Assignment 1: India on the move

Case Background:
The case 'India on the Move' examines India's background, including its geography, history,
prevalent domestic issues, government structure, and problems with Pakistan. It then
proceeds to analyze the economic history of India till 2003 to comprehend the decisions made
during the preparation of the Union Budget. Post the initial financial crisis after
independence, India has entered a new stage of the economy from a Closed to Market-
Oriented Economy with an emphasis on developing the industrial and services sector while
disinvesting in the public sector.

Jaswant Singh, the newly appointed Finance Minister, was responsible for formulating the
2003-2004 Union Budget. He had to ensure that the budget was in line with the 10th Five-
Year Plan that was recently approved by the BJP-led government. There was also a
substantial fiscal deficit of 5.6%, which he couldn't afford to reduce as curbing the spending
would spark a massive backlash and jeopardize the party's chances in the forthcoming 2004
general elections.

The key points in his budget were:

 To increase India's 5.4 percent growth rate to 8% and then proceed to enhance it to
9.3 percent during the 11th plan.
 Plan to add 100 million employment opportunities for India's increasing population.
 Agriculture would be the driving sector with the majority of the population employed
in it.
 Indian states would be able to capitalize on their comparative advantage as interstate
trade and commerce obstacles would be lifted.

Critical Issues and Challenges:

 Slow pace of expansion and investment in private sector:

 The industrial environment was monopolized by 75 large giants, who
controlled 45 percent of the private sector due to the initial concentration on
heavy industry industrialization. This significantly lowered the amount of
competition and the speed with which other companies might enter the market
without being at a competitive disadvantage.
 Despite propagating the entrepreneurial spirit, the IT sector emerged to be
riding the wave of global change. India's inexpensive, educated labor was the
major contributor to IT industry resulting in an uneven growth.
 Till 2002, FDI was barely $8 billion due to government restrictions that
limited foreign enterprises' access to the market. They could only enter
through joint ventures with domestic firms. Adding to that, the poor
infrastructure of the country along with cumbersome and corrupt
governmental control and a lack of transparency discouraged the firms to enter
Indian markets.
  High Fiscal Deficit:

 India has a history of running large fiscal deficits. Even during the preparation
of 2003-2004 Union budget, the government did not curb the spending due to
concerns about losing their seat in elections.
 As the tensions with Pakistan continued to rise, military costs increased.
Natural disasters were also a significant concern at the time, thus a significant
amount of money had to be spent there. The government continued to provide
large subsidies that it could not recoup through other means.
 Hence, however the government announced a strategy in 2003-2004 to reduce
the fiscal deficit from 5.9% to 5.6 percent, it proved impossible to execute the
same.

 Religious and Political Conflicts:

 India and Pakistan were at odds over the disputed territory of Kashmir. The
animosity between Hindus and Muslims began in the 1930s. After
independence, India declared itself a secular country after a violent division
lost 600,000 lives. Following partition, both countries fought numerous battles
across the region, resulting in resource depletion. India had to set aside
significant funds for military expenditures.
 In India, different caste systems and communal conflicts between Hindus and
Muslims have become a matter of debate for political parties, diverting the
attention of the people from issues such as the economy and investments.

Case analysis and interpretations:

 Demography and History of India:

India is a diverse country with over 650 dialects, a variety of religions, and prevalent
caste system. India's population was predicted to surpass China's by 2018 and no heed
has been paid towards taking any population control measures after abolition of Indira
Gandhi’s forceful sterilization campaign. India's literacy rate is low specially in
females. The sex ratio of females is low too due to female infanticide and lack of care.

India has had a considerable impact on British colonisation up to this point. India was
administered by the British with no Indian representation. For nearly 25 years,
Mahatma Gandhi struggled for India's independence from British raj. In 1947, India
gained freedom but was divided into India, East and West Pakistan.

 Tension with Pakistan:

After the partition, the King of Kashmir handed over the land to India, but Pakistan
believed that since the land has a Muslim majority it should be a part of Pakistan
 hence causing a dispute. Since then, India and Pakistan had several wars over the
disputed land of Kashmir. India has continued to believe and accuse Pakistan of
financing Muslim militants in Kashmir to create disturbances. Both countries are
reported to be working on nuclear weapons that might kill millions of people on both
sides.

 Domestic issues:
In India, there has been regional violence between people of various faiths and
ideologies. Hindu-Muslim tensions began around 1930s and grew worse during India's
violent split in 1947 where around 600,000 lost their lives. This detest progressed
when Hindu radicals demolished the Babri mosque, believing it to be the birthplace of
Rama increasing the religious tension in the country. The Gujarat riots of 2002, which
assumed a political angle to salvage electoral votes from a portion of the populace,
showed the ramifications ten years later. When Indira Gandhi dispatched troops to the
Golden Temple to disband a militant group, the temple was also destroyed. As a result,
Sikh devotees were enraged, and assassination attempts were made on Indira Gandhi.

 Politics:

The Congress Party was in power in India for around 33 years. But as a result of the
emergency declaration and corruption, the Congress party's strength began to
dwindle. Coalition governments have always been created because of the presence of
more than eight national and two dozen regional parties. To form the government, the
BJP forged a coalition with 25 other parties called the National Democratic Alliance.
Because the major aim of parties remained to create government in the next election,
political considerations were a huge obstacle in selecting where the budgets would be
assigned. This not only put political parties' power under scrutiny by the public, but it
also resulted in vote bank preferences for certain groups.

 Government Policies and Restrictions on Trade:

 The government had imposed restrictions and licensing to promote self-

sufficiency and reduce imports. As a result of these limitations, domestic
organisations had to make do with substandard crude materials that were
delivered locally at a high cost, rather than using imported materials that were
of acceptable quality and cost a fraction of what these domestic items did. As
a result, the merchandise delivered was of poor quality and excessive cost,
making them uncompetitive when compared to unknown products, and as a
result, trade income remained low. In 1970, the fare development structure fell
from 6.5 percent of GDP to 3.6 percent of GDP. These restrictions had a
significant impact on the private sector.
 Import quotas and industrial licences aided in corruption and power abuse.
Import restrictions and prohibitions were removed after 1991, endowments
were restricted, while taxes were reduced. This allowed organizations to freely
import raw materials and other resources from different countries, taking
 advantage of unfamiliar suppliers' lower costs and higher quality. There was
stringent control of government into capital markets, and it would influence
decisions of private investments, private sector regulations, company's layoffs.
This prompted the grouping of personal corporate resources in a few hands
and established an ominous climate for private firms to enter.
 To reduce unemployment, the government subsidised failing government-run
businesses known as "sick units." So, despite their appalling appearance, these
organisations were not shut down; instead, they were given credits from the
administration to keep them afloat. This had a significant impact on the
government's asset reports, and these assets could have been used for a variety
of objectives such as foundations, medical services, and education.
 The primary focus area of the government was still the agriculture sector
which employed more than half of the country’s population. During "Green
Revolution", new fertilisers and strains of high-yield seeds were developed.

 Growth of Technical Education and IT sector:

 Governments huge investment in education especially engineering colleges to

increase the technical advancements on country were being questioned as
more and more people went outside India and the return on government's
investment on education could never return. But this resulted in Companies
started seeing India as not just English speaking cheap outsourced IT but also
as a centre for Research and Development due to the presence of graduates
from IIMs and IISC Bangalore, considered as Silicon Valley of India.
 The IT sector bloomed as India had educated cheap labor which led to growth
and expansion of services industry.

 Rise of Entrepreneurial Mindset:

Following the relaxation of import restrictions and the availability of government

subsidies for IT sector, many entrepreneurs in India went on to establish Indian IT
firms such as Wipro, Tata Consultancy Services, and Infosys.

 Corruption:

Corruption has always been one of the biggest problems for India. Since the
Independence it was reported again and again and has become a kind of norm in each
sector. The more the government policies and restrictions the more ways around it
through bribe and corruption. The issue is that even now, politicians facing criminal
or corruption allegations are allowed to run for office and keep power. People knew
that corruption would have no serious consequences, thus a large sum of money
appeared to be a sufficient incentive for them to continue.

 FDI and Disinvestment in Public Sector:

  As import and export limitations were eased and FDI was allowed, more and
more foreign corporations discovered that it was easier to take use of India's
English-speaking, tech-savvy workforce at a cheaper cost. As a result, many
businesses began outsourcing services to India.
 The establishment of a disinvestment commission was done in order to
dispose off sick or failing public sector enterprises to the private sector. This
would allow the government to free up resources that could be used to invest
in infrastructure, education, and healthcare, among other things.
 India was forced to follow 10 policies prescribed by Washington Consensus.
The policies were:
a. Fiscal discipline
b. Increased public expenditure on health and education
c. Tax Reforms
d. Interest Rate Liberalization
e. Competitive exchange Rate
f. Removal of barrier to foreign investment
g. Removal of barrier to trade
h. Deregulation
i. Secure property Rights
j. Privatisation
 The government has opened the pharmaceutical, mining, and insurance sectors
to privatisation in order to attract more international investment. The
government has reduced its stake in banks and telecommunications
companies.
 Despite the FDI liberalisation, multinational corporations were reluctant to
invest because of the poor infrastructure in terms of power, transportation, and
communications. As a result, despite the abundance of cheap labour, the
country's lack of proper infrastructure functioned as a block for potential
investment inflows.

 High Fiscal Deficit:

India has a history of running large fiscal deficits which are hard to reduce.10% of
total expenditure went to military expenses, additional expenses were done on natural
disasters, 11% were done on agriculture and energy subsidies. None of this could be
reduced by government in the fear of the backlash it would get during elections, and it
can cause the government to lose elections which they will not opt for.

Macroeconomic Theory/Tools Used

 Gross Domestic Product:

GDP is used to assess a country's economic success since it is an aggregate metric that
encompasses a government's consumption, investment, and spending, providing us
with a comprehensive view. Furthermore, because other countries utilise a comparable
procedure, it is easier to compare and contrast their results. GDP of India grew from
 3.60% in 1st plan to 4.5% in 2nd plan. However, GDP kept decreasing till 4 th plan to
2.05%. It increased till 6.68% in 8th plan and reduced in the 9t plan to 5.35%.

 Unemployment Rate:

Though India’s official unemployment rate was 9%, but since most of the population
worked in unorganized sector this number was hard to verify. Some analysis suggested
it to be as high as 20%. Also, India has a huge dependency on agricultural sector
which is highly affected by the weather conditions, making the employability
conditions vulnerable.

 Fiscal Policy:

Changes in the amount and creation of government spending, the level and types of
costs necessary, and the level and type of government acquiring are all part of fiscal
policy. Governments can legitimately influence financial movement through
repetitive and capital usage, as well as indirect effects of spending, levies, and
movements on private utilisation, speculation, and net fares. The fiscal deficit of India
had been fluctuating from 1998 to 2002, with almost increasing constantly.

Key Learnings:
 Before investing in a sector or a geography, it is critical to consider macroeconomic
instruments such as unemployment rates, fiscal policies, and government monetary
policies, among others. These techniques provide an accurate image of a country's
current situation, including not just economic but also cultural, political, internal,
and external issues.
 Several aspects are linked to the consequences indirectly when making any decision.
For example, a country's communal sentiments may have an impact on the fiscal
imbalance since government expenditure decisions may be influenced by them.
Similarly, little details may have an indirect impact on a commercial choice.
 When a government makes a decision, the people of that country are at the centre of
it, as it is the people of India who determine whether or not to maintain a
government in place. Similarly, while making a business decision, the consumer is
the most important factor to consider. Because it is the customer who will use a
product or service, and the company would have no value or revenue if the
customers do not like the offerings.