioeconomic context of the two cities. the sale to private in. the most authoritative source of data on Indian R&D. During the 1990s. forms. For example. try to an. tics of the labor force are simply not available. and 74 percent performed in state laboratories. try means that much-needed regulatory reform. The current approach to IT policy in India addresses the immediate ob.12 July: 18���25.13 While on-site production accounted for 90 percent of Indian software exports in 1990. These statutes in turn compete with existing corporation. ber of measures could increase ���exibility: The length of time required be. for example. velopment. World development indicators. able.99 9. supervision. HLL.3 241.30 September 1991 and 29 November 1999. dia in the 1980s were both costly and technically backwards. vantage for India. A respected elder statesman and former ���. then central assistance should perhaps be made available to these states and linked to speci���c performance requirements.000 miles away. telecommunications.5 presents the invest.7 percent of employ. but the total expenditure for complet. and Bajpai and Sachs (1996). main largely outside the tax net. The multiplica. allowing the U.2Concluding Comments The IT industry has brought a wide range of important and tangible im. structure requirements of industrial and commercial development. were high cost and provided only a small range of coverage. 1977.2 0. Re. 4. Indian export growth was sluggish during the period when the world economy was expanding rapidly in the 1950s and 1960s. Uttar Pradesh. those who made all the arrangements. Further reforms in the ���nancial and other sectors are also highly desirable. intended to protect small-scale producers from compe. at the center and in the states is a challenging and daunting task.Madhya Pradesh 62. Reddy���s Laboratories (DRL).329 TVS Suzuki Engineering Iyengar 13. To address this im. Weingast. including.1859 ���1. alize over an eight-year period because of the state of telecommunications infrastructure (NASSCOM-McKinsey 1999). The capex data refer only to expenditure on government projects (center. tion are such that India must look to every possible means of enhancing e���ciency in resource use in order to increase competitiveness. India���s quest for technological independence: Policy foun. the issues he raises are perennial ones for Indian ���scal policy. and so on. tivities. Small-scale enterprises are believed to deserve special support because 6 Small-Scale Industry Policy in India.2 In sum. terprises was only 29.8 between the highest and the lowest. the Internet has the poten. One way of overcoming the resources problem would be to divert resources from existing subsidy-oriented programs to. These are important limitations. [Al]though in absolute terms the country may have made substantial progress. The GSDP data prepared by the statistical departments of the states are used by the CSO as an input into national accounts estimation.3 11. tive countries���which is probably a plus for entrepreneurship! However. further limits the ���nancing opportunities of Bangalore-based ���rms. Oil Removal of PSU monopoly. html]. Section 4. 210. frastructure. how. and entry was per. The Simputer project o���ers a model of collaboration for India. The sum of the states��� share in central taxes and grants from the center has accounted for around 40 percent of the total revenue receipts of the states during 1990���91 to 1997���98 (World Bank 2000. Changing these procedures after 1991 was of great importance. See Bhagwati and Srinivasan (1975).3 mil.20 11. mon economic program��� had remained unaltered. engineering. oped states. Fiscal incentives to the IT industry were one of the cornerstones of government policy in the early years of the high-tech boom. opportunities. In Trade and development: Essays in honour of J. are associated with variations in growth. For example. however. as is often argued.K. 25 June 1996. penditure in private-sector projects as a ratio of GSDP). on leave from his regular assignment as Chief Economic Adviser in the Ministry of Finance. scriptions of Korean ���rms such as Hyundai that.86 per kilowatt in 1996���67. while incentives and a framework for private activity were not fully developed. developmental capital expenditure has been declining. bottled water.1 percent of GDP in 1990���91 to 5. ���scal. Sandeep Raju heads the Life Sciences practice at Infosys Technologies Limited. lore as it is in the Valley. stop-���lers. In addition. equality. telecommunications (���fty-���rst). Growth rates reached 7 and 8 percent during the late 1990s. the NSSO had experimented with 7.8 406. particularly power and roads. sales tax. However.The public sector plays a declining role. Tb to tax base. nomic growth shifts the demand curve outward for additional years of schooling. before 1991 if an Indian ���rm wished to hire a foreign consultant and pay him even US$1000. for example. Lal Bahadur Shastri is cho.8(the individual components are listed in the footnote to the table). from around 300 percent (!) in 1990���91 to around 40 percent by the end of the decade. airports.444 100 United States 46. and the Senate majority leader. foreign direct investments. This is also the State-Level Performance under Economic Reforms 113 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 case with social infrastructure.2 320 India 95 1.4 1990 22.0 122. In respect of every other indus. What can be termed devel. bought a tire-cord plant���an industry in which it is the leading player���and sold its ���nance company to its joint venture partner.633 322 Technologies Nirma Consumer New 12. sion in these ���ows. What is worse. driven by the demand for innovation. the World Economic Forum (1999) asked businessmen to rank countries according to the adequacy of their overall infrastructure and of its various segments. all three of which were not only at the lower end of the per capita GSDP spectrum but also had relatively low rates of growth to begin with.. Also.. and yet prospects for increased resources in the public sector do not appear good: Reallocation of re.: IMF. in Andhra Pradesh it took Rs. Even a casual visitor to India would experience this contrast: A typical street scene would involve a bul. forcement e���ect over the period 1984���1985 to 1999���2000 has shown a de. Government-owned banks rationed credit slowly to estab. Joseph M. pand remote services such as medical transcription or call centers. leading to a deceleration in some states. when the target was met. 29.2. other two members of this group. Also. rupted to ask. Indians ac.7 0. Land rev.031 in 1993���94 (the latest year for which data are presented). grading through licensing and purchase of foreign technologies. there is room to reorient the expenditure un. Finally.8 percent annually during the 1980s. On the other hand. Professor of Economics at Yale University and nonresident senior fellow at the Center for Research on Economic Development and Policy Reform at Stanford University. crease would be recommended. The reforms that took place at a stroke.4 percent of the unex.17 May 2000). the annual revenue 178 AnnaLee Saxenian 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 16. as was the case for example in China.590 1. and hence underre. if it increases the amount of wheat distributed. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 9 Anne O. foreign-���rm entry many others foreign brands Soaps and Fewer limits on HLL and large HLL.��� Sunday Times of India. partial private ownership has been established. the higher is the recorded subsidy. and 1998/9. Pro���ts 1999 1995 1991 Growth Growth M ultiple M ultiple Company Industry Ownership Sales Pro���ts Sales Pro���ts Sales Pro���ts (1999/1991) (1999/1991) Reliance Industries Commodities Ambani 132. This should not necessarily be interpreted to mean that risk cor.000 software professionals every year. The state em. but left the long. as shown in table 4.702 12.110 239 Corporation Eveready Industries Engineering New 7. States su���ering from low levels of investment could reduce their competitive disadvantage vis-��-vis more industrialized states by allowing greater ���exibility with regard to labor. Health services. for a full discussion of the failure of the 1966 devaluation. Cipla. opment: essays for Manmohan Singh. mestic borrowing will raise interest rates and increase the cost of invest. ance-of-payments crisis of 1966���67.41 36. lished and given monopoly positions in activities as diverse as insurance. Another is to accel. Thus. riod can be seen from the o���cial estimates of poverty at the state level and the all-India level presented in table 3. This implies that the debt-to-GDP ratio cannot grow asymptotically at a rate faster than the di���erence between the real interest rate and the growth rate of real GDP. Mitsubishi into market. Instead.32 (2. RETG is the annual growth in the number of tax returns ���led.84 months in Morocco. As many at this conference may know.143 184 3. 1997. Patent Law of 1970. 17881-IN. it is evident that the present state of la. Second. productivity industries or ���rms that could otherwise be employed elsewhere in the economy.Rajasthan 19.N. less than a sixth of the stock of external reserves in 1998���99 (World Bank 2000. is adopted. is not a simple task.0044 ness processes consistent with the state-of-the-art information technology.3The Policy Environment and Governance There is general agreement that growth depends heavily upon the e���. For a conceptual background on this. Explanations of Growth Differentials I have several reservations about Montek���s explorations of possible ex. this improvement occurred in both personal and cor. penditure. India���s Fiscal Situation: Is a Crisis Ahead? 73 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 3. the labour market is severely distorted by non-market-determined high wages in the public sector. the year of stabi. ���ow of short-term capital. to which attention returns in section 1. which would show up as a change in the number of tax returns ���led. Qualitative evidence of growing technology imports complements this picture. Twelve percent of national R&D was ���. It is very likely that if the GSDP series were revised to re���ect the changes made in the na. The aggregate ���gures conceal.23 While many suppliers produced what could charitably be called sub. provement. and some. nancial markets and need the center���s consent for any borrowing in the do. the deceleration in overall growth in Orissa is almost en. for example. dian software services industry. Third. At the time of writing this article. has been a boon to Indian entrepreneurs. A second and related disadvantage. is that while high-quality datacom links are available to corporate users.810 1. fortunately they are a minority and. which makes their contribution to growth and development highly questionable.421 2 0 Raymond Consumer.197 3. 15 May 2000. deliv. al.130 424 Chemicals Tata Hydro-Electric Utilities Tata 5. roads. Al.3 percent of GDP.080 374 Essar Shipping Services New 4. and. and T. so that a surplus was available to ���nance in part the de���cit on capital ac. is chosen prime minister after the Congress party wins the ensuing elections.N. The Singhanias. spurred by the example of Andhra Pradesh. 25. tion of India to access the bene���ts of the internet. Report no. ing their ability to manage time and resources involved in large projects (Arora 1999). Shipment to Bombay is 1 day.70 All 14 states 19.618 65 3. A disinvestment commission was set up in 1996 to advise the government on the extent.21 (table 5.6 All India 100. The critical driv. competing goods was encouraged by imposing a regime of import licensing 12 Anne O. which are already high relative to per capita income. in part. Land tax as a source of revenue has virtually disappeared. and acquisitions by Indian ���rms of smaller players to grow market share. railways. and to overcome problems associated with time series data. The last two chapters in the volume. tites of some of the leading funds in the Valley.000���20.18 As of 1991. This chapter has provided a brief overview of India���s development and economic policies relating to economic growth to date. Unfortunately. and have signi���cantly increased. Experience suggests that the gains from privatization can come about both because the new owners can achieve e���. 2000. Ltd. it is di���cult for would-be acquirers of public-sector enterprises to know what the new rate of pro���tability would be. such as those related to environment regulations. nizes that the economy will become more competitive internally and also more open to both foreign trade and foreign investment. and exports. and in the absence of well crafted bankruptcy legis. Economic survey 1999���2000.g. which was also more consistent with the national accounts.755 190 6. a dual exchange rate The Indian Economy in Global Context 21 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 16. The political economy of industrial promotion: Indian.3The Changing Relationship with Foreign Firms8 Perhaps the greatest driver of change in the relationship with foreign ���rms has been the change in perceptions of India as an attractive market. and internet access systems speci���c to the needs of developing countries (Jhungjhun. there are doubtless signi���cant opportuni. The export earnings from IT are important to India���s GDP growth and foreign exchange reserves. One cannot underestimate the deleterious consequences of the precarious condition of the states��� ���scal health.4. jority of these exports derived from bodyshopping. We will neither generate employment op. Firms have often changed in some com. may be a somewhat unfair question since there is grossly inadequate understanding of the issue even at the national level. The addiction of the government to de���cit ���nancing and ���nancial re. which was much faster than the 5. This summary is drawn from a review of Naidu���s book on the o���cial website of Andhra Pradesh [http://www. so the impact of reservation will not receive further consideration here. can use IT for managing their timetables. this was to serve the interests of the software industry. in addition to the government���s con. Further. but it is worth exploring the limits of what is possible with the data available.5 1996 16.3 14. model in infor.16 20. for example. we consider some of the policy issues that need to be ad. ment Statistics. and to investment in R&D. (b) the additional foreign exchange that had been committed by foreign governments and multilateral institutions (to support the devaluation and accompanying policy measures) was not forthcoming. Wipro and Infosys have fallen be. it was as sharp before the software boom as after.750 1. 4. While the export of data via satellite links was permitted.000 workers. MIT had a joint program having to do with economic devel. Life expectancy at birth. the central government estab. appointing. Nonetheless. represents the e���ective tax base. A second Narasimham Commit.32 billion investments. when we think of all the major factors (and policies) that might impinge on the objective of ���a minimum growth rate of around 6 percent per year in the poorer. to adverse pressure on in���ation. The engineers at the Texas Instruments development center. Any 10 percent of employees have a right to form a union in India. Many of the state���s departments���such as treasury.6 9.26 1985���1986 2. so to speak in Silicon Valley. e���ciencies from IT-enabled disintermediation will help rural producers get a larger share of the economic pie. 12). tent with this quantitative picture: The Tatas have long been considerably more professionally managed than any of the other groups and avoided the license route to success.83 percent of The Indian Economy in Global Context 13 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 Table 1. (13) g��0. terprises whose pro���ts are aggregated included state oil and petroleum mo. linear in the dependent variables. in consumer elec.97 14.M. or timing of disinvestment.929 Fertilizers Hero Honda M otors Engineering M unjal 15.522 1.2. that a great deal remains to be learned about the determinants of di���erentials in state economic performance. government. Exchange arrangements and exchange restric. It may be added that the dismantling of that protection in the 1990s was responsible for the stagnation. there remains a great deal to be done���as is discussed in section 1. facturers all over the country. 5. Ltd. reform period 1991���92 to 1998���99. Investment expenditure is therefore typically less than plan expendi. and the stubborn estrangement of di���erent classes in In. that could be privatized with some budgetary gain. 12. The report���s recommends: (a) elimination of the li. and the future is promising. Bangalore has yet to see high acceptance of stock as a currency in lieu of cash payments. dia. 2.39 5. 1999. gem. and delinquent accounts. ity of legal and accounting services. Orissa. tain goods and services based on cross-subsidization from other parts of the system���for example.4 10. The World Bank estimates that of the twenty-seven cities in Asia with populations over 1 million. Apart from improving service quality.471 144 Hindustan Motors Engineering Birla 6. the feeling is that high-tech. ���scal expansion can generate growth as it did in the 1980s without a step-up in investment and without major reforms. minimal.722 D.378980 3. Dreze and Sen (1995).7 Electricity Tata Power Utilities Tata 12. ods. But which ���rms have succeeded in this new economic environment? Who 158 Naushad Forbes 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 33. tant to note that their superior performance was not the result of any con. and thus on the demand for labor. always eventually be granted.3IT in Indian Development: The Need for a Larger Vision Comparisons between Indian regions like Bangalore. 44 Anne O. capital will ���ow to smaller and lesser-known ���rms. eign joint ventures and wholly owned subsidiaries to a limited extent. little participatory economic growth at home. processes are in place to insure that the more politically di���. There continues to be a serious mismatch in the capacity of the tax administration and the requirements of the ever-increasing workload. say. there has been a steady buildup of debt. Sahay. as is increasingly the case. This has been the experience of Eastern European countries as well as those developing countries that had small-scale state-owned ���rms. low savings and investment. annex 8. a comment on ownership: Old business families dominated In. The clear message is that liberal. sidered to be very high cost. but the growth rates were very low. State-Level Performance under Economic Reforms 103 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 ing each project. As the center���s mission is to bring high-quality academic re. but if some states have a greater comparative advantage in exports.107 1. jee 2000). ity. never know it from reading India���s very vibrant popu. orities.43 5. 3.294 203 Ceat Consumer Goenka 5. it includes both capital expenditure and current ex. the Indian car market was sixth. investment size began to be determined on economic grounds. in turn.61 6. its have grown faster than sales.. The Department of Science and Technology publishes an annual in R&D statistics and industry. tition they presumably cannot handle from larger ���rms. while reserves were down to about two weeks of imports. Daewoo M&M���s development of new mobiles SUV.P. This continues to be the case: Only Korea. and e���ects of reforms in other countries. We focus ���rst on the domestic development of the IT industry as related to Forbes���s discussion.699 79 3.7328 1997���98 ���0.002 100 5. To the extent that in���ation has been avoided. ernment. does not hold as far as economic per. Taiwan. In addition. are likely to have been less vigorous than their e���orts to collect taxes that accrue entirely to the center.3253 ���0. But protection did also force e���ort and learning. sions have signi���cantly impaired the provision of these key social and economic services. Such remote services could ultimately provide more employment in India than the software ser. especially eco. 6. ex. structure at about 3 percent of GDP annually. Any broad generalization from the available data may be somewhat premature because the habit���of and attitude toward���tax compliance changes over the medium term. pirational leadership. 2000. ated with respect to direct and corporate taxes.603 121 5. And second. sumption underlying the tax rate cuts in 1997���98 appears to be validated.191 Technologies Colgate Palmolive M ultinational 9.16 January 1999. ander on for years.14 There are 1. The natural starting point is that Indian per capita incomes were very low in the late 1940s and early 1950s.3. tant. once privatized. However. This is not surprising. The key to narrowing this economic divide is reform at the grassroots level���increasing literacy. dia���s problems. Moving from sale of equity to the surpluses and de���cits of PSEs. economic stability. Journal of Public Economics47:171���205. The Fourth Five-Year Plan. vestment funds all over the world have an eye on the Indian software in.166 Mexico 26. Economic growth. though. This is particularly so in view of the possibility. The central government���s ���scal de���cit was 5. The committee���s report develops a comprehensive vision for the growth of India���s VC industry. if at all. GDP grew at 5. have become out. mon features in both Korea and India. If any penalty is to be exacted. Balaji. such as abolition of industrial licensing and other types of control over private investment. in the decision to organize the STPI pro. and freeing up the capital market. aging under 2 percent annually from the late 1940s until 1980. The composite index is the weighted sum of individual indices. she was the Herald L. and preventing imports of goods when domestic producers were deemed able to meet domestic demand. employment will rise more quickly. tween 1870 and 1913. tic economies.000 institutions of higher education. the mo. and ��� 2are coe���cients required to be estimated. A decade earlier. we ���rst brie���y address the issue of the linkages between infrastructure and growth.071 659 8 13 Hindalco Industries Commodities Birla 19. unpredictability of strikes (called by various unions). and Uttar Pradesh. Those items not so listed were eligible for importation without license.D. eraged 830 from 1986 to 1990. human. oning.: Organization for Economic Cooperation and Development. Since small. state electric. Since 1991. Bodyshopping. subsidy. India met a period of frequent changes of govern. The only information on invest. Vijay. NASSCOM���s goal of promoting software industry may tend to bias the data as well. Success was greater in some other areas.6). and the need to build a public lobby for reform. annex table 1.263 232. which imparted massive incentives for evasion and avoidance and imposed serious alloca. tential purchasers of divested equity. we begin by postulating the following equation: (3) PITGt ���������� 1�� MXR t����� 2�� RETG t����� 3�� NAGDPG t �� RETG t��U t where ���.710 253 3. 290 billion to Rs.2776 ���0. The National Institute of Public Finance and Policy (NIPFP) estimated (Government of India 1999) that the explicit and implicit subsidies were as high as 14. and even if it grows rapidly it will remain only one among many sectors that contribute to Indian development in coming decades.4The Macro-View of Technology in Industry since 1991 A macro-view of technology in India after nine years of liberalization shows some change albeit not a dramatic one. signi���cant e���orts at reforms were under way in the 1990s. Indira Gandhi Institute of Development Research. To that end. If widely available. an advantage for the IT industry is that. has cautioned the government against ���hasty��� privatization of some PSEs. In December 1998. the investment expenditure reported is not the ex. The recommendations in only thirteen cases were or are being implemented. banks are still con. and in fact shed labor (at a rate of 0.866 191 3 5 Products Indian Rayon Commodities Birla 13. dian minds behind them���over 750 technology companies in the Valley are now Indian-managed. 1999a.19 14. Unfortunately. At the same time. Five years after this ���asco.7 1998 6.22 4.Ph. In. These include reduction of explicit and implicit sub. formance has not been replicated. sistently made losses in the 1990s. explained variation is due to some year-to-year random factors. English-speaking workforce that is willing to work at relatively low wages. R.15 5. and health services) are mandated. Cited in C.State plan expenditure as a percentage of GSDP has declined in al. moval of quantitative restrictions on imports also made exporting more at.4 The ���ve years from 1991 to 1996 saw a boom. Indeed. sesses the changes in the environment in which private ���rms operated be. The costs are especially severe for companies in glob.K. Indian IT profes.3 7. Time series analyses reveal that the debt-to. 751 24 31 Mahindra & Mahindra Ltd. I. The main ob. through seamlessly integrated cross-border teams.Tamil Nadu 6. Rs. Chronology of Major Political and Economic Events xvii 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 Introduction Anne O. Tatas dropped from ten to eight ���rms. 107 in Brazil. 1992. a widely edu. (quoted in Parthasarathy 2000a) If limited understanding of the software industry allowed Indian ���rms to begin bodyshopping. ticle on the inside page of the ���nancial press. Information technology in India: Yet another missed op.N. and 1998/9. if any.397 2. The indus. for example. it is important to recognize that even though the reforms them. More.7 7. the tax elasticity with respect to tax rates and levels of enforcement. Similarly. 288���290.Uttar Pradesh 2. Approval would almost 150 Naushad Forbes 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 28. The economic role of political institutions: Market-preserving federalism and economic development.2 Estimated Equation for Personal Income Tax Collections in India (1984���1985 to 1999���2000) Independent Variables Coef���cients t-ratios MXR ���0.760 964 2. A very similar pattern contin. who are in turn to some degree a subset of the ���rms that have improved manufacturing e���.35 Multinational corpor. ware industry employed some 180. but it has since increased. and which ���rms mattered then and now.1 percent in 1998���99 (Government of India.P E A 4. risk appetites of ven. it India���s Fiscal Situation: Is a Crisis Ahead? 59 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 14. The political reaction in India to in���ation seems stronger than that in many countries. Final report of the Tax Reforms Committee.com]. compared to 2.70 percent.175 1992���93 0.6 percent in the 1990s. roads are required to charge low prices for ���social obligations. ures more distorting. and Philips (seen as an ���Indian��� ���rm.527 593 3.nic. tive. allowing the programmers to work at facilities in India. sis with ���nancial sector pressures arising from a growing need to recapital. In South Korea.536 63 2.5 138 Indonesia 103 2. India���s share in world trade has ���nally shown an increase in the 1990s after four decades 134 Naushad Forbes 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 6. Scientists in universities and laboratories think that industrial. ture to GSDP at 7.070 245 EID Parry India Commodities 9. swer some of these questions. sist computerization. Chandra Shekhar leads a minority government supported from the outside by the Congress party. 4) concluded that ���Rajiv Gandhi had embarked upon some liberalization in 1985. while being even more generous than the commission���s recommendations in increasing the wages and salaries of its employees. in January 1999. at least in the short run. ���������. 2000. For a comprehensive background. Indian industry is becoming normal. ronment this puts them in a disadvantaged position relative to the more ad. the state. Comment Kenneth Kletzer T. 4. but this does not yield a signi���cant rela. cent from 40 percent that year. Even with such re. and Hong Kong in addition to Korea.95 3. ing conditions for entrepreneurship. and that the vast pop. I concur with Srinivasan���s conclusion that the current ���scal de���cits are unsustainable and will lead to another macroeconomic crisis without a signi���cant correction. 1967.68 months (International Telecommunications Union 1998).410 427 11. nomic growth depend crucially on the success in managing the ���scal challenge confronting the economy.: World Bank.8 3. among other things.244 212 2 1 Eveready Industries Engineering New 7. World Development Report. food subsidies were not targeted at the poor. We have also tested for the impact of each of the individual components State-Level Performance under Economic Reforms 111 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 Table 3. further costless e���ciency gains would be exhausted.3253 1. and De���cit ���gures for 1997 and 1998 are preliminary. but the focus has been largely on the performance of the economy as a whole or of individual sectors. or 4. testing. Narayana Murthy is chairman and chief executive o���cer of Infosys Technologies Limited.1.79 31. we attempt to explore these issues to the extent possible. India was a predominantly agricultural economy. ists are philistines who run abroad whenever they need technology. Considerable red tape and delay were associated with the receipt of an import license. We wish to add our own perspective to the insights o���ered by Saxenian and Forbes. able) goals. There is. 34 Anne O. On the contrary. most of the central as. cumstances confronting private producers in India.M. The towering international economist of the 1960s and 1970s. Venture capital is the ���rst step toward encouraging entrepreneurship. Bangalore. a situation that is bound to have an impact on de. ciency in local public goods provision relies on somewhat strict assump. the growth rates of GSDP of the di���erent states in the second period would be correspondingly higher. Collections from other forms of corporate bodies are negligible. In the end. nomic performance at the state level corresponds with the picture for the country as a whole that emerges from the national accounts.Mumbai: Reserve Bank of India. By contrast. Ideally.N. 1999. it has become as much an American industry as horse racing is Australian. De.New Delhi: Government of India. the infrastructure: telecommunications in particular. Two-wheelers New foreign investment. Srinivasan 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 loans and ���nancing of losses) of CPSE has declined sharply as a proportion of GDP. i. ommendations of the ���fth pay commission. re. developed a low-cost technology for interactive television that uses existing cable-TV infrastructure to provide video on demand. spective histories and socioeconomic contexts. except in the most general sense of easing the import and cost of computer hardware. ment in telecommunications per inhabitant India was ���fty-second. 73). Even the discussion of growth performance is largely at the aggregate level. after all. The quality of air service improved dramatically with the entry of private airlines���it used to be said that In. Hence. As in most countries. controlling insects and rodents. One ad.20 7. tion. and. 3. States also competed with each other in o���ering tax and other ���scally costly incen. erated for the dependent and the explanatory variables.5 million children under the age of 5 die annually from water-borne diseases (as reported in Financial Times.S. their incentives to run the projects wane. three things changed: First.920 6. especially in rural areas. Business India(3���16 April) reports that in states such as Uttar Pradesh. and 33). cutting in the 1980s. and to suggest ways and means to restore budgetary balance and macro. but the protection domestic producers received from quantitative restrictions on imports (and prohibitions when indigenous supply was available) was removed as well. Of course. way route length per 000 square kilometers. and delivering the amounts supplied by the PDS of various commodities is believed to be much higher than what an e���cient enterprise would have incurred. Inequality is endemic in Indian society. by far the greatest advantage of India is its pool of well-educated. citizen-IT interface. tech regions in the West. a potentially serious lacuna. derstand further the determinants of state growth rates. D. Reserve Bank of India. convergence.Cambridge. the styling from Italy. ture sector at ���2 percent per year. ernment falls. There are also thousands of three-year science colleges and ���ve-year engineering colleges attached to universities. nanced by increasing public debt. in fact. as speculated above. announcing a program of economic reforms that constituted a signi���cant reversal of some of the most egregious aspects of earlier policies of regulation and government intervention in the economy. But their salaries are pitiful. and Madhya Pradesh. Even the term ���benign neglect��� would be too positive a phrase to use in this connection��� (Sen 1994. cited National Sample Survey household data. in building the technical capabilities necessary for internationally competitive ���rms? 4. Chitti Pantulu. which is turning out to be useful in building a pro. with the higher market-determined in. this approach also implies that the center can have no particular responsibility for ensuring that the speci���c constraints to growth at the state level are e���ectively addressed.81 per unit. has been keeping long-distance charges exorbitantly high. espe. there is no harm in posing the question to the author! Reference Trivedi. Rajendra Prasad is elected the ���rst president. ment or. world-class research and educational institutions. try���s use of IT remains extremely low by international standards. ductivity and growth in all states. In this paper she turns to the Indian end and she takes up two tasks. in the absence of accurate data relating to the real tax base and agricultural income remaining outside the purview of personal income tax.710 2. and (4) whether or not the entire pro���ts of the Reserve Bank of India are transferred to the central budget.9130 1999���2000 0. Working Paper 30d. but their standards are uneven. ing. just as it did in the 1980s..and postreforms pe. and central government has chosen to retain up to 15 percent of the transfers due to the states to clear the SEBs��� arrears with NTP. The Indian Economy in Global Context 39 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 42. The ���gure was revised to 50 percent in 1999 (Parthasarathy 2000b). 3. Karnataka. will be considerably greater if they do. In India.4 ���2. ���nding itself unable to compete with imports. restructuring the viable and closing the non-viable among failing enterprises is di���cult to bring about. these responses are not exclusive.(Government of India Publications. Dossani. it is worth exploring the relationship between state plan expenditure and growth of GSDP. The Indian Economy in Global Context 45 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 47 2. tory in Sri Lanka and import the product into India.9 Second. tuous. Teachers in the formal university system are contemptuous and jealous of these training institutes.7 Tata Chemicals Engineering Tata 13.3 26. The IT bill passed in mid-2000. tered with the department of science and technology. it is likely (in the absence of adverse developments internationally or other major setbacks) that growth rates could rise to the 7���8 percent range over the next decade. as well as to obtain needed cap. ���using the ���economic cost��� of FCI as the benchmark is ���xing the PDS [issue] price would be to institutionalize the poor quality of the system as a whole��� (Balakrishnan and Ramaswami 2000. ing out full-page ads in the papers that showed how the reform was to pro. and GE aircraft engines. and fertilizer would have dominated any such Indian industry list. the richest state. he does not know to whom to go. the Reserve Bank of India has warned that ���while the high level of government sector de���cit is attributa. ployees. per capita in. There are 300. computerization of government o���ces. often with bribes to grease the way. With ���scal de���cits continuing to be large. with approximately $700 million available for investment. and evaded government controls in the same way as other labor exports. This may be due to the fact that the capex public investment data are subject to large errors because of factors men. In the context of the long-term success of ���rms. nealing process toughens people but can be mentally exhausting. and more could be innovated���if only there were a market. better quality of schools can increase the quantity of schooling that children receive. had it occurred. They range from low savings and investment. explain much of the reduction in the sum of revenues from customs duties and excise taxes from 7. In addition. tax-GDP ratio will improve with better compliance and the bracket creep associated with growing incomes.28 4.: Harvard Business School Press. Virtually the entire ���nancial sec. Cases involving foreign investment rose even faster���from an aver. A major modernization in the system of prop. and tele-density plus the following per lakh of population: bank branches. and on the ���imsiest of pretexts. To summarise.250 480 3. It is based on free software (the Linux operating system). Rather than replicate the Ameri. The reasons for this are not far to seek. D.3Economic Growth over the 1993���2000 Period The momentum for reform was greatest in the years immediately follow. Sweeping reform of these regulatory systems at the state level is needed. although they were still going to be subject to 44 percent import duty. Human resources for science and tech. on the other hand.270 8.1149 �� P R2 ��0. ment. Quite clearly. The old reasons that foreign ���rms needed Indian ���rms���obtaining licences. Second. In sector after sector. ing.3gives an indication of this be. does not transfer control and op.010 497 4. these constituencies have been on a scale far greater than in Bangalore. this extraordinarily high growth of agriculture (and a similarly high rate in West Bengal) surely bears in. cal language software and local content that will allow the entire popula. imum of. To the best of my knowledge. hence. foreign technology agreements. based on this analysis. and the ���rm with the highest market capitalization on the Bombay Stock Exchange. intermediate or raw material was imported. in a closed capital market.146 510 3 11 M ahindra and Engineering M ahindra 35. Pune.90. Anecdotal evi. in institutional arrange. Debt service is another major expenditure��� 54 T. state payrolls have expanded to the point that a sub. and ready-made garments. and tis the time period between initial and current output. typically in the United States. have per capita capacities between ���ve and eight times higher than India���s. Where economic reform did come up at all. plan expenditure as a percentage of GDP has declined in almost all states. 62). ment has not limited the number of potential entrants this time. Similarly. As can be seen. serves. The Seventh Five-Year Plan sets out a target annual growth rate of about 5 percent. 35. Ashok. ciency of capital use. tory. from low labor cost. and then fallen to 0. manufacturer of the 1960 Fiat). Nehru���s interest in science is well documented. but it has also been criticized for un. and the wait for a new connection was 12. the basic facts are known. One of the areas in which further reform is called for and that is not covered in one of the background chapters is the trade regime.56 2. and that 1.��� whereby some of the remaining portion of their assets was to be extended in loans to speci. 3. with regrettably little anal. and of only 0. In addition. the lack of convertibility on capital account has often had an ad. and European corpora. thy and Sandeep Raju is more factual and provides con���rmatory under. pricing is a major problem. which was historically relatively low cost even in In. Whatever the true ultimate incidence of any of the subsidies and the factors that brought them about. populism is attractive to politicians of all shades.M. 1994 Programmer Programmer Systems Analyst Systems Analyst Country (US$) Index (US$) Index India 4. In a further indication of industry restructuring. One hundred ���fty million households are still without electricity. the decline of 1.1 71. major expansion. more generally. ments.6 319 Source:Morawetz (1977). This meant that the government had to borrow at home and abroad to ���nance not only its investment.42 and discour. the average rev. and West Bengal. speaking in the 1950s: ���I believe as a practical proposi. even after the fam. State-Level Performance under Economic Reforms 101 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 However. penditures than could be ���nanced by foreseeable revenue sources.71 billion. table 7. cal technology as much. but progress has been glacial.120 5. The policy also lowered import duties on software and personal computers (PCs) and permitted the import of computers in exchange for software ex. As can be seen. By far the most important driver of Silicon Valley���s success has been the proliferation of linkages between business.lays out his views on many issues related to governance and information technology in India. NASSCOM-McKinsey study: Indian I. foreign VC ���rms are also governed by the Foreign In.11). Response 1: Become more e���cient. John Kenneth Galbraith. This. the 1992 removal of import licensing on equipment and industrial imports.1 3. India is probably unique in the wide spread of its policies and in its choice of policies to pro.1The Existing Framework of Support of Small-Scale Industries inIndia1 Most countries in the world. While macroeconomic imperatives may warrant prudent foreign currency management.830 2. the relationship in equation (1) is reduced to (2) PIT ��f(NAGDP. I alone am responsible for any errors that re. the basic telecom service sector is stagnant: Private op. given the ���scal di���culties confronting the center. Second.1 Since then the de���cit has worsened markedly. and a greater role for conditional ���nance in center-state ���scal rela. sonal income tax inclusive of surcharge. Taiwan Semiconductor Manufacturing Corporation (TSMC). ready instituted. technology. He sees signs of the drag in declining investment. 1994). Papers presented at a conference held in May of 2000 at Stanford���s Center for Research on Economic Development and Policy Reform. 9���10 December. While it is evident that increases in port capacity will require investment in modernization. First. ginally faster than the 5. that the absolute quantum of spending is low.17. ing countries: The state and the information technology industry in Bangalore. thorization to highly skilled foreign persons. Although a spokesman of his party took pains to say. and the assurance that there is a single���that is. and could be a substitute for agricultural income tax.17 months. Bangalore. For example. However. money is abundant. vation in industrial economies. ample. which initiated the process of reforms.2776 1. foreign ���rms began to seek more control over the technology they provided and over their Indian op.Orissa 65. Heeks. at its factory near Calcutta. Ahluwalia 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 support to the states. remains small and barely viable.197 3. since state-level performance shows considerable variation across states. including setting up 136 Naushad Forbes 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 7.3 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 Reliance Industries Commodities Ambani 132. both domestic and potential exporters. 38. Reser. Egypt���s 279 and Korea���s 1. per capita energy con. In 1997. duction in poverty began to be noticed. There is no doubt that the information revolution has created nu. 120 Montek S. indeed. dia���s infrastructure���which was widely recognized to be of inadequate quality and quantity even during the 1960s and 1970s���became increas. 4. stitutional and resource endowments. India���s Fiscal Situation: Is a Crisis Ahead? 51 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 7.36 percent in 1977���78 to 34. This paper also considers alternative reforms that may mitigate against the time consistency problem.N. There are no objective measure with which to assess performance in this dimension. I do hope my comments will have a reciprocal e���ect on the author! Scope In Montek���s words. garded as a critical determinant of growth. Thus. able is for 1996���97.5 percent per year in the ���rst period.025 7.: IMF. vergence in per capita GSDP over certain periods. their students go to private training centers for supple. The average ���scal de���cit during 1991���97.4 percent in the ���rst half of the 1980s. This provides leverage for the associ.159 358 Special Steels Commodity Tata 2. content to establish a presence in a market of future im. by about 50 percent for Bihar and 33 percent for Uttar Pradesh. nance minister Manmohan Singh���s reforms of 1991 was to reduce the cen. but a change in the pro. Nadir Godrej is managing director of Godrej Soaps. however. section 4. producers. product development. Although they account for under 10 percent of total market capitalization.774 14. the tax rates. portion of R&D time spent on ���operational investigations��� would have dropped by 1991. deed. At ���rst. well beyond the means of most of the Indian population. The inability to gain scale economies proved fatal in a highly capital-intensive industry and. ucation and the level of educational attainment of the labor force. for example. tional Democratic Alliance..B. cation of resources across states in search of e���ciency. all dating from well before independence. crease themselves. Datt. going Eleventh Finance Commission might also make recommendations along these lines. On the contrary. 6. Unlike in earlier years.716 2. a price distortion that has made it cheaper for coastal power plants in the south to import coal from Australia rather than trans. from technical e���ort. cent of the eligible age group over the same time period. 1962The Congress party retains power in the third general election. Productivity and growth in Indian manufacturing. policy-based lending. and no signi���cant e���ciency gain or more rapid growth could be expected from disinvestment. All these factors.032 in 1990���91 to 0. to which she attributes its failure to achieve economies of scale and its stagnation in the 1990s. Therefore. ister. the Indian domestic power producers are generally loss-making entities. tis the annual time index. gress as yet has been slow. ���������. Moreover.513 ��0.Customs clearance Shipping bill ���led in customs. eign ���rms could now invest much more freely in India. Sudha. ther. vestment licensing. quently were unable to keep their commitments. constitute a negative factor even for the growth of the software industry it. a vast rural.050 1. namely the marginal cost of new debt issue. let us return to the Business India Super 100 indices for 1991 and 1999. Given the large size of India���s public-sector enterprises. rivalries between them. vides a delivery vehicle for ���nancial transactions on the internet and for e. the impending competition in the national long-distance market promises to reduce prices for households and businesses signi���cantly and to provided a boost to the information technology sector. arise not only for those already in schools. printed as Occasional Papers Number 33���1999.48-1992. 222 40 5 Wockhardt Ltd. Sixty percent of India���s com.abstract. sion. Ramaswami. 1999���2000. equality in the total population of the fourteen states that ignores the in. cial Change. Nonetheless.94 percent. for example.8 International Products M RF Consumer New���M apillai 17. 23. however. with a two. The vital importance of the quality of bank lending for economic growth has been bet. velopment does not buy votes: Empowerment does!��� is not necessarily the most e���cient strategy. Acharya comments that although in his two budgets. rural connectivity. its exercise will be at the expense of consumers in other states. Reliance.368 166 3 1 CESC Utilities Birla 17. and their buying preferences have led to a penalty on stock valuations of ���rms that have group cross-holdings or inadequate disclosures or that are closely held. celeration in growth in the former in the short run while slowing it down in the latter. which grants temporary work au. ternational standards.27 29.West Bengal 54. This seems a little unbalanced. it could be argued that questioning the same household about both the 7-day and 30-day recall has led to the 30-day estimate���s being adjusted upward.8 22. Dore.Haryana 17. the 1984 policy explic.46 35.. as in the 1980s. Bagchi. Moreover. excise inspector made personal visits for domestic shipments as well. especially when agricultural exports were involved. creasing savings remained. It was mentioned above that about two-thirds of Indian ���nancial assets are in the banking system.0 Glaxo M ultinational 7. I am reminded of the poll of American undergraduates.60 8. Available at [http://www. 15 are located in India. Several other old business families appeared in the 1991 Super 100 and also in 1999��� Bajaj. we have too few degrees of freedom to use additional explanatory variables. This is why they are frequently the ���rst movers in de���ning innovative products and services. that this growth rate was inevitable. In addition. it also suggests the need for some soul-searching on the e���ectiveness of these expenditures. digesting chemical. ports.��� siliconindia. Encore Software���designed the product explicitly for the Indian market. ports. The opposition Congress Party. 1 March 2000).26 more from the inherent inertia in state R&D budgets than from explicit policy.8 6.000 crores on railway passengers (���nanced by overcharging freight). employ. and in any case not widen.234 325 1 1 Zuari Industries Commodities Birla 8. and some reduction and rationalization of excise rates. fessionals are constraining the industry���s growth (���India Hit by Shortage ofIT Professionals. Correspondingly. and access to capital markets is limited for all levels of gov.235 1998���99 0.340 ���4. banking. India���s economic reforms 1991���2001. but 37 percent is still a large number (NCAER 1999. and I. has become marginal at 6 percent and 9 percent. ence participants agreed that. Available at [http:// it-taskforce. the policy reforms of the 1980s facilitated the emergence of an export-oriented software industry in India.8 10. or the telecom reform. However. is usually for the addition of new railway lines and the introduction of new passenger trains. The state of the infrastructure imposes signi���cant direct and indirect costs on producers and undoubtedly constitutes a barrier to foreign investment.8 billion on R&D. However. however. Average telephone faults. By 1999. 5.5 Investment Activity in the States in 1995���96 (as percentage of GSDP) Government Projects Private Projects All Projects 1. Government of India. The passage two years later of the 1986 Computer Software Export. There are activities that are socially important and for which there are no viable private-sector substitutes for the government���s involvement.5Conclusions The Indian economy in the year 2000 is vastly di���erent from what it was prior to the beginning of reforms in the early 1990s. there are people employed by users of software for day-to-day maintenance and to assist other employees who have to use IT without understanding it.6 4. or between companies and local universities or other research institutions. success for many industrial segments was measured more by the licenses that could be captured. As the 1980s wore on. delay.��� in this case to investing in projects ���. ered. 4. while in the weakest. it fought through and won a new in. the Na.30 September 1991 and 29 November 1999 Note:All ���gures in millions of rupees (Rs M). and other IT products manufactured in In. ministered.6 percent. includ. and Karnataka) was above the average.56 47. tween ���rms of all sizes. And.37 9. the government recently announced a re.2).1presents the estimated growth rates of GSDP in the fourteen major states in the prereform period 1980���81 to 1990���91 and in the post. whether the economic reforms are in some ways directly responsible for the divergent pattern of growth witnessed in the 1990s. which mainly met the representations of for.000 route miles were still under broad gauge as of 1996. 9. ing the ���human capital��� of India���s labor force (including access to health care as well as education) is clearly an important task in the years ahead. surance law. From the ���gures reported in Table 2C. dex than the average for the country and scores higher than Andhra Pradesh.Maharashtra 6. The result was an investment boom and a major increase in foreign investment. accelerated decision-making within the state government.900 263 7. personal visits to ���rms. mensional feature.42 18. I am optimistic that the lat. universities.��� and went onto list several critical tasks: the reform of the power sector. nancial Restructuring (BIFR) received 3441 references. try became an assembler of imports with little value addition. pand.58 6. Thus.2 percent in the prereform period to 5.16) (14) g��3. they cannot be disaggregated according to the state in which the expenditure was incurred.7 percent of the per capita expenditure of the poor in rural areas and 3. so that it was di���cult for any. 18 May 2000). This is particularly so because liberalization has eliminated many of the controls earlier exercised by the central government and thereby increased the role of state governments in many areas that are crit. and is look. tee (Department of Fertilizers 1998) has pointed out that the retention pric. Only in the 1990s���after pol. ni���cant reduction to 5. will develop records of all individuals in the state and provide uni. ch. Harvard Institute for International Development. 14. doubling in size by 1996.2 percent over 1913 to 1950 (Morawetz 1977. She associates the export boom with enclave development of an elite community. vanced planning stage. It has yet to produce its ���rst kilogram of fertilizer. let us look at some of the pending reform areas that can indeed help Indian ���rms compete internationally. In addition. Thus. the tenuous ���nancial position of the Maharashtra State Electricity Board (MSEB) has meant that it has. monds.247 781 51.615 865 63. both by Indians and by foreigners. plied through the public distribution system (PDS).0 ���1.14 8.7 ���W inners��� Sales. and Thailand for 1996. Since in���ation is already at an all time low. this is no easy task and typically demands years of e���ort to persuade constituent states and provinces. Moreover. but the Iraqi invasion of Kuwait and subsequent events had resulted in a sharp increase in the price of oil. it is not an exaggeration to call the situation a crisis that needs to be attended to immediately. and Eto the level of enforcement. when Unix became the system of choice for PCs and work. ber in international terms (DST 1999). it is worth not. It is not based on a statistical sample of the manner in which for.1Infrastructure That infrastructure is a bottleneck to Indian growth is widely recog. counting for the inability to increase infrastructure availability at the same pace as increases in real GDP). that would have triggered faster growth and poverty reduction.com/19990106/ spk1. Seventeen ���rms are in the traditional commodity industries. Pro���tability is an imperfect indicator of e���ciency. they impinge heavily on pro. cedures were cumbersome.com]. change of ideas at the grass roots. India���s lag is huge. tainable basis in earlier decades. more than half the population. Virtually every major software multinational has a base in India today. State-Level Performance under Economic Reforms 107 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 Table 3. Telco.2084 ��� 0. and it is this demand that private training centers are largely meeting.000. from both the capital market and nonresident Indians.1 Rate of Growth of Gross State Domestic Product (percent per year) 1980���81 to 1991���92 to 1990���91 1998���99 1.ed.461 234 B. In order for it to do so.359 118 McDowell Consumer Mallya 3.8 percent of GDP in 1990���91 and 5. performing states. the ability to add business value to a venture is the key di���erentia. dian Patent Act of 1970 was the most conscious attempt among developing countries (together with Brazil) to improve terms for accessing interna. and thus presumably of capital formation. N. denly gained prominence and may soon become so important as to a���ect India macroeconomically. D. national���common market. average outstanding debt varied from 13. For early-stage companies. all driven by the private sector.510 47 J K Synthetics Commodity Singhania 8. naled his political support for the plan in late 1999 by creating a new min.000 technical professionals that India���s more than 2000 institutions produce each year. out forty years of protection? On the other hand. it accelerated to 5. The chief minister of And. the success of the software industry and the failure of the hardware industry are not unconnected. hind the East Asia NICs in hardware exports. the greater freedom of a liberalized environment and the ambition of Indian ���rms are being translated into technological initiatives. tensions emerged. disinvestment���that is. to a 10. Industrial economic ac. Indian monetary and ���scal policies remained very conservative by standards of other developing countries. presents obvious problems. is eloquently expressed by the economic survey. and the development of lo. Since all states are indebted to the center. indus. however.. and has averaged 6. the change in competition meant that there was a demand for new technology. surfaced road length per 000 square kilometers. which was one rationale for adopting import-substitution policies. there is some faint hope that wiser counsels may prevail. operating in a much less restrictive environ. by and large. table A4). Nagraj.5 of percent of the total GSDP of all fourteen states.10 Doing Business in India: What Has Liberalization Changed? 137 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 9. Desai. and parliament is dissolved. Kerala has had. D. Uttar Pradesh has a higher value for the in. and even individual entrepreneurs is not as high in Banga.700 3. departments.579 420 Century Enka Commodities Birla 6. at least legally. However.19 The prime minister���s o���ce responded in 1998 with the formation of the National Task Force on Information Technology and Software Develop.183 ��0. as they may simply be un. age (table 3. which proved helpful in acquiring contracts for the maintenance of various legacy systems. But there is also the fact that the instru. (with a free market rate for exporters) in fact prevailed. They think it is due to the fact that they are exposed to computers much later in life than are Americans. The per-square-foot cost of Bangalore: The Silicon Valley of Asia? 195 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 1. In these areas. charging for freight.2045 ���0. their proportion grows. many state governments such as Kar. 166 Naushad Forbes 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 Lall. Industrial investment rose dramatically. there are also many bureaucratic processes and red tape whose removal could improve economic e���ciency. several U. estimates the de���cit of the non���nancial public sector. IPVT (cumulative ex. R&D in Indian industry meant one word: indigenization. machine-independent.144 1. GDP ratio. at least initially.13 23. ernment in 1998. sources into import-substitution induced by the high levels of protection (both from tari���s and from the unavailability of import licenses). telephone or access to internet. and academics participated in three days of intense discussion in May 2000. lization. tions.1 These links are a key factor in enabling teams that span the globe to accomplish software development tasks. In. For example. economic. Ministry of Finance 2001). a world-class facility in India is around $60.158 1989���90 0. however. Patricia Reynolds. cess to all these resources. 20. In. trols on licensing in particular. ment. nize that the role is still major. gether with the ���ow of central assistance in support of state plans through the planning commission. cessive absences or malfeasance in their jobs. In addition to these losses. such as pagers and computers. the conference and this volume are the prod. which was relatively lackluster in the 1980s. Hence. and growth perfor. Morawetz. who as chief of the government���s National Informatics Centre long played a critical role in IT policies. Singh is appointed prime minister. reaching an average level of almost 7 per. accounting for 10 percent of the total net pro���ts of the 1. Interestingly. 2000. formed badly. Both contentions are lu.06 for the poorest quintile. and directly regulate technology and industry structure. with spe. eds. These each had twelve to sixteen members and drew in a still wider range of perspectives. Several states have apparently objected to this linkage. single window clearance mechanism for ap. and never a study of the e���ciency with which it was achieved. Walking the goods through (with one person devoted exclusively to the job) can reduce the total from 5 days to 2 or 3 days. ports. PCs: World Development Indicators (1999���2000). nating in agriculture. niche. First. New Delhi. (8) g��3. After ���ve years of government with unheard-of growth for India. business houses. ible talent pool. Hyundai. However. the RBI strengthened its own monitoring procedures for banks. The Re. in any case. account for 72 per. If conditions of the majority are to be signi���cantly improved. in particular by the Chelliah Committee (Ministry of Finance 1992).07 and 5. Second. tured printed circuit boards (PCBs) with runs of twenty boards per year (imports were banned through 1991 with no exceptions) and in a personal computer industry that ten years ago was shown to have added negative value locally. ysis. The Indian Planning Commission is constituted with Prime Minis. However. but the delivery system in prac. omy: Some small ���rms would grow large enough to become signi���cant exporters and.Ox. tion across the economy. the educational attainments and work experience of the labor force are largely a given. ���nancing of state expenditures. policy makers face several trade-o���s. It���s not proven. the central government could attempt to discourage state governments from incurring debt by imposing a form of conditionality. which subsidizes passenger tra���c by over. Another contrast relates to the use of stock options. tations. it is not possible for producers to enter into market activity with other ar.380 ���290 Steel Deepak Fertilisers Commodities New 5. For the decade of the 1960s as a whole. and for scien. and India���s share fell continu. Bangalore: The Silicon Valley of Asia? 199 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 panies have based their R&D and product development teams in the city. For example. the proportion was 8���10 percent. By the 1990s.. but it remained a good performer in the 1990s. and the tax buoyancy with respect to the nonagricultural GDP at factor cost. government of India.. Japan. controlling foreign invest. Increasingly. If the tax structure did not con���ne the R&D laboratories of companies to doing research for the com.��� The Financial Express. China���s power supply per capita was judged to be about the same as India���s and is now 1. Rosenzweig 9. As shown in table 3.7192 11. ���������. cal de���cits by reducing socially desirable capital expenditure would weaken broader ���scal bal. the government of Prime Minister Narasimha Rao appointed a Committee on the Financial System under the chairman. in part. While the Indian soft. while the urban poverty gap is estimated to have stood at 0. As Madhur Bajaj. D. but satellite Doordarshan Zee. an interstate sales tax is a tax on the ex. Refrigerators by Samsung and GE and televisions by Sony and Akai (and even Konka of China) compete head-on with those from Godrej. Economic Reform and the Budget. particularly the CBDT. The key to a new relationship built around true partnership lies in technology. Joshi. A.��� Meanwhile. Andhra Pradesh. and has a low per capita income. and the Central Board of Direct Taxes (CBDT). At the time of writing this chapter. have been report. ing and restricting the import of technology.240 399 2.839 824 2 ���1 Textiles Novartis India M ultinational 7. which was manifest in the foreign exchange position of the government. vide the public with a better service. the remaining chapters in this volume also stress crucial aspects and issues to be faced by policy makers. who must have hands-on experience of the problem. 1970. The faster growth recorded in the national accounts probably re���ects the impact of the revision in the national accounts GDP series introduced from 1993���94 onward. and Goenka all accounting for one or two ���rms.25 1. Despite all of these advantages. is an inadequate focus on economic growth per se. with 421. As can be seen. the statement of the then minister for information and broadcasting that ���in the last four months we have changed the emphasis from the selective sale of minority shares of successful PSEs to the strategic sale of a signi���cant holding to a strategic partner��� (India Today. and provides some contrasts between Banga. ci���c to each state.61 percent share of GDP. which uses National Council of Applied Economic Research large sample household panel data to support the view that there have been substantial declines in headcount ratios of poverty incidence in India during the 1990s. and disinvestment (section 2. taken from World Bank (1977). ects and will also free up funds otherwise spent on overly elaborate admin. Despite that campaign. respectively. With competition either from other domestic ���rms or from imports. I would have said no.Andhra Pradesh 3.3.The emergence of new ���rms. a country almost equally poor in 1960.5 ���1. imports had to be cut back.: World Bank. and the manufacturing and tool-making capability from Japan.5 and 3 percent of total assets. India had 18. ���ned to national defense. in contrast to some other countries that were very poor in the immediate aftermath of the Second World War. manufacture of a new item. dent from Ford) and key individuals in R&D have been trained at leading ���rms overseas. The ���nancial position of the SEBs has deteriorated massively over time because of a combination of operational ine���ciency and irrational electricity pricing. liberalized the trade regime. There is always a tendency to put up another new plant rather than expand the more e���cient ones.5 percent in. For the non-banking components of the ���nan. where initially liberalization was deliberately limited to designated coastal zones. ship of M. In the second period. During its existence. Although some legal scholars have ques.15 1992���1993 2. the recently enacted amendment to the Constitution requires that 29 percent of the net proceeds of alltaxes be transferred to the states. Ranbaxy. of the infrastructure index on growth in the states by estimating separate re. stand straight: It���s not too late. dressed if the growth rate of the slow growing states is to be raised to a min. and growth in the nonagricultural gross domestic product. lombo. Madhya Pradesh and Rajasthan in the north and Karnataka in the south all grew at 5. testing for the role of plan expenditure seems a little forced. frastructure investments can increase. sentatives from the private sector.28 7. a mech. which was 32 years based on data from the 1950���51 census. the proceeds from the sale of government equity can be used to reduce the ���scal de���cit. although it is perhaps one of the politically easier reforms to undertake. with R&D spending as a percent of sales more than doubling. Likewise. ceived as having better infrastructure facilities. The author devotes special thanks as well to Sajjid Chinoy and Suraj Jacob. students of India. The reagent ultimately went dead on 140 Naushad Forbes 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 Table 4. such as are common in Silicon Valley. It will be instructive to learn the e���ects of that change on the industry���s performance. Singh Memorial Lecture. the need for ensuring that a PSE. software is signi���cantly higher than the aggregate data suggest (Arora et al. and 114 in China. tions and State Governments have interacted so intensively and in such a short period of time to cover so many bottleneck and promotional ar. Wipro was ���rst. given the existing framework of national policy. In Kerala. Working Paper no. and large private sector ���rms employing over 100 workers may not retrench any worker who has been employed for over 240 days without permission from the government.10 These include state ���nances (section 2. (1146) The issue of explicit and implicit subsidies is not simply one of raising or lowering this price or that price at the margin. is desirable in order to avoid another The Indian Economy in Global Context 43 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 macroeconomic crisis along the lines of the crisis of 1991. It is di���cult to impose credible restrictions on state-level borrowing as long as the states are not given su���cient means to raise revenues but remain reliant on transfers from the center to ���nance their mandates.6 Nei. looking and are putting pressure on the government to accelerate reforms. the nucleus of the information revolution and historically the most popular destination for high-technology companies. had fallen to 70 per thousand by 1994.63 3. Pro���ts 1999 1995 1991 Growth Growth M ultiple M ultiple Company Industry Ownership Sales Pro���ts Sales Pro���ts Sales Pro���ts (1999/1991) (1999/1991) A.4 6. while Indian companies have gone about developing niche products and services for large clients abroad. Between 1990���91 and 1996���97 there was tangible progress in reducing the ���scal de���cit (barring signi���cant slippage in 1993���94) from 9.C. rose in parlia. gricultural GDP. Infrastructure needs in these sectors must be met either directly through increased central public invest. Some plants are owned by the government and oth.447 445 4. it is evident that a num. gressive privatization. It is true that their standards are un. recommendations on ���fty-eight of the sixty-four PSEs referred to it. ment. pose more discipline on state ���scal authorities at the same time that they achieve the ���scal tools to provide state-level public goods. (c) restric. that would be essential to the sort of value-added ���nancing that is associated with VC in places like Silicon Valley. The states had little choice but to follow the center���s implementation of the rec. At the time of writing this article. Nonetheless. India: Reducing Poverty.to twelve-hour di���erence in time zones between the United States and India. As Srinivasan (1999. the e���ciency of the organization in which they are employed. The emerging ���scal crisis in the states has caught media atten.0 1987 22.667 160 Bharat Forge Engineering New-Kalyani 2. formation revolution. bodyshopping. Bajaj. Since there is obviously an upper bound on government expenditures. the ability of any level of government to tax and spend unwisely would be severely limited. any would-be entrants to the industry are confronted with the knowledge that.3 ���1. ing the education and health care systems to modernizing the retail and agricultural sectors. vestment ratio to construct the composite variable. and Indians will be employed in serving it. and Susan B. primarily because the reforms of the external sector have made a BOP crisis less likely. and services.185879 Constant 7.900 proposals worth US$42 billion in 1995. the ���rm must give the employee three months��� notice. Estimates are from World Bank. although by a lesser proportion.7 percent on invested cap.86 22. in the ���rst chapter Anne Krueger and Sajjid Chinoy present a brief overview of Indian economic policies and de. However.490 2. with an ideology of self-reliance prevailing for over four decades. after 1991 the growth rate of real GDP rose markedly.. while Madhya Pradesh and Rajasthan are both heartland states and have per. With fourteen observations. admittedly scanty.38 2. SEB losses were Rs. ual STPs have wide-ranging powers and are intended to serve as ���friend. nities for graft. 1994. This line of reasoning implies that (a) ���nancial repression is bene���cial. ���gure 1 and annex table 8. involve partners from other regions in India and even elsewhere in the world. awareness among the general public of the failure of some states and. 0. tion. mestic market if they are indebted to the center.08 (1.��� (1999. The ADR is a certi���cate issued by a U. By contrast. puter science graduates come from these three states (Dossani 2000).various years. gence of a venture capital industry in India. Because of the special features of the Northeastern and other special category states and some gaps in the data for some of these states. Even then. which are more dependent on agriculture. Even if all of these reforms. and the possibility that a ���scal responsi. she updates the history of the industry. ket-preserving federalism outlined by Weingast (1995). often providing bene���ts to outsiders. PDS subsidies are not particularly pro-poor in their incidence. particu. If the ���n. Second. which all in government claim to be a priority and something to be encouraged. out adequate ���nancing through taxes or recovery of costs from users of state-provided goods and services. of which three-fourths was from sales to the agricultural sector. ket rates and providing tax concessions for private saving and investment explain the failure of the government to rein in ���scal de���cits. As noted earlier. telecommunications. Kochar examines the supply-side factors that in���uence the decision to extend children���s school attendance to longer periods. It was announced that another 715 items were to be removedfrom licensing and quota restrictions a year later. Another signi���cant change from the 1950s to 1990 was that the rate of population growth had fallen from almost 3 percent per annum to about 2 percent. Only after 1995 did it drop signi���cantly to the 5���7 percent range. It is also consistent with the ���ndings of household income surveys conducted by the National Council of Applied Economic Research and reported in Lal.010 497 4. and LG. Second. but in addition. not an individual process.940 77. this helps to explain why hundreds of U. cal policy.13 All of this adds up to the need to build a strong and articulate public lobby for reform.New Delhi: NASS. Perhaps most obvious. size government as a whole and use the resources thus released to increase expenditures in critical areas such as health and education that are cur.710 253 3. These ���structural��� reforms represented a surprising departure from the general direction of policy that had been in place since the 1950s. and that of real wages 1. enue for that year was Rs 1.3 percent in 1998. prepared remarks. had been achieved since independence.52 37. Krueger 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 In the following chapter. they note ���the hands-on approach. We should worry that threats to reduce future transfers may not be cred. 1984. penditure as a percentage of GSDP and growth performance across states in either decade. especially foreign investment.0 billion was owed to private creditors (World Bank 2000. nitely as a proportion of output at any rate less than the long-run di���erence between the real interest rate and the growth rate. Facing a signi���cant balance-of-payments problem. the rate of in���ation fell from its high of 13. researchers. ployment of labor discussed above). Mahalanobis. ports and ���IT penetration for all��� as targets for 2008. with operational investigations���problems of raw material supply. India���s economic reforms and development: Essays for Manmohan Singh. Moreover.696 312 HCL Infosystems Information New 8. by the 1980s. The Reserve Bank of India is nationalized and becomes the central bank.18 Naidu has thus initiated a bottom-up process of policy reform in this his. In either case. nance institutions and to insurance. Ahluwalia 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 equation relating growth in each period to the percentage of literacy Lin the base year of the period yields the following results. The distance in India between science.956 1. the Indian venture capital industry not only saw a massive increase in the quantum of funds available. which had been ���owing into the country. such as that for income from export. debt ���nance is readily available for companies without a large base of physical assets both from banks and from state. forms.110 239 NIIT Information New 4. Flawed methodology employed for measuring subsidies in India. the Telugu Desam Party. gests that the substantial resources devoted to its high-speed communica.7 percent or Malaysia���s 16. but much cheaper. He notes that the large spread between lending and deposit rates is a tax on ���nancial intermedia. (National Taskforce on Information Technology and Software Development 2000) As a result. population lives in poverty. which is being funded by a tax on gasoline and diesel. ing the ���scal situation. NASSCOM has been in���uential in shaping 174 AnnaLee Saxenian 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 7.B. ing implicit and explicit subsidies on goods and services supplied by the government (electricity.4 percent in 1999���2000 and the grow. various types of protection rackets. What is missing is the nitty-gritty of reform. poor educational attainments of the bulk of the population cannot be the drag on growth that they were in earlier decades. The lack of political will is best illustrated by the government���s having agreed with the United States to open the market to consumer goods imports by 2001. Among them. but once the center ceases to pay for the operating costs. tion based on the two di���erent recall periods was sought from the same set of households.timescomputing... For further details on policy changes in 1991 and since. income was booked when it accrued (even if it was not received). total growth of real gross national product (GNP) was consistently around 3.620 748 5. He provides important data on the shift in tax structure from reliance on indirect taxes to a higher proportion of direct taxes for the econ.060 9. and well-functioning infrastructure and regulatory insti. But Ahluwalia provides an initial assessment of some of the plausible reasons for these di���erences among states. The general tone was one of ���just politics. but privatization could at least help avoid recurring losses that are otherwise a burden on the budget.8 per. the lack of credibility of the threat not to bail out states if they run excessive de���cits will lead the states to accumulate more and more de���cits (which become contingent liabilities of the central government) in a time.19 May 2000.5 1997 18. corporate tax collections in any given year are determined by the size of the aggregate tax base. Data in the next several paragraphs are from Government of India (1996). World development report.56 5. Indian per capita income was estimated at US$95 (in 1974 prices) in 1950.72 9. tional funding (directly through increased pro���ts of the electricity produc.022 8. the council could be used to evolve a consensus on right sizing of government. Again. the pressure for cost recovery is growing and will result in reduction in subsidies. their time trends appear to be very similar. as are passengers on short dis. universities. ���Firms are not able to rationalize their operations and labour force in response to changing market conditions. Expatriate managers have been hired (for example. all these states also show an acceleration in growth compared with the prereform period. however. Thus the essays provide an overview of the reforms. gross of states��� share) tax revenues of the central government have declined from about 10. It is entirely possible. although this is less clear from her paper. Under these assumptions. or NIC. We hasten to add that even if this growth objective is achieved. Improv. 257 billion to Rs. transport. India remains one of the world���s poorest countries. Pepsi Source:Author���s analysis. stead of the 5. These reservations. and to retrain and re-deploy existing manpower in order to e���ectively en. The corporate tax elasticity with respect to the corporate tax rate is neg. but.C.04 10. Greico (1984) and Heeks (1996). These conclusions have been challenged by other studies (e. Both are located away from the capitals of their respec. had reached 13 percent16 in 1991. Telco. In spite of record growth in sales and pro���ts for many ���rms.Punjab 5. Many thus aspire to work for foreign companies not only for the relatively high wages but also for the opportunity to be trans. while non-plan ���loans to the states��� constituted an additional 7.79 25. ronment needed to support experimentation with the application of these skills to new markets. a sustain. however. In the case of steel. Even loss making ���rms (referred to as ���sick��� ���rms) are not allowed to close down but given subsi. Further. The number of technology collaborations approved av. 1999���2000 (Government of India 2000. as well as the support of the IT ministry for these re. over time. re���ected in a much improved capital-output ratio for the economy as a whole.50 per kilo. in the 1991���97 period. eign investment we discussed earlier. the credibility problem could be mitigated. The transition to this fairly common pattern of modern taxation has been largely completed by the present government. Ashank. which has failed to attract private investments. However. Once the technology was de���ned. Conclusion Saxenian���s paper is an excellent ���rst cut into an industry that has sud. 26 billion is expected to be realized (Budget Speech of the Finance Min. ily entails an examination of Indian economic policies and performance in comparative perspective. India���s share of total world IT exports remained stable at 0. private steel companies were even taxed to help ���nance public-sector steel production. especially at the primary and secondary level.4 Within the plan.6 92. a rate that was exceeded by only 9 out of 123 countries. The percentage of total spending on R&D by the state (including PSEs) is slightly lower (78 percent in 1996���97 versus 86 percent in 1991). proved upon their earlier performance relative to other states in the same categories. recommended closing down 29 and rehabilitating 50.7 ���1. eign market without having to deal with the risk of currency transactions. Labour policy: Striking a balance. The report of June 2000 goes part of the way in adopting a normative approach.3834 0. ��� 1. The Simputer is a very low-cost mobile personal computer (priced at under Rs. ���rms imported components.3 Steps in Exporting Goods for a Medium-Sized Engineering Firm in Pune Step Actions Time Required 1. however.3 Personal Income Tax Elasticities Maximum Marginal Number of Nonagricultural Rate of Personal Tax Returns GDP at Fiscal Year Income Tax Filed Factor Cost 1984���85 ���0. most scenarios for the IT sector envision Indian software companies��� starting to develop innovative products and applications as well as continuing to provide low value-added services for export (NASSCOM 1999). subsidies. tional Thermal Power Corporation (NTP). The performance of individual states in the postreform period has not received comparable attention. ury bills (World Bank 2000. to roll back the mod. However. metrically in the postreform period. it will be necessary to bridge this ���disconnect��� between reform and what is perceived to be elitist-driven strategy. riod. ���������.G. a reduction in import tari���s.6 145. ready high wage and salary expenditures. 4. In an attempt to reduce the mounting stocks. Andhra Pradesh (Hyderabad). This section of the paper draws upon Ahluwalia (2000). Santa Cruz. extraordinary cost competitiveness.1 percent to 2. His recent book. Daewoo. First. However. Prior to 1994���95. state plan expenditures can be very important for certain sectors. which is very high by international standards. why should the government be in a hurry to throw away a family jewel? . in particular. then the people who actually write the software. we use the corporate tax rate applicable to companies in which the public is substantially interested (CTR) as a proxy for the tax rate. If products and services were developed that were a���ordable and reliable. cussed by Kochar and by Foster and Rosenzweig. 1999. such as the development of cyber law and regulations concerning overseas investment in venture capital. By the late 1970s and early 1980s. Srinivasan 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 2. The obstacles to in. at least in the early years.. tered the market by doing di���erent things. components.65 5. too. Research Policy9. Bangalore: The Silicon Valley of Asia? 201 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 regulatory bottlenecks. with particular emphasis on its freight-carrying capacity. Since the relation of PIT is non. and 96 in Mexico. implying that the de���cit cannot be positive in the long run if the government has outstanding public debt. to the extent that there is unutilized capacity. but it was seen as the only properobjective of R&D. Is all that many can a���ord And in this ���eld we have scored. and Patel.5097 1998���99 ���0. Indeed. Thus it might have continued into the 1990s. what it is employed to do. one cannot regard the low educational at. but that e���ective controls on gov. which would permit reduction of bonuses when ���rms have di���cult years.095 1. looking policies fostered much technical e���ort. creased to 46. Much could be done to im. comparisons with Silicon Valley are misleading because they imply that India could. policy makers. GDRs are similar to ADRs. the follow-on impact on state government wages has been blessed by past precedents and was largely predictable.Performance of four middle-income states (West Bengal.869 1. It is worth adding that excellent results from Reliance dominate the picture. while a comparable ���gure in Silicon Valley would be at least six times as much! Further. power company. exporting them) and of foreign ex.000 individuals enroll annually in the private software training insti. If one includes the losses of the non���nancial public-sector enterprises and the oil pool balance. It���s the same thing that they do over there. The steps that need to be taken to restore ���nancial viability in the states are well known. distribution. Clearances still take a minimum of two days. the only substitute available is the size of plan expenditure. However. David.400 632 Infosys Technologies Information New 5.3 ���0. group diversity still remains more similar to the structure one would ���nd with the Korean chaebolthan to the Anglo-Saxon model of fo. Fourth. Prabhakar. and the average rate of economic growth reached unprecedented highs. The soft-drink market has seen Coca-Cola buy out Parle. health. The major disquieting element in this otherwise bright macroeconomic picture is the ���scal imbalance. ���Entrepreneurs Should Be Prepared for Delays. when economic growth and Japan���s per capita GDP ranking merited inclu.148 151 4. Policy makers (ideally state governments. Singh comments on the lack of political consensus over reforms as a key factor in their ���incomplete��� nature. However. but with no trend de. Indian administrators. there are not many visible signs that the required political consensus and commitment are emerging.14 There is anecdotal evidence that in the late 1990s the ODCs began to take on more sophisticated design and programming projects. cantly.647 292 Ceat Consumer Goenka 10. Bangalore: The Silicon Valley of Asia? 205 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 vert all meter-gauge railway tracks to broad gauge. as is discussed by Srinivasan. major inter-���rm di���erences: Even more. 25. the cen. indicat. 1991The minority government loses support.811 23. the ra. the four leading Korean chaebolsSamsung. compared with an average cost of generation and distribution of power of Rs 1. Energy Statistics Yearbook. However. or Singapore. after Japan. It recognizes the bottleneck created by the power of the department of telecommunica. already add up to a substantial amount. But Silicon Valley has the advantage of having competent venture capitalists. although the rate of growth of per capita income was well below that of many other developing countries. cent of the increase in non-plan current expenditures between 1999 and 2000 is meant for ���dearness��� allowances (compensation for price in���ation) for the state bureaucracy.3 It is no surprise.New Delhi: Oxford University Press. the PDS had a negligible impact in the rural areas where more than three-fourths of the poor live. which typically encouraged central tax policy to load exemptions and tax sops on personal income and excise taxes.050 239 Indian Hotels Services Tata 6. ing���all these are di���erentiators that put the Valley several notches above other hi-tech habitats.10 The active role of the industry association.524 140 Gamble India Coats Viyella India M ultinational 9.462 1. sessment of the relative performance of states. private investment may go up even further. during that same period.560 6.0 billion was owed to private creditors (World Bank 1990. presents new evidence on di���. or have ���nally begun to disappear. and shelter. even if it had been. The transfers from the center to the states are meant in part to bridge the gap between the resources states India���s Fiscal Situation: Is a Crisis Ahead? 55 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 12. and the RBI. if the transfers received from the center form a large part of its expenditure. luwalia 1985. 1996.310 17.N. Historically. India also has over 4. The IT Action Plan recommends the promotion of VC.Rajasthan 34. M. plicity of con���icting and often cumbersome regulations and discriminated against in a variety of ways. 4. vestment. neur from Silicon Valley. notably by Joshi and Little (1994. kets and the external sector.0 percent or lower in three years or so.890 1. ���������. screens. These are legitimate concerns.3 percent. vision of basic education and health to the growing population and gave rise to hope for further declines in the population growth rate. This policy sti���ed entrepreneurs and isolated India from the global economy.693 292 SKF Bearings Multinational 2.3 Bihar and Uttar Pradesh performed very poorly. in addition. Other programs involve underpricing of cer. the Indian Institutes of Technology and the Indian Institute of Science o���er technical training comparable to the very best in the world.77 6. for example.5 percent in 1994. Even though the overall tax-GDP ratio in the post-reform period has shown a downward trend.65 12. dustrial development. all other states narrowed the distance between themselves and Punjab and Haryana. but cannot set up its own factory in India! This is clearly ridiculous.506 272 Usha (India) Engineering New 13.896 31. change was gradual and piecemeal. ware employment and investments are overwhelmingly concentrated in ur. 2. 8. 1999. However. the process quality benchmark for the software industry.12 10. ingly characterized by regionalization of politics. get constraints by diverting resources meant for investments to current ex.188 0. However. This acceleration in the combined GSDP is simi. And it is possible that a place like Malaysia has actually over-invested in IT given its level of development. they account for a disproportionate share of daily trading. a result of slow growth. Uttar Pradesh. tion. They include: a rede���nition and narrowing of government responsibili. the monetary au.740 115 Jindai Vijayanagar Commodities New 5. change was far less marked than in many other countries��� reform episodes.N. Most state PSEs are unlikely to yield signi���cant resources from privatization proceeds. publicly owned entities themselves undertook a great deal of economic activity.000 crores for food subsidy. and emphasis kept changing. The PDS had at most brought down the poverty ratio to 38 per. Some measures were announced in the central budget for 1998���99 to expand the tax base by identifying potential taxpayers through several presumptive cri. What a distinguished group: Senators Pat Moynihan and John Cooper. there is obviously little scope for increasing the total ���ow of re. before the crisis year of 1991.1 of the paper provides a disaggregation of growth perfor.5 8. R. eign ���rms and Indian ���rms have interacted. adjusted returns on private and public debt. My estimate is that there are on the order of 10. eign ���rms. I led the delegation of former U.1 A comment on data problems is appropriate at this stage. Securities and Exchange Board of India (SEBI).5 percent in 1996���97. Prime Minister A. the culture of the Valley has improved both intra. C. The most important contemporary issues for Indian ���scal reform are covered by these topics. ages. lationship in equation (1) is reduced to a simple relationship between CT and NAGDP and CTR: (5) CT �����(NAGDP. and the interested reader may consult any of the references above.07 6.4 International Reliance on Information Technology Ratio of IT Spending PCs per 1. The new 100 percent subsidiaries like Hyundai or IBM. magnifying the degree of exaggeration caused by using total investment expendi. and if necessary simpler. the government of India had met crises by borrowing short-term from the International Monetary Fund (IMF) and undertaking a series of measures that addressed the short-term issues. for instance. Anyone who doubts the impact of competition onservice levels and innovation (a point that will recur later in a speci���c discussion of the e���ect of the changes on technology) has not been a fre. Srinivasan 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 16. and especially in Bangalore. would not have been more generous than the commission itself. I particularly re.1. Road infor. It is also important to note that not all the poorer states per. and proposes an alternative that might serve India���s national interests better. These authors and others have proposed replacing the ex. creases in capacity.9 ���1.0188 1994���95 ���0.6 57 3 40 Mexico 427 886 0. tionships in India. 184 AnnaLee Saxenian 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 25. was not surprising..2 The following conclusions are worth noting: 1. autarkic model of import-substitution���led in. 5.680 101 3 4 Products Cummins India M ultinational 6. 2. They also provide some con���rmation that certain elements of infrastruc. while always fraught with di���culties. for the ���rst time in history. India���s 0.. I had something to do with drafting the para. Videocon. 31.07 per. Eswaran. Similarly.2 months in Turkey.867 3. and Lawrence Saez.Washington. A member of the coalition. This creates a situation in which a large number of projects are in progress at any given time.000 308 3 Ashok Leyland Ltd. Finally. Ahluwalia. many were in East and Southeast Asia. in turn. we consider a question which has been the subject of much discussion in India.9 21. 6. Most recently. especially of managers and architects. there are several discouraging signs but few encouraging ones. from about 2 percent of GDP in 1990���91 to around 3 percent by 1996���97. Like. cess.989 534 M RPL Commodities Birla 26. Fertilizer subsidies also re���ect in part the relatively high cost of domes. and Information Technology. especially in the context of a third-world economy otherwise saddled with poverty. dized credit and other facilities to continue operation. there are wide di���erences between the two because of their re. the Indian gov. Far from generating resources. annex table 4. Ahluwalia 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 13. For further details. Telephone information is from International Telecommunications Union. Previously.000 crores on kerosene (���nanced by overpricing gasoline) and about Rs. the stabilization aspects of policy in 1991 bore short-term suc. Srinivasan 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 Shankar Acharya is currently Honorary Professor at the Indian Council for Research on In. vol. as table 4. whose dominant nationalist rhetoric was Swadeshi when it ���rst formed the gov. 2. infrastructure. able budgetary situation of the center and the states had not been achieved. forms were actually begun. restricting commerce and inviting retaliation by other states. Joydeep. if ���hard��� budget constraints on individual states in the United States are the reason that government expenditure is restrained there.02 8. if growth in the poorer states is held back by gaps in infrastructure and social development.2 The reason is that the rates of interest. ity view. nomic policy reforms in which policy changes could have potentially sizable e���ects on growth and living standards. Centre for Monitoring the Indian Economy. the story has by no means only been one of foreign ���rms buying out or eclipsing Indian ���rms. ing. mitted. pected. sponse to the growing ���scal and balance-of-payments de���cits aris.4 percent during the next decade.5 for all the fourteen states is more than 19 percent of combined GSDP. Both because of the critical importance of increasing power capacity and production. NASSCOM-McKinsey. the Indian gov.. but the state and central government stood ���rm. While Silicon Valley���s track record provides very useful pointers to the direction Bangalore should take. cessful small ���rms and creates a barrier to their expansion. It is not easy to de���ne precisely whether or not some good or service is being subsidized. I. ducers��� costs. which I share. but impressionistic evidence suggests that the slower-growing states clearly lag behind the others. The central government has a major role in developing infrastructure in the poorer states by shaping its own expenditure on infrastructure to help overcome infrastructure bottlenecks in the poorer states as quickly as pos.3 The Indian Economy in Global Context 11 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 1. controlling for the e���ects of the maximum marginal rate of personal income tax and the nonagricultural GDP at 1984���85 levels. gram. cult or longer-term reforms are carried through. however. Industrial growth in India.4). 72 T. ADR/GDR: American/global depository receipts. Using literacy in the base year of each period to explain variations in growth amounts to explaining growth in terms of a stock variable. although he agrees that there is considerably more re. insurance companies. This is im. suming that the underlying relationship is Y��A(1 ��r)t . At the same time.652 190 3.8 4. Himself a busi. 37. indicates how much still needs to change.R. Kim. In June 1991. shedding workers or un.2000 1995���96 ���0.Gujarat 3. it had fallen to a low of 0. For private sector production. the complex rules and lengthy procedures for transacting business remain a source of tremendous cost and frustration.930 3. and investment could not curb them. the direction of movement is not in doubt. Bajaj Auto.02 5. agriculture. It seems to me that to di���use IT. (186) Although there are some who deny that ���scal de���cits are serious enough to matter.) The devaluation meant that the growth due to a lower exchange rate was almost as great as the real growth rate in dollars. References Buiter.08 3.18 billion in 1994���95..510 510 2. nopolies.West Bengal 17. tariat for Investment Approvals in the Ministry of Industry. ���Among graduates. This compared to $100. 3���4 December. tral government���s ���scal de���cit from 7. There is also a presumption that the lowering of tax rates will not a���ect revenues because the more moderate rates are likely to induce greater compliance. There was also considerable evidence that total factor productivity in Indian manufacturing had been falling over the years. and it can cut down the fertiliser subsidy by a much greater amount than has been achieved by the ���nance minister in this budget. The true miracle is that. cline.104 2. Likewise.11 Plan expenditure is undertaken by both the central government and the state government.005 Cement Ranbaxy Pharmaceuticals New 14. port is received. but Gujarat and Maharashtra. What was left of the gross ���scal de���cit���after domestic and external borrowing. Despite the problems just enumerated. new versions of old products come from here. Indeed. porate taxes. which holds that software ���ourished because bureaucrats did not understand it enough to tie it into knots. Bihar.437 8. Moreover. not an imperative for survival. ties. holdings among various PSUs. 148 more companies from India have achieved ISO 9000 or SEI Level 2. thasarathy (2000a).49) 1991���92 to 1997���98: (7) g ��2. What the survey really shows is that economic reform is largely a non-issue. rate pro���ts are closely linked to the value of output produced by a company. if that could be attained. the reservation of certain activities for small-scale industry.41 Of course. Lal. Blejer and T.2 International Wage Rates.609 ��0.33 in 1970 to 37. established as a regulator of the industry in 1999. despite occasional slippage. This sluggish growth of exports was accompanied by a falling share of ex. thanks to the relaxing of some import restrictions and the permitting of changes in their product mixes within the licensed capacity (under so-called broad banding). tures that have contributed to its rapid emergence and growth over the past two decades.42) (3) g ��4. Such an assessment necessar. rising to 1. Heeks. it had a negative impact on tax evaders and delinquent accounts. Six years later. and electricals and electronics account for about 60 percent of the total for private industry. too. To the extent that restructuring can enable them to survive (as for example by shedding labor). Supply of electricity free of charge or at a heavily subsidized price to farmers is one of many populist policies.27 May 2000. ware development processes and managerial tasks (such as overall project scheduling. a dy.5Disinvestment From the ���scal perspective. In 1992���93. while real wages in manufacturing grew at an average annual rate of 5. Re���ecting the ���foreign exchange shortage. It is only in the last four years. tio of private-sector investment expenditure for all states is almost 16. Paradoxically. India: Macroeconomics and political economy 1964��� 1991. ministration was the ���rst to emphasize new policies for electronics. has emerged as a major center of the country���s IT industry. The fear now. est reductions in subsidies he has proposed in the budget for 2000���01 has been unrelenting.7 billion in the ���scal year 2000. Isher Ahluwalia and I. as Saxenian���s data in. An average rental fee of 150 rupees (Rs. couraging employers to adopt capital-using techniques (as the advantage to hiring labor diminishes when employers must accept that they have no fu. This aggregate pro���tability measure is misleading. They can attempt to protect the job rights of existing workers only at the cost of en.083 1. The reduction of import duties to zero by 2002. Joseph M. The CMIE has produced a composite index of the relative infrastructure capacity of di���erent states based on thirteen separate components. and (b) the cumbersome bureaucratic hurdles and regulatory red tape involved in doing business (see. it is evident that 82 T. and 7.23205 R2 0. Economic performance of states in the post-reform period. Ra���q. and for good reason. eas is urgently needed to reduce the ���nancial burden of providing these ser. the establishment of the Prime Minister���s Council on Trade and Industry.. although his data also re���ect the relatively low Indian ratio of tax to gross domestic product. the reckless ���scal expansionism of the 1980s was unsustainable. Although In. Dr. bureaucrats. which are worth listing at the outset.3 billion of public and publicly guaranteed exter. ban areas in the southern states of Karnataka (Bangalore). capital markets. Nehru���s daughter. ternational Economic Relations. Stanford Uni. mittee should look carefully into whether the provisions adopted ���ve decades ago relating to the roles. and some could be under. harashtra.ed. but it focused on a strategy for rapid industrialization through develop.891 371 3 3 Shipping M RF Consumer New 17. esti. 1999. New Delhi: Oxford University Press. modity.28 9. the import of software in any form was permitted and various procedures simpli���ed. high-quality governance in recent years has been a tremendous asset for the country. lems. Singapore.419 billion during the same period (World Bank 2000. some argue that the ���scal de���cit has not adversely a���ected growth or the reform process. In contrast. The views expressed in the paper are those of the author and do not necessarily re���ect the views of the government of India. forty-eight are new en. bination of these three responses.Rajasthan 3. pinning for Saxenian���s paper. 1993.2State Finances The ���scal de���cit of the states fell from 3.519 1. mittee on venture capital. For IT companies. non. with the central government pledging to compensate states for any revenue losses during initial years of imple. Indian economic growth could achieve a satisfactory rate of 5 percent annually. and the extent to which this size has been swelled by acquisition of ���sick��� enterprises. Nehru made a point of attending every Indian Science Congress and.Andhra Pradesh 98. As is well known. and others20 are the source of industrial growth in their countries.2 percent in 1996���97. mainly operating in commodity industries. ter. there is likely ample scope for e���ciency improvements within the existing infrastructure. ses):10 (1) g ��6. portunity? Standard & Poor���s CreditWeek. Increasing educational attainments.10 10. or if telecommunications facilities do not exist. and when real wages are high. sources. to perform up to their full potential.256 333 Crompton Greaves Engineering Thapar 15. ceutical sector. ments of much of the Indian labor force as constituting a potentially seri. and agricultural value added at constant prices had increased at an average annual rate of 3. tives for workers. ciated increase in spending.0 155. sure greater accountability. though some remained).2000. and the discussion at the confer. the ���rm built an al. The center���s e���orts to collect taxes whose revenues have to be shared with the states.9 Laboratories BSES Utilities Professional 23. The History Murthy and Raju con���ne themselves to the current state of the industry and have little to say on the history. in industrial policies. there can be no objection to the arrangement. the foreign ���rm���s perception of the Indian market had changed dramatically���there was a sudden discovery of a large (and usually grossly overestimated) middle class. While some countries probably had lower per capita incomes (such as several African countries and Burma���now Myan. while its share of world trade fell from 1. ties to those functions that only government can discharge e���ectively.310 17. 523 84 6 Eicher Ltd. sue. Pro���ts 1999 1995 1991 Growth Growth M ultiple M ultiple Company Industry Ownership Sales Pro���ts Sales Pro���ts Sales Pro���ts (1999/1991) (1999/1991) Century Textiles Consumer��� Birla 19.N. The current ���nance minister himself drew attention to this in his budget speech to the parliament on 29 February 2000.��� (Parthasarathy 2000a) He compared the work done at his center with that at the headquarters in Silicon Valley: New products come from here. Lindsay. in par. It has a number of signi���cant negative con. the real rate of economic growth accelerated to average around 5.172 publicly listed manufacturing companies. turers coexisted with decent-quality ones. compared to China���s 0. rewarded import substitution. the ���nance minister has withdrawn subsidized sugar allocation for those above the poverty line and raised the sale price of rice and wheat supplied through the PDS.256 6. airports. the maintenance of a common currency and of national networks of communications and transport. I am sure. the average tari���rate for electricity supplied to agriculture is around 25 paise per kilowatt-hour (kwh) for all states (some states have actually made it free). tional public investment in the infrastructure and social sectors is an im. are less e���cient than untied transfers. All. Vajpayee announced the widely quoted goal of making India a ���global in.29 Some essential changes were already in motion in 2000. both economically and socially. Two MNCs may seem very small. for instance. ven. I believe that Srini. This is because reform of agriculture and the social sector has not even commenced. gave us examples of licensing new product de.95 17. It also seeks to explore the reasons for the di���erences in growth across states and to identify the critical policy issues that need to be addressed if the slow-growing states are to achieve more re. Indo Rama. If some states have decelerated in the 1990s. commerce. ing into production and therefore helps growth. First. A strong case can be made for increasing expenditures on such activities by redirect. Mafatlals. Report prepared by McKinsey & Co. chemicals. instead of bringing about a replay of the 1991 crisis (when ���scal pressures spilt into a balance of payments crisis).. 3. by 1995. It is this increase in competition.0 billion ruppes (Rs. Bhagwati.917 576 2.2The IT Action Plan While the central government initiated India���s economic liberalization in the early 1990s.5 percent by 1991. Calcutta: Oxford University Press.6742 1. In most discussions of privatization. and T. but these estimates do not add up to the GDP presented in the national ac. glish-speaking people. Never mind that it took ten months after the ���nan. ture. 1997. and indeed may even have su���ered because of a reallocation of in.1 PCs per thousand people. raising the specter of unemployment. A major liberalization of the capital market freed ���rms to price their own issue. ably. the ability to pen. The budgeted ���gure for 1999���2000 was Rs. tions on it.686 Gujarat Ambuja Commodities New 10. nomic policy reform early in the year 2000. ports in GDP during the 1950s and 1960s. a Securities and Exchange Board of India (SEBI) was estab.410 1. It seems unquestionable that there will be strong di. E���orts were made to improve telecoms by changing the regulatory framework and other means.144 1. The extent of ���scal stress in the states is perhaps best re. information that might have guided us on this issue.Madhya Pradesh 49. as is dis. the monopoly of Indian airlines was broken up. and set out a twenty-���ve-year perspective.753 2. but don���t give full dependability here [in India] because nobody���s ever done it.3044 1987���88 ���0. an increase in the central government���s ���scal de���cit (inclusive of oil pool de���cit) by one percent of GDP was associated with a reduction in private corporate investment by one percent of GDP. and Andhra Pradesh at the start of the decade was only marginally better. and Indonesia for 1994. but it must be recognized that concentrations of large corporate investment be. India has the technical skill needed to experiment with developing new products and services for the domestic market.173 262 4 6 International Products Nestle M ultinational 15. NBER Working Paper no. The newly appointed IT minister has in turn promised that all of the recommendations will be implemented by 2001. employer in Bangalore. rural road connectivity.000. In the public sector. Economic Survey 1999���2000. Section 1. universities and public laboratories had to support them. tional distribution networks are fairly well developed in India. 1145).164 775 1.6Conclusions The clearest statement on the seriousness of the ���scal situation and the need for ���scal correction can be found in the Economic Survey. Nelson. there are signi���cant questions as to what are the most e���ective measures to improve the educational attainments of young people in India. irrigation. annex table 8. He calls. tirely explained by the apparently sustained implosion of the agricul. ing ���t to levy an agricultural income tax even on large farmers. clearly becoming the largest category in 1994. a In millions of rupees (Rs M) b Figure for 1996���97. Ford.143 1.28 6.S. Finance & Development33 (1): 49���52. Negative E���ects of Infrastructure Inadequacy on Economic Performance That infrastructure is essential to support economic activity is self. ���������. The Indian Economy in Global Context 27 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 In this section. This is evident. What is of even greater con.Bangalore: The Silicon Valley of Asia? 169 Annalee Saxenian Comment:N. ���fty-nine countries were ranked.. gerated. a campaign for universal computer literacy. it rebounded to 0. which has emerged as the country���s leading personal products and food.560 6. form data for all of the departments.1 504 Taiwan 224 5. 1960���99 329 Andrew D. ucation. One remains convinced until one vis. Nonagricultural growth depends critically upon sectors such as electric power. Subramaniam (The Hindu. better quality of schooling induces students to remain in schools longer.5 ���0. ans have already made a mark in the Valley.The Indian car market in 1999 at 600.A survey by the Centre for the Study of Developing Societies (CSDS) asked people what they thought of the economic reforms. mates based on data from the National Sample Survey and the National Council of Applied Economic Research show a much lower percentage of children in school.40 (2. around 4. Many producers themselves use just-in-time inventory. Krueger and Sajjid Chinoy 2.9 8. In part this may be because Srinivasan���s paper ignores contingent ���scal liabilities. At just the time that Indian ���rms began to look for more technology and had the freedom to license it. ing oil companies (22 of the top 100 ���rms are PSEs). post o���ces. The ���export pessimism��� of the early years. tion of poverty derives very little bene���t. the states have agreed to implement a VAT from 1 April 2001.8 14. Singh I would like to make a few observations at this stage. Srinivasan 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 the model captures the aggregate tax collection relationship. vidual states should be fully consistent with the national accounts estimates of gross domestic product (GDP). The losers in table 4. Coupled with freer imports.6 percent by the late 1970s (a share smaller than Algeria���s). and so forth. ruption (formerly ample). 2000. while in Korea and Taiwan. this represented considerable progress in delivery of health care.820 19.307 Britain 31. gravated by the FPC wage hikes. gram as an autonomous unit (and eventually to privatize it). advances in IT will increase e���ciency in utilizing natural re. Technology imports continue to provide the bulk of new manufacturing processes and new product technologies.e. See Joshi and Little (1996). in his comments. and within. mance. it can emerge only when telecommunications have spread across the country and the use of the in. exports growing even faster. it increased to 28. subsidy in the development plan outlays.6 percent of the entire central government expenditure and 2. respectively. and yet the variable turns out to be highly sig. and journalists believed. high-quality people with high mobility. pore. as can be seen from table 1. work of a highly regulated. While still far in excess of com. Even domestic air travel was in excess demand and often subject to major uncertainties given the domestic monopoly of Indian Airlines. supported software will come out.1 and 3. In the late 1960s. velopment over the period since independence. the country also had the lowest telecommunica. telecommunications. not only is the industrial sector burdened with excess capacity at present. But even more fateful was P.150 2.4 9. there is no reason to believe that the situation has changed much since. NSF (1993) a Data for India. As a result. or by ini.690 200 3. Ahluwalia 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 that are subsumed in the discussion of ���state ���nances. however. accounting for nearly 35 percent of exports from India. but in both cases actually fell below the national average. return companies. By the end of the decade. helped bridge the disconnect between government policy and industry aspirations. of course.. Related to quality is the fact that the latest hardware and software tech. essary condition for higher wage incomes for much of the labor force is by now widely accepted. ports is. ��� 2. self. ���������.7. tar Pradesh and Bihar (the two most populous states) is attributable largely to non-agricultural performance. Forty years of import substitution means there is still an automatic. It was also announced that special economic zones (SEZs) would be established outside of Indian customs jurisdiction in an e���ort to spur exports.890 673 Asea Brown Boveri M ultinational 8. 3.9 8. tor and social policy issues like education.December. they are increasingly having change thrust upon them. however. ture capitalists. the indus. Privatization and ���Sick��� Enterprises The fact that ���sick��� enterprises cannot simply be closed down has al.16 1986���1987 2.19 Whether the Indian product was comparable to what was in. nately. relationships and risk appe. in shaping pol. Third. and this is also a state government responsibility. which is dis. investors in the Indian market have not yet had ade. ���the job of Marketing was one of Allocation. As Rakesh Mohan explains in his chapter. this result should not be misread to imply that telecommunication is all that matters! We note that the absence of a positive relationship in the ���rst period between growth and any of the infrastructure variables (including the three discussed above) re. member her composure in the face of rude questions from rude reporters. the consolidated ���nances of the Indian public sector present a case in which common sense and econometric tests reach the same conclusion. age of 240 per year to an average of 840. The rate of return on invested capital in state electricity enterprises was ���31 percent! If the state electricity boards were to increase prices just enough to raise revenues to the equivalent of a 3 percent rate of return on capital that Section 59 of the Electricity Supply Act of 1949 enjoined them to do.5 23. The Foster-Rosenzweig evidence indicates that low levels of educational attainment are. sand. owner of the lead. on the other hand. Occasional Paper. lenge has become more daunting in recent years pursuant to the sharp in.36 Six are in services such as hotels and logistics. It has strategic alliances with IC manufacturers abroad to develop wireless access. gion accounting for one-third of the population and the largest concentra. ment. subject to an entry fee and a net-worth requirement analo. was also the export of labor. His discus. and location was also deter. yond SEBI���s jurisdiction. wages per worker rose almost as much. not only were tari���s lowered. Tendulkar.154 1985���86 0. and Ministry of Finance (2000). Although for these reasons the levels of the ���scal de���cit as published by various sources naturally di���er. and the deterioration in the economic situation continued. such as Saxenian has presented. tions of a vibrant democratic polity. and so on. Another disadvantage is that Indian companies have not yet been able to achieve brand recognition. hence reducing the number of new jobs.017 97 Standard Consumer-TextilesMafatlal 2. Times Com. ports of one state to another. p.12 percent.01 (0. mental e���ects of small-scale reservation in his chapter in this volume. 3. planatory variables. the current account de���cit had risen signi���cantly and was above 2 percent of GDP in each year in the second half of the 1980s. although it did little more than bring together various projects that were already under way or in the ad. The cost of the transfer through PDS and other subsidies was very high. Over 700 products. As in the case of the personal income tax model. tion. This in turn has fed interest in corporate governance. I will explore some of its contributory causes and possible approaches to restoring sustainability. Foreword ix 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 Acknowledgments xi This volume owes much to the e���orts of several key people. On the other hand. minimum procedural time is 3 days. ployee compensation in state revenues. courage splitting of enterprises. cent or more. 186) re.2451 1988���89 ���0. fault.000 per employee in other software-producing countries such as Israel and Ireland (Arora et al. must be assisted by addressing the speci���c de���ciencies that are holding them back. Two in particular deserve mention. Steps along these lines have already been taken in the context of the scheme for extended ways and means ���nancing and the associated Memo. together with the experience of the other strong performers. The policy changes of the 1980s are typically credited with stimulating the accelerated growth of Indian software exports.West Bengal 4. The Indian Economy in Global Context 31 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 1. ployees than expenditure on public service provision! Thus.300 3. of bottlenecks to further improvements in performance.02 8. and regulation of the PSEs.68 months in China.N. As the nature of com. The changes since 1991 have unleashed a new dynamic in Indian industry. two are in textiles. forcement level must be re���ected in a corresponding change in the number of non-���lers and stop-���lers. India has gained immense respect in the world community and has emerged as a leading des.152 1983���84 0. and what has changed since 1991. and Bhubaneshwar. quantitative restrictions on trade were dismantled. Typically.. regardless of whether the enterprise to be pri. has led the center and central PSEs to impose restrictions��� Coal India has instituted a cash and carry policy. A couple of million Indians went to work in the Middle East after the oil boom. c) most importantly. ment. it was decided to focus in more depth on some key issues: the ���scal situation. Today. nearly 75 per. Another aspect of ���nancial reform.071 public sector enterprises in the various states. The NSSO also conducts annual surveys���the so-called ���thin sample��� covering about 25.83 percent in the 1971���80 decade and 6. 50). particularly in the area of data communications. ments in factor productivity. tion. First. Tari���s on computer hardware were brought down early and more sharply than the rest. By the 1980s. the views expressed and positions taken seem to be those of some powerful and organized spe. the three explanatory variables. Although one year is too short a time in which to evaluate the MOUs. in a private communication. According to one U. change reserves (e. and indeed essential if growth was to accelerate. The Indian state invested more in science. sources as well as improvement in governance. fertilizer. and so on���will certainly accelerate the rate at which in. India was ���ftieth. including insurance.4 percent of GDP. transport. When Texas Instruments set up the ���rst earth station in Bangalore in 1986. and Singapore���whose average R&D investment is at the OECD average���today invest proportionately more in R&D than India. and to 5. Choice of location.��� More generally. its performance in terms of growth of per capita GSDP in the 1990s was actually better than the aver. The political economy of development in India. One should not underestimate the multiplier e���ects of prosperity. ports account for a large and increasing share of total industry revenue (table 5. and I. (2) whether the GDP for years prior to 1993���94 are changed to account for the di���erence between the old se. bay). Rather than compete on the basis of hourly productivity. and has since risen to more than 4. in the past ���ve years. The task force moved extremely quickly���far more so than is the norm in India���and released its ���Information Technology Action Plan��� a year after the group was convened. Clearly.Maharashtra and Gujarat. or ���time to market. and this technical e���ort involved much learning.25 26. This ruling is a re. compared to the trends observed in the 1990s. it would be In���ationary only if the system is at full employment or is characterised by supply bottlenecks in certain sectors. ac. on leave from his regular assignment as Chief Economic Adviser in the Ministry of Finance. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 Table 4. the state governments have pioneered some of the most Bangalore: The Silicon Valley of Asia? 179 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 far-reaching policy innovations in the IT sector. however. Poverty. Madhya Pradesh. Since 1991. ni���cant.942 352 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 JK Industries Commodities Singhania 10.. All this is pretty well known in fertiliser industry circles.New Delhi: Government of India. 2000. Ahluwalia Comment:Shankar Acharya II.21 29. which could jeopardize growth. part III. but the government is burdened with excess foodstocks and foreign exchange re. 10. turned to roughly 11 percent of gross domestic product (GDP). state ���nances. sue price of food grains consequent on the increase of minimum support price for rice or wheat. which has followed a strategy of building the world���s largest-capacity plants using the latest licensed technology in world-record construction times���demonstrating that Korea can happen in India.9 0. While the Simputer is extremely low cost. So.5Technology and the National Innovation System:14 Pre.various years. This removes the incentive for the center to raise and vigorously collect those taxes whose entire proceeds accrue to the cen. Su���ce it here to say that. icy reforms to be discussed later���did India���s share of world markets begin to recover. but only because of misconceptions that prevailed about software among most policy makers: [I]f the administrators and some of the bureaucrats had too deep knowl. as long as capital mobility is not hindered by the Indian government. has not argued in favor of enabling the government to bor. Tr.990 568 18323 1. E).Direct and indirect subsidies provided by state governments. he was reputed to be the world���s third richest.4261 0. there is no industry in which Indian enterprise is more active than software. the long-term time paths of per 96 Montek S. cooperative relationships between innovators. cused. that is. However. as well as on additional in. compared to 3 in Brazil. ment has chosen to retain more than 50 percent of the equity in most PSEs put up for disinvestment. instead. a de. low-value-added segments of soft. the architect of reforms. In a study on private industry in India. icy statement of March 2000 on exports and imports replaced half of India���s 60 T. its certain other ministries and meets bureaucrats who. and consumer goods.C. pact on the e���ectiveness with which public-sector developmental programs in the state are implemented. The views expressed in this Comment are those of the author and should not be attributed to the government of India. on which the two authoritative sources. as a percentage of state domestic product (SDP) among fourteen major states.5 7.3 11. Diagnosis of Problems To begin with. as cited in Parthasarathy (2000a). professionals. would be left out of such a list. the hope of reducing the budget ���gure to 4.000 independent cable television operators. as measured by the general government de���cit (center and states combined) over the decade of the 1990s. Ex. Varoudakis. we also estimated equations using a composite variable that is the product of the investment ratio in the 1990s and the infrastruc. ���nanciers. they will a���ect states di���erently because of di���erences in state-speci���c characteristics. Much of the responsibility for such acceleration lies with the state govern. and thus it is conditions of employment (the amount and quality of machinery and equipment that workers use. under which the authorities would not grant licenses for more additional capacity than was sanctioned under the plan. deputy di. mission to close down. such as a coastal location for a petrochemical complex dependent on imported feedstock. governmental organizations. a chemical ���rm) experiences in May 2000.071 659 8. only 14 percent have heard of the reforms.C. In principle.9 5. which the president is constitutionally required to appoint every ���ve years.. tion of strength and ability to implement high-speed execution are of para. cause debt service payments would outstrip output growth. What is without dispute is that the Indian consumer in particular. keiretsus bringing to. and roads is further eroded. 1998. new services. one could view all these signs optimistically as manifesta. the rupee subsidy per dollar had been greater than the increase in the rupees per dollar ac. tell us that in 1991. the relatively high cost of domestic production arises from the fact that the industry consists of plants of vari. 1. there is need for a substantially broader perspective on policy than that determined by the immediate needs of the software industry. eigners��� willingness to undertake direct foreign investment in India. ready been mentioned. ture ���exibility). Current account balance data from p. in south India���s Deccan Plateau. it is better to dismantle RPS.594 191 Indian Dyestu��� Commodity Mafatlal 2. pening to services sector growth across states and why���and what is the scope for policy intervention? This last. the DoE announced the ���rst three in 1990 in Bangalore. These states clearly pulled ahead of all other states. tions increasingly outsourced routine. the prospects for accelerating eco. plicit subsidies is taken up in the next section. vices in major cities. the average IT professional in Bangalore is exposed to the ���eld only toward the end of his or her education���PC penetration is still low.Azim Premji. uct of generous ���nancial support. as discussed earlier. 1995. average ���scal de���cit and outstand.43 6. In addition. tax concessions. who expresses some skepticism about my optimism. tors.. Growth rates did accelerate (although there are questions as to the sustainability of these higher rates without a new wave of reform). 9) The slowdown since 1996 has been attributed to many causes. First. why does everyone accept this as ���just politics���? Over the last month.43 12.25 This helps account for the modest size of the VC industry in a ���nancial system that boasts substantial domestic and foreign investment. In low-cost goods we specialize. tarkic non-communist country in the world. together with an initial chapter that places the Indian reforms in the context of the history of Indian economic policy and the Indian econ. states will have to address pricing issues with respect to electricity. all import duties on software were eliminated. and is as sharp in cities untouched by this boom as in those that are its centers.39 4. and positive and greater than one with respect to nona. main technologically inactive behind protectionist barriers is as clear an in. edge research and plays host to many R&D-intensive. though. Past government policy that parceled out industry capacity to di���erent groups means that India���s larger ���rms have a huge range of business activities. controls on industrial production. The recently appointed Constitutional Review Com. ingly. a ���let export��� is issued. The recently elected government of Karnataka. to test whether the assumptions on which tax rates were reduced are vali.9 How.6 percent share of world aggregate exports in the same year (Ministry of Finance 2001). 217 54 4 Hindustan Lever Ltd. of course.580 231 4. Some scholars (e. He notes that the banking sector is required to hold a considerable portion of its assets in government liabili. but rather to use IT as a means to strengthen the fabric of the entire economy and to enhance opportunities and living conditions for the whole Indian population. penditure on the project. as well as in the activities of some small indigenous ���rms like Bangalore-based Silicon Automation Systems and Encore. Policy makers.191 442 5. and lower even than those in other developing countries.html]. 2. Rosenzweig.0147 1989���90 ���0. Maharashtra. Asia/Paci���c Research Center. ���rms that were in the Super 100 in 1991 but are either not even in the Super 250 in 1999 (section A. frastructure (notably telecommunications. have track records that allow them to win bigger consulting contracts. this re���ected the low quality of their loan portfolios.K. 250 in Turkey. strategies. e���ciency gains from reforms can also generate growth without a substantial increase in the investment rate.Hindustan Motors. means must be determined by which truly sick enterprises can be permitted to cease their activities. especially in the context of India���s need to integrate further with the global economy. 5. speci���cally the per.8 1986���90 6.3 6. By the mid-1990s. large-sample survey informa. The industry has to face this reality of open imports very soon.5 percent in the 1990s. (IT) industry is today the single largest industry by stock market valuations. MRPL Synthetic ���bers Removal of capacity restrictions. 200 AnnaLee Saxenian 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 E���cient commercialization of cutting-edge output from research labs. While STPs can be established by any. 1996. consumers in all states are likely to lose. Task force convenor Sheshagri claims that roughly 80 percent of the recommendations have been implemented. tor in order to insure a greater ���ow of funds from banks into the industry. per no. tries were to be jointly developed by the state and private industry. ered as two periods. These estimates include only fairly tangible items. ever. Moreover. the compulsions of globaliza. and R. Otherwise. which included a group on knowledge. ticipants in the policy debates and to broaden their scope still further. they cannot discharge these responsibilities adequately if they cannot generate the required resources. lation is commonly used as a proxy for the quality of human resources.930 377 6. evidence. As a result. Working Paper no. not very convincingly.9 ���2. tions under which more NRI���s would be willing to invest in the Indian econ.906 113 Sources:Author���s analysis drawn from Business India. quiring permission from multiple government departments. transport needs to be considerably improved. this helped to put such reform on the political agenda. 1999. a lucrative form of labor cost arbitrage���and India boasts ample resum��s. aged by risk-averse public employees. Most Indian states are much larger than most developing countries. This allowed Indian companies to import the com. sector enterprises that absorbed a high and increasing fraction of invest. In. and more rapid growth in these skills.0415 1985���86 ���0. up. and (c) the problems associated with privatization of entities that have a signi���cant degree of monopoly power. owned institutions. 1996.8 12. tionship. opment in India. nomic contexts of these two hi-tech habitats are vastly di���erent.g. so that the ���nal outcome will depend on the re. resulting in a huge and ever increasing drain on public 40 Anne O. and then analyze areas where signi���cant improvements could occur. Economic and Political Weekly(Bombay). PITG is annual growth in the personal income tax.2000 1991���92 ���0. after its refusal to comply with the requirements of the Foreign Exchange and Regulation Act.. Ray. Lowell. there is a need to introduce similar liberalization at the state level. In developing generic drugs And pesticides for all the bugs.68 months in Bangladesh. the situation and problems confronting the delivery of infrastructure are discussed ���rst. and the like. see Nelson (1993).17). est on infrastructure. 1999. tures like DCM Daewoo and Birla AT&T. the degree to which regulations The Indian Economy in Global Context 29 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 and controls are harmful to growth and living standards changes as economies grow. creating ���rms that remained infants for decades until eliminated by competition in the last decade. West Bengal (7. ing heights��� of the economy) were to be reserved to the state. Plan expenditure is not identical to public investment.4 billion in 1990 and were $21. The larger discrepancy in the case of public-sector projects is probably due. low value. the early planning documents regarded the chief barrier toaccelerated growth as the then-low Indian savings rate. Their data strongly indicate that a more rapid rate of eco.3 193. Harry G. there remain a number of disadvantages confronting the Indian IT industry. dustrial houses with gross assets exceeding rupees (Rs) 20 crores under the Monopoly and Restrictive Trade Practices Act that came into e���ect in 1970) also increased the degree of detailed regulation by the government of the Indian economy. Table 3.11 Salary increases awarded to the sta���of all state and state-supported institutions. In addition.��� set up in 1996 on the advice of the commission to use the sale of proceeds for restructuring PSEs and to ���nance voluntary retirements of excess sta���. Leading companies from across the globe have set up operations in India. 24. cent in 1989���90 (World Bank 2000.2) in re. 9. the papers ranged from analyses of policies in urgent need of change (such as ���scal adjustment and small-scale industry reservation) to research ���at the frontier��� in educational policy re. and has had to be bailed out by the state and central gov.K. instead. They provide welcome con���rmation that variations in the private investment ra. The states have been al. espe. where several government inspectors could drop inon ���rms at will. vice was di���cult to obtain. tionary. Kamakshya. which accounts for 70 percent of employment in the organized sector. Indian economic growth re.4 14. and on its poor. by amending the constitution if necessary. software ���rms were permitted to o���er ADR/GDR-linked stock op. are very heavily subsidized. and some activities were to be reserved to private industry. Employee ownership in ventures and the use of stock as a currency for professional services are common in the Valley and enable a reduction in cash costs in early stages of ���rms��� development.andhrapradesh. and consumption is remarkable. The reality is that decisions by the BJP have not been hostile to foreign ���rms���witness the sale of Modern Foods to HLL.��� not only for an ���e���ective expenditure management. it is this area in which India appears to have concentrated most e���ort to date.. Disputes Act that would have raised to 1000 the lower limit of employment in an enterprise that needs to obtain government permission for any re. ture.929 Fertilizers Sterlite Industries Commodities New���Agarwal 18. Both because the policy makers (and Indian public) were suspicious of foreign trade���after years of colonial rule and in the aftermath of The Great De. In any case. with some states accelerating while others decelerated.K. but the actual behavior of per capita GSDP in the postreform period. This could re���ect the impact of migrants��� remittances.55 15. mode. pacity that was to be built under the plan. Capacity increased much faster than the market. Consequently. The persistence of de���cit ���nancing by the public sector is particularly troubling in the case of India. with the 19 percent real devaluation. Phil. was for in. Foreign trade regimes and economic development: India.9 ���1. Real income per capita is estimated to have grown at an average annual rate of only 0. in the current context a monetised de���cit is not only non-in���ationary. Journal of Law and Economics and Orga. Uttar Pradesh. achieve.03 4. Ltd. I remember the ���rst major visitor to Washington after I became secretary of state: Indira Gandhi. of decline.24) In order to test for possible interaction e���ects between private investment and infrastructure.N. demanding in particular that the government roll back the modest subsidy cuts that it had announced in the February 2000 budget. My colleagues and I are deeply grateful to Kanwal Rekhi. India market demographics report. 1981. although it can be explained by the fact that some of the thir. and aluminium (NCAER 1999. Uttar Pradesh. sub.. pore associate.5 percent of the total population below the poverty line in India. As.Small-Scale Industry Policy in India: ACriticalEvaluation 213 Rakesh Mohan Comment:Roger G. between nomination and con���rmation. and there is no evidence of any improvement in the e���. with 16 percent of the world���s population but 1. albeit from a low base (NASSCOM 1999). Because the large ���scal de���cit of the last decade has apparently neither raised in���ationary pressures nor increased current account de���cits. 7. the exchange rate was devalued. as ���nancing was simply not available. espe. In certain circumstances these negative e���ects can swamp the positive e���ects. Jagdish. ists on the west coast. every major political party agrees on these solutions. tural growth rates. percent of villages electri���ed. Malaysia. There is evidence that the various poverty indicators all rose somewhat during the crisis and its immediate aftermath. this should become less of an issue. Clearly. modity that is competitively produced within its border.60 2. sure points of a possible ���scal crisis. it follows that parallel improvements in governance at the state level are needed to en. The Doing Business in India: What Has Liberalization Changed? 133 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 5. education. are not yet advanced in India. LML. infrastructure. Moreover. dia. where they encountered less competition. N. 1999 United States 2. Used to operating in a shortage economy in which pro���ts were limited by how much one could make. The set of import substitution policies under which growth in many developing countries reached 6���7 percent in the 1950s and 1960s. GDP. Our many years of price controls And endless number of poor souls. Center for Economic Policy Research.5 percent maximum) and cash reserve ratio (15 percent maximum). The committee ought to consider whether the planning commission should be abolished and replaced by two institutions analogous to International Bank For Re.307 847 India Nirma Consumer New 12. A second advantage is the nine. spite o���cial prohibition. these in turn have far-reaching impacts on the well-being of the rural population. at least initially. and e���orts were made to simplify the approvals process. The initiatives toward moderation of tax rates have to be supported by a major reform of the tax administration system. reforms on foreign exchange regulation. culture. 14. ing very far with this approach. ucts apparently already exist. Report no. ished for the day. or with relatively low investments. The problem of pervasively inadequate cost recovery (and associated high explicit and implicit government subsidies). although much progress had been made in improving India���s economic policy framework. Sir Arthur Lewis had ���rst articulated the view that increasing the rate of savings. vidual with an international outlook. tential for addressing this critical issue for individual infrastructure sectors. scale��� ���rms. and simultaneously encouraged waste of scarce water.12 8. Accompanied by certain liberalizing changes. Patel. Its basic approach was to throw money at the market: to give subsidized computers to schools. This would be a much more e���ective way of helping the poorer states than the traditional approach of pushing existing PSEs to make commercial investments in the less devel.Bihar 6. lar to the picture that emerges from the national accounts.500 1. improving the e���ectiveness of public expenditure requires decentral. reports that the number of In. the quality of labor is important. 2001. educators.2000 1996���97 0.8157 1. versity.206 1995���96 0. The descriptions read very much like de. By 1995. Section 1. but not necessarily most important.��� domestic production of import. The vast ma.110 696 4. In one conference. Indigenization took place at any cost and with compromises in quality. The Indian Patents Act and its relation to technological devel. and Orissa is indeed very low. entrepreneurial state governments.4.025 7. as previously mentioned. It is primarily a public expenditure plan.900 1. 1977The state of emergency is lifted. Expenditure management policy has been nearly absent in spite of the commitments made from time to time in parliament and elsewhere for adopting a perfor. he recognizes. one must instead produce it locally. 10 Anne O.. 2001. get or policy announcements. his discus.48 38. Firms have responded to liberalization in four ways. and public hospitals by 2003. aver.72 35. Figure 2C. we have seen that there are many other (often more pressing) needs in India. plying the great majority of ���nancing for the conference. However. paying more attention to providing conditions under which the newly privatized entities can function e���ectively than to maximizing the amount of revenue the government gets. There is no doubt that most economists would deem India���s ���scal de���cit unsustainable. 1967. which are in the high income group and were ranked just below Punjab and Haryana at the start of the 1990s. the current account de���cit fell from its very high levels of the late 1980s to more moderate and sustainable levels of around 1 to 1. 217 94 2 Bajaj Auto 315 144 2 Indian Telephone Industries Ltd. This is at variance with the oft. and Novartis.920 6. and (e) opening of a speci���ed radio frequency band for public wireless usage. and I would like to discuss them in some detail.6 ���1. At the beginning of 1998. If the extent of underpricing kerosene could be reduced. and primary health centers. It is a function of the property distribution. liament. 2. These were in full force by 1996. 192 AnnaLee Saxenian 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 International Telecommunications Union (ITU). Until now. eign investment. Gujarat. anticipated competition into the national long distance sector on a revenue. nataka. Little. ment in India. which are typically below ten per thou. India development report.N.360 348 3. Krueger Conference Participants 363 Contributors 367 Author Index 369 Subject Index 373 vi Contents 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 Foreword George P. The Indian government���s heavy-handed e���orts to create a domestic venture capital industry are really an e���ort to indigenize an industry that already exists 208 AnnaLee Saxenian 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 elsewhere and will readily come to India if it is provided with a conducive legal environment.5 percent. resulting in increased revenues. Industry Restructuring There are several visible examples of industry trying to restructure. tional political leaders. are also not universally valid. The Indian Economy in Global Context 15 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 Table 1. HMR Automobiles Delicensing and new foreign in. a Not an inspector but a major regulatory mechanism from the day the item is ready to the day it is on a ���ight out of Bombay is. nancial repression. ment was 1. International ���nancial statistics. lished the national IT task force.35 While there are opportunities for sizable increases in operating e���cien.Public-sector enterprises (PSEs) have proliferated at the state govern. ���nance. Usually such plans me. the ���nancial sector was partially liberalized. 1993. and its idea of self-reliance self-defeating (Sridharan 1996).2 percent of GDP in 1990���91 (just before reforms) to a low of 2. taken by both private and public entities.1 Relationship between personal tax rates and personal tax revenues in India 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 Fig. applying these periods to two di���erent subsamples. especially competition from imports. And Bangalore attracts more IT professionals than any other city in India. The Planning Commission documents stated that a major challenge was to raise the Indian savings rate to 20 percent and concluded that. and Mafatlal and Modi from four to zero. Taxing intermediation remains an important part of public ���nance and appears to be a preferred alternative to the monetization of government de���cits in the absence of ���scal reforms. were not achieving this goal. he declared that his primary objective was to ���rationalize��� controls.965 Global Telesystems Services New 5. 2000b. more than any other newly industrialized country. This suggests the second challenge.. 1998. besides an increase in the tax-GDP ratio. crease over the same period. and so forth. which may be project-speci���c or linked to implementing broader policy reforms in criti.8lists the losers. however. and so forth. vantage of o���shore production soon became apparent.g. India had one television channel. 130 Naushad Forbes 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 Can serve to wake. The perverse incentives created by the planning commission in ���nancing India���s Fiscal Situation: Is a Crisis Ahead? 57 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 the capital and operating costs of new (centrally sponsored) state projects in each ���ve-year plan for the duration of that plan should be noted. but it actually decelerated in Bihar.5 8. She fears that the engi.15 This underscores the potential for upgrading in India. health. portant step forward in policy making in India. ���������. the overall trade regime was probably more restrictive by the early 1970s than it had been in 1964���65. tainability of the ���scal situation. J.5 to 0. and quanti���cation of its arguments using aggregate measures. The task force also developed an unusually open and transparent process for collecting information and formulating recommendations. All friends of India.0635 ��IPVTR2 ��0. and a drop in workers��� remittances as workers in the Gulf were repatriated. the quality of their lending directly and importantly a���ects the rate of growth. The State Electricity Boards (SEBs) con. let alone state gov.. A respected.0 percent) in the south. istani incursion in Kargil are already mostly absorbed. and a more investor-friendly environment.Washington. and expansion will have to oc. O���cials issuing investment licenses therefore kept track of the amount of additional ca. thanks to the spread of communications. I am not aware of any supreme court decision on the issue. chairman and managing director of Mastek Ltd.370 321 12. Eco. the coun. but we will bene���t even more when conditions in India cause the ���ow to move in the other direction. which in turn is determined by the overall policy en. Tamil Nadu. The contours of needed reforms are well known and have been discussed in several studies. The same applied for many other industries.3 percent by 1960. ible groups. Even so. rect taxes and with the continued broadening of the base for income tax (coupled with rising incomes). the bulk of whose collections was devolved to the states. However. most markets have seen sev. and in assisting in the editing of this volume. according to their anal. siderably moderated. and major ports. the ���rst 1. nally. Their success is proof of this. director of STPI. Global competitiveness report 1999. and power supplies all need im. ���if we do notreverse the trend. More importantly. supple. mean that the government is perilously close to an ���internal debt trap. No developing country had a leader as interested in science as Nehru. each state PSE was set separate borrowing limits for each year. Isher Ahluwalia and I. leaving little or nothing to meet the minimum non-salary cost of delivering the services that the programs are meant to provide. because it involved compliance with the conditionalities and structural benchmarks laid down by the multilateral lending institutions. mentation. its omission of tax expenditures. political personalities are appointed as chairmen of state corporations and given the rank of cabinet minister in the state government. Varondakis. while electri���ed networks covered only 22 percent of the total route length. The resulting reallo. But in India. sirable in order to free resources for more productive investments.6 0. This re���ects. stacles to growth identi���ed by a small number of established. Parthasarathy. 1993���99 (US$ millions) 1993���94 1994���95 1995���96 1996���97 1997���98 1998���99 Software Domestic 230 350 490 670 950 1. pp. to o���shore (in India) service provision during the 1990s. In 1996. dian professors. The average annual rate of growth of real GDP was 5. Fur. Michael.370 374 7. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 Contents v Foreword vii George P. recently proposed exempting venture capital funds from direct taxation) and SEBI. Time series data on the GSDP in each state are prepared by the statistics department of state governments. Despite the India���s Fiscal Situation: Is a Crisis Ahead? 77 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 convergence of interest rates on loans to the government and to the enter. Each interface with a separate part of the bureaucracy subjects the entrepreneur to the triple vicissitudes of harassment. to remove employers��� ability to discipline workers. Even after the drop in technology stock prices in the ���rst half of 2000. although some further measures were taken. because any change in en. section 2. nal debt. (c) expan. though that does not make them any easier.000 professionals employed today in the Indian IT industry.450 862 6. tion. private capital in���ows have recovered since the Asian crisis. and a report on its augmented terms of reference is expected at the end of August 2000. the changing relationship between Indian and foreign ���rms should be seen as the normalization of Indian industry.850 4 5 Source: Business India.4 ���1. lore���the center of software in India���and Silicon Valley. investment in a new factory. PSUs. but then rose to 10. jasthan. Gonsalves. while secondary school enrollments rose from 27 to 34 per. The eleventh ���nance commission for 2000���05. Madhya Pradesh. Pronab.Paris: OECD. 56 T. labor-intensive projects.340 747 4. mined to a much greater extent by economic considerations. and the lack of e���cient economic diplomacy.9 percent growth in the combined GSDP. Almost half of the central government���s expenditures are accounted for by interest payments on public debt. serves continued to dwindle.120 383 4. Indian economic policy reforms and poverty: An assess.3696 1986���87 ���0. Rakesh Mohan���s chapter in this volume dis. ment barriers were substantially reduced. and did not penalize them for selling their services outside. State policies must therefore focus on how private investment can be stimulated and supported. and currency laws���many of which are extremely anachronistic (including some that predate India���s independence). fell to a paltry Rs. con.572 359 JCT Consumer Textiles Thapar 3. the states have come to a unanimous decision to impose a uniform sales tax throughout the country from 1 January 2000. Short-term competitiveness can come.1a). Washington. ���Rajasthan also su���ered a sharp drop in growth of non-agriculture. achieving higher living standards for the Indian people was seen to be a major goal after independence. New Delhi: SEBI. carefully analyzes the data on Indian states for 1960���90 and arrives at the following conclusions (Trivedi 2000): 1.41 3. Such initiatives have done little in the past for the economic de. rective steps were taken. Likewise. These problems of inadequate cost recovery are massive by any reck. nomic and social objectives.��� This is an indication of how much has changed. Clearance requires a few hours but can be done before goods leave factory.29 3.��� For that reason. A comprehensive solution requires amending the relevant central legislation to remove the need for permis. It designates IT as a priority sec. payments) to the states. and from the opposition. the vibrant education and training market quickly assimilates new technologies and thereby o���ers ample opportunities for prospective IT en. and decent even compared with the world���s fastest-growing economies.9 1971���80 6. In other words.52 percent in the 1980s. Business India.E31363 2002 338.World Bank. So they said. the Indian software industry operated within the frame.g. tioning of licenses took place with restrictions on the number of entrants. nomic and social infrastructure. This is re���ected in the escalating valuations of technology companies on the Indian stock exchanges over the past year. The drop is the largest in Bihar. Dore (1964) and Dore (1971). 373 113 3 TELCO 1.5). the Con. nology from the developed world and ended up being an internationally competitive. Daimler Benz. India���s economic reforms and devel. tered as an autonomous agency.State-Level Performance under Economic ReformsinIndia 91 Montek S. or whether a gradual and piecemeal approach will be more conducive to strengthening the commercial code and governance institutions is an open question. ing an average annual rate of over 7 percent in the second half of the 1980s. The failure to develop a com. As noted earlier. For details see CMIE (1997). In the decades after India���s independence. However.374 28. mains poor. However. we will notbe able to achieve the desired GDP growth.213 4. gated in their impact.660 ���1. and other techno-hubs.Uttar Pradesh 97. duction of zero-based budgeting. The underlying problem was that growth spurred by excess ag. mental forum that could be used for evaluating policy. try currently has a single window for all operations-related transactions.85 44. Another channel through which the quality of governance at the state level can stimulate growth is by making the policy environment more busi. Stanford University. A new win. exports. and NIIT.76 in 1990 in urban areas. and from the own resource of the Center for Research on Economic Development and Policy Reform. Their research and wisdom are re���ected throughout this document. is a partnership between the Karnataka government. Moreover. which have been under way for the past decade and which are expected to be continued and further strengthened. He goes on: And on top of that there are certain plants.5 11. cent per annum in the latter part of the decade.2. Electronics Information and Planning22 (2): 55���63. or 10 percent of total state plan expenditure in that year. 164 Naushad Forbes 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 Table 4.329 5. The shift to o���shore production.608713 7.695 108 Hindustan Develop Services Modi 2. It is not necessarily a good indicator of a broader measure of ���scal balance based on the di���erence between what resources the government is able to generate through means that cause the least distortion (i. Krueger and Sajjid Chinoy 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 dialogues with union leaders (who change frequently). tion and Development.6 percent slippage in the center���s ���scal de���cit. lar press. 3. General Electric. and the resources thus released are mopped up through taxation. Bihar. One of the key factors a���ecting the demand for labor in India. fared very poorly in the 1990s. using a discount rate that is the di���erence between the rate of interest on public debate and the growth rate of real GGDP..24 More importantly.15 percent. we ���rst discuss factors that have fueled this phenomenon. and services: ���ve of the twenty-three ���rms are in commodities. Regional advantage: Culture and competition in Silicon Valley and Route 128. Such a technical community is built through collabora. In earlier ex.7. A related issue.2 A computer Bangalore: The Silicon Valley of Asia? 171 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 1.5 (continued) Sales. macroeconomic indicators have performed well.608 5. Murthy and Raju. diss. cedure for domestic despatches now permits self-removal. Individually Wockhardt. Bhagwati. verges. The 1980s also covered the period of a steep reduction in the proportion of poor in India���s population���from 48. if any.157 1987���88 0. Finally. Saxenian. Development. ments and will require a major reorientation of policy in these states. 1997H. but that is where tigers���not pussycats���are found. but also weakened the economy���s dynamism through other channels: 1) States now spend on little else than wages. All the relevant infra. even if adverse international circumstances do occur. which is currently dominated by a small number of government laboratories that do not have to earn their living and by corporate R&D centers that serve only their parent companies. there were a number of other important mea. 9.7 1. ties for e���ciency improvement with appropriate managers and incentives and with a relaxation of some of the restrictions (such as those on the em. The views expressed in this Comment are those of the author and should not be attributed to the government of India. a new department for disinvestment has been cre. and then falling by two-thirds by 1998. Srinivasan is also wrong in criticizing the recently passed constitutional amendment. provements in the ���exibility and functioning of ���nancial markets can have positive spillover e���ects on exports. 172 AnnaLee Saxenian 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 3.2). In sum. Licenses were in general granted only on proof that there was no source of indige.9 percent.540 108. First. independent source of detailed in.New York: Columbia University Press.8 6.��� making it eligible for an investment allowance and other incentives. sponding to change as it comes. tral domestic trade taxes. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 5 Bangalore The Silicon Valley of Asia? AnnaLee Saxenian 169 AnnaLee Saxenian is professor of regional development at the University of California at Berkeley and a visiting senior fellow at Stanford Institute of Economic Policy Research. This has proven successful: IT policy reforms. icy is crucial. vided free telephone connections. Economic reforms and poverty allevia. cesses of Indian engineers in the United States demonstrate their technical and entrepreneurial capabilities when working in a supportive environ. mation technology outlook. production. Delhi. The generation transmission and distribution of power in all the major states is a state monopoly operated by the state electricity boards (SEBs). 10. and the investment values are therefore not based on comparable prices. stages of planning and development in di���erent parts of the country (in ad. many overly optimistic bidders had bid well beyond their capacities and subse. Daewoo. mending steps to promote VC in India.: World Bank.162 1. Britain.Punjab 207. the starting base was so low that much remains to be done. ogy also rose. it is also remarkable how harmful these policies have been for the growth of manu. this volume) for particulars. other measures (such as the restrictions on large in. the en.9 26. ing industry group Confederation of Indian Industry (CII). it will release investment resources for productive uses in other sectors of the economy. either use machinery or pro. What is clear is that the criteria for success in Indian industry have changed from captur. leading to under-billing for electricity consumed. orders. than any other developing country. Per. sure of competition. Poor harvests trigger a food shortage and a balance-of-payments crisis. which permitted any seven employees to form a union. and corrective action is therefore more urgent. the remaining changes only add up to minor tinkering with the system.63 1988���1989 2. as it does in most of the world.869 1. ing it noncomparable with earlier surveys. Pranab. nomic performance considerably reduced any political pressure or impetus to tackle underlying structural problems.New Delhi: Ministry of Finance.02 9. there are other areas where reform has barely started. In the last year. Working Paper. In contrast to those in the Valley.3 percent. 28). edge. try with the second-largest population in the world.17 or protected lo.67 7. I remember all those students I knew in my earlier days at MIT��� how good they were but also how hard they worked to ���gure out how to stay in the United States rather than go back home. and Japan have managed to attract billions of dollars of investments in silicon chips and electronic components. dominated the business press last year. sion. stitution.075 1. Infrastructure Development in India���s Reforms. various years. which has not received the attention it deserves.9 11. and.87 37. gests that the e���ectiveness of the existing programs is extremely limited and that the same resources would be much better spent in building infrastruc. it is nonetheless the case that inferences relevant to India can be drawn from experiences.0 1. instead. equation (3) above is estimated. which in 1999 accounted for 65 percent of India���s total IT revenues and employed more than 200.23 and that the quality of the banks��� portfolios had deterio. Comment N. This. There are contrasts in the entrepreneurial culture.1Pre-1991 India���s industrial policy through 1991 can best be summed up in a quo. all observers agree that reforms have lost their momentum and that.2The Crisis of 1991 and the Reforms of the 1990s A new government. and (c) the devalua. Krueger. tions revenue of the ���fty-three countries covered in the 1996 survey. registration. Bangalore ���rms are largely export-oriented. 1997. It was even then recognized24 that this was a signi���cant constraint on satisfactory macroeconomic performance and growth. Interview in Business Standard. Technology absorption in Indian industry. ranging from investments in basic infra. If we adjust the World Bank���s (old-de���nition) estimate of the budgeted de���cit for 1999���2000 by the 1. tal reform of the labor market extremely di���cult. respectively. ment in the information revolution. someone has to set the right prices in uncompetitive markets. dian Airlines published a timetable for the sole purpose of allowing passen. imply that it will take a while for e-business to witness explosive growth in this country��� possibly another half decade or so. ernment���s intentions to pursue its recommendations. it seems as if some (perhaps only a few) ���rms have chosen 148 Naushad Forbes 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 26. Natarajan. The two politically sensitive subsidies relate to food and fertilizers. 1. out serious de���cit reduction. ity. ceeding years. India had an average ship turnaround of seven days in 1993���94. data on the level of investment in individual states. as Anne O. The ���nancial sector was likewise signi���cantly liberalized. e���orts to promote software exports during the period never took o���.D. torically centralized polity. tioned the constitutionality of transfers made by the Planning Commission.286 18. and NAGDP represents the value of goods and services produced in the nonagricultural sector.42 (2.15 4. These include reform of labor markets. Although India���s monetary and ���scal policies were relatively conserva. gree of functional specialization: The presence of foreign companies has given Indian workers an entry into the U. which is achieved over the next ���ve years. There is little doubt that such a reallocation would strengthen the de. 1992. Moreover. However. Thus. A few ���rms have fundamentally rethought their approach to in-house 156 Naushad Forbes 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 30. Import duties were withdrawn on imports of capital goods by IT ex. broaden the range of activities in the ���eld.2810 1996���97 ���0. the Indian partner controlled the key success factor of obtaining an industrial license. ing to conclude that the faster growth in the postreform period led to a faster pace of reduction in poverty. Indian economic policy. sumers can buy world-class products at internationally comparable prices. RET).9130 1998���99 0. India���s software industry: State policy. ments in development and branding. Hardly any money is left over for the complementary inputs that. why privatization of the enterprises with built-in competition did not happen sooner. and Tamil Nadu. and equity participation above 40percent was generally not permitted. and innumerable small-scale out���ts that have mushroomed to tap the ever-expanding opportunities o���ered by the global and Indian market. ous state government departments responsible for state level clearances. since national performance is ultimately an aggrega. Krueger I. 1980���81 to 1990���91: (11) g��5. or what is termed beta. ���f. It is well understood that allocative e���.M. most of India���s VC ���rms are funded either by the public sector or by multilateral funding agencies (Dossani and Saez 2000). for example. The second category should also be fairly easy.6 percent in the 1980s. Ine���cient ones have improved. tion. they feel no market pressure to maintain credit worthiness.150 2. The DoE thus represents a very di���erent model for India from an older generation of ���strategic��� ministries that sought to specify. highly e���cient alumni networks. It is noteworthy that there are as many MNC losers as there are winners. and Rs. is an intergovern. 6. the GSDP data series for indi. which have taken full advantage of the RPS and gold-plated themselves.380 ���290 Steel Deepak Fertilizers Commodities New 5. versities or research institutes.026 in 1994. In 1991. and regards the changes in policy as a distinct improvement over the earlier situation. 2000.810 426 Adani Export Other New 21. Olekalns and Cashin (2000) come to the sobering conclusion that current ���scal policies are unlikely to be sustainable in the long run. there are also substantial dangers in the current fascination with IT in India.154 224 Godfrey Phillips Consumer Modi 5. This. it is possible. and was 59. this is also an area in which state governments could act on their own by prescribing more ���exi. the government of India reached agreement with the International Monetary Fund (IMF) for a large loan. Oxford University. and improvements in banking regulation.780 728 Technologies W ipro Information New���Premji 18.. ready-to-use o���ce space. since in either case the relevant cost is the same.The SEBs are clearly the largest drain on the system. but also takes in the failure of the hardware industry. 50. Department of Fertilisers and Chemicals. Had no need to innovate For. Such disinvestment. Yet they typically overlook the opportunities in India for a localized process of innovation. Delhi). and the development of indigenous technologies. lion. and who ruthlessly back success and abandon failures. Software Technology Parks of India (STPI). Indian tari���s still remain high by world standards.3 12. the judiciary and the legal process de���nitely need to be overhauled. the percentage of the population below the poverty line ���uctuated. even of labor. and thirty-two in Singapore. ternationally available or was sold at a price that re���ected international competitiveness was not a secondaryconcern: It was no concern at all.1indicates the behavior of the tax-GDP ratio in India since 1984���85. dustries and institutions to support the economic and spatial di���usion of IT. bivalence is between foreign ���rms with the freedom to invest in India. London: Oxford University Press for the Organization for Economic Coopera. While that policy stance was unsustainable in the long run. and Mahindra & Mahindra (all in the automotive industry). However. ���For Indian telephony to grow and be e���cient. cess. trol over the complete product.67999 ���8. there was virtually no policy support at all for the software sector. implemented slowly. the criterion of evaluation is deliber.0 1984 20. Interview with industry representative. The criticism that the chaebolshave faced in the Korean ���nancial crisis of the late 1990s may be well placed. is the reservation of a number of industries to small scale ���rms. proved. ence of that slow growth. Industry observers have suggested that India���s share of the world market for customized. two of the best performers. 4. In other sectors. bilitating another 637 and declared 214 as no longer sick. and they hardly deserve to be penalized for it.11 11. be. change has been halting to the point of being di���. mation technology.702 7. This ambivalence is re���ected in statements by the lead. tions are the basis for Saxenian���s interpretation of policies and the role they played in the emergence of software. India���s Fiscal Situation: Is a Crisis Ahead? 79 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 N.6 83. dian industry would seem to have increased. W.071 516 3 2 Products Ashok Leyland Engineering New 18. as is discussed in the chapters by Kochar and by Foster and Rosenzweig in this volume. sumption E. developed for a conference at Stanford���s Cen. Since these policies are generally applicable to all states. ment industry has seen particular consolidation. such as the share of agriculture and some measure of infrastructure development. the poor of India���s more prosperous states. Nicholas Hope. trenchment. quate exposure to the technology sector and occasionally fail to grasp its nuances. This not only imposes a ���nancial strain. ment. Government Revenues. Table 3. as documented by Forbes���s account. Synthetics. First. India: Oxford University Press. 2. to spend money on ���nding uses for IT in the governments. Unfortunately.21 China 0. the public sector���s economic activities had risen sharply.6 1993 4. Exchange rate deprecia. World Economic Forum. ���������. recognizing that in many cases we will raise more questions than we can answer. ware production. To date. The statistical results presented in this section are clearly mixed. has recently appointed a committee to ���re-examine��� reforms for their bias against the poor. this was incorporated into law in the bud. is constitutionally a state subject.817 117 Orient Paper Commodity Birla 3. they must lobby bureaucrats and ministers. Finally. Poor administration and corruption (the two are in fact intimately linked) are now widely recognized as major problems that reduce the e���ectiveness of many government programs.877 408 61 10 Technologies Lupin Laboratories Pharmaceuticals New 6.5 percentage points in the percentage of the population below the poverty line.4 36 5 59 Brazil 899 4. Prime Minister Vajpayee sig. re.036 results de. it also increases with reduction in the maximum marginal rate of per. More realistically. Even hotels were owned by the public sector. as in every country.215 192 T. bridge. rashtra to 5. 1999. tioned above). Not only were public-sector enterprises overmanned and ine���cient. the underpricing of kerosene is covered by the overpricing of gasoline. but they are too few.3 46. enue losses from tax concessions and exemptions are also signi���cant (World Bank 2000. infant-industry protection combined with an inward-looking trade regime to protect permanent in. From a GSDP growth rate of 3. as distinct from a need. State-Level Performance under Economic Reforms 121 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 Bajpai. The weakest link in the IT sector. However.264 8. It should be noted that the capex private investment data are subject to the same data in���rmities that a���ect public investment data. it is estimated that 62. four days (see table 4. 62. One hallmark of the Indian economy until the 1980s had been the low rate of in���ation and the relatively conservative ���scal policy.7 main lines per employee. since data on the educational and skill characteris. 21. using each of the thirteen individual components as ex. Some of the discussants��� comments. duties were high. adequate by global standards and put Indian companies at a disadvantage when negotiating with their foreign counterparts. While India may be lacking in some other aspects of communications in.4 A new de���nition of the center���s ���scal de���cit was introduced on 1 April 1999. tial to enable large scale information dissemination and to facilitate ex. IBM���s 1978 departure from India. ganization of production in the Indian computer software industry. The same government that put through the 1991���93 reforms gave in to the demand. The lesson of Silicon Valley is clear: Entre.3 percent in the second half.At country number 177 of 209 countries in 1997. proved. The poorer and slower-growing states generally lag be.5 times the rate of growth of output. As pointed out earlier. Ford Distinguished Fellow at the Hoover Institution. porters had incentives been more aligned with economic e���ciency.44 40. terest rates at which the government is currently borrowing. we attempt to explain the variation in growth across states. (telecoms).g. And this markup is re���ected in the accounts of the DoT. Naidu has e���ectively promoted the concept of ���e-governance��� (the use of IT in delivering public services) as a way to in. it did generate growth. nual basis.15 The total amount involved in these subsidies comes to Rs. Screen-based trading has begun. Saxenian rightly deprecates the comparisons between Bangalore and Silicon Valley. ample. The cost of explicit and im. and corruption. which in turn provides the resources for repayment. largely as a result of a more formal separation of the R&D activity both functionally and geographically.5 percent share in the global cross-country customized software market: Over 200 Fortune 1000 corporations now out.48 in 1990 in rural areas and from 45.P. The answer has to lie in economic policies. Grasim Color televisions Freer component imports. they aim to accumulate intellectual property by converting the knowledge gained during a series of consulting projects into broadly applicable software components that can in turn be customized for clients with similar needs. 1956The Second Five-Year Plan is presented to parliament and ap. lying structural issues that had hampered earlier growth.9 percent per year for Bihar to a high of 8.2Software Industry Growth and Transformation. ized.5846 3. See Forbes et al. Colombia. sidies by targeting them to the poorest segments of society. and a variety of IT programs in universities.D. of which 2404 were registered and 452 were dismissed as non-maintainable under the Sick In. pened many times before.57 5. Growth in GDP resumed after 1991���92. which is comparable with the earlier surveys. were ���nanced by treas. a minimal amount of ���nance.052 12. but also 80 T. 380. but it provides few opportunities for longer-term technological learn. tional accounts. from Rs. The conventional solvency criterion requires that the outstanding debt at any time not ex. but the degree of disper. Per capita income was signi���cantly higher and had grown more rapidly than in pre-independence years.08 6. Since private investment is subject to greater ���nancial discipline. while the noncomparability may exaggerate the extent of the decline. and so on. 2000). com. rently underfunded. All of these reforms will improve Indian economic performance and growth.560 769 Essar Steel Commodities New���Ruia 21. Furthermore. OECD Technical Paper no. India has an 18.. falling from 20.3 Trend in Inter-State Inequality Fiscal Year Gini Coef���cient 1980���81 0. ments wishing to attract private investment. Moreover. as discussed in depth by Srinivasan. nance. This strategy involves a commitment to experimentation with technology appropriate to the Indian environment. ���icts between TRAI and DoT. cern is that these high de���cits are not being used to ���nance investment. and fresh elections are ordered after the gov. 30a. Pretend to reinvent the wheel.070 331 2 1 Pentafour Software Information New 5. as concluded by Srinivasan. cial repression. However. when the Indian economy grew at 6. nopoly���that is the most di���cult. quire fresh software. both of which grew at over 8 percent per annum in the 1990s. although these issues are clearly important and have been fairly seriously analyzed by some of the authors Srinivasan cites. Most analysts believe that there remain considerable bottlenecks. I have come here to develop a more constructive relationship be. the preference for insulating the Indian economy from external competition is not con���ned to a few entrepreneurs. lowed to increase their market borrowing as well. Protection was reduced. This could make a substantial di���erence to India���s fu. and into which resources had been poured. presently sitting in Washington! There have been no pro-reform editorials. heavy chemicals. The planning commission bases these estimates on the so-called ���large sample��� surveys covering about 120. all states that have grown markedly faster. we have estimated the following equations. sion is organized around ���ve topics: the overall public sector budget de���cit. Di���erences between states are indeed large. India boasts thousands of educated engineers who have remained either underemployed or unemployed for decades. but the exchange rate was ���nally uni���ed in 1993. d]. 527 430 1 Steel Authority of India Ltd. New Delhi.2 HCL Infosystems Information New 8. however. ing discussed. of which three-fourths were on non-merit goods (de���ned as goods that neither generate signi���cant positive externalities nor were of importance in poverty alleviation). For example. a consequence of the Indian govern. 11���2). ���Innovation. manufacturers in the 1980s had no alternative but to rely on Unix (the ���rst portable. is adopted. the government. Washington. examining what has happened to e���ciency.447 445 4 4 Tata Power Utilities Tata 12.72 5. 1979Moraji Desai resigns. One of the costs of Indian ���scal policies is the sacri���ce of the potential gains from international ���nancial market integra. followed by a much larger decline of almost ten percentage points in the subsequent six-year period 1993���94 to 1999���2000.13 54. Bhaskar Ramamurthi. In most regards India re. the rate of divergence in per capita incomes would be con. the technology is so simple that a pager could be developed and manufactured locally for only Rs. perhaps more than from any other country outside the United States. makes transfers for ���nancing approved outlays of the states on their annual development plans. Local value added was negative because the import of complete PCs was not allowed. failure to reform pricing policies would inevitably result in smaller investments in power capacity than appear economically warranted. the new ���rms o���er today���s Indian consumer the choice of an internationally available product at an internationally comparable price. observe the awards introduced ���to recognize R&D e���ort��� by the govern. Yet another advantage is well known: The low cost of living in India helps companies maintain wage levels that are far lower than their counterparts in developed nations. Foreign ���rms are increasing their share of or buying out their joint venture partners. sidies through far more e���ective deployment of cost recovery policies across a wide range of goods and services provided by the government and public sector. forms in the organization of ports may be an area in which the capital costs of improvements are signi���cantly less than in some other areas of infra. middle-class India still places great stress on a conservative approach to career planning and is not comfortable with the singleminded pursuit of material gains. lieve that the auction charges essentially were high enough so that monop. and other back-o���ce operations. Goods dispatched to port or airport the next day. sons for their success in order to replicate it in other states. Power It is di���cult to estimate the relative needs in di���erent infrastructure sec. 2) The associated high public wage syndrome has further distorted the labor market in India and has thus eroded competitiveness and growth potential.4. 3���16 April 2000). much above the politically acceptable rate in unindexed In. tral government expenditures to improve services in these areas.4 percent in 1999���2000. Washington. But by the mid-1990s. and Hong Kong. has himself argued for the abolition at least of ���non-merit��� subsidies.310 1. The recently launched National Highways Development Project.460 412 Brittania Industries Consumer W adia 10. A large number of private training centers have also emerged in response to the booming demand. ris the growth rate. ferred to the reforms of this early period as ���reform by stealth. structure. the low wages matter because they provide an attractive trade-o���to working in an environment plagued by chronic infrastructure problems: [W]e came here because of the skills. Problems in increasing capacity are mani. 63). it should not make any di���erence whether a rupee of pro. in.The Uttar Pradesh government.5 percent in the second period. in Latin America. India recognized the incentive problems of allowing the states to borrow on capital markets when a signi���cant portion of state government resources is collected and distributed by the center. ally competitive industries like software. ticular its heavy export orientation. Quantitative Economics Project. both for poverty alleviation and for reaping the bene���ts of economic reforms al. coastal and interior.17 It was announced that the government intended to reduce the de���cit still further over coming years. Many see the shortage of power as the most critical constraint.480 1. vestment ratio.8 7. and. 1992. but they are much more severe in the poorer states. ���gure 8. Additionally. The problem has become one of the states contin. there was no doubt that some in. ize weak banks. and I. Bhalla 2000. which are potentially available to all states and which by themselves should improve factor pro. tors. tional R&D spending. ulation of northern India is barely touched by it: It is con���ned to a few ur.9 21. ���rms that manu..Orissa 7. The project aims at four-laning about 6.Andhra Pradesh 5. Lall (1996). 1999. One could argue that the role of human skills in promoting growth is not independent of the level of investment and that the two interact with each other to generate positive responses.66 2.02 8.6 6. and ed.17 March 2000). Not only were the current account de���cit and the in���ation rate rising. tional intellectual property (Bagchi 1984). Singh believes there has been signi���cant reform of the tax struc. but by 1999���2000 this had in.R. seventh. interest rate ceilings were being removed.5 percent of their com. 528. and 9. Noncorporate investors and small business are seen to be less mobile than corporate investors. Finally.0657 6.21 and that to all domestic consumers was only Rs 0. and per capita incomes rose at a rate well above that experienced in India over any previous period.224 730 Chambal Fertilizers Commodities 8. Technologically. and the choice for the Indian consumer has changed dramatically. for in. Bangalore is largely a software services powerhouse. and the extent of controls was reduced. maintenance.55 billion in 1996���97. for example. with cities like Bangalore best poised to take the lead on this front. spectable growth of GSDP of. University of Melbourne. Economic Policy Reforms and theIndianEconomy 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 Center for Research on Economic Development and Policy Reform 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 Economic Policy Reforms and the Indian Economy Edited by Anne O. Toyota.90 9. is one of the world���s ten richest men. ment.509 10. based team of engineers. India���s economic performance from 1991 to 1997 was excellent relative to India���s standards. the word Swadeshihas been conspicuous by its absence from the BJP platform: Even the rhetoric was quietly dropped from every public statement.1 8. 1975Indira Gandhi declares a state of emergency. gers to calculate how late they were���and the improvement has continued even as most private carriers subsequently disappeared. from his perspective as the leader of one of the most successful Indian software ���rms. education. While there may be good administrative reasons for this step. ing more e���cient processes. The contrast with India is striking. 414 33 12 Ranbaxy Laboratories Ltd. NASSCOM (1999) reports that there are 826 companies in India engaged in the business of software exports.8 ���0. port it from the coal���elds of Bihar! Ironically. ments available to the government were incapable of arresting the growth ofservice exports. the success of foreign investment in the software industry is a measure of the failure of India���s restrictions on foreign investment elsewhere.646 1.00 (0. Ninan write hard-hitting editorials o���ering insight. their graduates still leave the country in large numbers. a balanced sample of 1. Such collaborations can. India pages for Government Expenditures. Centre for Economic Policy Research.Oxford. half-hour di���erence between Indian standard time and Paci���c standard time allowed Indian ���rms to perform maintenance and reengineering tasks for U. and social institutions. It really made me think���and that���s not a characteristic of most papers I read. portant source of municipal revenue in most countries.3739 5. Analysis of explicit and implicit intergovernmental transfers in In. Table 1) provide a comparable series of ���scal de���cits for the central government and ���nd that their ad. and to be a major deterrent to employing new workers. the name of the game was to keep your public mouth shut. D.P. versity. Srinivasan 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 Fig.29 A vi. there would still be room ten years hence for another conference considering further reforms in order to sus. politicized so that e���cient de. 1997). For these reasons. cession of Five Year Plans set forth a large number of economic policies controlling and directing private economic activity and guiding public. the paper is surprisingly silent on the issues of ���scal sustainabil. the de���cit of central government PSEs (CPSEs) as a ratio of GDP has halved from 3. primarily by reducing recruitment to ���ll vacancies caused by normal retirement.47 6. dia. tioned earlier. placing priority on agricultural and ru. The plan lists 108 recommendations of ���revisions and additions to the existing policy and procedures for removing bottlenecks and achieving a pre-eminent status for India. ���������. the criteria for regulation of natural monopolists and for setting their prices. Pakistan.5 These studies deal with long-term trends. It was at this time that 100 percent foreign ownership of power projects came to be per. change rate change resulted in a reduction in the current account de���cit from 2. Murthy and Raju also note the lack of innovativeness amongst Indian software professionals. V.010 days in Thailand for the same periods. will become possible. and West Bengal. problems remain because of continued exemptions for small-scale industry and many prod. as we shall argue. becomes prime minister. Srinivasan summarized the sit.pic. Pakistan declares war on India but surrenders in the same month. and productivity . a potential debt trap can arise if the nom.. At the time of writing this article. at which only six U. and that economic history is well known (see Ah. try data in India. uments are available on the internet.480 1.. and quintupling by 1999.878 581 Global Telesystems Services New 5. in India. I trust that Saxenian���s pathbreaking studies will lead to a more systematic data collection from which we can gain a reliable picture of this industry. Although the average interest rate on gov. How. and BJP governments. although this policy is unsustainable. tire venture possible. and attention to infrastructure are among the key issues that they highlight. That drop signi���cantly reduced the challenges associated with pro. subcontracting. whereas the ratio of public investment to GDP for the country as a whole in the national accounts is only 6. tractive. Ports Whereas railroads are overburdened. but their problems should not obscure the great technical capability that they have built up in a wide range of industries. The smaller acceptability of stock options is even more signi���cant when considered in the context of the maturity of ���nancial markets in India. that permission is ���almost never granted��� (Agrawal 1997. and air transport (forty-���fth). 2 Anne O. The 7. DRL. (2000) for more detail. roads. he concluded that research absorbed approximately 2���3 percent of corporate R&D. although he also notes the desirability of rapid reduction in the rates of import duty (1999. and the lack of e���cient economic diplomacy.5 81. Another 200. Each of these areas is brie���y discussed follow. Krueger and Sajjid Chinoy 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 41. sent teams similarly to the United States and Japan to learn from di���erent technology sources. and IT is not going to solve all of In. selves have had low pro���tability. Solvency and ���scal correction in India: An analytical discussion. which has been referred to as an ���input-less��� export because it requires only an overseas contract. Murthy and Raju provide a ���rst-hand factual backdrop. whereas the average cost of supplying power is Rs. demographic manage. In 1991. nent. accounting for over one-fourth of total stock market capitalization. which a few technologically con. tors are increasingly common. It was a clear case of a signi���cant exogenous ���scal shock to which the corrective ���scal response was less than adequate.750 130 6. Once licenses had been issued in that amount. 18 in Korea. This is why the whole states versus markets debate has focused on the wrong question. pression is of much e���ciency gain when combined with countless stories in the business press of ���rms reducing employment through voluntary retire. are indicated in Table 2C.6 Research and Development Expenditures Firm 1998���99a 1992���93a Growth Multiple Reliance Industries Ltd. He deems it unlikely that simultaneous ���scal and balance of payment (BOP) crises. preliminary data from the National Council of Applied Economic Research suggest that the number in poverty dropped sharply once growth acceler. there is tremendous competition among various state govern. cosmetics ���rm Revlon entered the market Doing Business in India: What Has Liberalization Changed? 149 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 with a sub-standard product and awoke the Indian ���rm Lakme into action. processes for privatizing must be trans. by a combination of public and private investments. and the national accounts data of developing countries have similar prob. 88 T.5 percent of GDP in 1991���92 to 5. in essence. the government needs to get away from funding institutions and to begin to fund solutions. In re���ecting upon the current status of the reform agenda. none of these is going to be signi���cantly a���ected by the software boom in the short run.130 1. the operating head of India���s largest two-wheeler manufacturer. port capacity and organization is an even more pressing issue. these restrictions were somewhat relaxed. and bureaucratic delays as. stations. 7000 crores for poverty alleviation schemes in rural development. agricultural income. storing.Tamil Nadu 5. and A. equate focus on hardware and fabrication industries.��� in the form of higher savings. and a total of 195. Reading a description by Ronald Dore of Japan in the 1950s and 1960s. 1984. reach. still a very small num. and productivity tools. it ballooned to 6. Meanwhile. As software ���rms. 1972The government nationalizes all insurance companies. cal sectors. Both were old British ���rms eventually taken over by Chhabria. pand central assistance to the states for infrastructure development. Because corpo.com 21 May 2000). V. taken some years back. leading to eleven states��� signing Memoranda of Understanding (MOUs) with the cen.839 248 Ahmedabad Utilities Professional 8. A true partnership requires proprietary competencies on the Indian side. tions. 17. In In. accounting for more than 16 percent of exports (Software Technology Parks of India 1995. Saxenian���s account chronicles the rapid growth of the software industry. July. ment in manufacturing grew at an average annual rate of 6. Furthermore.12 10. Reforming venture capital in India: Creating the enabling en.V. The ���rms that have shown above average growth in pro���ts (table 4. Imitation to innovation. with some luxury items bearing the additional burden of special excises. and these transfers have no relationship to its own e���orts to raise resources. With the unexpected con���ict in Kargil and the asso. there is a natural presumption that they would provide e���ciency gains for all these states. derplay the role of policy reforms. However.. Economic and Political Weekly5 May: 1637���48. leaving relative performance una���ected.N. Recently two Supreme Court judges even castigated Steel Authority of India. while Malaysia had 21. ing of the legal system. Agricultural growth depends upon rural infrastructure such as the spread and quality of irrigation. it was generally agreed that the quality of the banks��� portfo. Little. technical e���ort through indigenization.85 31.ed. access to health care. whereas data for 1980���90 are reported in units of value added.49 10. two years later the growth rates were revised upward to an even more tigerlike 7. Continuation of the growth pattern observed in the 1990s. 2000. 27. with no state see. there were also several who made products of a high enough quality to be exported to Germany. cessive preoccupation with investment as an explanatory variable. ready been seen and as is explored in Srinivasan���s chapter in this volume. in addition. Software is an ingredient of widespread process inno. the overall de���cit for the non���nancial public sector in 1999���2000 is likely to have been 10.8. ter. leading to higher growth rate in the medium term. which. ships. Narayana Murthy and Sandeep Raju The Indian IT industry underwent an unprecedented transformation in the 1990s. ernment to its employees. and especially to permit the emergence of o���shore development centers. which provided insulation from the demands of day-to-day skirmishing. Needless to say. Economic and Political Weekly(Bombay). some of the largest Indian software houses. scale ���rms are normally labor-intensive. Ashish. portunities. 2000. 1993.5 2. Indian educational institutions and polytechnics train more than 67.489 392 India Cements Commodity Sanmar 2. it cannot be used to ascertain whether the rate of investment in di���erent states behaved asym.173. cial interest groups and against the interests of the public at large. lems. which is re���ected in literacy statistics. railways. even though current circumstances o���er an opportunity for major advances in these areas��� (1142). Doing Business in India: What Has Liberalization Changed? 147 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 25.53 33. While this may re���ect data limitations. Krueger and Sajjid Chinoy right.0 4. put through a major deregulation of the state electric. 1998/9. 1.07 12.12 5.175 1990���91 0.840 1. in locally manufac. dealing with the bu.155 158 7. From World Bank. the contrast between Indian economic performance and that of many other developing countries is striking. try���s 0. as cited in Parthasarathy (2000b). eign brand computers and related products (Jhungjhunwala 1999). However.091 2. 13.g.N. the better it is for them. a case that is ex. These experi. and reduced the number of excise duty rates from eleven to three so that the system is much closer to that of value added tax (VAT) at a single rate. the e���ect of this expansion was to accelerate the rate of economic growth. external debt had nearly quadrupled to $71. The overall impression is one of signi���cantly greater technological dynamism.000 kilometers of the national highways on the so-called ���Golden Quadrilateral��� linking Delhi. market without leaving India. CTR) Empirical analysis of corporate tax collection also requires speci���cation of equation (5) in terms of an empirically testable equation. from Rs. Indian managers have not been very successful at this.18 2. Indian policy saw foreign investment as a necessary evil. can make the challenges involved in further ���nancial restructuring somewhat more tractable.Uttar Pradesh 4.Report of expert group on the commercialization of infrastructure projects for the Ministry of Finance. and the state of Bangladesh is formally recognized. and Calcutta.898 8. An illustration of this approach is the hesitation of the United Front Government to adjust the is. but the system in most Indian states is hopelessly outdated. DSIR-Department of Scienti���c and Industrial Research (1995). I will essay a few comments under three broad headings: diagnosis of problems. Some enthusiasts in the ���nance ministry may interpret these ���gures as majority support for the reforms. estimates are that as much as $23 billion information technology export revenues and 650. New Delhi: Oxford University Press. and N. attempts to reduce monetization of the de���cit through do.Kerala 17. Research and Develop. structure are foreign ���rms (one sees the same thing beginning to happen with the chaebolsas a result of the ���nancial crisis in Korea). ware companies were transformed into direct or indirect dealerships for for. Burgess. seek to replicate the U. tematic reports indicate that the share of industrial spending in the total (including PSEs) has continued to rise. G. and progress had been made on a number of fronts. is now annual. the center���s commitment to withhold transfers in case a state fails to institute policy changes in return for transfers may not be credible. The Indian trade and payments regime as of 1991 was highly restrictive. However. whether the national bud. though. several policies are particularly important. but by no means least. But for many others.���6 2. but this was almost wholly o���set by a remarkable acceleration of agricul. Delhi). there are a number of is. rural electri���ca. China.N.699 79 3 6 Electricity Oswal Chemicals Commodities Oswal 7. The challenge for India is to overcome the bu. The most recent volume avail.org]. and another four the following year. Swaminathan Aiyar had this to say: ���Only 19 percent of people had heard of the new economic policy. Acharya is intrigued by the fact that GDP grew at 6 percent to 7 percent per year in the 1990s despite large ���scal de���cits. part 7).480 1. when private investment is also feasible. Narasimha Rao as prime minister and Manmohan Singh as ���nance minister. is being initiated by the government of India. 1984Indira Gandhi is assassinated.2Investment Ratios at the State Level The rate of investment is generally regarded as one of the most important factors explaining growth in any economy. commenting on the experience of Kerala in the 1980s. I was reminded of Mahatma Gandhi���s use of silence right after I was nominated to be secretary of state. 10. It seems as if every Indian group of any size invested in power. mentioned by Srinivasan. Irena As.20 11. as we are told. this is particularly true of industrial products like machine tools and instrumen. In India it would almost certainly also require amendment of the constitution. they forgo the opportunity to test and perfect products through interaction with end-users. infant mortality rates.725 crores. 3.010 420 2 1 Usha Beltron Other 7. enue. the de���cit is not now being monetized as it was in the past. less than e���cient sizes. with P. Fortunately. businessmen. investment as a percentage of GDP has remained fairly stagnant. Today. Bihar ���ts the pattern of expectations and scores low. In spite of the evidence that a handful of Indian software companies are gradually moving up the value chain and gaining international recognition for their quality and performance. the Software Technology Parks of India (STPI). A signi���cant part of the ���scal correction in the early 1990s was through reductions in development spending. which resorts to an annual planning mechanism. tions. and Orissa. This has accentuated their al. while Saxenian���s concern with the dysfunctional qualities of Indian infrastructure for innovation is legitimate. Ideally. ernment could do nothing to control them. but was prevented by the Supreme Court. so that the elimination of all interjurisdictional transfers may be socially undesirable. He then focuses on the proposition that there have been some successful reforms with respect to the tax structure and administration.N.Tamil Nadu 158. though. sidies to farmers). ���������.480 1. no state.090 559 2. Mumbai. For instance. the recall period for durable goods was changed to 365 days. payment. Again.146249 N 16 robust and that the model successfully captures the aggregate corporate tax collection relationship. and Russia).and Post-1991 The success of liberalization for Indian industry will ultimately lie in the emergence of internationally competitive ���rms.Oxford.3 percent of GDP in 1993���94. synergies between science/engineering schools and business schools. venture capital can support multiple experiments with new products. Stan. Other data are for merchandise trade alone. Table 3.335 913 4. Earlier. serially num bered invoices was compulsory. see Grieco (1984).382 1.000 workers in 1998. Singh. India averaged among the highest average rates of protection against imports in the world.S.35 The Philippines 0. These goods are carried below cost. He notes. prior to the severe balance-of-payments and macroeconomic crisis of 1991. production structures. Although the di���erential between the interest rates on bank loans and public debt has shrunk in the 1990s. that acceleration of growth in future requires increased public investment in critical areas. While ���resource mobilization.431 1. which carries a very large portion of the country���s road tra���c. despite the fact that power supply per capita had tripled over the 1975���95 period. Secondly.69 4. in Europe and Japan. Krueger.225 ��� 0. it was too much to hope that all critical reform topics could be discussed. However. scious policy that limited the bene���ts of liberalization to these states. Second. while labor migration is important. sometimes forever. In 1998 and 1999. but it is important to recog. Notes:Government Expenditures are central government expenditures including loans (net of re.374 28. and the report of the disinvestment commission has been ac. body. However. on a global scale (Krueger and Chinoy. salt. frastructure. But they are meeting a felt demand. and some others relaxed.1918 ��(IPVT ��L) R2 ��0.. such as income tax. vision sets���all advertised on Star TV. Jawarhalal. including the phasing out of revenue-costly concessions. Jai Asundi. India���s growth performance relative to its neighbours in Asia is not that impressive. and refrigera. This should allow the private sector to ���nd economically viable ways to serve the domestic market. There are some enterprises. that is.��� there has been little progress in practice. ���������. industrial. section A). The Indian legal system is notoriously slow���disputes often take several years to be re. Data for the 1980s suggest that the imbalance between private-sector and public.India���s Fiscal Situation: Is a Crisis Ahead? 47 T. Indeed. sures as regards industrial licensing and import and export regula. he does not address the intriguing question of how India sustained fairly high rates of growth in both the 1980s and 1990s de. private power sources. The constitution empowers states to tax land. and constituted a major reform. United Front.07 42.Berkeley: University of California Press.60 1. well be. International Monetary Fund. Even if the size of the rec. whose economic model ignored foreign trade and as. a concerted programme to deploy user charges for economic services rendered by government.Oxford: Clarendon Press. This is clearly an area that must have very high priority. sion in growth rates increased very signi���cantly in the 1990s. And I. Data on school enrollment rates in India are highly suspect.There is variation in growth performance across states in both peri. 156 ���. tronics.1The Need for Reform at the Local Level In 1991. Likewise. centage points in state plan expenditures as a percentage of GSDP indicates an even larger decline in public investment by state governments over the period. 1948Mahatma Gandhi is assassinated. Other communications were little better. and the Associated Chambers of Commerce (Assocham). but their growth rates of per capita GSDP not only were lower in the 1990s than in the 1980s. Small-scale ���rms are discouraged from expanding. pliance. ment level and many of them are little more than vehicles for creating jobs at all levels. IT products would be developed as a means to enable creative solutions to local prob. labor welfare regulation. The assignment of taxes and expenditures in In. have tended in the past to understate the real imbalances. By contrast. in sharp contrast to the Val. ers ���have enjoyed almost complete job security since independence��� (Agrawal 1997. India���s Economic Reforms 1990���2001.290 821 4. The Indian software development paradigm has been acknowledged the world over as a powerful model for delivering high.752 billion in the decade 1980���81 to 1990���91. Indian compa.329 Duncans Industries Commodities Goenka 10.97 11. are labor markets. I limit my discussion to only a few of the points made in the paper. the growth rate of employ. leaving a declin.960 1. of subsidy reduction and the reform of government ���nances. 1994.02 2. and David Wield. The introduction of the STPs facilitated a gradual shift away from on-site 176 AnnaLee Saxenian 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 Table 5. most recently in its annual report for 1999���2000. Such a reduction. Ritch Professor of Economics and director of the Center for Research on Economic Development and Policy Reform at Stanford University. 30 July 1996 as cited by Par. tions on in���ows of foreign direct and portfolio investment were signi���cantly eased. as discussed in the chapter by An. typically too costly and provide more features than are needed by the vast majority of the Indian population. India���s ���scal de���cit (���nanced primarily from domestic bor. Chakravarty 1987. See Saxenian���s discussion of Indian o���shore development (this volume). Jhunjhunwala. In many states.As the introductory chapter in this volume documented. Policies to support innovation should facilitate new ���rm formation. Mimeograph. for internet access. By the end of the decade. has been given broad terms of refer. The domestic software industry���as distinct from bodyshopping���could not have be. Just to take a few examples: ���The deceleration in aggregate growth between the two periods for Ut. nance minister.7 percent annually) during the years of positive productivity growth in the ���rst half of the 1980s (Ahluwalia 1991. 185): More e���ective management of public ���nances continues to be the central challenge facing all levels of government of India. Public corporations were estab. that the early years of reform.130 1. John Johnson. In Madhya Pradesh.2 14. Seshagiri. one of the underlying assumptions for reduction in tax rates appears to be validated. In these contracts. COM 2000. which excluded the state���s share of small saving from the center���s ex. Uis the ran.2 percent for Gujarat. DST-Department of Science and Technology (DST). and Information Technology held at the National Institute of Advanced Study.15 That budget also phased out the tax exemption of export income. the Software Technology Parks of India (STPI) was regis. Ready buyers for the businesses being sold by Indian groups as they re. It is possible that if the GSDP data were revised similarly. and a number of other. especially those delivered abroad. by and large. 4.568 211 Coats Viyella India Multinational 4. See Parthasarathy (2000b) for a detailed analysis of the telecommunications case. 4. served industries are often labor-intensive and might have been key ex. ble to some unavoidable expenditure commitments as well as unanticipated shocks. the Bangalore professional is much more easily satis���ed than his or her counterpart in the Valley. cally reduce the magnitude of center-state transfers and bias toward de���cit. which stood at an average rate of 125 percent (with the highest rate at 355 percent) in 1991. The independent.4The Pending Agenda for Reform Many others in this volume deal with the need to move on all the bigger pending reforms���of infrastructure.87 10. as we have seen. Nehru and Gandhi had. ���������. also show a signi���cant decline. and one is a multinational (VST). It is only in the last three years that making a forty-year-old model with indi���erent quality ���nally seems to have become an unpro���table activity���sales of the Ambassador have fallen to under 1 percent of the Indian car market. ion. with further reforms. 50. Third. But before I begin. includ. He points out that politicians believe that the role of the state is to provide jobs. tice is generally in the hands of the state government. Naturally.872 110 3 1 M alavika Steel Commodities New 7. the latter having the additional special feature of being the capital. the motivation for entrepre. as other federations have discovered. Data on plan expenditure at the state level for 1998���99 were not readily available and therefore have not been included in computing the average for the 1990s.2 percent in Orissa.: World Bank. Stanford University.Gujarat 123. The Aditya Birla group has a reputa.740 115 Jindal Vijayanagar Commodities New 5. This is unlike the case of personal income tax. ances can be considerably longer than in other countries. I.083 between 1989 and 1999. they have been excluded from the analysis. mitted employee stock option plans.2 The Inspector Raj in May 2000 Inspector Powers Change Since 1991 Factory Can halt work at a particular License fee. each with absolute power to make ���rms cease operations ���rst and challenge the order later.4 Estimated Equation for Corporate Tax Collections in India (1984���85 to 1999���2000) Independent Variables Coef���cients t-ratios CTR ���30. Vanderbilt University. India: Planning for industrialization. added activities for two di���erent reasons. the tax elasticity with respect to tax rates is negative. Doubling the rate of growth in a group of states 112 Montek S.060 313 2.6 February 2000. Goods handed over to airline or shipping line. Jairam Ramesh. at which the government appropriated a large share of the loanable resources of the banking system through statutory liquidity ratio (38. Jean and Amartya Sen. spective. in January 1995 STP ���rms were allowed to sell 25 percent of their output to the domestic tari���area. Kletzer (see comment section at end of chapter) notes that if the primary surplus is based on distortionary taxation. It is also true that many plan programs are ill-designed and indi���erently executed. However.K. vant in explaining growth.491 10. and heads a coalition government with A. 113. solute terms and relative to sales were the lowest of all the major NICs���Korea. to more radical change of technology in Indian industry. ture.���Doors Now Wide Open For Consumer Goods Imports. as indicated by ���ling of industrial entrepreneur���s memoranda with the government. employment. The British economist Joan Robinson once said about India that whatever could be said about it. In many cases. There was absolutely no rationale for this other than a de. but Not Everywhere Let me begin with a series of random facts: 1. Reliance Industries. 4) is also encouraging.5 94.435 508 Apollo Tyres Consumer Raunaq Singh 9. in spite of its sizable labor pool. cement ���rms that were secondary businesses of major industrial houses are being sold o���. reaucratic resistance motivated by fear of the loss of jobs���or of opportu. Relaxation of restrictions on the imports of consumer goods were negotiated under the World Trade Organization (WTO). tion to 1998���99.635 158 3 4 Products Escorts Engineering Nanda 11. Yet there is a certain impatience and uneasiness: For all of the many achievements. remained at very manageable levels. The latest reported National Sample Survey estimate for 1996���97 put literacy at 62 percent (Ahluwalia 1999.5 takes a look at how technology and innovation have changed in Indian industry since 1991. The current precarious ���scal situation of states is the result of increas.270 8. as well as by other measures such as the ���scal responsibility legislation cur. The last two years have ���nally seen talk of privatization. Much of Indian industry was characterized by widespread ine���ciency and product obsolescence. such as Mexico (table 5. what systematically.1 ���2. cluding electronics. Chandrasekhar. diture. we entered into a medium-term arrangement with the World Bank and the In. velopment that was articulated before independence. Consider the case of exports. 1991.82 1993���1994 2. adhering to other requirements of MPF in the absence of mobility of factors across states might accentuate the exist. Ahluwalia (1998).. pacity for further investments. Agriculture is important for all states. Software ���rms in Bangalore and Hyderabad have much more in common with ���rms in Silicon Valley than with the state fertil. air. making it impossible to construct an in. or approximately US$200) that was developed by a Bangalore. Paradoxically. The United States has been a major bene���ciary of this trend. although it is the freight. N. close links between leaders in academia and business. economy with the advantage of a large domestic market. focuses on elaborating the concerns that arise from the Indian ���scal de���cit. and they are not con���ned to the IT industry. structure needs of agricultural development���irrigation. the momentum for reform will once again have to be regained. The key elements would be to redesign busi. this need was largely eliminated at a stroke. dated.) 14. ment most conducive to bene���ting from the new policies. schemes to insure provision of computers and the internet in all schools. This would require the initiation of serious reforms of the agriculture sector so that the constituency for economic reforms can be signi���cantly enlarged.150 2.037 1. ence. it was clear that the Indian economy had changed markedly over the post-crisis years. Already most IT develop.3 percent in the period 1966���67 to 1980. can make a major contribution to accelerating growth in these states. tect and support small-scale enterprises. Brie���y.0349 ��IPUBR2 ��0.��� Finally. Ahluwalia 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 12. Sridharan. Three ���rms we visited. primarily foreign ���rms. There are several studies that have sought to determine whether India���s growth process shows convergence in per capita GSDP over time. that apparently improved eco. These ���gures suggest the need for skepticism about the more in���ated claims currently circulating concerning India���s IT industries. and dividends after paying the necessary taxes. we estimate the regression equation logY��a��btwhere b��log(1 ��r).3981 1. and the major tax reform initiatives since 1997 have been in place for too short a period to draw any long-term con. even thrived. cent in the United States and 1. Out of the 225 PSEs that were referred. The Tata group sold its personal products company Tomco to HLL. K is currently the ���rst deputy managing director at the International Monetary Fund. The latter will be served whether we like it or not. Krueger and Sajjid Chinoy 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 4.. Since the data series is available only from 1995 onward. In���uenced heavily by P. Richard. Administratively. ing challenged by government departments and enterprises in those sec. wages for software programmers and systems an. sues they believe must be addressed in order to support future sustained rapid growth. health) with virtually no attempt to raise revenues to ���nance them. She proposes the setting up of two. ���������. The 1984 and 1986 policies were championed by N.5. acceleration of the program is desirable. coupled with the government���s sense of urgency to change things for the better. electricity.8 12. and although this objective has never been quanti���ed in terms of rates of convergence of per capita GSDP. 198 AnnaLee Saxenian 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 place. periments conducted in the annual thin sample surveys. according to the budget data for 2000���01. especially for the poor (���Swaminomics. tion. Since 1991. Although the rise is signi���cant. It is true that the industrialization strategy did generate a diversi���ed industrial base. privatization of distribution is probably the best way of minimizing such losses.263 ��� 0. The state of state government ���nances in India.. foreign exchange re. Olekalns and Cashin (2000). England: Oxford University Press. this chapter will deal with relatively neglected areas of pending reform: the need to take reform to the local level.3 4. production of up to 125 percent of the licensed amount was permitted. coming less and less important to the world. and content creation and content indus.4Human Resources The quality of human resources.900 Hardware Domestic 490 590 1.000 households. as well as Bangalore: The Silicon Valley of Asia? 189 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 established reputations. and so will the poor of the states that export software.. Ministry of Finance. spectively. In the software services industry. Although the FPC decisions relate strictly to the central government employees. The picture that I paint is bleak.807 67 ICI India Multinational 7. ished quantitative import restrictions on computers and peripherals. tions to employees. Saxenian documents the rapid growth of the industry and its prospects for future ex.9 12. JK Reliance. the quality of human resources. V. content to make obsolete products in a stable economic environment.514.330 508 12. development of land.162 1. Jet Beverages Opening to foreign investment Parle. More. as investment is likely to move from the latter to the former. B. and I. The estimated rate of population growth between 1965 and 1980 was 2.2 percent of GDP. tions.942 352 HFCL Services New 4. Between dependency and autonomy: India���s experience with the international computer industry. and the consolidated de���cit for the center and states to. ponent of the plan has increased over this period. pressive.668 10.2 by 1990���91 (Dreze and Sen 1995. and Mexico. primary de���cits are positive and ris. Bangalore: The Silicon Valley of Asia? 203 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 Ashtok V. it has a direct im. Washington. revenues from which should ideally have risen to compensate for the predictable decline in customs collections.0005 �� INF R2 ��0. The greater challenge for India will be to create the social and institutional environments that support a decentralized process of ex. cept for export credits. Quite apart from administrative weaknesses. ing player in hardware-intensive domains.). rea again. What has happened is a certain de. One might think that MNCs would be prime bene���ciaries of liberaliza. The state of Andhra Pradesh has been a leader and a model in public-sector adoption of IT. 2. computer schools That clearly pass every test And are considered the very best.0 5. form that can build a basis for sounder measures in the future as under. ���scal prudence was abandoned���with the consequence that current rev. but there is a striking lack of public awareness of this issue. India was ���fty.4963 5. and the quality of regulation. contrasted with 2. At the time of writing this chapter. The NCAER study identi���es poor investment decisions of the boom years as a major cause. It is also possible that the extent of the decline between 1993���94 and 1999���2000 is exaggerated because of the noncomparability problem. The fact of the matter is. mental fault of IDA: That is.S. and Wipro. Finance Minister Yashwant Sinha has moved the excise tax structure closer to a single-rate central value-added tax (CENVAT). Even then. the inability to expand probably represents a signi���cant deterrent to exporting in just those labor-intensive areas where Indian industry might have a considerable competitive advan.089 4.6 6.��� And he claims that the IT-related initiatives under. tee also advocated the adoption of capital adequacy standards commensu. Thus.8 75 1 24 South Korea 3. The abolition of licensing eliminated the central government���s ability to spread investment evenly across the country. 14). 36. pervision and accounting rules were lax: For example. cial year ended to discover that the economy grew 10 percent faster than thought earlier! Moreover. ready. either jointly or independently. contrasts it with the proliferation of start-ups in Silicon valley. Isher. icon Valley could become an invaluable resource in identifying and coordi.9 10. Import licenses and investment licenses were still required for all but small-scale businesses in the private sector.159 1986���87 0. ing and upgrading (Arora 1999). more use could be made of bonuses instead of wage increases. If it is good management that determines the success or failure of ���rms. as well as limiting India���s overall rate of economic growth. tre and states need revision in the contemporary context. crease in government wage bills resulting from the Fifth Pay Commis.��� 19 April 2000.32 4. an industrial mini-boom took place from 1985 to 1988. Unfortunately.5 Indeed. Entry of Hyundai. despite the pressing need for new investments in a number of areas. modern. and other emerging industries. the policy has. India still has a long reform agenda pending.��� Actually. Buiter. is na��ve.K. he did achieve a sig. and the level of enforce. the electric power producers require ���nancing simply to cover operating costs. and the banks were mostly recapitalized by 1995. 330 million people. preciative of smaller operational changes that greatly eased the ability to acquire foreign technology.97) The introduction of a composite variable that allows for an interactive e���ect clearly improves the explanatory power of each of the investment variables. which is pre. the high real interest rate. In 1998 there were only twenty-one companies registered with the Indian Venture Capital Industry Association. though. hind the better-performing states in this area. 4. A telling example of the challenges involved in achieving regulatory re.2134 1993���94 ���0. 1957Stringent import and foreign exchange controls are imposed in re. 4. The same is probably true for India: Removal of some of the in. Thapar from four to one.86 9.68 19. The entire world economy will bene���t from an open. which uses the total in. However.633 322 Technologies Usha Beltron Other Rai 7. ability of a range of international quality consumer goods has led to a boom in demand for consumer durables like refrigerators. and this is one of the items on the agenda of second generation reforms that are currently being discussed in India. boardroom decisions are taken with.2494 1991���92 ���0.0 percent in the second period. Underpinning the pro. Rates of return were low or even negative. terest rates. ers.702 7. In other words.351 65. 363���412. but given statutory powers to oversee securities markets and so forth only in 1992.Punjab 12.8 16 ��� 84 United States 150. developing substitutes where the exact item was unavailable. It is unusually di���cult for me to comment critically on this paper since. ation in some states.000 computer science professionals annually. ever.405 787. The major exception is Reliance.492 6. The paper by N. icy reform as well. leading in turn to power shortages.130 424 Chemicals Tata Hydro-electric Utilities Tata 5. tards the development of export activities reliant upon the use of unskilled labor. formance of individual states��� and ���the variation in performance across states. it could also alter our as. and debt was build. doning progressivity. table A4. National innovation systems. 1998.877 408 61 Technologies Lupin Laboratories Pharmaceuticals New 6. T. First. such as Wipro and In. or whether. In other lands it is a fact The smaller ���rms are quick to act. falling in good agricultural years and rising in bad. It preempts resources that would otherwise be available for investment by the nongovernment sector. In 1991. ban centers and has left the rural areas untouched. International Financial Statistics Yearbook.400 632 South India Services New 17. usually chosen as the best available indicator of the quality of service.602 2. tional accounts. R. While it is broadly true that the direc.��� Additionally. but each accounted for 6 percent or less of the total visas granted (Lowell 2000).25 The sudden avail. The slowdown has been particularly important as a driver of change in industry. primary education.32 Especially for products that are intensive in the use of unskilled labor. try.472 RETG ���2. Howes.14 11. The states are constitutionally barred from borrowing in international ���. both developed and developing. however.571 Synthetics Total 1. the lack of a venture capital industry is not an important handicap. In section 1. ing number of multinationals locating overseas development centers in the established IT regions.25 to transfer one rupee to the poor. In this section.1 ���2. 1997. so that when one needs an innovation. One of his most innovative contributions was the creation of the Center for the Development of Telematics. they would be prepared to look for outside problems to solve. nologies are sold and supported in India. 435 companies were registered under the STP scheme. Diver.5shows that prof.9 percent in the postreform period. Ahluwalia 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 carrying function of the railways that is most likely to spur development in hinterland states. For that purpose. However. dustry data. 17 are not even in the Super 250 in 1999. though progress was made in reducing poverty.702 12.9399 1987���88 ���0. the bene���ts derived from networking among. dia. There are more pharmaceutical ���rms as new entrants in the 100 to 250 listing. and other goods and services provided by the government. petitive.9948 1999���20000 ���0.0 billion in 1997���98. Table 3. However. sought to achieve in. ter. and Lal casts doubt on the quality of that data and the trends based on them. jeopardizing it is unconscionable. 2000. what is hap. That is why tensions have emerged: Foreign ���rms have become more asser. 1988. Narayana Murthy: ���If you want to be the ���rst mover in India.6presents the average ratio of plan expenditure to GSDP in each state in the 1980s and compares it with the average ratio in the 1990s. tions of the sort that are rarely practiced in India today: collaborations be. dication as any of the di���culty of building technical capability. there is now much greater mobility of factors. business infrastructure provision was poor.408 220 Mysore Cements Commodity Birla 2. 2000. Report no. These investment ratios are much higher than the investment ratio derived from the national accounts because the investment refers not to the an. 2.6 concludes.Bihar 17. dia.73 percent in the un. Indian ports are also ine���cient when compared with their competitors in nearby countries. 1969Parliament passes the Bank Nationalization Bill nationalizing all domestically owned commercial banks.R. Hence. the ���rst is that Bangalore has not possessed a vibrant VC industry. especially primary school. ally uncompetitive industrial sector which was also out of tune with India���s capital scarcity and labour abundance��� (Srinivasan 2000. The macroeconomic picture is comforting. ture (���fty-���fth). but will still be below 1 percent of sales. However. It is also the case that the growth rate has to be still higher if poverty is to be eradicated within a not���too���distant time horizon. Nosbusch. the United States. the overarching objective of Indian de. literacy and educational attainments. World Development Report.000 vehicles passed China. Ahluwalia presents data on di���erences among the fourteen large states in their growth rates before and after reforms. cur to accommodate rapid economic growth. Doing Business in India: What Has Liberalization Changed? 165 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 39.6 This provides a measure of in. 14 Anne O. cess of acquiring the same. and the leveling of the playing ���eld so that IT products and services sold domestically enjoy the same tax bene���ts as those currently enjoyed by software export units. in turn. around 25 percent of the technology ventures in Silicon Valley have had In.867 3.869 1. frastructure lags behind that of most other countries. Desai is consulting editor of the Business Standard. Once we do so. The import licensing regime was replaced by a ���negative list. sults for public-sector enterprises in these areas and thus reducing the ca. especially in the postreform period. Some have even re.930 Source:NASSCOM (1999. Table 3.4 per. tions. who provided outstanding research assistance on very short notice. software is the most attractive opportunity for Bangalore-centric ���rms.000�����rms and 25 percent of the pro���t increase over the previous year. We have also used the change in literacy in each period as an explanatory variable.14 3. ensuring its imple. he did not enthusiastically endorse them either. 28. Tr. The most signi���cant structural reforms. the country is still plagued by archaic practices in core industries and by inad. it has a long way to go before matching the hands-on approach.Education and state���India���Congresses. lati 2000. World Development Reports. lion in January 1991 and sharp cuts in imports starting earlier in the year (imports had been $23. con.3 Decomposing the Annual Growth of Indian Software Exports. In writing the exist. competition between state governments for IT investments should insure improvements in transportation and communications infrastruc. Studies of the experience of a cross-section of countries suggest that large public-sector de���cits reduce growth by crowding out productive private investment. puters that its clients used and to produce or modify software for them di. forging. outwardly oriented companies and institutions that currently characterize the Indian scene have the potential to become local.6).33 4. the products she cites. The concentration of the software industry in a small number of cities in the south has the potential to exacerbate the already disparate rates of growth across states and regions in India (Ahluwalia. gross subsidy would go down by 10 percent (Government of India 2000. In later years. export subsidies were abolished and an import entitlement scheme for exporters was announced. as other countries have also been lowering their tari���s. Princeton.6 percent per year for Kerala to a high of 6. As a conse. and while some states may bene���t more than others. the bottle listed liters.Oxford: Basil Blackwell. All PSUs Reliance at 25 per. It is important to emphasize that they did not actually become poorer. Policies that permitted the import of state-of-the-art computers in exchange for a guarantee to export a certain amount of soft. The recently published estimate of a signi���cant decline in domestic savings and investment in 1998���99 is primarily traceable to bur.The growth rate of the combined GSDP of all the fourteen states taken together increased from 5. These awards for import substitution are still presented today. 2. Somewhat surprisingly. These ���rms typically lack the expertise or contacts in the IT ���eld. looks large numbers of smaller software and IT companies that are not part of the association. some evidence that buoyancy of gross tax revenue has gone down since the mid-1990s (World Bank 2000. liberalisation and in.Priorities for Further Reforms 355 Anne O.ppic. What is clear.27 The task for policy makers who aspire for IT to become more than an en. trade. argue later) by reducing the number of di���erent classi���cations and di���erent rates. Manuscript. of whom 3 per cent approve. Interestingly. University of California at Berkeley. Writing about a poll con. As is well known. are public sector ���rms. Fortunately. cent from 1991���97���almost double the highest rate achieved in any prior decade. Tr. Then cautious hope can give way to con���dent optimism. and. for example.4 percent in 1993���94 and a de���cit of 5. Krueger and Sajjid Chinoy 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 35. 1992. Krueger and Sajjid Chinoy 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 18. a bread company. Deve Gowda is chosen prime minister. and disinvestment. foreign investors have to run a gauntlet: After applying to the Secre.234 25.1 Indian Rayon Commodities Birla 13. Kletzer suggests that ���nancial repression is. Advocates of decentralization will no doubt object to the suggestion on the grounds that resources to the states should be provided on the basis of an entitlement criterion and that ac. 15. tomers to develop expertise and to de���ne and test new products. sumer good imports. what is unarguable is that.124 Japan 51.770 405 2. they can become available as addi. Jagdish.16 in 1986���87 to 0. References Ahluwalia. But. For software companies. As of 1999. is ���ve times that of Bihar at the other end of the spectrum.Small industry continues to be an area no government has had the courage to tackle.7072 0. Do the aforementioned results hold true even for corporate tax revenues? We use a similar methodology to investigate the evidence in support of the underlying assumption that corporate tax revenues respond positively to re.3441 4. However. Jet Airways. has strongly criticized the method. Kerala has long been commended for its achievements in human develop. see Ahluwalia et al.2478 0.758 208 6. mates of IT workers in the United States vary between 2 million and 10 mil. therefore. The domestic software industry in perspective. yet no government has had the courage and political will to push anything serious through in these areas when in power. experienced fairly good growth in per capita GSDP. Table 1. of which six are in fertilizers (where success is built around a government subsidy). and a much faster rate of growth in government employment in state governments than the center. 2000. Mohana. teen variables included in the CMIE infrastructure index are not very rele. of whom 10 percent approve. with Indian ���rms and branches of leading global IT players as well as ���ne academic institutions.697 1.7 1998 17. In���ation has moderated.Maharashtra 3. then one to bring electricity to every village. However. now can have own serial numbers and computerized records. To be fair.1 in Malaysia. The policy was designed to pro. and they are incapable of attracting and retaining competent teachers. even where signi���cant reforms were achieved. and new applications. mains to be done. and certainly not encouraged. 3. NAGDPG is the annual growth in nonagricultural gross do. were focused on the trade and payments regime. gregate demand resulting from ���scal de���cits was unsustainable. dia. was clear. but also in other years. vestments. ting a time trend to the series shows a statistically signi���cant positive slope. most analysts would have regarded the low levels of educational attain. and whether they have institutional support or not. reform of the relationships of center and states with regard to electricity pricing is clearly a high priority for reform. 1. there emerged specialized funds focusing on seed funding. not so much of product innovation. ���nally. Special thanks are due to the Honorable Montek Ahluwalia. it would appear that repeal of the small-scale industries reservation policies would improve the e���ciency and equity of the Indian economy considerably. sented a very small fraction of an estimated world software market of some $300���500 billion (Arora et al. telecommunications.��� I have already mentioned the range of trade. the data error arising from a large number of un���nished and underfunded projects is likely to be much smaller. Combined with growing shortages of skilled labor in the West.P.20 References Bajpai. velopment and Policy Reform at Stanford University in May 2000. Krueger is currently the ���rst deputy managing director at the International Mon. However. Ideally. this conclusion is only strengthened by the present ongoing debate within the ruling party in India and the re. Rakesh Mohan covers these and other detri.540 204 13. Two years ago. including hospital care in public hospitals. 17 March. ���������. A growing number of foreign companies followed the earlier model of Texas Instruments and Hewlett-Packard and located o���shore development centers (ODCs) in India in the 1990s.199 1993���94 0.488 416 Products BPL Consumer New 17. He believed that India���s failure to follow such a strategy had left it far be. the question is. but this is a minor quibble. and an inability of management to establish meaningful aging the development of labor-intensive industries that might otherwise have a competitive advantage in export markets. I was impressed. (VSNL) in this sector. What did not change was the local inspector Raj. Ter-Minassian. overall economic growth was sharply reduced during the bal. single window clearance for IT ventures. Soft. Such competition might end up transferring resources from taxpayers to investors without a���ecting their location decision. These were given to state enterprises.02 14.760 964 2. vey of the global experience. when economic policies are not conducive to rapid eco. but the overall im. Before recounting the measures taken during the crisis. Among them. with the entry through acquisition of two major foreign groups (Lafarge and Blue Circle). our papers have beenfull of reports on a recent national sample survey that. Finally. ternational Economic Relations. Within software. There are signs the slowdown is ending���business con���dence indicators are increasingly positive as of mid-2000. the resulting acceleration of economic viii George P. versus a target of Rs. India: Economic development and social oppor. The result is predictable: The majority of the villages are connected or supplied at enormous expense. vironment and the quality of governance. in which case economic growth could actu. This is a general problem. current policy approach risks accelerating the growth of IT as a small. what the substantial domestic sales claimed for it consist of. This means that if a large Indian ���rm or multinational wishes to enter the Indian market for toilet paper or soap. The IT industry is concentrated in Andhra Pradesh. Nirma. A formal policy of making transfers contingent on past ���scal performance will probably be time inconsistent. ciency of resource use. and too little public articulation of the case for reform and of how reform enhances the well.030 Grand total 1. Tr. especially for the poor. It is likely that there would have been a strong political im. rising at an average annual rate of 14. sion. ished product. width is still a constraint. Somewhat surprisingly. tion in growth to above 7 percent in the mid-1990s occurred during periods of relatively low plan expenditure. tential world-beating software packages lies in the West. and it shows up even more in the qualitative picture of change in individual ���rms. starting in 1975.4. frastructure. duction in poverty achieved during a period of unsustainable debt-led growth could not have lasted.64 Brazil 0.4 ���0. the increased revenues from changes in taxes and subsidies are o���set by a signi���cant increase in defense expenditure.250 Exports 330 485 734 1. de. inal interest rate on debt exceeds the rate of growth of nominal GDP. as noted by Saxenian.315 2. and so on. Pro���ts 1999 1995 1991 Growth Growth M ultiple M ultiple Company Industry Ownership Sales Pro���ts Sales Pro���ts Sales Pro���ts (1999/1991) (1999/1991) Nagarjuna Commodities New 12. ing inter-state disparities in income and poverty as well as lower public ex. Tensions associated with economic and caste strati���cation in parts of the country. India in 1991 had a large and fairly competitive casting.2). but they could be detrimental to the rest of the economy. Logistical support was more di���cult than is the case for most confer. to aggregate growth. Third. how quali���ed it is.040 1. The bulk of Indian software exports. but were particularly ap. Dossani. Some ofthe potential applications include using the Simputer as a platform for microbanking. the Indian society is not one of the most unequal among developing countries. the government has recently decided to introduce much.. Research and Development in Industry.0 percent) in the west.N. ambassadors to her funeral in India.460 412 Finolex Industries Commodities New���Chhabria 5.. 194 AnnaLee Saxenian 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 N.. Debt. and this explains the lack of any signi���cant relationship with growth. Institute of Economic and So. while action in the area of improved expenditure management has continued to be weak. ity and availability of reliable telecommunications services cannot be exag. however.: World Bank. Half of all villages are not yet connected by all-weather roads. mance in the previous decade. full capacity. which had grown more slowly than the average in the 1980s. This process should facilitate the creation of cross. ditional resources has been criticized by some of the better-performing states on the grounds that such mechanisms reward ine���ciency and mis. nized. Although these changes are not immi.976 42. the elapsed time Doing Business in India: What Has Liberalization Changed? 139 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 Table 4. can be only bene���cial. The nimbler mammals start to grow. with the average probably under 40 percent. low credit card penetration. tion: A tale of two surveys.5 12. if the exaggeration is uniform for all states. The report of the World Bank (2000) also discusses the issues in some detail. it was obvious to many that the perva. In some ways the chal. dustrialization (ISI) and the ideology of self-reliance that guided the Indian economy.020 140 2. Jr. Most ���rms have seen signi���cant improvements in productivity. Take the comments of Madhavrao Scindia of the Congress Party. ���Kerala has been very successful in developing the social opportunities (related to widespread education. The roots of this failure include the continuation of over-regulated economic governance that has blighted the prospects of economic expansion all over India for many decades. 6. Nehru���s (1958. but opportunities to engage in pro.1 At independence. 1967Indira Gandhi remains prime minister after the Congress party re. Short-term external debt. could be imported only by a government monopoly (Joshi and Little 1996. Available at [http://www. a strong thrust on exports. and often even when they are in government. box 3. if any. fers would be. Thereafter. there was no signi���cant reduction in poverty. 102). deserves careful study. and in some instances new entrants have been encouraged to enter and to compete with former monopolies. pendence. ���bre access. only Rs. To be sure. counts. with the universal computer illit. ally believed (including by Montek) that reforms in trade and exchange rate regimes. over time.3 percent of GDP in 1998���99 (World Bank 2000. For details. who is sympathetic to mild ���nan. Where Srinivasan is correct is in observing the lack of serious progress in integrating the VAT-type Central Excise (or MANVAT) and the state sales tax systems into some form of integrated VAT taxation. many of the committees��� proposals require changes that go be. at least in high-tech cities like Bangalore. this volume). and no political party chose to make it one. Bangalore: The Silicon Valley of Asia? 207 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 panies alone. power. as Mohan demonstrates. The decision to establish an expenditure reforms commission. mance criteria or conditionality. cereals. The reader is warned that data limitations prevent us from proceed. and the policy directions outlined above are certainly not a comprehensive blueprint of what is needed. The intent was clearly to reduce the number of overlapping and sometimes even inconsistent regulations. privatization is strongly resisted by vested in. 1 April: 1137���39.4 shows that the percentage of the pop.7 (continued) Sales.307 847 India ACC Commodities Tata 23. pricing. So does the immense middle class in India. 8. The visibility of foreign brands has increased dramatically: Small towns boast Coca-Cola and Akai signs.the apparent acceptance. As of 1991. ment Association (IDA).89 6. it is widely believed. Ra���q. 4. GE India Technology Center.758 208 6. mance. will the standards of the people rise substantially and poverty be combated. very tentative. Similarly.455 6. and through indirect borrowing by running up arrears with cen. 131. I am also fairly con. let alone the entrepreneurs and investors. These are all areas whose problems and solutions are well known.54 3. The government of India has taken advantage of a captive capital market to subsidize its borrowing. tation. thus eroding aggregate saving. The front page headlines of their own newspapers repeat populist liberalization-bashing by every party when liberals are not in power. but a much deeper one of do. An examination of the sustainability of Indian ���s.148 151 5 6 (continued) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 Table 4. When de���cits are ���. even from these states. the tax transfer system has had some disincentive and e���.668 332 5 8 Bajaj Auto Engineering Bajaj 33. nothing is more important than technology: Thus. be it textiles in the 1970s. merous middle-class millionaires. Krueger and Sajjid Chinoy 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 cussion in planning for independence focused on the need for rapid eco. fants. but that states whose growth accelerated were relatively evenly spread throughout the country.400 480 4. See [http://it-taskforce. in India. dian industry. but it can lead to negative e���ects in particular states. Technical capability is at the heart of competing in the long term. Gulati is surely right in suggesting that Thus. Singhania from four to two.33 2.Gujarat 5. JK Corp. Fi. IEEE Communications Magazine36 (11): 88���94.London: Macmillan. any further erosion of the ���scal position could turn out to be un. Maruti Suzuki.78 8. novations.406 1. London School of Economics and Political Science. mance must be made in light of an understanding of the evolution of policy and the economy at least since independence. nual expenditure but the total expenditure on all ongoing projects. and at the expense of the vast majority of workers in other sec.060 employees. cient. She also notes. 1999. and many states are therefore reluctant to accept this as an objec. eracy of its white-collar workers. NASSCOM National Association of Software and Service Companies NPA non-performing asset NSS National Sample Survey NTP New Telecom Policy NTPC National Thermal Power Cooperation OECD Organization for Economic Cooperation and Development PDS public distribution system PSE public sector enterprise RBI Reserve Bank of India REDS Rural Economic and Demography Survey SDP state domestic product SEB State Electricity Board SEBI Securities and Exchange Board of India SIDC State Industrial Development Corporation SIDO Small Industries Development Organization SSI small-scale industry STPI Software Technology Parks of India TRAI Telecom Regulatory Authority of India VAT value added tax VSNL Videsh Sanchar Nigam Ltd. tainments of the labor force in a slowly growing country as being independ. the focus of the paper appears to be much more on the variation in growth performance across states. Politicians are extremely fond of such campaigns. and the tra���c fatality rate is estimated to be 25 times that in the United States.084 Technologies Pentafour Software Information New 5. ICI Fibres. and U. Today. Dr.89 6. it became increasingly apparent that public sector enterprises. While inter-state inequality as measured by the Gini coe���cient has clearly increased. part four). vestment resources toward other better endowed states. Moreover. Priorities for Economic Reforms.3). only a part of the surpluses and de���cits of PSEs will enter the overall de���cit of the non���nan.5 to 2. In 1980.1 percent for 1999���2000 receded. serve Bank of India permits Indian employees to remit up to $50. removal of maximum Kinetic Honda Hero Honda capacity restrictions. ical for economic development. The same considerations apply to ���sick��� enterprises. China. lack of local language content. has the full involvement of the state. tition���and eliminate VSNL���s monopoly���in the international long dis. for that matter. quently to Rs. penditure. they might have prevented bodyshopping or on site services.900 12. linking it to their open market price. At present. investor to invest in a for.7 Although correlation is by no means causation. and domestic telephony. thus far.��� which listed all those goods (including consumer goods) which could notbe imported. have inevitably led to con. di���erentials in estimated per capita incomes were generally not high���the Philippines was estimated to have a per capita income about 70 percent higher than India.C. but because they include the total invest. See Smith (2000) for more detail on the impact of the GATT/WTO agreement on Indian pharmaceutical ���rms. the gain for each quintile following a rupee in. fore employees cannot be retrenched could be increased to two to three years. table 2.0596 ��V R2 ��0. evidently for purposes of maximizing revenue: Srinivasan appears to be. pression���and because export growth lagged while import demand accel. the prime minister pointed out that an unsustainable ���scal de���cit has serious negative e���ects on the economy.2 5. mends bringing IT into government by allocating 1���3 percent of the budget of each ministry and department for IT applications. They ���nd that in 1986���87. but it has also pushed many activities into the unorganized sector. reforms had largely stalled. the inevitable consequences of ex. H. commerce and industry Ministries. 20. Unfortunately. 21.87 4. and wor. which only worsen the ���nancial position of the railways. A Bangalore company. In recent years.21 (1. was largely responsible for it. Third. National Taskforce on Information Technology and Software Development. the commission issued eleven reports containing India���s Fiscal Situation: Is a Crisis Ahead? 65 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 18. Rajasthan. is an example of a central government pro. Exports are serious business for a growing number of Indian ���rms. ernment is devoted to various types of poverty alleviation programs.2 5. But the fact of physical availability does not tell even half of the story. Nehru. it stood at 79. it does suggest that if transfers are to be pro. Acharya is wrong in viewing them as unanticipated and exogenous shocks.5 percent by the mid 1990s.281 9.1 6. Largely absent in this picture is the kind of ���rm that led to the emergence of East Asia as a model of industrial development: the ���rm that began by importing tech. isting PDS with a system of food stamps. The winners: Of the Super 100 ���rms for 1999. ���rms need to build the technical capa. And that is all I have to say. As supply increases and relative wages de. 1965India and Pakistan go to war over Kashmir. based on a sur. 15882-IN.1). For another. The gross subsidy on account of sale of electricity in 1999���2000 was estimated at Rs. must be im. Reserve Bank of India. but is not an optimal situation for policy makers or scholars. there are close linkages between various parts of the economy. The demand for support workers is even greater in India. those bene���ts raise employers��� costs in much the same way as wage increases do. to be phased in gradually. but it is not possible to ascertain ex ante how much individual producers will be able to achieve in productivity gains. as they also had positive growth rates of per capita GSDP. It appears to be shared by supporters of the dominant Bharatiya Janata Party (BJP) in the ruling coalition at the center. we use the nonagricultural GDP at factor cost (NAGDP) as a proxy for the size of the aggregate tax base. the reforms that would support improvement in this area are discussed further in section 1. etrate the U. In either case. although certain regulatory and tax issues remain to be addressed. Reliance has been buying up synthetic ���ber competitors (Raymond Synthetics. Hind Lever Chemicals. for example.151 1984���85 0. The next section (section 4. It is also possible that a ���scal crisis could lead to the reversal of recent capital market reforms and to increased ���nancial repression as devaluation and domestic in���ation are resisted. At the same time as bank restructuring was taking place.8 8. based industries.026 705 4. Informal chan. capita GSDP across states show convergence after allowance is made for di���erences across states in some of the initial conditions that a���ect growth rates. It shifts emphasis to government-led industrialization. 2 India���s Fiscal Situation Is a Crisis Ahead? T. Bangalore���s IT industry still faces some challenges from various aspects of governmental regulations. the key 28 Anne O. low value-added exports and move up the value chain. a subsidy of Rs.180 ���49 50. The conclusions of this committee formed the basis for signi���cant ���nancial re. and bar. tion. 1971Indira Gandhi continues as prime minister after the Congress party wins the ���fth general election. sets of regula. contrasted with six to eight hours in Singapore. Srinivasan does not seriously explore the interactions between ���scal de���cits and economic growth. rate with the riskiness of loans and advocated a level of 10 percent for most Indian loans to the private sector.77 Combined GSDP of 14 states 5. export volume grew at an average annual rate of 11. The resulting ���nancial repression distorts the pattern of investment and production and can be quite costly in terms of real economic growth. It would seem that these restrictions impose a hard budget constraint on states. Likewise.24 37. lion jobs across various skill classes. broadly de���ned to mean the educational attainment and skill level of the labor force. soft.970 585 5. tion of mass poverty through rapid and well-distributed growth. reliable supply. the data [suggest] a remarkable boom in industry in the ���rst half of the 1990s. whose participation. centage of villages electri���ed in the base year V. Ashok. as of 1990���91. to the fact that these projects are typically of longer gestation. There has been some attempt by some groups to focus on fewer activities: SRF. One purpose of interest rate ceilings was to make it low cost to ���nance the government���s borrowing requirements. It already poses a number of conundrums to which we have no answers: For instance. However. Such prod. As in the predecessor programs for export-oriented units. we observe a negative elasticity not only in years when the nonagricultural GDP registered a negative growth rate. and there have been signi���cant improvements in both quality and avail. ysis or discussion of performance of individual states.24 Other sections of the plan will be signi���cantly more di���cult to implement for political or institutional reasons (e. Jawaharlal Nehru is chosen prime minister. Much of Hong Kong���s early success as an exporter is attributed to the ability of buyers in other countries to obtain reliable delivery on short notice. The Fertilizer Pricing Commit.82 8. The southern states as a group have done well. ment.6 M ahindra Bajaj Auto Engineering Bajaj 33. Organized la. Since those issues are discussed by Kochar and by Foster and Rosenzweig in their chapters in this volume. 36. To carry the re. the literacy rate of the popu. both foreign and domestic. ance. com. mired in a time warp of British socialist teaching.090 118 Bombay Dyeing Consumer Textiles Wadia 4. high costs imposed on producers by infrastructure are no doubt a signi���cant factor in raising costs to producers. and nearly Rs. we have not as yet witnessed an outstanding world. but for those who will stay in school longer when quality increases. it would be possible to levy an excise tax on gasoline and mop up the corresponding component of the gasoline price without increas.2. and the spread of rural roads. ���The deceleration of growth of Punjab and Haryana is attributable largely to the decline in agricultural growth.) the 1990s.28 4.25 Banks may now set lending and deposit rates on most accounts ex.740 808 2. trally important social conditions for having participatory growth. ���ation data are for producer prices. Remarks given at conference on Equity. 4. Clearly. Bardhan. Indian ���rms still need foreign ���rms as a source of technology: This has not changed. Improvement in the quality and an in.and postreform period can be studied on the basis of the available data on the gross state domestic product (GSDP) for each state. ment of a range of intermediate components of some sophistication.6 percent in Rajasthan.1 158. Some studies (e. from distribution and marketing to banking to agriculture. cusses this issue in detail. The historical data series for each of the variables is generated after ad.96 42. namely. while o���shore services are performed in a remote location. the progressivity built into the distribution of various types of central transfers to the states under which poorer states receive ad. educational pol. which presents growth rates of per capita GSDP of the di���erent states in the two periods. Ahluwalia Montek Singh Ahluwalia is currently Director of the International Monetary Fund���s Inde. and investment have become mutually reinforcing. 1. tion tax is not obviously legislated. Quality certi���cation serves as an important marketing device for Indian companies while also improv. Cer. especially in the public sector. The presence of an attractive capital market. To do this. N. ward infrastructure development. The University of Chicago Press. Krueger and Sajjid Chinoy 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 26. the system trains thousands who would neither qualify for a work visa abroad nor meet the skill requirements abroad. and direct management of a ���rm in India shows much more technological change than the macro-statistics would indicate. The third chapter. main. or to adjust diesel and kerosene prices in line with the movement of the international prices resulting in an unsustainable de���cit in the Oil Pool Account. As of 2000. self.4. See the discussion by Chakravarty (1987). and agricultural incomes re. discouraged in part by excess demand in the domestic economy.274 263 2 1 SPIC Commodities Chidambaram 24.��� but also for radically reshaping the economic. far cheaper than any of the hi. This paper begins with a most appropriate question: Are the ���scal and ���.7 In some instances. dition. 2000a. Except for Bihar. dia than in the technology habitats of the West. replacing the existing set of indirect taxes through a system of value added taxes (VATs) has not made rapid progress. First. e���ciencies resulting from the trade regime. Such mechanisms should be expanded in future. the Tata group has since sold Lakme to Hindustan Levers. along with the western state of Maharashtra (Mumbai) and areas surrounding Delhi. It seemed that this ambivalent attitude from some sections of industry to. 226. when Rajiv Gandhi became prime minister.Most states su���er from deteriorating urban infrastructure because municipal tax revenues are inadequate to ���nance infrastructure. for example.71 1999���2000 3.4 5. infrastructure development calls for additional ���nancial re. tries. India Todayput the cost of poor infra. companied by a considerable acceleration of growth in both employment 132 Naushad Forbes 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 3. formance in the postreform period is concerned. com. A ���nal chapter provides an overview of the current state of economic pol. they focus on the disadvantages of outdated labor leg. and local) and on private-corporate sector projects that are currently being implemented. many of which are discussed later in this volume. or 30 percent of total state plan expenditure! The need for reforms in this area has been mentioned earlier. chapter 3 in this volume). land reform. Foreign ���rms saw India as a place that was more trouble than it was worth.360 348 3. preferring instead to focus. whether they are paid for it or not. which also came in de. analysis is divided into two or three parts: (a) what is involved in privatization of small shops and other small. planations of inter-state variations in growth. to measure accurately the ex. Murthy and Raju. Chandrasekhar. two countries whose industrial progress had been much more rapid. Tarozzi.000 People. however.185 Germany 54. measures liberalizing the trade regime included: (a) the removal of import licensing requirements for most imports (although prohibitions on the import of consumer goods remained).5 percent in 1992���93. tion. because there is an interesting and important story to be told here. The equation explains 92 percent of the variation in the corporate tax collections.765 346 2. the price for desirable technology. Similarly.Madhya Pradesh 4. Needless to say. handling capacity of major ports. for example. resource transfers that are ���tied. New Delhi. This type of consistency is not possible at present. The author is especially indebted to Balaji Parthasarathy. the need for reducing the ���scal de���cit and debt to sustainable levels is widely felt��� (Reserve Bank of India 2000. reforms in regulations governing labor markets. World Bank.1421 1. Gujarat.333 and 0.27 4. Historically. ADB-NCAER Project on Economic and Policy Reforms in India. As already mentioned. of the cost of achieving the goal. there has been no serious analysis of the social rationale for such tax expenditures. and prospects for its reduction without further policy measures are quite bleak.timescomputing. see Krueger and Chinoy (this vol. which they think make much money for poor teaching. Desai The ascent of the Indian software industry is recent. Pentafour. and guide��� to the industry while also functioning as the eyes and ears of the DoE. It also includes a SmartCard reader/writer. opening the economy to foreign trade can be viewed as improving the e���ciency of resource use in the economy as a whole and thus potentially bene���cial to all states. the environment for private economic activ. as I believe was the case in the 1990s. My optimism is based on the following. the general philosophy was to push heavily to ���make machines to make machines. and how these deter. The Times of India. They are more likely to follow the lead of the more advanced states. privatizing existing central PSEs and using the proceeds to build social and economic infrastructure in the less developed states will increase the e���ciency with which existing PSE as.2.300 3. the paper is a ���modest foray into the economic per. and fo. Mass. search to bear on pressing policy issues. and Rajasthan. due to carrying costs. railroads are in relatively better condition than other forms of transport and communications. collaborative research among universities. the concern about ���scal de���cit has been excessive and has prevented an expansion. ences in the rate of investment in individual states. penditures on rural development and poverty alleviation. for example. Promotions are based almost entirely on seniority. paragraph 2. Innomedia Technologies. While the 1991���93 measures certainly signaled that change was afoot. Economic and Political Weekly(Bombay). and in many other instances. and there had been little improvement inliving standards over the previous century. tain growth. 1996. and Y2K solutions. sultancy Services. The challenge today is twofold. icy suggestions. 14. and it is increasing. and ���nds that. Taiwan.315 2. Municipal Can serve notice and demolish None corporation unauthorized construction Lift Can stop functioning of lift None Customsa Does not clear goods. its corporate leaders are listened to and their suggestions acted upon. This. Department of Economics. However. Ranbaxy baxy. teria. dian society.34 Not only are there costs in terms of health and well-being. in the bot. and what was clearly going to be one of the world���s top few markets in a few years. and ���rm valuations that have skyrocketed to the point that it is cheap for some Indian software ���rms to acquire American software ���rms. Note. However. the DoT. because they depend not on engineers but on large numbers of people with English language skills and the willingness to work for very low wages. and the corporate tax rate for companies in which the public was substantially interested was sharply reduced to 35 percent. Even with all these contrasts apparent. tion. constrained growth to rates of at most 3���4 percent by the 1980s.220 727 Bhushan Steel Commodities New 6. in the longer run. Over time.5 1995 16. C. This paper attempts to document the performance of the major states in the postreform period 1991���92 to 1998���99 and to compare it with perfor. the states have succeeded in circumventing ostensibly hard bud. academia. are also included in the volume. ing infrastructure quality and quantity. All relevant coe���cients have the expected signs and are signi���cant at the 0.310 399 5. a lack of upfront investments to establish a credible presence on the web.709 3. d From the time goods are ready at factory to the time goods are on aircraft or ship. Organization for Economic Cooperation and Development (OECD). icy distinguishes the software industry from the computer hardware and other older Indian industries. 18. 2000.377 299 3 3 Textiles Chambal Fertilizers Commodities New 8. which raised the ceiling below which licenses were not needed and simpli���ed procedures in some instances. As pointed out earlier. This comment was written in October 2000.2. Paper presented at conference. computer Bangalore: The Silicon Valley of Asia? 175 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 11. were intended to help the poor (such as fertilizer and electricity sub. and charge high prices for them.27 2.1686 ��(IPUB ��L) R2 ��0. consisting of leaders of the software and hardware industries. 9. In other words. except for a few elements 124 Montek S. these experiments are relatively recent.4 Products M ahindra & Engineering M ahindra 35. She rightly points out the harm done to the hardware industry by heavy protection in the 1970s and 1980s. Like Acharya. Krueger 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 and determinants of di���erentials in rates of growth across the di���erent In.7 7. Change is being driven both by liberalization in general and more importantly. Moreover. initially from 8. 2000. since they are typically closer and more respon. and union responsibilities could be gradually changed to reduce the incidence of rivalry-related di���culties. export. When infrastructure facilities are inadequate. This can happen. and T. the meteoric rise of the city invites comparisons with Silicon Valley.0 percent) in the east. tionally competent levels.443 11.571 Synthetics India B.25 August 1996). One must recognize 102 Montek S. dition to those sponsored by the DoE). the share had fallen to 58 percent by 1998 (Parthasarathy 2000a. sive regulation and controls over private economic activity by the govern. and power. Growth accelerated sharply for two states at the upper end of the spectrum.930 3.1 percent.20 2. Srinivasan 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 Let me start with the most encouraging sign.018 ��E R2 ��0. Has poverty declined since economic reforms? Economic & Political Weekly34 (50): 3516���18. c Ship-loading times in India are among the worst in the world. and the latter ���soft��� loans to relatively poorer ones. Therefore. headed by leaders of the private sector industry. Some controls on private economic activity were removed. including many populist programs with. It also proposes expansion of the software industry de���nition to in.. and 136 more are in the pro. 2000. was only possible following the reforms of the early 1990s. major ports.1. ment.4. 1996. Hinterland states would bene���t the most from an e���cient railway system capable of trans. D. tually suspended in the software industry. However.4). dian states. If the software tycoon is as big as Bill Gates. ernment. Recently. Toward freedom.9 6. especially the poorer states. which train about 74. If they were to increase just Rs. the momentum of economic reforms.3470 ���0. Left ideologues may interpret them as meaning most poor people are against reform. Although problems remain. In the 1980s. and only thus. by Kamakshysa Trivedi.The decline in plan expenditures as a percentage of GSDP is not a phenomenon unique to the slower-growing states. Whether actual exports dropped is more problematic.21 Thus. increasing the tax-GDP ra. India���s public distribution system. scale enterprises. ernment. while Malaysian per capita income was thought to be almost four times as high. and 2. Petro Commodity Chidambaram 2. NSF���National Science Foundation (1993).05) There is no signi���cant relationship between the variation in growth across states and the variation in the capex public investment ratio. irrigation water at below cost. The performance of India���s IT industry during the 1990s has been im. rules governing union forma. At the same time. ture in public-sector projects as a ratio of GSDP). but this has not deterred development economists from comparing performance across developing countries and drawing lessons from inter. Natarajan. India���s Fiscal Situation: Is a Crisis Ahead? 83 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 Table 2C. 39) re. ing in ���rms. Economic reform was simply not a mass is. Balakrishnan. Srinivasan is optimistic that ���scal competition between the states will lead to a race to the top.4 How India Compares in Spending on Research and Development R&D Spending R&D Gross Domestic Expenditure on (US$M) % of GDP R&D by Source of Funds (%)a Business 1990 1996 1990 1996 Government Universities Enterprises India 2.C.5 Top 100 Private Firms from Business IndiaSuper 100 (1998���99) Sales. which still The Indian Economy in Global Context 35 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 38.505 4. It is estimated that the annual rate of growth of employment in the organized sector over the 1981���91 decade was 1. it is necessary India���s Fiscal Situation: Is a Crisis Ahead? 81 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 Table 2C. The same factors have facilitated the swift di���usion of information technology into the U. lion technical workers and around 2. and the drastic reduction in tari���s over the following three years. it makes no reference to the substantial literature on convergence of growth rates.3 Macroeconomic Imbalances during the 1980s Government Government Fiscal Current Account Year Expenditures ��GDP Revenues ��GDP De���cit ��GDP De���cit ��GDP 1980 18. was only around 4. The estimates presented in table 3. ing to the economic survey (Government of India 2000. reduction of large subsidies in power.5 5. viders from all import duties. these e���orts are described in Section 4. consults for state governments.��� He did not let him ���nish his thought.379 123 3. There are the positive e���ciency e���ects of reforms. 20. such as tourism corporations running hotels. Sessions were lively. Over two-thirds of ���nancial assets in India were held in banks by 1991. ments. These data are given in table 1.650 Total 560 835 1.89 in 1970 to 34.30 Response 3: Re-think in-house R&D and invest more in it. who keep innovators on a tight leash. and most in.8). ing actions on its recommendation send the most unfortunate signals about the disinvestment process to foreign and domestic investors who are the po. plus the pull of re. Prices and poverty in India. Among the many discouraging signs is the tendency of some private sec. the NAGDP is a good proxy for the aggregate tax base.08) 1991���92 to 1997���98: (12) g��5. They entered India by ceding the lead role to an Indian ���rm. tion to policy reforms deemed critical for Indian economic growth that are not the focus of later chapters. nopoly as international gateway for the internet. 186 AnnaLee Saxenian 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 27. This in turn has driven the import of more technology and. It is also the case that there were reductions in personal income tax rates.3346 1. ment.28 One also sees ���rms in many industries invest.Washington. and telecommunications density (or tele-density [T]). Because of that. 4. perceptions of India���s infrastruc. call these the Super-losers). a First Five Year Plan was formulated. NASSCOM. increase in the tax-GDP ratio. slow growing States. Purpose Household Study. dertaken by the center in a manner that provides greater developmental 118 Montek S.9 percent in 1992. a topic to which we therefore return in section 1. There is growing recognition among Indian policy makers and software producers of the need to accelerate the industry���s shift into higher value. exports grew at an average annual rate of less than 1 percent in the 1950s. Table 1. tionally. His and other contribu. dia���s traditional reverence for education and its readiness to encourage and invest in excellence are increasingly recognized and valued throughout the world. which would ensure that the resources are well spent. The government issues the First Industrial Policy Resolution. Even China and the Philippines boasted higher rates of PC penetration. Table 4. A common industry cocktail. which in turn would be overtaken by a 1990s Suzuki or Opel Astra. An STP is like an export processing zone for software: It gives export-oriented software ���rms in designated zones tax exemptions for ���ve years and guaranteed access to high-speed satellite links and reliable electricity. The source quoted is the CMIE (Centre for Monitoring the Indian economy) Prowess database.6 Sources:International Monetary Fund (various issues). Although these increases undoubtedly contributed to the worsening situation. DCL Polyester. tion of the policies initiated in 1991 remained unaltered by the coalition governments that replaced the Congress Government following the elec. will happen again. The results obtained are presented below. State governments also subsidize.2 Indian Export Performance. Gujral resigns. 1. Between dependency and autonomy: India���s experience with the international computer industry. entrepreneurship forums at universities. they are not consid.6 percent of GDP in 1999���2000. it might encourage states to compete to provide an environment that is most conducive to economic and social development. MXR.005 3 2 BSES Utilities Professional 23. cutting-edge technological infrastructure play. and 13. Bhagwati.4 are based on the 30-day recall period for food. and ���nancial policies that presumably a���ect growth of states. that is.7 ITC M ultinational 36.6 8. cially with regard to the e���ciency of bank management and the extent of directed credit. in 1996. ranging infant-industry protection or the objective of self-reliance. go into the e���ective provision of public and quasi-public goods. ternet has expanded by a few magnitudes.000 jobs failed to materi. and parliament is dissolved. tween us. Therefore. but they should not deter us from using these data for analyzing state perfor. Naidu���s administration has pio. 1985. The only concrete response to this has been from the journalist Swaminathan Aiyar. Infant mortality rates. It is interesting to note that these states are fairly well distributed regionally. Furthermore. The choice is not between serving the domestic and the international markets. While that still leaves considerable room for improvement. with investment intentions. uation for Wipro that had risen 800 times in the last eight years.D.There is no evidence of unconditional beta-convergence for Indian states. After all. the use of Indian languages for computers. especially in the capital markets. The investment data pertain to the year 1995. to introduce new products or more e���cient processes.Berkeley: University of California Press. politicians in failing states would have much explaining to do. mance. Vajpayee as prime minis. 64. pecially to Bangalore. ter appreciated since the Asian ���nancial crisis of 1997���98. Many of these expenditures. dom disturbance term.020 1. despite having the fourth largest telecommunications sta���(behind the United States.591 145 VST Multinational 4. Although privatization is now be. Fifth and ���.47 1987���1988 2. it can set up a fac.6 percent of GDP. national highways.88 2.186 331. pansions have taken place. resource generation through transparent sale of under-utilised public properties such as land. the inter-state Gini coe���cient was fairly stable up to about 1986���87 but began to increase in the late 1980s. such as coding.1 The economy weathered the Asian crisis admirably. but the policy regime as a whole has also switched to being positively supportive in recent years. ously until the end of the 1980s: India���s average share of world trade for that decade averaged only one half of one percent. with many states recording strong growth in the postreform period. ware and pharmaceutical ���rms points the way for the rest of industry. 12. or real per capita in. cussion Paper no.33 It is estimated that India lost between $5 and $6 billion annually because of the slow speeds and other inadequacies of the roads on which commercial ve. Since this is not the subject of a sep. not only by tardy action to improve the ���nances of state elec.Furthermore. Tr to the tax rate. and how they did it. Indian engineers who work overseas are paid their salaries in rupees and provided with minimal allowances for housing and expenses.442 3.Maharashtra 43. The invoice listed kilograms. approval is still re. It is not further dwelt on here because the crucial changes have al. the need for reforms in this area is now well recognized and two of the slower-growing states��� Uttar Pradesh and Orissa���have actually commenced the process. and Brazil (World Bank 2000. Annual report 1998���1999. The pace of change in the business environment has been remarkable. but it has the advantage that data are available on an an. Only 7 percent of tra���c in Indian ports in 1994 was containerized. porters. and military o���cials. There are compelling reasons that India will need to de. 190 AnnaLee Saxenian 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 29. and di���erent technologies. 1993Financial sector reforms. derperformance in economic growth.39 By 1999. although he notes that the number of days lost to strikes declined somewhat in the mid-1990s. to take stock of and analyze Indian eco.4. the current account balance was de. Regional economic growth and convergence in In. as the sale value of many public enterprises is likely to diminish quite swiftly. despite repeated tari���reductions.68 85. 5. ernment���s deliberate strategy of reforming trade and tari���policies. the success of other states in the performance of their social sectors is also increasing. 4. posure in the press. ers and through the increased attractiveness of power investments to for. State governments are also responsible for many of the critical infra. ers by cooperatives and the private sector. ous vintages.20 22 Anne O.0 1986 23. ment criteria for VC funds. e-governance initiatives will increase e���ciency of governance: This will increase the percentage trickle-down of public funds to grassroots proj. for example. students. T. if not above.930 377 6. NAGDPG ��� RETG. But they are not innovating for India���s needs. and interest rates were freed to a considerable degree. penditure. airline cooling-o���period is 1 day. its success leaves much to be desired. It can do the same in India. Applications could be developed to meet many of India���s domestic needs. But venture capital alone is not su���cient. ernment to government external aid transactions. ducers in India. capital account liberalization would result in a ���scal crisis with.6 1992 5. come more like transfers to the protected segment of state government em. stance. designed to be open and modular. and most of their graduates emigrate.3696 1989���90 ���0. and a senior leader of Mrs. verse impact on the day-to-day operations of global Indian corporations. Many.9 percent in 1994. the range of actors and the scope of policy debates need to be expanded signi���cantly to realize the full potential of the IT revolution in India. Many states have not revised water rates for irrigation in over three decades.8 percent that was estimated through January 1998. The 1984 and 1986 policies merely removed barriers to its growth. and 1998/9.18 17. of whom half approve. ous constraint on the rate of growth. dia. However. As I argue in the paper. trants from 1991 (table 4. Here. often on a turnkey basis. What is even more disturbing.: World Bank. ANSI Z39. while leading at the same time to poor ���nancial re. standing of the underlying behavioral patterns increases.5 percent during the previous three decades. try. This type of argument can be made against any progressive distribution scheme and does not provide a su���cient justi���cation for aban.7 percent still compares poorly with China���s 12.4 raises some points regarding the way ahead���pending areas of reform that are comparatively neglected in public debate. and the current account.9 April 2000. especially the national highways. limited PC penetration. ative for most years. The di���erences in per capita income across the states of India are large. it would be simpler to import it. Looking at the development of the domestic software industry. ���������. tio is easier said than done.1). tutions. Cashin. sale of Tomco to Godrej Godrej HLL Television No policy change. The ���nal section recom.1287 1. Until the early 1980s. compared to 55. ti���ed poverty groups that may not bene���t su���ciently from the growth pro. even Joseph Stiglitz. and online shopping. plies that regional di���erences in per capita incomes should narrow with de. Srinivasan describes the current state of Indian ���scal a���airs: After the crisis of 1991. Economic growth is simply not an issue at the top of the public policy agenda in India.The setting up of two-year and four-year colleges to train mid-level IT workers. but also roads.4 However.8 7. and other factors could also have induced a reduction in corporate investment. That.3). The govern. competition in this sector promises to bring further price relief to consumers and households.6 19. leaving the ���Hindu rate of economic growth��� well behind. Chandrasekhar. many in collaboration with industry. Before such solutions can emerge.336 1. 156 33 5 Indian Oil Corporation Ltd.11 In 1995���96. 23. Srinivasan 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 13. the removal of which has met more resistance in Kerala than in most other Indian States��� (197���98). In July 1991.690 1. namely Gujarat and Maharashtra. Jhunjhunwala. He then provides a preliminary examination of the various fac. however. Again. in a more competitive en.13 This balance has now turned negative for all states. structure. eral provocative and thoughtful suggestions for future reform e���orts. 5. but not as much as had been targeted. have become unsustainable. This ratcheted up central government expenditure by nearly 1 percent of GDP in 1997���98 and beyond. Industrial users paid more than average cost. cultural practices. the Rao government tackled a variety of other problem ar. More broadly.4 0. The In.435 508 Castrol India M ultinational 9. ecutive of one ODC explains why his company waited until the 1990s to move to Bangalore: Bangalore: The Silicon Valley of Asia? 177 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 Table 5. and the participants of the conference on Indian Economic Prospects: Advancing Reform for their comments on an earlier version of this chapter. nology licensing. and right now there is one to bring a telephone line to every village.256 333 Gujarat Ambuja Commodities New 10. 1 day (from Pune to Bombay) Customs carries out ���valuation and clari���cation��� 1 day if no query of every consignment. ported. The leader of the opposition. direct and indirect.10 However. as mentioned above.4 percent from 1960 to 1970. maximum mar. Bombay: Oxford University Press. 1999. and the slower-growing states would at least experience strong growth in per capita GSDP and sharply falling poverty levels. evident. say. some ���rms did worry about the development of new products. exacerbated by new and sophisticated methods of tax evasion. the key qualitative issue. 6. workers��� remittances plummeted (due both to the impact of the Gulf War and to anticipation of an exchange rate change).040 1. capable of generating a broad-based expansion in employment and income levels. novation.956 1. In the absence of any satisfactory measure of Efor corporate tax. It also leads to valuable capital and labour resources getting locked-up in ine���cient production��� (1997. Labor market regulations a���ecting those variables a���ect productivity and. even past the period of reforms. and airports.856 907 Bata India M ultinational 7. the govern.S. Note also. In Bangalore the bene���ts of IT have yet to percolate down to the masses. transporting.The Talcher unit of Fertilizer Corporation of India. and wishes India were a bit more like Silicon Valley. In other words.New Delhi: National In. tains power in the fourth general election.6 111. Source:Author. we nonetheless proceed with an assessment of performance to date. (1998) and Bhagwati (1993). The response on the basis of 7-day recall consistently showed higher food consumption. Quite clearly. Section 1. anism could be devised to permit employers to discipline workers for ex. See table 4. pansion between 1985 and 1995. Institute for International Studies. India���s secretive public-sector units. rationalization of taxes. 1. dian IT strategies.17 Naidu���s e���orts have triggered escalating competition from neighboring states. tunity. Using quarterly data. From Mohan���s chapter. ing up. and are then for.1 12. Such taxes prevent India from being a com. and ITOT (the sum of IPUB and IPVT). duction. and 0.32 9. gether was almost 10 percent of GDP. However. The author would like to thank Anne O.162���63 for Current Account De���cit. gression equations. In particular. The Ninth Five-Year Plan. increased e���. but also Indian ���rms that were formerly prevented from entering a particular market. and potential investors in India are watching the current pace of reforms with cautious hope.4). selves by selling their services. and im. India in transition: Freeing the economy. The total spending of the top ten R&D ���rms in India is under US$150 million. nonetheless it has the undesirable consequence of reducing the tax base. However. and non-government pension and provident funds. for not giving employment on compassionate grounds to the family members of employees who died while in service. by India���s signing of the General Agreement on Tari���s and Trade/World Trade Organization agreement. infrastructure. 1 April: 1140���42. little has been done with regard to privatization or exit of uneconomic state-owned enterprises. most all the states (Rajasthan and Karnataka are the only exceptions). According to the World Bank (1999. and promotes the Indian software industry around the world through a very e���ective web site as well as through attendance at international trade shows and foreign visits (see [http://www. 30. stitutional reforms to achieve this goal (SEBI 2000). the industry as a whole remains signi���. AnnaLee Saxenian is one of a handful of pioneers in this ���eld. this volume). and this forces them to move to higher value addition in their o���erings. For these reasons.287 Hong Kong 34. and developing a local manufacturing process. small saving. P. There are several excellent studies on state ���nances and ���scal federalism of the Indian Constitution (see in particular Rao and Singh [1999a. and established new capital adequacy standards meeting the Basle Accord.Innovations to serve the domestic market. Policy makers pointed out that the pace of reforms was such that there was no year in which real income actually fell.826 484 Products Adani Export Consumer 21. 43. it would alleviate the resource scarcity of poorer states through the provision of subsidized loans. ports and airports. mitted into the airline. there is a need to be very realistic about the limits of software as a development strategy for In. and J. A motif of self-reliance as an end in itself was given form through major investments by the state in civilian R&D and by a policy of protecting local technical e���ort by strictly regulat. ral development. But no one should underestimate the political obstacles to more sensible cost recovery policies. nalee Saxenian and the contributions of Naushad Forbes. E���orts at rebalancing tari���s on the part of TRAI. the process of opening up could well lead to an ac. there is evidence to support that reduction in the personal income tax rates over the years has induced greater compliance. which had made recommendations on ���fty-eight.. Combined with the increase in DFI (from an average of US$150 million per year in the 1980s to US$3 billion per year by the mid-1990s) that we spoke of earlier.��� which he then goes on to cite at some length. A licence then was a sinecure.8 bil. Singhania 12. interest payments alone. state-owned electricity boards (SEBs) have been tardy in paying their dues to Coal India and Na. For example.3) looks at foreign ���rms and their evolving relationship with Indian ���rms since 1991. was predicated on protecting the domestic econ. which comes as no surprise. year and four-year colleges to train mid-level personnel. forms. The discussion of India���s venture capital industry draws from Dossani and Saez (2000). Development Discussion Pa. of production technology. nical e���ort aimed at indigenization: Productivity and product improvement were not part of the imperative. In spite of some ambivalence within the gov. the wage bill accounted for more than 70 percent of tax revenue (India Today. in which some regulations had been removed.. Although problems remained and remain in the banking sector. jective was to achieve a product that could be made locally almost in its en. railroads. is a sure prescription for ine���ciency and has rec. the fact that a joint venture between Tatas and Singapore Airlines has been simultaneously forbidden to proceed by the Congress. Before 1991. a great deal remains to be done. Si. duction per capita was estimated to have increased by 3 percent over the decade of the 1970s. By the 1990s. many CEOs in Silicon Valley. remain reserved for the small-scale sector. policies have been maintained.3). meant something quite di���erent in India: indigenization. when public-sector enterprises are loss-making (or making unacceptably low rates of return on invested capital). and by 1996 overcapacity combined with a liquidity crunch and a psychological swing from feel-good to feel-bad (driven by the political uncertainty that came from four governments in less than two years) and led to the slowdown. of meeting leading international scientists when they visited India. The di���erence was not wide. D.335 181 3. Table 2C. receive central assistance to support a program of power-sector reforms. rently being drafted.9 138. ment. Murthy and Raju. 20 June 1996. icy reform. which we know has varied enormously across states. the average price to farmers was only Rs 0. the experience is not very encouraging���transfer pay. Ahluwalia 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 1. ucts. Since the transfers in large part ���nance mandated social expenditures by states.Punjab 16. Innovation and Networks Saxenian would like to see in India something that is so evident in Silicon Valley and so fundamental to its economic success���namely. 1985The Rajiv Gandhi government initiates modest liberalization mea. Singapore had it on a ���ight that same afternoon and we lost the order. ���������. During The Indian Economy in Global Context 33 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 33. although the percentage of permitted private equity has been increased. Srinivasan has written an insightful and careful analysis of the ���scal policy challenges facing India at the beginning of a new decade. I sincerely hope my pessimism is exaggerated. and the pattern of expenditures (and especially subsidies) was not con. Since the state budgets are unable to provide su���cient funds to the departments providing these services. 2. as she did in May 2000.308 1. Re. it must be borne in mind that the in. The politicians and the judiciary do not seem to appreciate that laws protect only the labour aristocracy employed in organized manufacturing and the public sector. I would suggest that this is due to two primary factors. The negative in.162 727 3. b.335 913 5 4 TISCO Commodities Tata 57. which was the fastest-growing state. and Training Policy marked an explicit rejection of Indian ISI and the idea of self-reliance in software. petroleum.120 790 3. Naturally. The need for infrastructure and other public sector investments is very great. less sys. and so on. as occurred in 1991. Yet a third source of strength for the Indian IT industry is the Indian software industry���s focus on quality. a vigorous drive to divest commercial undertakings such as power utilities and transport undertakings. Doing Business in India: What Has Liberalization Changed? 131 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 2. Since 1991. on the grounds that they adversely a���ect the poor. and of these only 247 are pro���t-making. brant entrepreneurial sector could ideally generate innovative small ���rms that. skill.047 Indian workers in 1999 alone. and they all have two basic characteristics. In the short run. Growth and poverty in India: myth or reality? Paper prepared for conference in honor of Raja Chelliah.Emerging Challenges for Indian Education Policy303 Anjini Kochar 8. electricity.310 1. she was the Herald L. Karnataka. Therefore.28 Table 1. In 1998.3 ���2. ers.68 3. land development and water management programs. Their operating expenses average between 2. Chicago 60637 The University of Chicago Press.0 8.8 percent annually���which came to be dubbed the ���Hindu rate of economic growth���! Some politicians. focusing on government-led industrialization.8 percent of GDP (World Bank 2000. Action has been even weaker in downsizing the government and rationalizing manpower in public sector undertakings.3 5. health. The former will provide ���hard��� loans to relatively richer states after a thorough appraisal of the projects to be ���nanced by loans. 224 in Argentina. In other words. gram that could help to overcome transport bottlenecks a���ecting hinter. Economists and ed. First. and communications facilities including internet access and sixty-four kilobits per second data-lines. signaling the seriousness of the gov. Its export success is a mea.New Delhi: Wiley Eastern. opment in India. despite the great potential for e���ciency gains. Based on the estimated functional relationship above. any technology license. from US$300 million a year to US$1 billion a year. the government of India for the ���rst time attempted to attract foreign direct and portfolio investment by reducing and removing restric. Montek S.11 NASSCOM���s leaders interact continually with politicians and policy makers. with due recognition that growth rates among Indian states and regions di���er signi���cantly (see Ahluwalia. Testing for a statistically signi���cant correlation between growth across states and the base year value of the composite infrastructure index INF. GM. technology imports both in ab. salaries and pensions. as well as the problems still to be confronted. led by a successful nonresident Indian entrepre.0887 (ITOT ��L) R2 ��0.22 The processes of starting and running an IT business in India have been simpli���ed and streamlined since 1984.896 ��0.1 2.13 13. established manufacturer. tations listed above warrant more than the usual caveats for the results re. Operational ine���ciencies are particularly marked in distribution where corruption is widespread. Tari���s.830 2. Rao and Nath (2000. These events were the trigger leading to a crisis in 1991. A second important measure was a devaluation of the rupee. tax exemptions and concessions) are ubiquitous at the central and state levels. two-wheelers.7 percent of GDP in 1993. with much chasing with the Reserve Bank (RBI) in Bombay and perhaps even ministries in Delhi. Shultz 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 growth in India during the 1990s.. Subramanian. Krueger is currently the ���rst deputy managing director at the International Mon. no more were given. and Orissa. 1992The Eighth Five-Year Plan. 17. with some states growing faster than others. ment is potentially mobile across states. counting changes exposed the true weakened state of the banking system: Nonperforming assets (NPAs) constituted about 24 percent of the total loan portfolio of the public sector banks (virtually the entire banking sys. any e���ort to assess priorities to improve economic perfor. 1996a. As already indicated. Srinivasan does not moot the possibility of a con���uence of ���scal cri. This IT Action Plan has provided an impetus for change as well as an am.070 245 ICI India M ultinational 7. Not only has regulation of the labor market discouraged the growth of employment and productivity in those activities subject to the law. there is a strong sense that more rapid improvements in these and other indicators of well-being are quite possible. Indeed. because of the consequent low return to investment in schooling be.: International Monetary Fund. there were areas where reforms were either nonexistent or very. In the strongest banks. it is the business ideas and execution capabilities that are at a premium. Ais the initial output. while data on total plan expenditure by the central government are readily available. trucks��� economic lives are signi���cantly shortened. Oxford University. in its bid to cross-subsidize local calls. not just the amount. amounted to 35 percent ofstates��� own tax revenue and 15 percent of states��� revenue receipts from all sources. provides excellent service���and competition has led to a dramatic improvement in Indian Airlines.9 121.. Fiscal de���cits. credible and whose only constraints are on the supply side. Despite a little liberalization in the 1980s all imports were subject to licensing or were prohibited.3098 ���0.1 percent per year in the 1990s. There are no licensing-related ine���ciencies.086 150 2.12 It is my estimate that the average Indian college graduate has no idea that India ranks in the world���s poorest 20 percent of countries. cumstances. literacy. Instead. tricity tari���s on industrial and commercial users. 1999d. as discussed by Rakesh Mohan. We then turn to the po. to un. But they have not come only from competi. even in the absence of a ���scal de���cit. Rajasthan.23 in 1997���98 is very substantial. 12. rected rates of return have converged when banks are state-owned and man. Richard. Perhaps the chief disadvantage remains physical infrastructure.640 5. Comments by N. It is important to recognize that it is the nature of competition that changed.213 4. nies have not been able to improve their brand images and increase their gross margins.784 5. straining private investment through these interest rates. Each of these implications is questionable. which in e���ect is based on ensuring that even the most costly plant breaks even.590 1. A quick look at the Super 100 index for 1998���99 in table 4. Of those ���fty-nine. but that reforms faltered before the underlying struc. and in the rest of the developing world (Jhungjhunwala 1999). The question is whether they will serve it from within India or from somewhere in the United States. This group (or even a subset of them) could play a technological leadership role in India in the coming decades if more were to return to or stay in the country. Debt held by the banking system grew roughly at the same rate. tions.44 (3. It was apparent that a crisis was at hand: The current account de���cit was running at an annual rate of about US$10 billion. and so on have boosted factor productivity and growth.9 percent in the poor state of Orissa. Srinivasan 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 4. When the macroeconomic crisis hit in 1990���91.240 399 2. The FPC wage increases not only worsened central and state ���scal de���cits. One of the many reasons for concern with the ���scal situation is the infrastructure de���cit.��� Indeed. dow of concessional assistance was introduced in the year 2000���01 in the form of an accelerated power development program.15 7. and Kenneth Kletzer.0 14. 2000. Alternatively. healthcare. What could explain the di���erence in economic performance? Certainly the people of India have outstanding capability. all sectors in which they usually had no background. I could go on with other examples to illustrate the general point that a look at the two-sector data raises a lot of interesting questions and issues (including about the reliability of the data). as the domestic market is relatively less attractive for high-tech companies. cated population. 1964Prime Minister Jawaharlal Nehru dies.76) The literacy variable has the wrong sign and is not signi���cant in the ���rst pe. tant happened nearby. However. Though Bangalore has attracted several high-quality technology-focused venture capitalists. Similarly. Central Statistical Organization. and 3. tio are positively and signi���cantly correlated with variations in growth. There is no question that Indian industry built substantial technical capability by learning to make almost everything locally. uing to run de���cits and borrowing directly from the center. merce and Industry (FICCI).8 However. and others test for whether the debt-to-GDP ratio con. until something impor. The computer industry in India: strategies for latecomer entry. de���cits and in���ation: An application to the public ���nances of India. each prescribes di���erent invest. and land and water manage. This is a pity since table 3. and licensing and quota restrictions for 714 consumer goods imports were relaxed on April 1.290 821 4. India���s total hardware revenues amounted to $1. As mentioned earlier. Major reforms in the power sector are desperately needed in all states to bring about rational tari������xation and to create stronger incen. In what follows.2 percent of GDP in 1990���91 to 6. This situation arose in spite an IMF loan of $1.224 730 Tata Tea Consumer Tata 8. Approval of payment for technol. vices. The governments of Tamil Nadu and Kerala are also develop. It has also focused on some aspects of economic policy that are not covered by other chapters in this volume. The investment boom of the early 1990s was dominated by Indian ���rms. For one thing. the budget raised income tax exemption limits. ingly stretched. the amount of software code is speci���ed in advance.34 Seven ���rms are consumer product and engineering ���rms. a process that involved consultation with an unusually wide variety of public. 4. Education Saxenian notes a bias in Indian IT education: The four Indian Institutes of Education provide ���rst-class education. following electoral reverses in some states. day and 30-day recall periods for food. 1995. Private economic activity was permitted in a number of areas previously reserved to the public sector.02 11. Although the government of India intends to attract private foreign investment to support in. On the eve of the macroeconomic crisis in 1990���91.160 1. velopment expenditures. ���������.S. where scalability is of paramount importance and analytical reasoning is critical.Uttar Pradesh 47. and transmission. Not only are there long delays in Indian ports.693 292 3 1 (continued) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 Table 4. Sachs. is rare in India. There is nothing surprising or intriguing about this.4 percent of total debt and. but they are almost certainly more severe in these states. age of GDP have been reduced.247 1. mon market and consumers from reaping the static and dynamic e���ciency gains of a large market. since they have the skills. IT is the aspirational career for many of the over 250. Bangalore. This is by no means to suggest that India should pursue a policy of ���com. Bangalore is not Silicon Valley. cess has been built around an abundance of low cost English-speaking pro. and ��� 3are coe���cients required to be estimated. The rate of economic growth slowed (but was still above its levels of the 1980s). 1992. The Congress party retains power in the second general election.D. It did try to introduce controls on the issue of passports. ciency and e���ectiveness of the commercial code and judicial system. although the 1990s did see several serious attempts to reduce these. with the Indian ���rm thus retaining proprietary con.2 percent in the urban areas. regulating the activities of business houses. By contrast. munity with diminishing ties to (or bene���cial impacts on) the rest of the country. forts: A policy framework that was adequate to permit 4���5 percent growth twenty years ago would no longer sustain that growth rate. section 4. Joshi. Further. ages gold plating and does not provide extra incentive to those plants that are on the lower part of the cost curve (economically more e���cient) to ex. Krueger. Srinivasan believes that some industries facing competition from imports should receive moderate tari���protection for a period of time after privatization.23 8. 1999. so that the disaggregated picture of eco. thing in knocked-down form thrived alongside those who added signi���cant value locally. The 7-day recall still yields higher consumption. The economic reforms of 1991 have radically altered the options open to states: They can now compete for private investment in infrastructure sec. Much of the rapid increase in expenditures in the late 1980s had been the result of changes in the provision of subsidies���for fertilizer.1). 1951A draft of the First Five-Year Plan is published. and venture capital.735157 + 0. When e���orts are made to regulate the labor market. The states share in the central government���s borrowing from captive sources of ���nance such as banks. former secretary of the department of electronics.19 4. and if looser budget constraints on Canadian provinces explain poorer ���scal discipline in Canada. but much re. and it is natural to inquire as to the role of the industry for India���s future economic growth. South Korea.945 ��� 0. ever. limited government-industry interaction. The banking sector is presently required to hold 35 percent of its assets in government liabilities through a combination of currency and interest-bearing debt. CENVAT is con���ned to the manufacturing end because of the constitutional constraints on taxes that the center can levy on domestic trade. expressed as a ratio of GSDP in 1995���96 in current prices.: World Bank. had a relatively robust growth of 6. Chennai.15 others were still reserved for the public sector. Given the central government���s evident compulsion to reduce its own ���s. 2. rural development.5 and annex table 3. which is almost never given. there is little doubt that SEBI���s authority and use of it have signi���cantly improved the e���ciency of the primary equity market in India. this has resulted in extreme ine���ciency in these sectors with large wastage of public funds. tant than the short-term ���scal rewards. limited revenue sharing exists among levels of government. social services and public investment in infrastructure. Consequently. dustries in India were characterized by contrasts���bad-quality manufac. discussed above.5 percent of the total (see Bardhan 1984. it is important to note that even after allowing for the decline.Washington. with (probably unacceptable) pressure for higher interest rates. for generation. we see that India���s per. sug. policy announced in November 1984 recognized software as an ���industry. broadcasts technology bypasses state Doordarshan. and it recommends the removal of regulatory constraints limiting the availability of venture capital.22 But indigenization also resulted in forcing the local develop. given the diversity in per capita incomes and other indicators of development of the states. ture. But the evidence indicated that a very large fraction of the expenditures ended up in the pockets of the well-to-do among the elig. have been acted on already.5 1989 22. a very low ���gure by any standard. Total 5 daysd a In the past.27 Re���ecting this trend. structure for software exports. companying devaluation. The relative in. However. and expanded access to the internet. Ahluwalia 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 Shankar Acharya is currently Honorary Professor at the Indian Council for Research on In. Six of the nine engineering ���rms we visited in our APARC study have signi���cantly increased technology imports. It is important to begin by putting the performance of Indian IT in a global perspective. ed.6Winners and Losers: 1991 to 1999 So far. They pay particular atten. A successful product requires heavy upfront invest. business con���dence. highlighting the policy depar. ���What other country is there like India?��� He was. states will be unable to attract private capital without good quality infra. Job security in India also appears to be so rigid as to provide disincen. to which the borrowed funds are put. Although these amounts are cross. Any errors are the author���s alone. clearly a state is unlikely to be diligent in raising resources. and industrial growth has accelerated. the pressing need to bring better living standards. plored. these problems a���ect all states to varying degrees. in spite of the ���rm o���ering to ���le a bond. require to meet their assigned responsibilities and the resources they can raise themselves. Al. The Indian railway system is the second largest in the world. agricultural services.075 1. at least partially. who owns 75 percent of the Indian ���rm Wipro (which deals mainly in IT. els. pression creates a barrier to further economic liberalization. de���cits and in���ation: an application to the public ���nances of India. There is ample room for improvement in educa.3Plan Expenditure In the absence of reliable data on public investment. But a clear de���nition of the framework for these activities���such as which parts will be competitors and which nat. It ���rst re. a small reduction indeed. count. Indian innovators who have made a fortune in the United States are coming increasingly to India to set up and fund start-ups. NASSCOM was founded in 1988 with thirty-eight members. 1992���93 and 1998���99(Government of India Publications. as long as Indian software houses continue to rely primarily on exporting. owned Doordarshan. and incentives. ital) on developmental activities has remained static with signi���cant year. Perhaps the key point here is the resurgence of ���scal pressure in the last three years. minants can be in���uenced through policy.405 19. education.Orissa 4. and did it earlier. It is always rash to write about stock-market valuations. Fur. Government revenues also declined. out of $18.49 percent in the 1980s.084 Technologies Satyam Computer Information New 3. Uttar Pradesh. The slower-growing states must therefore devise a strategy that recog. rector of the Center for Research on Economic Development and Policy Reform. crowding out. or. ployees went on strike. published in June 1999.600 1. If there is no road.N. 1999���2000 (Government of India 2000.6 per thousand people. erations.A.2 The Nehruvian view���derived predominantly from Fabian Socialism���endorsed the need for rapid development led by state economic activity and planning. $2. its general tari���level is still high.866 191 2. omy was reversed. Further. 6).030 400 5. 111). Next. In light of India���s abundance of unskilled labor. der 0. See Indira Gandhi Institute of Development Research (1997). however. Quantitative rankings tend to con���rm these perceptions. A recent study of the H-1B visa. in which the chief ministers of all the states are members. low the average. As can be seen. several states had a positive balance from current revenues (BCR). dustry performed at the Asia Paci���c Research Center (APARC) at Stanford University in 1998. especially in the manufacturing industries. extent of rural electri���cation. come tax inclusive of union surcharge.000 Internet Hosts per Country to GDP. construction and Development (World Bank) and International Develop. The industry association. ment in industry. Japanese industrialisation and the developing countries: model. ticulated by software and other IT producers in India: (a) the inadequacy of Bangalore: The Silicon Valley of Asia? 181 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 20. respectively��� much higher than the Hindu growth rate of 3. To these I would also add a relatively circumscribed role of redistribution across states. the increased focus on human development.2The Changing Structure of Indian Industry: Becoming Normal The nine-year period since liberalization3 began in 1991 is best consid.. As aptly put by Agrawal. Firms have to earn a net amount equal to 150 percent of the hardware imported within four years. 2000. the survey has adopted two alternatives. Recognizing that the poor state of the ���nancial system was a signi���cant drain on economic growth. but falling somewhat thereafter.276 Constant 0. ���the debt growth has generally exceeded the nominal GDP growth since 1997���98 with an excep. irrigation. nanced by the state but carried out in the in-house R&D laboratories of public sector ���rms. prevents international ���nancial integra. and it proposes a series of regulatory and in. Telecommunications For telecoms. nomic growth and rising living standards. such as customs. which are so important to the economy���s long-run growth potential.0 1988 22. ation. Future policy reform would ideally include creation of a reliable. mobile phones. See ���Indian Business: Spice Up Your Services. and at an average annual rate of 7. They have en. and social inequality. Castrol.Only four states achieved relatively strong growth with growth rates of GSDP in the 1990s above 6.4. dustries such as steel. There are many successful examples of decentralization in states such as Kerala. Ranbaxy bought the generics business of Bayer as a way of entering the German market. mount importance in such transactions. sible. Even more. Not only is there an urgent need for increased e���ciency and timeliness of the court and legal system. such as agriculture.230 1.��� In hindsight. ics. small-scale industry. let alone evaluation. ulator is necessary to absorb and de���ect all of the short-term political heat that naturally is cre. terest rate di���erential paid to ���nancial institutions on government debt rel. Singh. Thus. And therefore some have taken pains To organize our talent pools.190 25.36 and the Philippines 1. I remember that during my days as a graduate student at Massachusetts In. and so on. the continuous series of large de���cits lead to inexorably mounting interest payments. of taking the right decisions and re. 48 T. shows that poverty has not fallen signi���cantly in the 1990s as growth has taken o���as it did in the 1980s.7 5. tor undertaking is e���cient.5 The budgeted ���gure for 2000���01 is 5. Then ���scal de���cits would begin to bind. in spite of the ongoing e���orts at reform by the Ministry of Finance (which. So ideas known in other nations Were passed o���here as innovations. such as the aerospace and defense research out���ts in Bangalore. University of California at Berkeley.g.842 517 2 2 M otor Industries M ultinational 12.. 110 Montek S. to around 0. The list also illustrates that the change is dramatic relative to India���s own past. 2000. But he went beyond the traditional stabiliza. tion of statewise performance? Finally. or other substitutes for existing public infrastructure. and so were forced to de. Third. and e���ciency in the government of Andhra Pradesh. lacking even minimal levels of education (Kochar. ITC. with a knock-on e���ect of similar magnitude on state government expenditure in 1998���99 and subsequently.4). then one to con. it applies leading-edge technologies. the valuations of IT 196 AnnaLee Saxenian 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 stocks in India are far higher than their traditional economy counterparts. 1994. with growth expected to be around 6 percent in 1999���2000 and likely to accelerate in 2000���01. graphs he cites! Nevertheless.1 The Information Technology Industry in India. tak. The region thrives on the commercialization of leading.71 6.M. Ministry of Finance 2000). and government investment. ���rst. one should not project their present high level of wages into the future. 21 October.3 817 Thailand 132 3. tive capital��� was in state-owned enterprises. the one thriving private sector carrier. vironment. The goal of in. nancial markets were signi���cantly liberalized. ponent of state plans that is potentially relevant for growth. Silicon Valley. An income concept would take into account net factor income from outside the state accruing to residents in the state.S.3 Larsen & Toubro Engineering Professional 69.610 671 5. In 1994.839 248 Dabur Pharmaceuticals Burman 9.Tamil Nadu 7. software exports could have contributed to an even faster growth of smuggling. owned enterprises operated alongside private sector ���rms. World Development Reports. With failing enterprises having to obtain rarely granted government per. but what mix of state andmarket led to what kinds of learn. high. counts. els. However. ever. Further ���scal measures are urgently needed. in February 2000. Stanford University. foreign scientists have been hired. while revenues grew much more slowly. The realized ���gure is likely to be 5. 483 395 1 Oil & Natural Gas Corporation Ltd.21 14. which also en. In telephone penetration (measured by main lines per 100 of population). the precondition is the creation in India of the local networks that support the recombination of capital. gards: (a) the poor harvest itself resulted in worsened economic conditions. and schools often do not pro. lators who convert customers��� requirements into programming projects. Chief among these. it is evident that the regression diagnostic results are India���s Fiscal Situation: Is a Crisis Ahead? 87 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 Table 2C.3.W 1. Singh examines the determinants of this performance in some depth. cm. and 100 percent foreign ownership is per. has led a ���protest march��� of members of parliament from her party to the prime minister���s house (The Hindu. where bis the regression estimate. please expect a lot of delays and trying times. Of course. liberalisationand in. or that China. with a corresponding reduction in invest. Not only was indigenization almost the only objective of R&D.0272 �� L R2 �� 0. Over a longer period.5 5. 9. Prescription of Solutions I generally agree with the thrust of Srinivasan���s prescriptions for improv. It re���ects a clear understanding of the needs of the industry and of the limitations of the Indian business environment���an understanding that could only have grown through consultation with the private sector and other industry specialists. The implicit proposition that people can be taught in order to spread out into the coun. the fact that ���scal de���cits have not thus far resulted in deleterious con. there is likely to be a signi���cant shift in this mind-set. ects leading to a proliferation of incomplete projects. Voltas. as the chief ministers of states had once agreed to do. Tradi. especially for the poor.9 which has changed stance from being unquali���ed liberalizers in 1991 to qualifying their welcome to foreign ���rms today. it nonetheless seems clear that what was done in the early 1990s was su���cient to enable the country to attain a more satisfactory economic performance than at any earlier point. the story again appeared on an inside page in the ���. and her son. espe. its procedures too cumbersome.There has been much restructuring of several industry sectors: The ce. There is little mention of these in the paper. The government���s IT Task Force. there was a period during which the ���scal de���cit was somewhat reduced. based on a stock market val. The ten. While the past few years have witnessed an occasional high-quality prod.51 12.43 percent over the 1972���92 period. it would be an exag. providing scope for yet further e���ciency gains. the commitment to pursue key elements of the reform did not remain constant. And it has generated jobs. Small-scale reservation continues to this day. Naushad Forbes as.8). Kerala���s economic perfor. the shelf in customs and had to be scrapped. and service that begin to approach interna.43 In East Asia. ready been e���ected. In addition. nally. dex values for individual states conform with some expectations but also contain some surprises. the tax collections increased by 5. comes into e���ect. Despite that. by physically walking the product through every process personally. cessional terms for multilateral lending institutions and from bilateral gov. Diversity. the wide-ranging nature of the report raises concerns about the implementation process and what. and all other notations are as de���ned previously. In an important sense. India faces a severe macroeconomic and balance-of-payments cri.851 658 Source: Business India(1995. subsidized by other parts of the system. Veri���cation/ inspection of documents. penditure by each project in a year. processing ���rm.03 billion in 1998���99 (table 5. and other indicators of living standards (there is some discussion of trends in headcount ratios of poverty). rowing) was averaging well above 8 percent of GDP���an unsustainable number. Srinivasan 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 cluding Buiter. even so. Ashok. This compares to Israel���s 100 ���rms with $4 billion investible funds (in 1999) and Taiwan���s 110 funds with $1. on the basis of criteria similar to those used by the two Washington institutions. However. she evaluates the development trends in the industry. dia. This is a much more restrictive condition.20 All of the task force doc. This change shows up in the numbers. what its market structure is. only railroads fared signi���cantly better. tailed comment on the direct tax reforms strategy.8 percent of GDP. omy.5 percent in 1996. expenditure (revenue and cap. Some analysts report that shortages of IT pro. The banks were also subject to ���directed lending.91 25. crease in the quantity of infrastructures services depend on reforms of the operation.9 billion in 1999 were close to four times those of IT hardware manu. the available data can be used to test whether variations in investment across states are correlated with variations in growth. and not services. Sen (1994) shows that between 1987 and 1993 a signi���cant portion of export growth was accounted for by the falling value of the rupee (table 5.N. 1 The Indian Economy in GlobalContext Anne O. but we hasten to caution that although telecommunication is undoubtedly important (as an e���ciency. ten or ���fteen years earlier. and productivity) than are required in bodyshopping and to begin charging higher rates for their work. section B). Such products would in turn be likely to have substantial export potential elsewhere Asia. Another. dent that even the Indian growth rate attained in the decade of the 1980s was unsustainable. in the form of both increased foreign investment and tech. on IT research. The Sixth Five-Year Plan sets out a target annual growth rate of about 5 percent. ward full convertibility as soon as feasible is an urgent need. mance very disappointing. prescription of solutions. puters at all costs. England. sible to build in a larger component of conditional ���nance in center-state ���ows. oth. from the beginning. are more likely to have higher per capita GSDP and to experience faster growth. these very policies forced much techni. Their experience. on the one hand. the elasticity of private investment with respect to ���scal de���cit would rise above one. we use the number of tax returns ���led in any year (RET) as a proxy for E. hance e���ciency of government. such as the view that only the coastal states or the southern states have done well in the period of liberalization.7 8. regardless of the use 52 T. Five are multinationals.118 ��0. in the absence of accurate data relating to the real tax base and with agricultural income remaining outside the purview of corporate tax. 1138. 2.024 91 Dunlop Consumer Chhabria 6.14 India 0. Un. Budgetary imbalances for state governments are a major factor in the persistence and growth of India���s public sector de���cits and occupy a central place in Srinivasan���s analysis. we seek to explain growth of GSDP in individual states in terms of the familiar explanatory variables conventionally used in such analyses. structuring of bank portfolios was therefore of vital importance.841 10 Hind Lever M ultinational 9. to-year ���uctuations. such as better infra. detergents Indian ���rms. And the results are poor. Bhalla. as is the case for education and electric power.4 percent of SDP in Maharashtra to 41. which will no doubt cheer telecommunications enthusiasts.5 74. It is clear that greater and faster progress toward needed ���scal correction can be made if possibilities on both revenue and expenditure sides of the budget are ex. focusing as far as the data permit on the breakdown between agricultural and nonagricul. namely the eradica. which covered only 80 percent of average cost. tral government controls on investment activity. By contrast. while others have developed aproduction structure excessively dependent on uncompetitive import. tion. Washington. beating package emerging from the city. As dinosaurs were now laid low.28 3.ed.500 1.37 Meanwhile.3). Even with recession. the commission was divested of its powers to monitor and supervise the dis. ment of heavy industry. which celebrated its silver jubilee before producing its ���rst ton of fertilizer. It is regrettable that. Unfortunately. Even when a state has monopoly power.58 4. sharing basis.8 show that this process is well under way. Patel. and other infrastructure activities were also in public hands. 2C. in the largest overseas acquisition by any Indian ���rm. for strengthening India���s plural democracy. this peak is somewhat illusory: The purchases by some PSEs of the equity divested in other PSEs. ulation below the poverty line in the fourteen major states has declined steadily from 43.0 percent in 1990���91 to a budget estimate of 1. The provision of routine software services for export may be highly pro���table for individual compa. 3.507674 Log(NAGDPG) ��CTR 2. the form that early software exports took. and India was a favored country. has precisely the opposite e���ect because it increases the cost of rail freight. the states have decided not to compete with tax concessions.9 3. State-owned enterprises had been built in in. Ahluwalia 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 that such reallocation is necessary if the e���ciency bene���ts of the reforms are to be realized for the country as a whole. vestment licenses speci���ed the permitted output of factories. Why then should we expect this variable to be a powerful explanatory variable at the state level? Policy Conclusions In this section the paper says a little about infrastructure and a lot about state ���nances���and there isn���t much else. den. and Lupin are today spending an order of magnitude more on R&D than ten years ago. Professionals in IT enclaves could become better connected. but there is no way to con���rm this ���gure (Prabhakar 2000b). The ���rst few years after independence were naturally focused predominantly on establishing institutions. much changed at the central level. Bank su. As a result. he was Secretary to the Prime Minister of India. ity-related indices and the tele-density index are broadly in line with expec. erratic voltage. and points to the features of the latter that cannot be replicated in India��� the high level of education. Says Narayana Murthy.900 441 3.110 696 4. 3. 4. Today. Stanford: Stanford University Press. The twelve and one. crease in aggregate spending on PDS���is only 1. further liberalization occurred. have severe e���ects on many aspects of Indian economic activity: Reservation penalizes suc. See Morawetz (1981). a strong entrepreneur. telecommunications. much below the average for the fourteen states.07 41. At the same time. Any collection of his speeches contains several gems on the value of science���as a way of thinking and of life generally.7 percent be. given the disincentives of the national government to reduce regional de. lished in 1988.05 levels.8 percent in the early 1950s (a share larger than Japan���s) to 0. and reduced growth. vices in GDP by the latter part of the 1990s���9.036 56.84 25. IT action plan.Washington. 1 April: 1143���46. midstage investments. pagers. tom 10 percent of ranked countries. is a step in the right direction.234 25.14 February 2000). lows in later chapters. minished.610 671 5. Moreover. and if their salaries were ���exible. Cyber laws will be in place: Dr.g. Manmohan Singh. over. pro���ts from existing companies would provide a sizable share of ���nancing for new plants. Today. obviously. and yet these states showed a much better performance in the 1990s.66 43. port facilities (���fty-third). ing was inevitable but is only now gathering pace. 34. The software in. Bangalore in December 1999.W 2. ments regime.4 Percentage of Population in Poverty 1983 1987���88 1993���94 1999���2000 1. The 1999���2000 budget reduced the multiplicity of tax rates. c.N. but they are a small part of total investment in the state. celerated very signi���cantly and achieved the fastest rates of growth in per capita GSDP. 1999. and a consequent increase in their growth rate. preneurship is a collective. pation in Indian capital markets. achieving a 7���8 percent rate of economic growth over the coming decade will clearly require other measures. Bob Goheen. across di���erent governments. over. The goal should not be to simply meet the needs of a handful of producers. 9. sures that e���ectively reduced the extent to which the public sector both un. were largely con���ned to the ���nance.8 Company EID Parry India Commodities 9. Simplistic perceptions about the role of geography in determining per. as the more reputable ���rms get bought into and become overval. 1996. As we have seen. Similarly. Several ���rms cited the freedom to license technology as a major factor. The ���gures of ���scal de���cit as a percentage of GDP in the publications of Government of India. rather than competition.Krueger. Accelerating growth will certainly increase the demand for quality and timely telecommunications services rapidly. and infrastructure endow.43 1989���1990 2.1 90. ment (the Department of Science and Technology [DST]) and by various chambers of commerce (for example.89 5.6 The underlying philosophy of the second and subsequent plans was that Indian development would have industrialization as the major ���engine of growth��� and that import-substitution policies would be used to stimulate growth. and is heavily in���uenced by the quality of ed. and B.63. ranging hugely in size and capability.40 57. It will also re. The Congress party wins the tenth general election. With this change.16 The extent of subsidies in 1994���95 was indeed staggering.Maharashtra 120.3. while insurance companies. However. or a reduction in regional inequality to some speci���ed target in terms of one of the inequality measures. boxes.nasscom.329 5. els. in which a re. source use. and provisioning. Similarly.Uttar Pradesh 6. foreign debt had accumulated during the 1980s and in���ation rose to a peak of 17 percent. eas.25 4. the rate of growth of per capita income in India was low. ruption and improve service delivery. and N. is entirely a state government responsibility. ture and spent on social services. This is from a standing start: In 1991. As of 1991. the railroads are cer. Chonira Aturupane and Mu Yang helped Sajjid Chinoy ensure that papers and other conference materials reached partici. or the joint ven.4 gives the key macroeconomic indicators for the 1990s.41 7. when a distinction was made between those below the poverty line who were to pay only 50 percent of the cost to the government of food sup. Carnegie-Mellon University.93 Combined GSDP of 14 states 3. 3. align domestic price of urea with long-term import parity price to ensure healthy growth of domestic in. In the words of Saxenian. All bulk items (e.1 percent of total ���produc. India���s rate of growth in real per capita income remained stubbornly low. formed reasonably well. the Plan.776 162 CESC Utilities Goenka 5. the next few years should witness an increase in grassroots involve. The poverty gap indicator for the rural areas is estimated to have risen from 0. The prerequisites for such a strategy include continued deregulation in telecommunications. with the result that income from this source has declined from 20 percent of total costs in the 1960s to less than 6 percent. in fact. tion raised the rupee reward for exporting very little.81 22.1shows the estimated trend of personal income tax collections at 1984���85 prices in response to changes in the maximum marginal rate of personal income tax controlling for the e���ects of the level of enforcement and the nonagricultural gross domestic product at 1984���85 levels. Problems confronting the software entrepreneur. In his budget for 2000���01. 32 Anne O.3600 1990���91 ���0. indicate that poverty has fallen over the period.0 percent. nization11 (1): 1���31. As a result.822 194 2. cites telecommunications reforms as a relative suc. tional policy in India. and 82 in Cote d���Ivoire. tinue to diverge from those in other sectors. ial culture.430 94 3 ���14 HFCL Services New 4. 5 August: 2806���09.99 1991���1992 2.. for greater devolution of central tax revenues to state governments and greater ���exibility in ���scal management. Bangalore has several world-class institutions of research and learning. Signi���cant changes were introduced in 1997���98.4 percent in 1994 and 7. and Sandeep Raju and others. Even a cursory inspection of this table suggests opportunities for interesting analysis and assessments. a public-sector university and a private-sector company. sources and in predicting weather patterns and natural disasters. justed ���scal de���cit was 6.77 19.5 percent in 1999���2000 (World Bank 2000. Naturally. and Uttar Pradesh) as a homogeneous group of poor performers.Does Economic Growth Increase the Demand for Schools? Evidence from Rural India. ment in states. ponent has declined steadily over time until it now accounts for only about half of state plan expenditure. the abundance of forums where youngsters may put forth their ideas and interact with industry leaders. In the structural reforms of the early 1990s.7 102. If one were to assess ���scal performance since the crisis. on average. Second. 1998. cense fee for internet service providers. a stable and proactive governance.76 14.3 percent in 1951. which was only mar. Therefore. The targets laid out in the Fifth Five-Year Plan are abrogated by the new government. unsurfaced road length. Twenty-���ve years of economic development: 1950 to 1975. ization is good for growth but not for poverty reduction. support information sharing and collective learning. the need to widen the range of par.15 in the ���rst period to 0. India���s telecommunications. the United States is peculiar in having venture capitalists who understand the innovation game.��� Programmers in India are increasingly aware of the global demand for their skills and the substantially higher compensation available in more developed economies. tive contrasted with those in a number of developing countries.645 89 Indian Organic ChemicalCommodity Ghai 2.8 million people are still awaiting telephone connections. The availability of power at an appropriate price and of acceptable quality is a critical requirement for industrial and commercial development. other structural problems were becoming more and more evident and acute. and between ���rms and ���nancial institutions (especially venture capital). it was anticipated that $50 billion would be from exports. and air transport infrastructures rank extremely poorly. The thirteen variables are per capita electric power. The software industry association estimates that wages in the software industry rose 21 percent per year in the late 1990s. and thus the portfolio decisions of their managers are not necessarily market driven. I will focus only on the ���scal impact of disinvestment. telecommunications. Tomco. over the periods 1972���81 and 1982���92 India lost an average of 4.209 13.. The Indian Economy in Global Context 25 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 24. This reduction in the ���scal de���cit undoubtedly had a number of e���ects.D. Joshi and Little (1996. was more impressive in rupee terms than in dollar terms. A second reason relates to the necessity for marketing and branding e���orts for a successful product. It would be wrong to conclude from the lack of a signi���cant relationship between growth and public investment that public investment is not impor. association between technical e���ort and indigenization. but states have left this tax base untouched. 2. upfrom 0. ���������. illustrating how the opening-up after 1991 allowed an excellently managed MNC to expand and enter new businesses. private investment may also be more directly correlated with growth because of greater e���ciency of re. that Saxenian does not mean this kind of development of a local market. ports. 2C. Srinivasan states that ���The clearest statement on the seriousness of the ���scal situation and the need for ���scal correction can be found in the Economic Survey. we would take two days to have it on a ���ight to Sri Lanka.2 then analyzes the reforms of the 1990s and economic performance during the decade. the demands upon the railways. ment matters and that states with a higher ratio of private investment to GSDP are likely to experience faster growth. The expenditure budgets of some state governments have been compro.646 1. This limitation also encourages manufacturing units to price and account in a manner that pushes as much of value to the post-manufacturing stage as possible. pharmaceuticals. Both for sending the ap. 1970The Monopoly and Restrictive Trade Practices Act.2gives some pertinent data. largely because the industry is governed by a multi. She said. central government expenditures as a percent.1 109. The task force set up four working groups. dav. G.6 ���0. mentum for reform slowed signi���cantly.92 36. it is down to 12 percent. Singh 3.7 1994 18. In other words.8 ���1.22 In some circumstances. when bene���ts for workers (such as housing. ture capital is readily available. Dreze. tional level shows that as long as GDP growth was modest. Poverty in Punjab and Haryana. In the process. Mohan. particularly in contrast to other sectors of the Indian economy. work. erated in response to the expenditure patterns generated by the plans with consequent ���foreign exchange shortage. Rao. Howard Baker. Dreze. though. 2000.N. The banks themselves had been nationalized since 1969 and were subject to two sets of reserve requirements that e���ectively meant they held more than half their assets in government paper. and therefore the re. It is often suggested that since the sale of public equity in a PSE is in fact a sale of government assets. erentials in growth rates among the Indian states. Little. recent times have seen IT-friendly governments at the central and state levels. say. In addition. and workers��� remittances from abroad. mittee���which Srinivasan commends highly���and many public ���nance specialists. there was a case for increasing the corporate tax rate without fear of losing revenues. Measures were also taken to encourage exports. neversleeps. The percentage for the fourteen states taken together declined from 5. which are required to be invested in designated government securi.720 457 6. forms. was a pun on the Hindi word Bimar. table 4. which were still 151 per thousand in 1965. and Uttar Pradesh. First. plored. Thesis.87 2. growing states su���er from more than the usual problems in this dimension. data on net fac. If these programs could be re. the boom of 1991 to 1996 and the slowdown from 1996 to 1999.6 percent in 1998. the state of Minas Gerais defaulted on debt repayments to the Brazilian government.6 1993 18. Includes bibliographical references and index. Several observers have cautioned against the dangers of the ���Dutch Disease. The government also established a Board of Financial Supervision within the RBI. and more generally. puting Online. more attractive. Shankar Acharya. Acharya is less pessimistic than I am in viewing the ���scal situation as heading toward a crisis.850 518 Laboratories Proctor & Gamble M ultinational 4. tion. as export sub. clear. ments to attract investments in this sector. 87���121.750 2. The action plan also provides thirty-nine recommendations calling for systematic rationalization of Indian duty structure and of the companies act. Seshagiri. Karnataka. and especially the ���rst few years. The conventional solvency condition requires that the outstanding debt-to-GDP ratio be no larger than the expected present value of future primary public sector budget surpluses (as ratios of GDP). and the Indian economy in general. We are grateful too for supplementary funding from the President���s Fund of Stanford Uni. the direct tax-GDP ratio has shown a distinct in. S. ���������.9 And in 1998. Expanding cen.Excise clearance Exports are exempt from excise duty. the quality of resource allocation achieved by 24 Anne O. 9. philosopher. Running persistent public-sector budget de���cits and borrowing on subsidized terms from the ���nancial sector is a bad habit. The Reserve Bank of India has been drawing attention to this possibility. the agenda we have outlined identi���es some of the major areas of policy that must be addressed if the slow-growing states are to achieve a growth rate of 6 percent in the future.005 Cement Indo Gulf Commodities Birla 14. 9. Further. Naushad Forbes is a consulting professor in the department of industrial engineering. led to a big increase in industrial investment. tion for being much better managed than the other Birla groups.5 13. What changes are visible? Table 4.7296 1995���96 ���0. lie elsewhere. informed discussion of alternative visions for it. frastructure and to education in rural as well as urban India.. Innovation in East Asia: the challenge to Japan.060 141 Nagarjuna Commodities 12. reporting that over half the students thought the Soviet Union was a founding member of NATO. His version of events. the average real wage in an economy cannot for long increase at any rate signi���cantly di���erent from that at which the aver. in terms of the number of ���rms that make up the market. demanding higher wages. However. Narayana Mur. and because changing the pricing of electricity would itself do much to make usage more e���cient and generate some of the needed addi. These terms were augmented in April 2000 to ask the commission to draw a monitorable ���scal reforms program and recommend ways to link grants to states to their progress in implementing the program. The government of India has also enacted entrepreneurship-friendly policies and has been proactive in supporting the IT sector.5 percent GDP Growth in 1996���97 Belie Advance Estimates������one would never know the economy grew 10 percent faster than expected without reading the small print!). 1960���1990.60 6. Thus.28 (2.0 169 Malaysia 350 2.78 43. Saxenian cites some interesting material from interviews. 1997. The chief ex. strictions remained. as contrasted with outright sale of a PSE through full privatization. The industry su���ered tremendously from the protection provided by the high import duties as well as from very limited access to foreign technology after IBM left the country in 1978. India���s poverty problem is becoming increasingly concentrated in this area. Indians and foreigners. ation to the manufacturing level and thus places value-added in services (the fastest growing sector of the Indian economy) outside the pale of cen. fold: Obviously the desirable amount of investment is large. partic. respectively. but the sheer hassle of following up with several trips to Bombay and Delhi acted as a considerable deterrent even to applying. duction in corporate tax rates.94. we then examine the key areas in which reforms are urgently needed. Indeed. The following features are worth noting: 1. has clearly had unintended side e���ects. tially successfully export. ley. Empirical analysis of income tax collection requires speci���cation of equation (2) in terms of an empirically testable equation. I would note that the problem has undoubtedly been ag.K. barring 1998���99. A. ness-friendly. Their superior performance must be at.3 5. tination for investment and outsourcing in the IT industry. substituting industries. Relative to power supplies elsewhere. discusses the key areas where further reform is urgently needed if India is to sustain a 6���7 percent annual rate of economic growth. It can be argued that such assistance would be more e���ective if it were linked to policy reforms and other speci���c per.64 percent of sales in 199631 for 990 private ���rms with R&D units regis. Negotiating from a posi. Pro���t mar. Exports from India: A systemic analysis. that is.41 15.2 begins by looking at what has changed for Indian ���rms. sponse to their higher price. It was also widely believed that there had been a considerable amount of ���false��� exports where nonexistent exports were reported in order to receive the export subsidy. however.078 652 35. This an. tract technology investment to the state and to promote the use of IT in hisadministration. modernization. that should of course be encouraged. parable with the investment data at the national level obtained from the na. re. Drawing on this experience. An increase in user charges in all these ar. ��� 1.050 239 Jaiprakash Industries Other 9.a 2.330 508 12. lines claimed.6 Plan Expenditure as Percentage of Gross State Domestic Product Average 1980���81 to 1991���92 to 1990���91 1997���98 1. Shankar Acharya reinforces Srinivasan���s concerns with respect to the in���uence of state ���scal balances on the center���s overall ���scal position. And much cargo is loaded on small ships at Indian ports only to be transferred to larger vessels in Singa. based on an abundance of low-cost skilled labor. The development strategy for the future must therefore ensure that the slow-growing states accelerate to a re. tion was one measure. rect government involvement in the industry. However.96 3. 1977. the pricing policy of the railways. and many complex issues were greatly clari���ed by discussion. However. imports also grew rapidly over the 1990s. At the time of writing this chapter.19 Before turning to some of the key measures. Rajiv Gandhi is assassinated during the election campaign.08 5.18 13. Vajpayee is chosen prime min. timedia Super Corridor.2 .4533 1. century ago. powers and resources assigned to the cen.524 140 India Bharat Forge Engineering New 4. Gupta 1999) have commented that these surveys show a very marginal decline in poverty despite rapid growth. depositories have been established.709 3. Today. Veganzones. they could transform what is now a po.09) The positive signi���cant relationship between growth and the two electric. 2000. and new elections are or. The investment expenditure therefore captures investment made in previous years in all ongoing projects and also the expected invest. sion. so I invoked Mahatma Gandhi���s use of silence as a way of avoiding unwise ex. case. The terminology used in the Indian software industry can be confusing: Onsite services are those in which programmers work at the customer���s facilities. Hyundai. K. there is never any discussion. enhancing and therefore growth-promoting factor). from revamp. a series of other policy measures were enacted in rapid succession in the ���rst two years after re. and the central government���s ���scal position does not allow any signi���cant expan. after reaching a peak of Rs. normally considered to be a more progressive politician: ���If the public sec. tax evaders.4 1961���70 4.1Policy Reform in Software The election of Rajiv Gandhi as prime minister marked the turning point for policy reform in India���s software and computer industries.160 1. ing debt during 1991���97 exceeded 4. Itspace. too.000 crores fertilizer subsidy. Nath. Debt service as a proportion of current account receipts has dropped from more than one-third to less than one-���fth during the same period. as men. This paper has argued that some Indian ���rms have built up the technical capabilities that can make a tiger of the Indian economy. the di���erence is accounted for by support workers. 10. ing the eleven-year period since 1986���87. Equally.21 9..There is no obvious relationship between the ratio of state plan ex. India���s Fiscal Situation: Is a Crisis Ahead? 63 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 17. lios was poor. Adhering to the simultaneous protection of industry. tal available to encourage new ���rm formation and export growth. Desai 1999b and Saxenian 1999). sion of infrastructure capacity and the improvement of services from it. and by Ashok Desai. Here. These involve reassigning tax authority and expenditure responsibility within the ���scal federal system. how the structure of Indian industry is di���erent in 2000 from 1991.2000. The bell has rung. when the personal income tax rates were sim. tries have restructured. he was a Visiting Research Fellow at Merton College. Joshi and Little (1996). and thus the al. Revenues.400 480 4.8 percent in 1983 to 26. systematic e���orts to reduce sub. When the economy grew at a Tiger-like 7. Punjab and Haryana were the two richest states in 1990���91. information on household expenditure for all items was collected on the basis of a 30-day recall period. monalities in demographic behavior. is now twice as rich. and service providers to seek solutions to shared problems such as the shortage of skilled labor or the need for bet. and as a laboratory for experiments in rural schools. they analyze the degree to which low rates of economic growth reduce the demand for additional years of schooling at the secondary level. Moreover.506 272 Usha (India) Engineering New 13. savings accounts.0 137. would you dispose of a large source of livelihood? In the case of Modern Foods. or seemed to believe.1. and so forth���fall in the area of the state governments. with an annual growth rate of 50 percent over the last decade. Simple products in a tiny size. the importance of this change is di���cult to appreciate for those who have not experienced the old system. Stanford University. In the short term. Venture capital in India.536 63 3 8 Indian Hotels Services Tata 6. Similarly. additional ���nancing from the center would probably in any case have a high rate of return. form Bill on precisely the same grounds two years earlier. More recent initiatives have also attempted to ac. are simply not available. In 1997. 10.the remarkable reduction in peak customs tari���rates. Mundle. Consider a product like an electronic pager.00 Ireland 1. Jagdish. The task force was a high-powered group that included senior repre. The lack of any signi���cant relationship between the size of the state plan in relation to GSDP and growth of GSDP is borne out by the following re. velopment of the area and have often increased the probability of driving the PSEs into sickness.1501 1. given the fact that the capacity of the tax administration to deal with noncompliance has remained unchanged during this period. and this makes the economic performance of individual states an issue of potential electoral importance. it risks creating an international technical com.0 0. and should be. See IMF (1992).704 405 3. SEBI has considerably improved oversight. and Korean electronics in comparative perspective 1969���1994. but pro. the Reserve Bank of India (RBI) was al. recently celebrated its silver jubilee. Srinivasan Comment:Shankar Acharya Comment:Kenneth Kletzer Comment:N. as well as urban. These are. and wages are likely to come down to more realistic levels.000 people. In 1980���81.93 42.0 percent by 1991. to distant regions than to the rest of the Indian economy. structure adds to costs and simultaneously creates uncertainty in delivery times (or inability to be assured of instantaneous communications).22 32.970 866 8. 2000.05 level.805 955 5. Karnataka. though. When thisis positive. For many products in today���s world.1859 0. Cashin.5 1995 7. Especially in countries such as In. for example.6 telephone main lines per 1000 people in 1997. An analysis by Buiter and Patel (1992) showed that unless cor. in addition. since factors would ���ee any state that did so.K. vice Companies (NASSCOM). the degree to which employers will demand labor or. In a period of major policy reform. Working Paper. the seri. The new prime minister. as their growth rate also plummeted (see column 2 of table 1. changes came about in part in response to the open. 8). Note:All ���gures except Growth M ultiples in millions of rupees (Rs. between 1991 and 1995 (with liberalization concentrated in 1993 and 1994). the sector is open to anyone. They also bene���ted from the exemption from income tax of pro���ts on software and other service exports and. especially without specifying in advance the degree of relaxation of rules that might occur. table A4. making foreign travel easier. tries policies. is higher than the R2 in equation (9). From this per. therefore. Table 1.222 1997���98 0. H-1B temporary workers: Estimating the population. ported waiting time among the twenty-one countries covered. vestment Promotion Board (FIPB) and the Reserve Bank of India (RBI). First. it was 25���40 percent! While they are still high. pact on the e���ciency with which resources are used throughout the econ. As this chapter will argue. to substantially increase investment in in-house R&D. the concept of performance does seem limited.90 GDP (national accounts) 5. but all have chosen to unpackage technology. bottom-up process of policy reform. especially when one recalls Montek���s comment that many Indian states are more populous than most developing countries���and therefore merit serious analysis on their own. Macroeconomic management in India. for in. resources. cated. The U. as do other good performers such as Madhya Pradesh. some. NPIL. it would be na��ve to con. portant. vanced states. the historical data series for each of the variables is generated after adjusting for in���ation by using the index of consumer prices for non-manual urban workers (base year 1973���74).1on changes in ten industry segments shows. this 2. In this scenario.. HC435.2 7.900 12. Economic Survey 1999���2000. Moreover. either monetary policy would have had to be tightened. but they are mainly read by the converted. dia in their implementation of e-governance and other IT reforms. Acharya adds a few others: The shocks to expenditures from the implementation of the Fifth Pay Commission���s recommendations and the increase in defense needs following Pak. ready inadequate provision of public goods and services such as education. As in all growing economies.9 4. tional standards. the trickle-down e���ect of the growth in the Indian IT industry will help raise the standard of living among the less privileged sections of soci. which improves the e���ciency of public service while it also reduces opportunities for cor. However. and ���sick��� ���rms should be permitted to exit even if some public assistance for laid-o��� workers is substituted. except that they are traded on international stock exchanges such as London���s. the states have established a large infrastruc. Each employs from two to four times as many R&D engineers as ten years ago. bined GSDP. and the concluding section of his paper does not dispel this suggestion. Krueger The University of Chicago Press Chicago and London 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 A O. cians. but Kochar���s analysis suggests that. at least in part. as prime minister. 787 for Egypt. reached an estimated 98 percent by 1983. and 52. tive form implies that the response of growth to a higher investment rate is State-Level Performance under Economic Reforms 109 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 Table 3. but it also witnessed increased sophistica. ment. ity to develop economic infrastructure and provide essential social services raises the issue of what the central government can do to assist these states to achieve these objectives. and Argentina.1The Evolution of the Indian Software Industry. Moreover. change in what ���rms did. we assume that the ad. Industry associations have since argued against any attempt to relax this regulation. She notes the high level of concentration in the Indian software industry. itly recognized bodyshopping���the provision of labor-intensive. ative to industrial borrowers has also decreased signi���cantly over the last several years as a policy initiative to reduce the degree of ���nancial repres.6 1992 20. This group includes university faculty and several small R&D companies formed by alumni. ���������.htm]. Krueger and Sajjid Chinoy 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 7. And because of this sorry state Both big and small didn���t innovate. gation charges at present cover only around 20 percent of the maintenance costs of the system.869 1. and by 12 percent over the decade of the 1980s. both areas in which the poorer states have exceptionally large gaps and improvements are needed to stimulate growth.865 83 5. acy. Further. these are still in.250 480 3. Rajasthan shows a deceleration in growth of GSDP compared with the 1980s. As in other infrastructure sectors. Hence.48 1990���1991 2. The changes in the airline industry characterize what has and has not changed in India: The change from the Indian Airlines monopoly of ten years ago is dramatic.6 percent by 1981. Vittal. which uni���es the proportion of major centrally collected taxes devolved to the states. cause of poor connectivity through other states. the public sector had become a monumental waste and liability for taxpayers. how. ries GDP with 1980���81 as base and the new series with 1993���94 as base.B. but it was surely gratifying.22 9. ity boards. ter infrastructure. and pro���ts from software services were made tax-free. nels developed to deliver their savings to their families in India. a right that extends to sales to buyers in other states. Tax reform in India. they should at least be made conditional so that they are seen to contribute to a solution of the problem in the longer run. For a review of these issues see Ahluwalia (2000). around times.285 345 3 1 CIPLA Pharmaceuticals New 6. In the process of indigenization as job number one. In���ation fell. Interview with N. India was ranked well down the scale. The regulatory framework is still in the process of being adapted to the needs of technology companies. The equation explains 72 percent of the variation in the income tax collections. 4 Anne O. However. cates the success of liberalization. 1961The Third Five-Year Plan continues the investment patterns of the second plan. the corporate tax elasticity with respect to the rate is not independent of the level of the NAGDP. Using the historical data series so gen. discussants N.6 5. If this is indeed the explanation for the divergence in growth rates observed in the 1990s. Unless a state has a national monopoly over a com. 1984���98 Prior to 1984.58 percent. Globalization and agglomeration in newly industrializ.9 times as high. by and large. we assess economic growth during the 1990s. dia. and detergents. Earlier they prepare themselves. headlined India���s Fiscal Situation: Is a Crisis Ahead? 53 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 9.0022 1.078 393. turn on investment in state-owned manufacturing enterprises is estimated to have been no more than 2 percent. formatics Center.89 ��0.31 August 2000). ware. Ninth Five Year Plan. In the context of electoral politics as practiced in India. Reddy���s Labs and Mahindra & Mahindra and Tata Tea exist as potential world-beaters with.26 1996���1997 3. In. the data are collected from multiple sources. tinue to increase since the rest of the country is projected to grow at a faster rate. and ten companies were certi���ed at level ���ve (the highest level. 50) estimate the net real devaluation between 1991 and 1993 to have been about 25 percent. justing for in���ation by using the index of consumer prices for non-manual urban workers (base year 1973���74). In contrast with even two years earlier. ing that this growth. sequences. Previous foreign exchange crises had also been triggered by inability to continue voluntary debt service as foreign exchange reserves diminished. Text of the Thirteenth Jawaharlal Nehru Memorial IFFCO Lecture.��� Although sensationalism is to be expected from the news media.2Public Articulation of the Case for Reform Apart from these speci���c measures.7 percent in the budget estimates of 1999���2000 (World Bank 2000. clining trend in terms of its e���ect on revenue collections (���g. party conversation topic in 1991 was that one no longer needed to catch a weekly ���ight to Delhi or maintain a liaison o���ce there to get permissions through the government. this time the costs might manifest themselves through high real interest rates. but impressionistic evaluations suggest that the slower. in rate of ���lling orders for new connections. 1. which signi���cantly enhanced the salary and perks of government em.42 percent in the 1950s. Note:Sales and pro���ts in millions of rupees (Rs M ). tion 2.455 6. 1999. ing a particular ���ve-year period. those industrial users paying high prices are either locating ine���cient (but lower-cost) captive power sup. minishing returns to economic activity unless means are found for improv. 1.13 Moreover. These zones. ing stock of infrastructure serves as a growth barrier. Fiscal overlapping. mentation.108 and 0. 8. the common perception that ���the rich states got richer and the poor states got poorer��� is misleading. alization. They also suggest that public investment and state plan expenditure are not nearly as obviously correlated with growth as many would have ex. primary schools. 1999. nous supply . particularly of the public sector. plained variation is due to some year-to-year random factors. were administratively set below what would have been market clearing lev. Telephone ser. 1994. No state government has experi. Bangalore: The Silicon Valley of Asia? 191 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 over.1752 1992���93 ���0. where labor laws are considerably less restrictive and ���exibility in the labor market is much greater. Similarly. The Citi. which everyone���politi.N. Sukhamoy. although they had no intention of using the entire permitted capacity in. sanitary and safety inspection.540 712 3. but their explanation is very di���erent. Saxenian���s interest is quite di���erent.The tax administration needs to be massively modernized in all states to create simple systems with transparent administrative procedures and an honest tax administration. 1998. of course. While the domestic market for software has grown in absolute terms. Kletzer is professor of economics at the University of California.703 105 2. See also Hobday (1995) for cases from Taiwan.4 9. and P. establishing an earth station was a protracted procedure re. and the association is represented on many in���uential committees of the government of India. In the initial stage of reforms. the regression equation does not reveal any signi���cant relationship between growth and the measure of public investment available to us. and hence on the productivity and e���ciency of other re. Much more work needs to be done in improving the data available on possible factors that may help explain the variations in growth across states. Of course.4. as of 2000. over and above the 125-percent rule. has accelerated the pol.652 190 3.N. formation technology superpower��� and a ���forerunner in the age of the in. Total investment in government-sector projects reported in table 3. In.890 673 Products 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 Arvind M ills Consumer��� Lalbhai 9. Collaboration between IT start-ups and established producers with knowledge of particular domains could be especially important in the In. which uses only the private investment ratio. compared to only 7 percent for the economy as a whole (NASS.Gujarat 6.696 312 HCL Infosystems Information New 8. Telco���s de. While the administration has embarked on a program of large-scale induction of information technology. Similarly. this is obviously not the case. there is always complete agreement on the need for change. portunities nor achieve a reduction in poverty. and the state GSDP series are not modi���ed to make them consistent with each other and with the national accounts. tive.70 Malaysia 1.8 lists six of them. forms to date have improved the functioning of the economy and permitted a higher rate of economic growth than was regarded as attainable on a sus.267 127 Shaw Wallace Consumer Chhabria 4. istrative structures. 1998The BJP secures a plurality in the twelfth general election. related areas are readily available to Indian companies. Thus the older establishments invested heav. has paid a heavy price for inward-looking protection.vol. compared to 5. cess. 2). 74 T.Washington. Among the reasons for this. Srinivasan���s discussion of trends in the tax-GDP ratio notes a decline since the early 1990s. Enron. business-friendly bureaucracy. Krueger 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 I Current State of the Economy Since Indian independence.Paris: OECD. dian H-1Bs grew steadily from 1989. Given the ���contentment��� imperative that guides many an Indian���s ambitions. In other words. who had long argued that India���s policies were too restrictive.3 percent of GDP in 1990 (despite import controls) to 0. Bajaj. ing industrial licenses through acquaintance with Rajiv Gandhi. above all. Nor has this destroyed Indian enterprises.263 232 2618 65 Smithkline Beecham M ultinational 5. 43. The problem with this RPS is that it encour. ceed the expected present value of future primary surpluses. W.2below. competition has to emerge in the technology market. Charging reasonable tu.0 ���0. that economic reforms in certain circumstances could lead to a reallocation of investment away from some states and toward others. It depends upon a wider process of collective learning. as the changes are far too detailed to be politically contentious.3 traces theresponse of the economy in the 1990s to the reforms. We bene���t in the United States from all this brainpower that comes our way. as the Delhi wits have it.010 ���1.Rajasthan 6. the chief problem is that of ap. Public sector ���scal de���cits. squeezes outlays for essential social and economic infrastructure. She uses available variables to indicate the quality of Indian schooling.3Toward a Strategy for Slow-Growing States In this section. pendent Evaluation O���ce. primarily the corporate sector.7 con���rms that literacy in the slow-growing states of Uttar Pradesh. pers presented at the conference were revised on the basis of (usually very lively) discussion that followed each paper.24 11. India���s poverty reduction strategy consisted of a two-pronged approach relying on an acceleration in growth to bring about a general improvement in living standards.6 12. ing scheme (RPS). (b) the reason for excess capacity is lack of domestic demand. ical Weekly(Bombay). and so on. Sean Eric. we see that over the last decade Bangalore has emerged as a focal point in the landscape of the global IT industry. leading to fragmented capacities.5 percent. The project would greatly improve connectivity for Uttar Pradesh. The Indian Economy in Global Context 17 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 10. The ���scal consolida. Anne O. power use grew at about 1. which shed additional light on the subject at hand. In a recent econometric analysis of this issue. Joshi and Little 1994. the banks was poor..560 110 4 2 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 Asian Paints Consumer New 9. having dramatically changed its economic policies. around 61 percent in 1999. and Saxenian in this volume. The growth of export earnings was rapid enough to reverse India���s declining share in world trade: Having started at 1. Business Standard.1)..3 Nestle M ultinational 15.7 and 452. lion people. with strengthened powers in 1995.1 per. land states.036 in 1993. but the level of signi���cance. Chandrababu Naidu. Glaxo.77 7. ments persuasive. Quality certi���cation and the economics of contract software development: A study of the Indian software industry..48 3. Narasimha Rao. vations have particularly bene���ted the few large ���rms that made the item before reservation: Under a grandfather clause. Princeton University. Several states have recognized this problem and de. Labor Markets At an aggregate level. Silicon Valley emerged in the postwar U.7 40.54 ��3. In 1999���2000. and to completely ignore this incentive e���ect.and private-sector actors. merged. Some progress has been made recently in encouraging states to reform their sales tax systems along VAT lines. followed by more de. as industrial growth has fallen and industry has come under the dual pressure of competition from imports and falling margins. 1999. judicious investments in IT o���er the opportunity to improve the productivity of many other sectors of the Indian economy. textiles. The volume of state-guaranteed loans to state PSEs has been increasing at 12 percent a year recently (World Bank 2000. reducing the stock of external debt). 1. The inter. an educated labour force. and related issues remain to be addressed both for social reasons and to increase the supply of individuals who can contribute productively. 1995.647 292 Indo Rama Commodities New 11. Response 2: Increase imports of technology. (c) removal of the DoT monopoly on the long-distance backbone to allow railways. the implementation of the recommendation of the eleventh ���nance commission will involve increases in states��� share of central tax collections and central grants to states. India runs the risk of choking its nascent digital revolution due to inadequate bandwidth and appalling last-mile connectivity. highly skilled workers. with particular attention to the role of policy in this process.310 1. New Delhi.8 percent for the 1990���97 period.8. ���nancial mar. ment debt. I have already mentioned that the VC industry is springing up fast in In.364 N 16 Note:See text for de���nitions of variables. economic growth accelerated markedly during the 1990s. or have dropped more than ���fty places since 1991 (section B). so that new borrowing undertaken to service existing debt has not raised the debt. It is estimated that the State Electricity Boards (SEBs) have plant load factors of between 55 and 60 percent. 3.Haryana 21. This twenty-four-hour virtual workday enables IT services companies and their clients to fully leverage the bene���ts of globalization and is a signi���cant comparative ad. 30c. Srinivasan 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 Table 2C. ond Plan recognized the importance of education. portionate reduction was about the same.15 27. middle-class IT professional. Industry. ing the growth performance of the states. This is welcome. 3.74 workdays per employee due to strikes. When I began writing this chap. Institute for the Study of International Migration. thorities having handled the situation very well. and obtaining foreign ex. the achievements of Indian professionals in leading-edge technology industries abroad have contributed to a growing sense of con���dence in India. ternational Centre for Economics and Related Disciplines. however.9 percent in 1991���92. In any case. high ���scal de���cit also leads to rising debt burdens and a continuous growth in interest payments. This was the economic activity on which the Five Year Plans had fo.Maharashtra 5. Nonetheless. ding categories in the states. there are others.3894 7. ductive activities are also limited by the scope of the market. Reserve Bank of India (2000) reports a ���gure of 9. 1999.8 96. as the climate for entrepreneurship improves and as more and more role models emerge. and technology. Economic and Political Weekly (Bom. Then there are managers who coordinate the work of programmers and im. rapid growth was possible because there was slack in the system (Ahluwalia 1998. all these conclusions. Population of less developed countries. I wish you all a good day.310 399 5.36 percent. nity of scholars and policy makers of the progress India has made. and then turn to contrasts between Silicon Valley and Bangalore and give our own perspective on the contrasts.60 percent in the 1960s (when the average annual rate of growth of world exports was well above 10 percent). but which has its origins as a family business in soap and edible oil). if not the dead. ing its economics. their ap. ment in future years on these projects. Only two of the southern states. InIndiaDevelopment Report 1997. and quanti���cation of its arguments using aggregate measures. small shops and enterprises. often constituting a deterrent to exporters when contrasted with their foreign competitors. form momentum forward. This is a considerable missed opportunity for reform. 13.40 The Indian Economy in Global Context 37 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 39. Dis. If the essays in this volume can better inform the international commu. cation of investment in the postreform period could lead to a substantial increase in investment in the better-performing states. as industrial and service output and value added had grown at a more rapid rate (World Bank 1988. In particular. Sheth. T.616 23. at client sites overseas���as valid exports. Threatening a Collapse of Public Services. venture capitalists and other ser.1. came to power in mid-1991. but we should also ask why this industry has ���ourished in the United States and is so unimportant.490 2. and was of poor quality. India���s greatest asset is a large. as compared to the richest quintile���s 0. Working Paper no. Arunchalam. and the general conclusion (di���erent studies have used di���erent periods between 1960 and 1995) seems to be that there is no evidence of unconditional convergence but that there is evidence of conditional convergence. soil testing. Rao. low HLL! 8. The mid-1990s witnessed further sig. life expectancy.981 351 Dr Reddys Pharmaceuticals New 3. The next two chapters focus on aspects of government policy toward private economic activity in India.4 12.4.0 100. tors that have contributed to di���erences in growth rates. port���s acceptance by other parts of the government.New Delhi: Sage Publications. nor the budget document.06 16. Narayana Murthy. Sheshagri claims that 80 percent of the recommendations have been implemented al.05 8.892 1. The scale on which the center can undertake infrastructure development aimed at helping the poorer states is obviously constrained by the total availability of resources. ers the state enterprise was a monopoly.205 1. ing that many are still relatively small. Chakravarty. the gross ���scal de���cit of the central and state governments had grown to 9 percent of GDP at market prices. This low growth rate persisted into the 1970s despite the Indian govern.3 percent in Malaysia. The software sector cannot properly be seen as a bene���ciary of liberalization. Following established academic tradition. In practice. which had been established in order to accelerate eco. Except for Rajasthan. employment and pricing policies of the public sector had become . Srinivasan 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 20.51 43. 1996After the eleventh general election.Bihar 4. is still low. He also comments on Srinivasan���s concern that state governments��� ���scal behavior is a major factor contributing to the Indian ���scal problem. after a coalition government was reelected. there was a peak ���scal de���cit of 6. This type of hijacking of government resources is not unique. Available at [http://www. Entry into banking is still relatively di���cult. where ���rms have invested in more new plants in the last ���ve years than they did in the previous twenty. Firms argue that R&D is cheap in India. sition and the relationship between the budget of the center and total government expendi. Among countries that grew faster than India. 2000. 55). [I]f they had asked me then.3500 1993���94 ���0. fertilizers. This list illustrates the complex picture that always emerges when one studies India. 100 billion (World Bank 2000. mod. but the major change took place in 1991. First Quarter-Century of Development (1974 constant prices) Per Capita Income Growth Rate. Industrial policy���India��� Congresses.6 5. He attributes the deterioration primarily to the increase in central and state government expenditures on wages and salaries following the implementation of the recommendations of the Fifth Pay Commis. the state governments spend on little other than wages and salaries. 13. vestors of the government���s equity in public-sector enterprises (PSE)���is relevant for at least two reasons. Many Indian pharmaceutical ���rms bene���ted from the 1970 Indian Patent Act (which made product patents illegal and only permitted process patents for pharmaceuticals). ments by our highly quali���ed and eloquent present or past ���nance ministers or senior ���nance ministry o���cials. at the height of the Cold War.15 7. gin by postulating the following equation: (6)Log(CT t) ���������� 1�� CTR t����� 2�� LOG(NAGDP t) �� CTR t��U t. has been a frequent and troublesome event. See the chapter by Srinivasan in this volume for a thorough exploration of the ���scal po.In May 2000. by Montek Ahluwalia.4 percent of GDP in 1994���95. or indeed the opening-up of the insurance sector to limited for.86 25. Good infrastructure not only increases the productivity of existing resources go.660 ���1. her dignity. The policy also invited foreign investment and promised to make venture capi. The local directors of individ.155 158 7 8 Great Eastern Services Sheth 9.64 25. by the Chelliah Committee (Ministry of Finance 1992) on tax reforms. there���s zero di���erence. 89). Divergence in Growth Performance across States The paper provides an interesting account of trends in inter-state in. Sahota (2000) ar. it should be re���ected in divergent movements in the in. portunities at home.81 (World Bank 1998 table 4.: Harvard University Press. and at the same time deters other investors. sions was to ���ll the gap between the states��� revenues and expenditures. An Asian Silicon Valley in Bangalore? Evidence for the changing or. from $28 million to $481 million. equation (6) above is estimated.3 8. most of which are not well targeted.12 Most other poverty indicators showed similar de.��� India���s software industry has grown so rapidly that it evokes frequent comparisons between Bangalore. 1. 3. Even now. ital in 1991���92 to 21.234 1. then India and all its partners and friends around the world will bene���t.30 August 2000).5).2. Urban property taxation is an im. which she refers to. many infrastructure areas are the speci���c re. where ev. in both instances the spurt in growth is most unlikely to be sustainable: Sooner or later the excess capacity would disappear. it has been argued that change in Indian industry since 1991 has been dramatic. While existing producers typically have resources and experience. They recovered subse. and could essentially bypass import and export controls. Oxford University. multaneously.B. and a much larger number of high-tech professionals. sumers with products. ternational Monetary Fund (IMF). contrasted with 444 in Korea. By 1998 there were twenty-���ve STPs under various Bangalore: The Silicon Valley of Asia? 173 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 4.3 percent per year. and undertakes a prelim. such as the Swadeshi Jagaran Manch and the supreme leader of the Rashtriya Swayam Sevak Sangh. while momentum for further controls and regulation of the econ.��� In the recent words of Infosys chairman N.4 billion and 109. 772 185 4 Crompton Greaves Ltd. above all. or they are at a competitive disadvantage

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