A Business Environment Project

Date:November 2nd, 2011 BBS Finance 3F-B Rahul (8125) Ishan Luthra (8135) Cyril Thomas (8136) Achint Singh Gulati (8165)


Topics Acknowledgement Introduction Economy of India (Brief Overview) Objectives Indian Economy History Indian Economy Present Scenario India & China India & USA A Multipolar C-I-A World Conclusion

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We would like to express our heartiest gratitude to our Business Environment Professor, Dr. Amar N. Gupta. Without his constant, untiring & unfailing support and guidance, we would not have been able to complete this project. We wish to acknowledge all the authors and experts whom we extensively referred to, as without their researches and analysis, this project would not have come to fruition.



Economic Growth & development are two different terms used in economics. Generally speaking, economic development refers to the problems of underdeveloped countries and economic growth to those of developed countries. The term economic development is far more comprehensive. It implies progressive changes in the socio-economic structure of a country. Viewed in this way economic development Involves a steady decline in agricultural shares in GNP and continuous increase in shares of industries, trade banking construction and services. Further whereas economic growth merely refers to rise in output; development implies change in technological and institutional organization of production as well as in distributive pattern of income. In the words of Prof. Amartya Sen "Development requires the removal of major sources of unfreedom poverty as well as tyranny, poor economic opportunities as well as systematic social deprivation neglect of public facilities as well as intolerance or over activity of repressive states."


It has increased the pace of privatization of government-owned companies. a debt waiver program for farmers. with only one-third of its labor force. has re-emerged as a key driver of growth. followed by the global financial crisis. India's diverse economy encompasses traditional village farming. modern agriculture. accounting for more than half of India's output. limited employment opportunities. India has capitalized on its large educated English-speaking population to become a major exporter of information technology services and software workers. which has averaged more than 7% per year since 1997. including reduced controls on foreign trade and investment. India's fiscal deficit increased substantially in 2008 due to fuel and fertilizer subsidies. inadequate physical and social infrastructure. Over the long-term.5% in 2009. led annual GDP growth to slow to 6. both government spending and taxation are among the lowest in the world. India's long term challenges include widespread poverty.8% of GDP in FY10. partly to offset the deficit. economic. Economic liberalization. An industrial slowdown early in 2008. Nevertheless. Slightly more than half of the work force is in agriculture. India escaped the brunt of the global financial crisis because of cautious banking policies and a relatively low dependence on exports for growth. Domestic demand. still the second highest growth in the world among major economies. handicrafts. a job guarantee program for rural workers. yet traces of its past autarkic policies remain. and a multitude of services. as shares of GDP. a wide range of modern industries. a growing population and changing demographics will only exacerbate social. as exports have fallen since the global crisis started. began in the early 1990s and has served to accelerate the country's growth. but services are the major source of economic growth. and environmental problems. and to deficit reduction the following two years. driven by purchases of consumer durables and automobiles. and stimulus expenditures. The government has expressed a commitment to fiscal stimulus in FY10. BUSINESS ENVIRONMENT TERM PAPER | 2011 | 4 | P a g e .ECONOMY OF INDIA (BRIEF OVERVIEW): India is developing into an open-market economy. The government abandoned its deficit target and allowed the deficit to reach 6. and insufficient access to basic and higher education.

OBJECTIVE OF THE STUDY: This comparative study is aimed at determining the position of India in the scale of economic development and to analyze the current status of India compared to other countries. BUSINESS ENVIRONMENT TERM PAPER | 2011 | 5 | P a g e .

a single currency system with exchange rates was brought into being. The financial and banking system as well as free trade was established. the economy of India was mainly based on agricultural produce. Towards the later part of the Mughal period. one needs to make an analysis of the Indian economy history. the Indian Nationalists advocated for the Swadeshi Movement in which the British products were boycotted. The main source of economy and income for the people in the ancient ages was agriculture. the chief form of trading in those times was the barter system. railway lines were constructed and roads were made. the British East India Company eventually came into power. The pre colonial era of Indian economy India is one of the world's oldest civilizations. The ancient civilizations of India like Indus Valley. the farmers and villagers were required to provide a part of their crops or produce to the kings or the landlords. Gupta Empire and most other dynasties had a planned economic system. the Aryan civilization. During India's freedom struggle. French and Portuguese merchants. Mauryan Empire. the Indian economy has come a long way to become one of the fastest growing economies. In some dynasties. standardization of weights and measures took place and also a capital market came into existence. According to the economic rule. It brought a considerable change in the process of taxation from the revenue taxes to the property taxes which resulted in large scale economic breakdown. after the Battle of Plassey. rivers and water bodies and a favorable climate provided a wonderful scope for agricultural produce in the country. the British rule also developed the country to a great extent. Even in the Muslim rule. Eventually. even coins were issued. BUSINESS ENVIRONMENT TERM PAPER | 2011 | 6 | P a g e . The colonial era of India is a significant part of the India Economy history.INDIAN ECONOMY HISTORY The 12th largest economy in the world in terms of the market exchange rate. However. In fact a number of industries like the Indian handicrafts industry suffered huge losses. Stress was also given to the development of infrastructure and new telegraph lines were laid. Thus the colonial rule in India started. However. some trade relations were established between the Mughal Empire and the British. The fertile plains. In order to have an idea of the various economic stages.

improved seed usage. Another major economic reform that was initiated in the 1960s was to make India self sufficient in food grain production. In the liberalization plan. a number of economic reforms and policies were formulated. central planning and nationalization of the industries in mining. In his tenure. better farming techniques and use of fertilizers and lots more. the then Finance Minister initiated the liberalization plan. more irrigational projects. service and tertiary sectors were developed. From 1990s to the present times India's economic condition in the initial stage of the 1990s was dismal. electricity and infrastructure. foreign direct investments (FDI) were welcomed.was dissolved and India faced huge balance of payment problems. BUSINESS ENVIRONMENT TERM PAPER | 2011 | 7 | P a g e . In this regard. village industries. This is one of the milestones in the history of Indian Economy. Boost was also given to develop the money and capital market. restrictions on a number of sectors were eased. mining. The main trading partner. Public and rural sectors were developed. the first step towards market liberalization was undertaken by the then government headed by Rajiv Gandhi. Manmohan Singh. defence and so on. stress was given to stabilize the economic system of the country. pricing regulations were abolished and efforts were made to improve the GDP of the country. and electricity was spread to the rural areas to improve the standard of living. making the country self sufficient and minimize imports and other related reforms. New roads were built.Post Independence to the 1990s After India gained independence. the ‗Green Revolution' movement was initiated for aforestation. The loans kept on increasing and the IMF asked for a bailout loan. Wide scale development was made in sectors such as agriculture. The political leaders also put stress on business regulations. In the 1980s. In the subsequent Five Year Plans. public monopolies were abolished and banking. emphasis was given to increase the quantity and quality of the export items. In this situation. Soviet Union . dams and bridges were constructed.

Since the open market plan in the 1990s. But one of Singh's speeches. standard of living and industrial development. will go down in the annals of Indian history as the one that changed India. To complement the growing GDP. made exactly twenty years ago. India has experienced favorable economic growth. thereby changing the lives of not just India's 84 crore citizens then but those of another 36 crore citizens who have been born since.  How the Indian economy changed in 1991-2011 Manmohan Singh is not a renowned orator. He delivers his public speeches in a monotonous undertone that one associates with college lecturers and bankers and India's prime minister has been both. Today it has become one of the fastest growing economies in the world with a GDP growth rate of around 6-7 %. Singh presented the finances of a country that was nearly bankrupt and slayed the licence raj. the country has also experienced growth in per capita income. BUSINESS ENVIRONMENT TERM PAPER | 2011 | 8 | P a g e . In his maiden budget speech as the finance minister of India.

A bottle of soft drink.48 lakh in Delhi) was a middle. its forex reserves have surged from $5.How much has India changed since then? Since 1991. be it desi versions like Gold Spot or Thums Up.class status symbol. Back in 1991. BUSINESS ENVIRONMENT TERM PAPER | 2011 | 9 | P a g e . owning a Maruti 800 (Rs 1. But these are just numbers.50. Scooters like Bajaj Chetak and Lambretta accounted for more than half of the two-wheelers sold in the country.8 billion to $279 billion. The change in our lives and lifestyles is a lot more fascinating. India's GDP has quadrupled. and exports from $18 billion to $178 billion. cost just Rs 4.

028.11% approx. Rural urban divide: It is said that India lies in villages. Poverty: As per records of National Planning Commission. These include      Maintaining fiscal discipline Orientation of public expenditure towards sectors in which India is faring badly such as health and education. population of India in 2001 was 1. Reorganization of agricultural sector. BUSINESS ENVIRONMENT TERM PAPER | 2011 | 10 | P a g e . Indian government has started various schemes such as Jawahar RozgarYojna. According to 2001 census of India. even today when there is lots of talk going about migration to cities. 36% of the Indian population was living Below Poverty Line in 1993-94. There is a very stark difference in pace of rural and urban growth. Though this figure has decreased in recent times but some major steps are needed to be taken to eliminate poverty from India.610. growing at a rate of 2. But these are proving to be a drop in an ocean. Such a vast population puts lots of stress on economic infrastructure of the nation. Introduction of reforms in labour laws to generate more employment opportunities for the growing population of India. introduction of new technology.Challenges before Indian economy  Population explosion: This monster is eating up into the success of India. and Self Employment Scheme for Educated Unemployed Youth (SEEUY). 70% of the Indian population still lives in villages.328. Unemployment: The increasing population is pressing hard on economic resources as well as job opportunities.    These challenges can be overcome by the sustained and planned economic reforms. reducing agriculture's dependence on monsoon by developing means of irrigation. Unless there isn't a balanced development Indian economy cannot grow. Thus India has to control its burgeoning population. Introduction of financial reforms including privatization of some public sector banks.

personal spending or the investment expenditure. the prices may fall and such a situation may be referred to as ‗deflation‘. Economic conditions in India are now favourable for a wider cross section of people. the situation of fall in prices is generally experienced and is referred to as deflation. On the other hand. India‘s economic boom has been made possible mainly through its information technology and outsourcing business. leading to general rise in prices. or the supply increases more than the demand. no other country has as high an economic growth rate as India. In economic terms. if the demand of the goods and services increases in an economy. It can also be caused by the direct contraction in expenditure. deflation can be termed as a situation of declining prices. In addition to the above demand supply dynamics. While the situation of inflation is quite common for the developing economies and most of the people are well versed with problem of inflation and know its implications in general. including the public expenditure. but in economic theory there is much more to it than just the reducing price level. often caused by a reduction in the supply of money or credit. If the money supply is less. the prices are likely to go up and the economy is likely to encounter a situation of inflation. deflation has entirely different connotations than those of the inflation. This country offers several economic advantages to its nationals as well as foreign investors. the inflation or deflation can also be caused by the reasons of the adequacy or lack of money supply in the country. Apart from China. the supply being constant. it is a situation of more money chasing lesser goods and services. On the other hand. the situation of deflation is rare.Indian Economy Present Scenario India is one of world‘s fastest growing economies. This is opposite of inflation and often leads to lower effective demand and increasing unemployment rate in the economy. To put it simply. if the money supply is more than the supply of goods and services. In developing countries. According to economic theory. price level is the result of functional relationship between demand and supply. In the common parlance deflation is an economic situation of falling prices. if the supply increases with demand being constant. BUSINESS ENVIRONMENT TERM PAPER | 2011 | 11 | P a g e . India‘s rise as an Asian economic powerhouse has been quite remarkable.

Deflation caused by rapid growth of production and manufacturing in the country. It is this very concern which is causing anxiety among the economists and the policy makers. causing the supply to go up is good for the economy. dramatically reducing the money supply in the economy. The Great Depression of 1930s was associated with deflation and it is said that the recession coupled with deflation leads the economies to suffer. mainly because of the reasons like lower aggregate demand for newly produced goods and very low interest rates that discourage the people from keeping money in bank deposits. the rate of interest in an economy is linked to the rate of inflation. Effects on the Economy Temporary fall in prices is not deflation and it is the sustained fall for a considerably long period of time which is a matter of serious concern. as with abundant availability of all goods and services in the economy. as due to the falling prices the consumers try to delay the purchases. resulting in increase in the real income and wealth of all the consumers. as one BUSINESS ENVIRONMENT TERM PAPER | 2011 | 12 | P a g e . leading to further reduction in aggregate demand and even more reduction in economic activity. Such a situation does not harm the producers also. If the process continues without any interventions from the government. Generally. which in turn reduces economic activity in the economy. as they gain by increasing sales volumes.e. Deflationary times and zero interest rates reduce the economic viability of most of the projects due to tremendously reduced demand and the investors also tend to postpone their new projects. the economies may move in to a situation of recession. the situation of deflation may also lead to a peculiar economic condition known as the ‗liquidity trap‘. This causes substantial reduction in the velocity of money i. The result is that the existing manufacturing capacity of the economy becomes idle. It causes the aggregate demand to fall. But the situation of deflation may necessitate the interest rates to go down as low as zero. Generally. reduction in the number of transactions. But it must be clearly understood that deflation and depression are two different words and situations and should not be taken as synonymous. Theoretically speaking. the deflationary situation encourages people to hold on to their money. the prices go down. thereby accentuating the spiral effect of deflation. This worsens the situation further.

the prices of food items are still experiencing reasonably higher increase in prices. Consumer Price Index (CPI). land and buildings. as the average price level goes down. 15 per cent weightage to the domestic facilities.6 per cent to apparel and shoes. Deflation results in fall of availability of hard currency per person. It is thus evident that sustained deflation is a serious cause of worry to the policy makers. This further results in increasing the purchasing power of each unit of currency. The economic theory provides separate sets of solutions for both the BUSINESS ENVIRONMENT TERM PAPER | 2011 | 13 | P a g e . appraisal and decisions. while putting the economically vulnerable sections of society in a disadvantageous position. While the deflation is persistent fall in price level. But despite extremely lower inflation rate. is an index of the consumer prices that give 46 per cent weightage to the food items. to a situation of depression.‘s expenditure is the income of another. The economists are in a fix and do not know whether to call this economic situation in the country as deflation or disinflation.4 per cent to lighting and fuel and 6. the rate of inflation or deflation is measured on the basis of Wholesale Price Index (WPI) on weekly basis and then computed for the fiscal years for the purpose of policy monitoring. on the other hand. more seriously. disinflation is a situation where the inflation rate goes down. Indian Fears In India. WPI is an indicative and representative index of the wholesale prices of various commodities produced in the economy. Reduced velocity of money results in reduction of incomes. The inflation rate in India has suddenly fallen to a level of less than half a per cent and closer to zero in March 2009 onwards and the fears of the Indian economy slipping into a precarious situation of deflation have been expressed by many. has also given a glimmer of hope to the policy makers because this phenomenon may gradually stabilize the economy and help it come out of the deflationary pressures early. as it may lead the economies to recession and. Increase in purchasing power may sound beneficial to a layman but actually it may cause hardship to those people whose majority of wealth is kept in non-liquid assets such as real estate. This.

This implies that for some part of the year. Many economists believe that the current situation can be termed as ‗demand deflation‘. Despite the above. Economists like Suresh Tendulkar and Pranab Sen also argue on the same lines.K. the Citigroup has said that the deflationary patch in India is due to high base effect and supply side issues and is likely to be temporary and shortlived in nature. the current economic situation is that of disinflation in India. The International Monetary Fund has projected the annual inflation rate of 1. The resilience of our economy may not allow the typical deflationary situation to emerge and the current phase may turn out to transient and temporary.3 per cent in the third quarter of the previous fiscal. Economic Advisor in the Ministry of Commerce and Industry. the rural demand for FMCGs is robust and food items are in great demand. the situation needs to be tackled by the Government very carefully.7 per cent for the Indian economy for 2009-10. But persistence of such a situation may increase the problems of the economy in the months to follow. Government agencies in India vehemently deny that there is any fear of deflation in the near future.situations and unless the situation is clearly identified and diagnosed. As per Mr P. along with stepped up direct government purchases and increased scope of public distribution system. The CPI is still positive and at around 10 per cent. Whether or not to call such a situation a deflationary situation. Both production and the prices are falling down. Padhy. The situation in India may not be as grave as that of sustained deflation. the economy may experience a brief spell of deflation. it would be difficult to resolve it. is a matter of argument. The basis for such a belief is that the economy has grown at the rate of 5. This would require more targeted fiscal measures. BUSINESS ENVIRONMENT TERM PAPER | 2011 | 14 | P a g e . In one of its reports on the Indian economy.

of which services accounted for maximum percentage.8 billion and total imports totalled about $224 billion.  India inflation Inflation in India rose to more than 11 percent in July 2008. followed by industry and agriculture. A rapidly developing economy coupled with national government‘s favourable attitude towards foreign investors. Some economic facts about India India GDP (purchasing power parity) stood at around $2965 billion. which identified India as fourth most attractive investment destination of world. have generated a lot of revenue for India vis-à-vis foreign direct investments. total Indian exports totalled $140. this nation began to generate a lot of interest among foreign investors. Ernst and Young had carried out a survey in June 2008. Ministry of Commerce and Industry projections indicate that India is slated to attract more then $35 billion as foreign direct investment. as per CIA‘s 2007 estimates. this figure was around $15. As of May 21. In previous time period.7 billion. 2008 India‘s foreign exchange exceeded $341 billion. BUSINESS ENVIRONMENT TERM PAPER | 2011 | 15 | P a g e .  Foreign direct investment With economic liberalization of India in 1990s. average inflation was around 5.  Foreign direct investment data In 2007-08. But due to government measures and role played Reserve Bank of India. All this augurs well for economic condition of India. foreign direct investment in India touched $25 billion. Earlier in 2007. inflation was brought down to about 6 percent.3 percent. As per CIA estimates.

both Sehwag and Gambhir are prolific opening batsmen. both the players gel-up very well while running between the wickets and mutual understanding. This is how Indo-China relationship is currently stacked up. Furthermore. both China and India have to gel-up to emerge as two giants that will firmly buttress the world‘s economy in the coming century by preparing themselves for a second wave of growth in aftermath of the global financial crisis. China led the way (like Sehwag) with its decade of scorching growth rate. thus. By 2030. and is likely to break into global top 10 in terms of size. when Sehwag is on the song. Gambhir‘s performance is almost over-shadowed by his partner‘s fast-paced innings. this provides opportunity to Sehwag to calm down post power-play session and pace his innings for a longer haul. However. But. However. But. Gambhir immediately joins the party once he settles down and gets the measure of the wicket. India‘s economy currently is in 12 th position. passing on the baton of illuminating the world economy to India by taking over the driver‘s seat.  Key Findings of the Comparison Report between India and China India catching up with Chinese economy India is currently in the phase of growth as explained by Gambhir‘s position above. just when the Chinese economy was getting over-heated. BUSINESS ENVIRONMENT TERM PAPER | 2011 | 16 | P a g e . They set the tone of the Indian innings by showing controlled aggression between themselves and a building a firm base for the Team India. the People‘s Bank of China slammed the brakes on its scoring rate. India will have overtaken China both in terms of population and GDP growth rates. The country has just started to come in lime-light and its growth patterns have mirrored that of China‘s at an average of about 8% annually until the financial crisis hit.India & China – Comparison of two Asian Giants In the Indian cricket team. says a report on China-India Comparison – An examination of 2011 Direction and Developments. In a nutshell. over-shadowing India‘s slow and steady growth prospects (like Gambhir).

Moreover.The Indo-China bilateral trade has grown significantly since 2005. Chinese imports of Indian goods fell 26. Tax Structures Both India and China have done fairly well when it comes to tax structures and other central and regional levies within the country. especially in indirect taxes through introduction of GST. The inequality of trade has led to tension as Indian manufacturers have to surpass the rout of low-cost Chinese goods. India is on the cusp of landmark tax reform. except for the crisis-hit year 2009. BUSINESS ENVIRONMENT TERM PAPER | 2011 | 17 | P a g e .6% more than Indian imports of Chinese goods.

India‘s economic miracle can be largely attributed to its private sector story.7% by 2020.7% in 2015 and by 6. followed by its one-child policy. the World Bank‘s prediction that China‘s GDP growth will fall to 7. highlights the cause of concerns that could slowdown the dragon‘s growth. Also. even India‘s state-owned companies are gradually logging change from its conventional business model hit by red-tapism. The Manufacturing Hub Morgan Stanley had reported that China‘s rapidly aging population. Morgan Stanley expects India‘s growth to surpass China‘s growth two years from now. BUSINESS ENVIRONMENT TERM PAPER | 2011 | 18 | P a g e . with unification of tax base in 2008. The Government Intervention While a vast majority of China‘s growth comes from state-owned companies. is set to dramatically shrink its workforce and effectively pass the baton to India as the world‘s manufacturing hub. China is becoming a consumer market to sell to. rather than a global manufacturing hub. Having said this.While China did away with preferential tax incentives largely available to foreign investors in free trade zones. India has shored-up tax incentives in special economic zones to gives its infrastructure sector a much-needed boost. Moreover.

However. The Business Environment In China. But. The report finds that though Shanghai is referred as China‘s financial center. BUSINESS ENVIRONMENT TERM PAPER | 2011 | 19 | P a g e . and ability to deliver dividends to shareholders. it seriously lags Mumbai in terms of financial maturity. profitability. the business hubs are already established and running with efficient administration in place. on the other hand. Even the levels of corruption is different in both the places – with that at China being more of disguised as favors and connections. The City to reckon with The stage is set where India-China comparisons are inevitable in any form of demographic analysis. rather than in the form of ‗baksheesh‘ that is prevalent in India. even China is facing certain headwinds such as increase in labor unrest and strikes due to protectionist policies. The same also applies to social media and internet interventions administered by the Chinese government.China‘s state-owned and subsidized model has led to unfair competition and frequent government interventions paving way for difference in decision making and executive talent within the two countries. India isn‘t up to China standards yet when it comes to development and execution of large-scale projects including infrastructure solutions.

With agricultural technology which was developed about 1000 years ago. The Indian political system always appears to be chaotic and sluggish in this regard. The GDP of China grew 9. The economy of China has always outpaced the economy of India in almost every measure. China has seen explosion in the international trade between 2000 and 2007 with growth of imports about 425% and increase in exports almost 490%. it could produce only 5% of global output.6% every year between 1978 and 2005. the sagging infrastructure of Mumbai and New Delhi shows a sharp contrast. If you are interested to know China economy facts. you must go back to check its history in the 18th century when its economy was the largest in the entire world.When the business people and economists make the inevitable comparison of India vs China economy. About 89% of the population of China lived in the countryside in the year 1949 and the agricultural product accounted for 60% of the economy output in total. However. China‘s population was quarter of the world‘s population and hence. The comparison between India vs China economy 2011 has proved that China is far ahead of India. the leadership quality and well-planned economic strategy of China during the crisis period have helped the entire Asian region to lift up from the economic downturn. The economy of China had the tendency to double its size every eight years since 1978. India would really have to work hard on its policies and strategies to reach or attain what China has achieved. The huge growth of China‘s economy helped its people to come out of poverty. the two rising giants of Asia. India comes second to China. A contrast in the airports of Beijing along with Delhi and Mumbai would give you the practical visuals of the infrastructure of these two countries. At that time. The Chinese government is very prompt at making and implementing new effective policies whereas the government of India always lags behind. In 1949. On the contrary. According to the trade reporters. With the emerging global economy after the recession. it is always China that holds the top position. it came to be known as the ―the poor man of Asia‖ in the first half of the 20th Century. BUSINESS ENVIRONMENT TERM PAPER | 2011 | 20 | P a g e . 25% of global output came from China. Wide freeways and shiny new airport in Beijing have set the modern development models. China helped about half a billion people in the year 1850.

6%. I am tempted to invoke a much abused phrase: ―this time it‘s different.S. A Brief Comparison Interestingly. these two different economies are following divergent monetary policies trying to solve their economic riddles—one is aiming to control high levels of inflation and the other is trying to move accelerate from ―stall speed‖ (it currently stands on the precipice of economic recession) and an unacceptably high level of unemployment. To add to the woes. rendering the monetary policy actions ineffective. what gives? Even at the cost of sounding clichéd. However. where the average inflation since January 2010 is 9. First let‘s focus on India. So. when ordinarily they could have had an impact.‖ Past sins are clearly catching up now. the latter is the U. the U. Figure 1: Inflation and Monetary Policy BUSINESS ENVIRONMENT TERM PAPER | 2011 | 21 | P a g e . Fed is following ultra-expansionary monetary policy. While the Reserve Bank of India (RBI) has been tightening the monetary screws (12 rate hikes in the past 18 months) more than ever before. success has been steadfastly eluding both. external factors are conspiring against success.S. The former is India.India & USA.

there is a high price to be paid for such neglect. as is evident from the yields shown in Figure 3. Figure 3: Comparison of Yields (hectogram per hectare) Source: FAO BUSINESS ENVIRONMENT TERM PAPER | 2011 | 22 | P a g e . GoI For a sector that supports about 65% of India‘s population. Not surprisingly. agriculture productivity levels in India are among the lowest in the world. Years of neglect suffered by the agriculture sector are evident from the excessively low level of investment in the sector (Figure 2). RBI The very fact that such a long tightening phase has failed to affect prices to the extent desired clearly indicates that inflation in India is mainly structural in nature (not cyclical). Figure 2: Gross Capital Formation (GCF) Note: QE = quick estimate Source: Economic survey.Source: Office of Economic Advisor (GoI).

which has started to feed into overall inflation (Figure 4). mainly on account of a perceptible retreat of FX flows due to the decreasing appetite for emerging market risk assets. as the European sovereign debt crisis continues to boil. transportation. preventable post-harvest losses of foodgrains are estimated at about 20 million tonnes a year. India wastes close to 50% of Australia‘s annual foodgrain production. food inflation has remained persistently high in India. which is nearly 10. Not surprisingly. As per the report of the 11th Planning Commission.) not only leads to low levels of productivity. In India.Hugely inadequate physical infrastructure in agriculture (be it irrigation. cold storage facility. while every day millions of Indians go to bed hungry. Even a bumper crop is a problem for India and the country has had to resort to exporting foodgrains this year to tide over the storage problem. The problem has been further compounded by the recent depreciation of the rupee (Figure 5). more than 10% of foodgrain production gets wasted every year. but also to a huge loss of foodgrain due to improper storage. y/y) Source: Office of Economic Advisor Moreover. BUSINESS ENVIRONMENT TERM PAPER | 2011 | 23 | P a g e .5% of the total production. To put things in perspective. Figure 4: WPI/Food Inflation (%. inflationary pressures are also coming from the trade channel. as I have said in previous posts. etc. as a result of the persistently high prices of oil and other commodities.

Fed. further adding to inflationary pressures and thereby rendering the RBI‘s monetary policy efforts futile.Figure 5: USD/INR Source: Bloomberg This is leading to imports becoming even costlier (negating the effect of some of the recent softening in commodity prices). All this. despite clear evidence of demand destruction in India. BUSINESS ENVIRONMENT TERM PAPER | 2011 | 24 | P a g e . At the other end of the monetary policy spectrum lies the U.S.

S. with the Fed Funds rate at as close to zero as possible (and having been so for a longish period of time).Figure 6: Fed Funds Rate Source: Fed As the global crisis erupted. an extended period of ultra-low interest rates has not ratcheted up the economy. and hence about their income and employment situations. the Fed has no more policy bullets. the excessively leveraged U. which is what it is doing. With house prices yet to bottom out and unemployment levels remaining stubbornly high. However. Here again. The Conference Board Consumer Confidence Index stagnated at a two-year low in September (Figure 7). consumer seems to be thoroughly down and out. the Fed acted quickly and eased money policy as fast as it could (Figure 6). except for continuing to keep rates low. indicating that consumers are deeply worried about the state of the economy. BUSINESS ENVIRONMENT TERM PAPER | 2011 | 25 | P a g e .

even this did not help much. Credit growth did not perk up materially and all that QE resulted in was rising excess reserves (rather than further lending).Figure 7: Conference Board Consumer Confidence Index Source: Bloomberg With consumers retreating and the crisis of confidence becoming all pervasive. Unfortunately. The policy limitation that close-to-zero interest rates entailed forced the Fed to go for QE. the low interest rate regime has simply failed to spur the economy. given the crisis of confidence and the fear of tighter regulations. as credit-worthy borrowers refrained from borrowing and lending institutions also preferred to hold tight (Figure 8). BUSINESS ENVIRONMENT TERM PAPER | 2011 | 26 | P a g e .

it did not help that Europe was hurtling faster and deeper into trouble. the politicians of both countries have played an important role in spoiling the party—in the U. through one-upmanship. most companies.Figure 8: Bank Credit (%. though in a slightly altered form: When the world needed wisdom. to a great extent. foolishness was more readily on display) BUSINESS ENVIRONMENT TERM PAPER | 2011 | 27 | P a g e . Of course. This reminds me of what Charles Dickens wrote in ―A Tale of Two Cities‖ (―it was the age of wisdom. especially the nonfinancial ones. Moreover. They have helped to arrest the slide in consumer spending. but have not stimulated an increase. Even the vast sum of money used for the ―cash for clunkers‖ scheme or the ―second home buying scheme‖ helped the economy to perk up only in the short term and the positive multiplier effect soon faded away. it was the age of foolishness‖).S. SAAR) Source: St. Louis Fed With corporate profits moving to record-high levels. The fact also remains that both the RBI and the Fed have not necessarily always taken the right decisions (though these been debated enough in the public domain and are beyond the scope of this article). have preferred to use their cash to deleverage. The same has gone for credit-worthy consumers. and in India through sheer inertia (policy paralysis for some). Even the tax breaks and transfers have been. used to reduce debt.

000.096. 11 times more than India $1.053 Ranked 33rd.000.060.00 GDP per capita in 1820 $531.00 Ranked 38th.2 Ranked 7th. 15 times more than India $16.000. 93 times more than India $13.5 Ranked 123rd.573. more than United States GDP (per capita) $3.000. 142% more than India $4.00 Ranked 5th. 6 times more than India $9. GDP per capita in 1900 $625.99 per capita Ranked 121st in 2006.1 Ranked 25th. GDP growth > annual % 9. 113% more than India 197.00 Ranked 1st. Economic importance 2.00 Ranked 24th.00 Ranked 3rd. 69% more than India 3.2 annual % GDP $4.287.00 Ranked 2nd in 2006. GDP per capita in 1950 $597.000.164. GDP per capita in 1973 $853.American Indian Economy stats Economy stats Business efficiency 59.680.9 Ranked 1st.23 annual % Ranked 14th in 2005.00 Ranked 49th. 188% Ranked 119th in 2005.000. 2 times more than India 3. Economic freedom 1. $43.751. 100 Ranked 1st.00 Ranked 5th in 2006.00 BUSINESS ENVIRONMENT TERM PAPER | 2011 | 28 | P a g e .607.67 per capita Ranked 3rd in 2006.

000.000.960.00 Ranked 4th.780.362. 5 times more than India 0. 20 times more than India GDP > PPP $3. 57% more than India High income: OECD Human Index Development 0. 2 times more than India $9. Income category Income distribution Poorest 10% > Low income 3.00 Ranked 1st.00 Ranked 12th. Ranked 2nd.2 Ranked 59th.000.000. States Technological achievement 0. Gross National Income $477.5% 1.000.628.23 per $100 Ranked 20th. States Income distribution Richest 10% > 33.Ranked 50th. Gross National Income $14.944 Ranked 10th.000.5% Ranked 38th.083.000. 3 times more than India BUSINESS ENVIRONMENT TERM PAPER | 2011 | 29 | P a g e .8% Ranked 22nd. 94% more than United Ranked 85th. $83. 0. 18 times more than India $11.5% per $100 (per $ GDP) Ranked 160th.73 Ranked 2nd.602 Ranked 128th.00 Ranked 1st. 10% more than United Ranked 54th.000.

Comparison of select parameters for C-I-A Commentaries on China: China accounts for up to 60% of most and 90% of some industrially important globally produced commodities. some Western democracies and Islamic dictatorships were engaged in building imperial powers through extraterritorial expansions and colonization. Until mid-20th century. a powerful military and a deep rooted political capacity. any global or regional power is three legged. since the end of the Cold War in 1989. Industrializing European nations for about 500 years (16th to 20th century) colonized many poor nations of Middle East. Metaphorically. America became uncontested super power standing on three powerful legs.A Multipolar C-I-A World C-I-A (China. American supremacy in 21st century is challenged by two emerging powers. Muslim invaders colonized South Asia for about 900 years (950 to 1857). India and America) are compared to understand relative strengths of emerging powers. Latin America and South and East Asia rich in commodities supplies. Important factor to note is that these three nations are achieving sustained growth through peaceful competitive process. With three relatively stable legs India at best an aspiring global power. Proselytizers and religious fanatics seeking to build an Islamist Caliphate were looters and plunderers seeking riches in lands of non-believers. In my opinion contrary to projections otherwise China is not likely to match or surpass America in less than two decades and in same period India is likely to be closing in on China. The blog presents select data on the growth of India relative to other two nations. India was a British colony from 1857 to 1947. not through imperial designs. Three legged stools on one (Pakistan) and two (China) legs by nature are unstable. Africa. America has a deteriorating economy compared to peaks in the Clinton (1992 – 2000) and the Bush (2000 – 08) eras. Some hard facts about China touting its economic strength follow: BUSINESS ENVIRONMENT TERM PAPER | 2011 | 30 | P a g e . In a unipolar world. To be a global or a regional power depends on three factors: a strong economy.

It also has dubious distinctions.g. 5. by each of three nations. In technology and intellectual property.000 cigarettes per second. Vikram Dalal (Professor of electrical and computer engineering. Ian Bremmer (an executive at Microsoft). China‘s 19% of the world‘s population. e. it made and sold 18 million vehicles and for food supply it had more pigs than in the next 43 pork producing nations combined. a CNN weekly program). By March 2011. Iowa State University).04 trillion in foreign currency reserves – the largest stockpile on the entire globe. There is a need to develop a comprehensive picture that compares progress.. China set several new records: in 2010. As China continues to grow and the US continues to decline economically. 2.1. In industrial sectors. these authors present a picture of China that evaluates China‘s progress and how it compares to that of America. Robert J. Individually they presented a skewed picture of China‘s growth. Chinese consume 50. speculators ask: when will China match or surpass American global dominance? All analysts are well intentioned. Listed in references and notes are several recent commentaries on the impacts of China‘s growth on global powers. 4. 3. 48% of iron ore and 47% of coal and the majority of just about every major commodity. BUSINESS ENVIRONMENT TERM PAPER | 2011 | 31 | P a g e . China produced 11 times more steel than the US. it is world‘s number one producer of wind and solar power and it controls more than 90% of the total global supply of rare earth elements. The analysts are Fareed Zakaria (moderator of the GPS. China had accumulated US$3. Herbold (WSJ. China possesses the fastest supercomputer on the entire globe and in the past 15 years. or lack of it. To put it in relative context the following data were assembled using Google searches. it consumes the world‘s 53% of cement. Collectively. it has moved from 14th to 2nd place in the world in published scientific research articles. China has the world‘s fastest train and the largest high-speed rail network. Op-ed) and Dr.

China‘s labor force was more than 5 times that of America and 1.2 trillion Index. the third populous nation in the world.8 (28.400 1.5 8. $ NominalPPP $PPP 4. million Unemployment.1) 45.2 billion were about 4 times higher than that of America at 310+ million.339 2.Comparison of Select Data for C-I-A In 2010 the populations of China at 1. China also had largest workforce and America had the largest economy.7 478 9. Select Facts for two emerging and one developed Global powers 0712 2011 Facts China (C) India (I) America (A) 2010 GDP (PPP).00 2.71 Trillions. % Inflation.Bracketed are PPP estimates (22. $ 9.265 3.1 6. % of GDP Gold Reserves.3 1. 58th 4.6) for 2020 Per Capita GDP.5 615 $310 billion 88th 14.7 8.7 times of India. % Fiscal Deficit.4 3.56 GDP Growth.6 1.4 820 4.989 45.054 $3.134 NA World Prosperity 1st BUSINESS ENVIRONMENT TERM PAPER | 2011 | 32 | P a g e .2) 1.6 153 9.743 Factor (PPP/Nominal) 7. tonnes Foreign Exchange Reserves 9. % Labor Force.989 1.4 5.2 10.07 (10.65 8. Additional select facts are compared in the following table.3 billion and India with 1.

Since population of India and China are comparable and China is expected to experience a demographic decline in next few decades.position Mobil Users. years Literacy Rate.200 and Americans produced $96.3 times more productive. that for India $3.730 per worker. Labor force of India in 2010 was about 58% of China. million Internet Users Life Expectancy. BUSINESS ENVIRONMENT TERM PAPER | 2011 | 33 | P a g e . but compares poorly not only to China and America but also to some economic peers (Brazil and Russia) and neighbors (Sri Lanka and Bangladesh).% Under 5 Mortality rate 896 420 73 96 20 21 840 81 65 74 50 66 303 240 79 99 6 8 Using nominal GDP numbers for each nation and its labor force in 2010 annually goods produced by each worker in China were worth $7. China – India at a Glance The following data suggests that India may substantially narrow the gap with China in about two decades. % Infant Mortality Rate. It will have to increase its labor force and improve productivity comparable to that of China by adding more skilled and highly skilled workers to its manufacturing and high value added product sectors. For wealth generation Americans compared to Chinese were 13 times more productive and Chinese compared Indians were 2. Unless China improves its productivity by more than 30% and American suffers an additional significant economic decline it would be unlikely for China to catch up with American GDP by 2050. The following data sizes up India and China.500. Health in India has improved. India can narrow the economic gap by accelerating its economic growth rate. Chinese are expected to experience a 30% demographic decline by 2050.

European nations through colonization built imperial powers that lasted a few centuries and so did the Muslim Caliphates. Europeans colonized many autocratic nations for part or all of last few centuries. clerics and merchant/landedgentry classes.0 12.0 18.China – India at a Glance Source: ―Sizing up India and China‖. there is no guarantee that in long term democratic societies are any more stable than autocratic societies.  Most of today‘s democracies were mostly autocratic societies. clerics. In most cases they lacked adequate political capacity.0 5. May be.3 18. warlords and scholars) establishment grew to be imperial powers through extra territorial expansions. 1 November 2010 Parameters China to India ratio India’s lag in years 11. Autocratic societies were mostly poor.0 6. up to 90% ruled by 10+% of ruling establishments of royalty. Each of these societies to varying degrees managed with one or two of the three legs.0 Democracy vs Autocracy: A contention appears to be that a middle class dominated society has a tendency to become politically democratic. BUSINESS ENVIRONMENT TERM PAPER | 2011 | 34 | P a g e . Collectively the ruling BACWAS (bureaucrats. Demise of a strong autocratic leader invariably led to political vacuum and chaos until the next savior arrived.0 GDP Industrial output Steel production Car sales 3. warlords. army. IIFL via Thomson Research.8 8.

With both bubbles there were associated financial activities bubbles. Did we have a steady economic activity decline for 30 years? Not exactly as America successfully replaced low paying jobs with high value added technology products and services. America started shifting jobs to China during Reagan administration in 1980s. With a double digit GDP growth rates it took China three decades to have a $5 trillion economy by concentrating on low paid manufacturing jobs. The following are my observation on diminishing political capacity of America. technology and housing market bubbles appeared and were busted. How likely is American economic decline to continue? According to Dalal the cycle has a life span of 10 years. America: Dr Dalal in ‗a diagnosis of the American decline‘ offered a credible description of the economic activity cycle per decade. It would be interesting if Dr Dalal could or would predict America‘s GDP. China‘s GDP was around $5 trillion in 2010 and it was less than $1 trillion before 1980s. two wars in three Muslims heart lands (Iraq and the AfPak region of Afghanistan and Pakistan) have strained American economy. In last 30 years. The decade long wars have cost America $4 trillion and it still has a few more years (2014 and beyond) to go to neutralize ―the hub‖ of terrorism in the Af-Pak region by destroying the safe heavens protected by Pakistan army. BUSINESS ENVIRONMENT TERM PAPER | 2011 | 35 | P a g e   . It all came crashing down in 2008.5 trillion. With the market crash of 2007 – 08 the decline precipitated and it may last through most of current decade.  Starting 2001. Its economic growth is stagnating and may even be diminishing as it continues to struggle to extricate itself from the Af-Pak quick sand. both annual rates and cumulative for a decade of 2011 – 21. It is interesting to note that America has technological capacity to reverse trends of its economic decline seen in last few years. Given 9+% unemployment rates it is reasonable to assume a steady decline in American GDP. In 2011 American economy is around $14. However for next few years its economy is likely to decline due to shrinkage of its manufacturing base and high employment rates.

Indian economy being focused on high (up to 70%) internal consumption is less exposed to external political pressures. Indian ocean and Arabian Sea.5 trillion. etc). Its economy in two decades grew to about $1. It has moved up from the out sourcing services provider to technology dominated R&D activities in many industrial products. To sustain its supply chains for exports of technology and high value added manufactured products and imports of raw materials it is building up its navy to assert a dominance in waters all around India (Bay of Bengal.000 MW by 2020 and 63. especially for an assured steady supply of energy and other raw materials to attain a double digit growth needed for augmenting capacity for steel.780 MW in 2011) and more than dozen large plants at various stages of constructions (20. For next few decades the best India can hope for is to be a regional power provided it effectively manages border disputes with China and Pakistan. India with 7% – 9% economic growth for two decades. India is getting ready to export indigenous designed and developed 220 and 540 MW heavy water nuclear power plants. It also needs to build economic interests with commodities rich nations. overall as a global power is a distant third. With 20 operating nuclear plants (4.India: India built its political capacity over last 64 years and now it is focused on building strong economy.  India has been concentrating on building technology base and manufacture of high value added products. cement. technology and intellectual property based electronic industry.000 MW by 2032) for completion in about two decades.       BUSINESS ENVIRONMENT TERM PAPER | 2011 | 36 | P a g e . In addition to being a major global generic drug provider its manufacturing industries include deployment of communications satellites and many advanced military products. Except in software developments the growth of manufacturing of high value products has been slow but steadily rising. It is marketing Pratham series super computers.

and agricultural science – there is a possibility that with a rapid decline in poverty rate economic growth may accelerate.4 billion (2020) to less than a billion from 2020 to 2050. America has maintained its population growth rates by allowing immigrants to enter.India v.  China‘s projected to suffer a demographic decline from 1. China: Both India and China have net job gains whereas America and Western nations have suffered job declines judging from near double digit unemployment rates. As the numbers of middle class go up. If jobs decline in America is not arrested in near future. It is fallacious to claim that corruption and asymetric distribution of wealth is responsible for high poverty levels in India. productivity can not rise. its political structure may come under additional social pressures. Without an edge in R&D. Issues like Lokpal bill may bring down corruption but it may not have much influence on poverty reduction as with implementation of RTE (right to education) by nature takes about a decade to show improved BUSINESS ENVIRONMENT TERM PAPER | 2011 | 37 | P a g e      . In 25 years (1990 -2015) poverty in India is expected to decline by 22% or about 1% a year assuming a 7% to 9% annual GDP growth. math. The poverty data represents declining population of illiterate old people due to natural attrition and increasing level of literacy as more and more youth get educated. it may not see technology savvy immigrants coming to its shores to help it continue on with its established business plan of attracting skilled foreign workers. Such claims ignore facts that generational cycle of poverty requires skilled based education for the poor to generate wealth. If the education system for youth is reformed to incorporate skills based education such as introduction to basic rural technology – engineering. There may be all kinds of pressures and chief among it would be political capacity. For China demographic decline means its low paying jobs may disappear and to maintain production consistent with consumer demands it will be forced to improve productivity by offering better salaries to manufacturing workers. India added 180+ million populations in first decade of 21st century and at this rate of population growth it will be most populous nation after 2030.

BUSINESS ENVIRONMENT TERM PAPER | 2011 | 38 | P a g e . RTE presumably will have same effect in helping those who want to get in job market as soon as they complete 7th to 10th level high school education. The RTE was implemented a few years ago and there are many states that have resisted implementing the RTE reforms.results.  It took India two generations (40 years) of IIT and higher education to reap benefits of wealth generation.

BUSINESS ENVIRONMENT TERM PAPER | 2011 | 39 | P a g e .as a counterbalance.Conclusion China and India have come a long way since they fought a brief border war in 1962. Bottellier. Prof. Both countries are not only developing economically at rapid speed.up from only 338 million dollars in 1992. Despite these developments. but they are also making extraordinary efforts to increase mutual trade and to improve bilateral relations. In fact. says Prof. Even during the visit of Chinese President Hu to India in the latter part of last year. Rapid economic growth and the expansion of bilateral trade have fuelled the development of closer relations. Pakistan.a democracy it views as less threatening . ―I do not think that the proposed civilian nuclear agreement between the United States and India is resented or rejected by China. Bottellier says concerns that the Chinese are worried about India's relationship with the United States are overblown: ―I am very pleased that the United States and India are developing good. Some expect the United States to deepen ties with India .many analysts say there is no doubt about the enormous economic potential of China and India in the 21st century. constructive friendly relations.and many structural and institutional problems lie ahead -. Trade between India and China reached 18 point 4 billion dollars last year -. One would have expected the Chinese to have protested. especially their landmark nuclear agreement allowing India access to civilian nuclear technology. this was not the subject of discussion. the Chinese government has been remarkably silent on that subject.‖ Although the vast majority of the rural population in both countries remains illiterate and impoverished -. Chinese President Hu Jintao's state visit to India last November reflects the progress of bilateral dialogue on a range of issues over the past few years. several analysts say India remains suspicious of China's relationship with its long-time rival. but they have not done so. Both countries pledged to double trade to 40 billion dollars a year during talks in New Delhi between Indian Prime Minister Manmohan Singh and Chinese President Hu Jintao. And China is concerned about New Delhi's growing ties with Washington. However. That is very important for both countries.