Economic Liberalization in India

Past Achievements and Future Challenges

6 August 2011

Confederation of Indian Industry

Economic Reforms
The early burst of reforms in the early to mid nineties made sweeping changes such as Reduction in tariff barriers Removal of barriers to entry in industry Removal of controls in the financial sector Encouragement to foreign investment and technology Rationalization of tax structure

These have ensured macroeconomic stability and driven the economy towards greater competitiveness These measures have also helped India in emerging as a resurgent, vibrant and dynamic nation, leading global growth India is the second fastest growing economy in the world after China India was able to withstand the repercussion of the global economic crisis Indias participation is required in all global negotiations ranging from global trade to climate related deals

CIIs Role
Post-1991, CII worked on multiple fronts to facilitate liberalization: Engaged with administration to calibrate policies to sequence reforms and minimize industry adjustment pains Sensitized officials and Members of Parliament for reforms through sustained interaction Worked with industry to build consensus recommendations Organized seminars to disseminate awareness among industry Interacted persuasively with different stakeholders across society to create buy-in Globalisation was a key plank of CIIs endeavours since 1991. Some of CIIs pioneering initiatives that helped industry to align with global imperatives include: Arranging outward missions through networking with international governments, industry associations, institutes and academia for opening new avenues for Indian industry Initiating Quality Movement in India; Sundaram Fasteners first company to get ISO9000 certification (1991) Organising exhibitions/shows to showcase Indian products Initiating debate on key economy/ industry issues Laying thrust on Corporate Governance: Developing Code of Corporate Governance

Robust GDP Growth

GDP
6000.0 9.5% 9.6% 8.5% 9.3% 8.5% 5000.0 7.3% (Rs. 000' Crore) 4000.0 5.3% 5.4% 5.7% 3000.0 2000.0 1000.0 0.0 1993 1994 1995 1996 1997 1998 2003 2004 2005 2006 2007 2008 1991 1992 1999 2000 2001 2002 2009 2010 2011 1.4% 6.4% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Y-O-Y Growth (%)

8.0%

7.5%

6.7%

6.4%

4.3%

4.4%

5.8%

GDP

GDP Growth Rate

3.8%

6.8%

8.0%

GDP has surged from 5.7% during 1991-00 to 7.7% during 2001-11

Per Capita Income

3.4% 3.8% 3.8% 5.1% 5.9% 2.4% 4.7% 4.5% 2.5% 4.1% 2.1% 6.8% 7.1% 7.8% 8.0% 7.8% 5.3% 6.5% 7.1%

Source: Economic survey 2010-11 and CSO

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

-0.5%

Per Capita Income

Growth in Per Capita Income

Y-O-Y Growth (%)

Per Capita Income has more than doubled from Rs. 15,826 in 1991 to Rs. 41,129 in 2011; has been increasing at an average annual rate of about 7% since 2004

45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 -

9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% -1.0%

(Rs.)

Structural Change in GDP Composition

Com position of GDP (1991 v/s 2011)

Agriculture, 16.6%

2011 42.7% Services, 57.7% 1991

34.0%

Industry, 25.7% 23.2%

GDP has undergone a marked structural change over a span of two decades Agriculture contribution has shrunk to 16.6% in 2011 from 34.0% in 1991 Share of tertiary sector has increased commendably, in fact is becoming engine of growth Flat growth in Secondary sector is however, a cause of worry given the reducing employment elasticity of agricultural sector

Source: Economic survey 2010-11 and CSO

Savings and Investment (as % of GDP)

38.1% 3,000 34.7% 35.7% 32.8% 2,500 29.8% 27.6% 26.0% 26.2% 25.5% 25.3% 25.9% 25.2% 24.0% 24.3% (R s. 000' Crore) 23.1% 23.3% 22.8% 22.1% 22.5% 2,000 1,500 22.8% 21.5% 21.2% 21.9% 1,000 500 5.0% 1993 1994 1995 1996 1997 1998 2003 2004 2005 2006 2007 2008 1991 1992 1999 2000 2001 2002 2009 2010 0.0% 45.0% 34.5% 30.8% 33.7% 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% Y -O -Y G ro w th (% )

32.4%

33.5%

34.6%

36.9%

24.4%

24.4%

23.8%

24.8%

23.7%

22.7%

Savings

Investment

22.3%

Savings as % of GDP

23.5%

26.3%

Investment as % of GDP

Savings as a proportion of GDP moved up by more than ten percentage points from 22.8% in 1991 to 33.7% in 2010 Investment to GDP ratio also jumped from 26.0% to 30.8%, however expected to declined to 29.5% in 2011 due to rising interest rate

Source: Economic survey 2010-11 and CSO

32.2%

Merchandise and Service Trade

400.0 350.0 300.0 (U S$ Billion) 250.0 200.0 150.0 100.0 50.0 0.0 257.6 308.5 300.6 380.9

Merchandise Trade

250.5

27.9 18.5 21.1 18.3 24.3 18.9 26.7 22.7 35.9 26.9 43.7 32.3 48.9 34.1 51.2 35.7 47.5 34.3 55.4 37.5 57.9 45.5 56.3 44.7 64.5 53.8 80.0 66.3 118.9 85.2 157.1 105.2 190.7 128.9

Merchandise exports soared to cross US$250 bn in 2011 from US$ 18.5 bn in 1991, about 14 fold increase Service exports went up to US$132 bn in 2011 from mere US$ 4.6 bn in 1991, registering a CAGR of 18.3%
Backed by robust exports of IT and ITes services; close to $60 billion in 2010-11

189.0

166.2

182.2

1993

1994

1995

1996

1997

1998

2003

2004

2005

2006

2007

2008

1991

1992

1999

2000

2001

2002

2009

2010

Merchandise Exports

Merchandise Imports

2011

150.0 130.0 90.3 110.0 (US$ Billion) 90.0 70.0 43.2 50.0 30.0 3.6 3.8 3.6 4.7 10.0 -10.0 4.6 4.7 5.0 5.3 6.1 57.7 73.8 132.0

Service Trade
106.0 95.8

Merchandise and Service imports grown at a CAGR of about 14.0% and 17.1% respectively
Faster rise in imports over exports have undoubtly widened trade deficit yet it has helped in keeping global demand alive in the wake of the global economic crisis Trade as a proportion of GDP has increased magnificently from 9.0% in 1991 to 87.9% in 2011

60.0

84.3

7.3 7.5 7.5 6.7 9.4 8.1 13.2 11.0 15.7 11.6 16.3 14.6 17.1 13.8 20.8 17.1 26.9 16.7

1993

1994

1995

1996

5.5

1997

1998

2003

2004

2005

2006

27.8

2007

34.5

2008

1991

1992

1999

2000

2001

2002

44.3

2009

51.5

2010

52.0

Service Exports
Source: RBI

Service Imports

2011

FDI Inflows
157.8% 40000 35000 30000 94.2% 97.0% US $ Millio n 25000 20000 15000 10000 5000 0 1993 1994 1995 1996 1997 1998 2003 2004 2005 2006 2007 2008 1991 1992 1999 2000 2001 2002 2009 2010 2011 102.5% 180.0% 160.0% 140.0% 83.7% 120.0% 76.5% 100.0% 56.1% 53.8% 49.1% 80.0% 60.0% 40.0% 20.0% 0.0% F D I as % o f T o tal F o reig n In flo w s

66.1%

56.4%

43.8%

46.0%

41.6%

59.3%

75.2%

14.1%

25.6%

FDI Inflow s

As % of Total foreign Investment Inflow s

FDI inflows have grown multiple fold from just US$ 97 mn in 1991 to US$ 30.4 bn with an average annual compound growth rate of 33.3% FDI inflows as a proportion of total foreign investment inflows has fallen from 157.8% in 2008-09 to 49.1% in 2011 due to faster rise in portfolio investment Indian companies have made an outward investment totaling US$80 billion in the first decade of the century mostly in developed economies

Source: RBI

27.5%

39.4%

41.8%

SENSEX
Trends in Capital Market - SENSEX ans BSE 100 21,000.0 18,000.0 15,000.0 12,000.0 9,000.0 6,000.0 3,000.0 0.0 1993 1995 1997 2003 2005 2007 1991 1999 2001 2009 2011

SENSEX

BSE 1 00

Steps taken over the last two decades have resulted into maturing of nascent financial market. Further, robust economic growth and fast pace of globalization has led to buoyant investors sentiment SENSEX has increased from a level of 1908.9 in 1991 to 18518.2 in 2011 at a CAGR of 12.0%

Source: BSE, bseindia.com

Move Towards Inclusive Growth

While the first phase of reforms had unleashed economic growth, it was felt that the benefits of growth must be more equitably distributed Starting 2005, the UPA government has shifted the focus to inclusive growth through greater allocation to socially beneficial schemes and programmes Total Plan Allocation increased markedly from Rs. 9.6 thousand crore in 1991 to Rs. 335.5 thousand crore in 2011-12, nearly 35 fold increase

Some flagship schemes

Bharat Nirman - Total Budget allocation for 2011-12: Rs. 58,000 crore NREGA - Total Budget allocation for 2011-12: Rs. 40,000 crore JNNURM - Total Budget allocation for 2011-12: Rs. 49 crore

Source: Budget and Government Sources

CIIs Initiative on Socio Responsibilities

Corporate Social Responsibility Set up Social Development and Community Affairs Council in 1995 Developed Action Agenda for Affirmative Action and worked to generate awareness and intensify industry efforts Facilitates industry interventions in society through NGO partnerships Undertakes public health and community welfare activities in factories Spearheaded the India Business Trust for HIV/AIDS Environment Management Set up Environment Management Division after Rio Summit in 1992 Initiated Green Building movement in India through its Centre of Excellence Green Business Center Engages in climate change mitigation efforts

Social indicators
Literacy Rates
100.0% 80.0% 60.0% 40.0% 20.0% 0.0% Overall Males 1991
Source: Economic Survey

74.0% 64.1% 52.2%

82.1% 65.5% 39.3%

Overall literacy rate has gone up from just over half to almost three-quarters during 1991 and 2011
Literacy level among female folk which constitutes about half of the population has nearly doubled

Females 2011

Among young people, the rates are higher as the Right to Education law kicks in

Poverty Estimates
40.0% 35.0% 35.6% 27.5% 35.0% 28.3% 37.0%

Overall, poverty has declined by eight percentage points from as high as 35.6% in 1991 to 27.5% in 2005
Decline was more pronounced in urban areas as compared to rural areas Urban poverty fell by double digits. Rural poverty came down by seven percentage points

30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Total

25.7%

Rural 1991 2005

Urban

Source: Planning Commission

Major Plans for Infrastructure Development

Sector Deficit 65,590 km of NH comprise only 2% of network; carry 40% of traffic; 12% 4laned; 50% 2-laned; and 38% singlelaned Inadequate berths and rail/road connectivity Inadequate runways, aircraft handling capacity, parking space and terminal buildings Eleventh Plan (2007-12) Targets

Roads/ Highways

6-lane 6,500 km in GQ; 4-lane 6,736 km NSEW; 4-lane 20,000 km; 2-lane 20,000 km; 1,000 km Expressway New capacity: 485 m MT in major ports; 345 m MT in minor ports

Ports

Airports

Modernize 4 metro and 35 non-metro airports; 10 greenfield airports

Railways

Old technology; saturated routes; slow speeds (freight: 22 kmph; passenger: 50 kmph) 13.8% peaking deficit; 9.6% energy shortage; 40% transmission and distribution losses; absence of competition

8,132 km new rail; 7,148 km gauge conversion; modernize 22 stations; dedicated freight corridors

Power

Add 78,577 MW; access to all rural households

Source: Planning Commission

Power and Road

Installed Capacity: Power
180,000.0 160,000.0 140,000.0 120,000.0 100,000.0 MW 80,000.0 60,000.0 40,000.0 20,000.0 1991
Source: CMIE, Industry Analysis Service

Installed Capacity in Power Sector: All India

153,774.8

Total installed capacity has more than doubled during 1991 and 2011
Even after 20 years, thermal power remained the most dominant form There is a need to change the present composition in favour of hydro, nuclear and other bio-produce power to conserve coal for industrial purposes

66,086.3

2011

Road Length
Public-private-multilateral partnerships have been successful in implementing highways programme
NHAI to award 7,994 km of highway projects in the FY 2012 Going to generate demand for cement, steel, and bitumen of worth Rs 42,000 crore Though the sectoral performance has improved, yet to be enhanced considerably to ensure optimal utilization of resources and to avoid overrunning of cost
( 0 00 ' K m ) 4,500.0 4,000.0 3,500.0 3,000.0 2,500.0 2,000.0 1,500.0 1,000.0 500.0 1991
Source: Ministry of Road, Transport and Highways

Road Length

4,236.4

2,327.4

2008

Steel and Telecom

Finished Steel Production Finished SteelProduction 70,000.0 60,000.0 (0 0 0 ' T o n n e s ) 50,000.0 40,000.0 30,000.0 20,000.0 10,000.0 1991
Source: CMIE, Industry Analysis Service

66,013.0

Steel production has surged nearly five fold in last 20 years India fourth largest steel producer in the world and is expected to become the second largest producer by 2013
Steel production capacity to touch 120 Million Tonnes by 2013 and over 150 Million Tonnes by 2020

13,566.0

2011
Telecom Subscriber Base Telecom 900.0 826.9

(M illio n s )

Private sector participation has lead to sharp reduction in tariffs and rapid increase in penetration of basic/mobile telephones
Registering a CAGR of 29.0% during 1991 and 2011 Teledensity improved from 0.6 (per 100 person) in 1991 to 66.2 twenty years later

800.0 700.0 600.0 500.0 400.0 300.0 200.0 100.0 0.0 1991 2011
Source: Department of Telecommunications, Ministry of Communications and Information Technology

5.1

Challenges
High inflation level above comfortable zone 9.4% in June 2011 Industrial slow down IIP has grown by 5.6% in May 2011 as compared to 8.5% in May 2010 Falling investment - 30.8% in 2010 to 29.5% in 2011 High interest rates have impacted credit to MSMEs in manufacturing sector as well as key industries Non food credit growth to MSMEs declined from 21.1% in April, 2010 to 20.6% in April,
2011

Inadequate infrastructure continues to be a major structural bottleneck Shrink in FDI inflows due to structural bottlenecks In 2010-11, FDI inflows shrunk by 28% to
US$ 27 billion from a level of US$ 38 billion in 2009-10

Weak enforcement and monitoring Likely overshooting of fiscal deficit Though fiscal deficit is budgeted at 4.6% for FY 2012,
however, developments in recent months like deceleration in growth, high crude oil prices, high subsidy and rising interest rates are casting doubts

Agenda for further reforms

Investment Climate:
FDI in sectors such as retail, insurance, defence, etc needs to be expanded drastically Rapid clearance of large projects

Financial Sector Reforms:

Liberalize financing guidelines Facilitate increased access to international debt markets Encourage development of the corporate debt market

Agriculture Sector Reforms:

Allow FDI in food retailing to integrate distorted supply chain Encouragement to PPP model in strengthening agriculture research and extension programmes Exempting horticulture produce from APMC Act Move towards unified national market and allow free movement of produce

Infrastructure:
For greater investment in infrastructure policy framework needs to be made more friendly

Social Sector:
Much better delivery of government services to the poor with the support of state governments

CII has been a strong partner to government during the reforms period and will continue to build the partnership of Government and industry to make India a developed nation in the next two decades

Thank You