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ASSIGNMENT

INDIA SINCE 1991

(Submitted in the partial fulfillment for the degree of

Masters in Business Administration)

Submitted to: Submitted by:

Miss. Azizinder sekhon Gurdev Singh

Roll no: 5731

MBA-I (B)

SCHOOL OF MANAGEMENT STUDIES

PUNJABI UNIVERSITY, PATIALA

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Economic development since 1991

Introduction

The foundation of credible national security is based on the level of economic prosperity and

well-being of the population of any country. This is especially so for developing countries like

India. Many developing countries in the Asia-Pacific region, including China and India where

nearly one third of the worlds population live, are currently going through economic transitions.

The central objective of transition through economic liberalization is to improve the competitive

efficiency of the economy in the global marketplace to sustain accelerated rates of economic

growth and thereby continuously improve the security and well being of thepeople. India

launched its market-oriented economic reforms in 1991.

In India, post-1991 economic reforms have been evolutionary and incremental in nature.

There have been delays and reverses in some areas due to the interplay of democratic politics,

coalition governments, and pressure groups with vested interests. It is well known that from 1951

to 1991, Indian policy-makers stuck to a path of centralized economic planning accompanied by

extensive regulatory controls over the economy. The strategy was based on an inward-looking

import substitution model of development. Indias economy went through several episodes of

economic liberalization in the 1970s and the 1980s under Prime Minsters Indira Gandhi and,

later, Rajiv Gandhi. However, these attempts at economic liberalization were halfhearted, self-

contradictory, and often self-reversing in parts. In contrast, the economic reforms launched in the

1990s (by Prime Minister P V Narasimha Rao and Dr. Manmohan Singh as his Finance Minister)

were much wider and deeper and decidedly marked a U-turn in the direction of economic

policy followed by India during the last forty years of centralized economic planning. All the

sectors have experienced tremendous growth ever since, here we try to discuss an overview of

various sectors since these reforms took place.

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Industry and services

Manufacturing

The manufacturing sector accounts for more than 80 percent of industrial production in India,and its growth is an ample indicator of the industrial health of India. Interesting is the trajectory

of India's manufacturing output over the last fifteen years, covering three plan periods since the

early 1990s reforms. the growth of manufacturing since 1991 has followed quite a roller-coaster

profile. There was an initial post-reforms upswing in the mid-1990s, followed by a steep tumble

in 1997-08, stagnation for the next four years and then a steady recovery and acceleration since

2002-03. But while recovering from the economic downturn of 2008 it was this sector that

registered the highest growth showing itself to be the supporting pillar for the Indian economy.

Between 2001-02 and 2007-08 manufactured exports have increased at the compound annual

rate of growth (CARG) of 20%. But the share of manufactured goods in total exports has

declined from 73.6% in 1991-92 to 63.6% in 2007-08. precisely the industries which were

created and developed in the pre-reforms period through active state intervention. Consider, for

example drugs & pharmaceuticals. This industry is considered to be one of the success stories of

independent India. A conscious industrial policy worked behind the development of the

pharmaceutical industry in India. Among the instruments used were regulation of foreign capital,

promotion of indigenous enterprises, patent reforms, public investments in manufacturing and

R&D. Import liberalization may help existing exporters, as for example in pharmaceuticals.

But certain dangers loom first, for example an important stimulus to the recent, strong

manufacturing growth has come from a surge in corporate investment activity. Can this be

sustained for long? Has India outgrown the vagaries of business cycles? The graph is none too

reassuring. Second, the momentum of manufacturing growth could be significantly dented by our

exchange rate policy, which has been mismanaged. Labour-intensive exports and import-

substitutes are already hurting. More pain may well be in store if the appreciation of the rupee is

not curbed. Third, we have been enjoying a benign period of declining fiscal deficits in the last

five years. That particular joyride is threatened by a number of factors, including: the mounting

off-budget subsidies for oil, food and fertilisers, the ticking time-bomb of the Sixth Pay

Commission, rising expenditure on various populist programmes and a possible slowdown in the

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rapid growth of corporate income taxes. If fiscal deficits widen again, upward pressure on

interest rates and (downward on) investment is inevitable.

SERVICES

India is fifteenth in services output. It provides employment to 23% of work force, and it is

growing fast, growth rate 7.5% in 19912000 up from 4.5% in 195180. It has the largest share

in the GDP, accounting for 55% in 2007 up from 15% in 1950. Business services (information

technology, information technology enabled services, business process outsourcing) are among

the fastest growing sectors contributing to one third of the total output of services in 2000. In

2009, seven Indian firms were listed among the top 15 technology outsourcing companies in the

world. In March 2009, annual revenues from outsourcing operations in India amounted to US$60

billion and this is expected to increase to US$225 billion by 2020. Indian service sector has

witnessed a major boom and is one of the major contributors to both employment and national

income in recent times. The activities under the purview of the service sector are quite diverse.

Trading, transportation and communication, financial, real estate and business services,

community, social and personal services come within the gambit of the service industry.

Information Technology Industry

The Information Technology industry has achieved phenomenal growth after liberalization. The

industry has performed exceedingly well amidst tough global competition. Being knowledge

based industry; India has been able to leverage the global markets, because of the huge pool of

engineering talent available and the proficiency in English language among the middle class.

Retailing

Before liberalization, India had one of the most underdeveloped retail sectors in the world. After

liberalization the scenario changed dramatically. Organized retailing with prominence on self

service and chain stores has changed the dynamics of retailing. In most of the tier I and tier II

cities supermarket chains mushroomed, catering to the needs of vibrant middle class. This

indirectly contributed to the growth of the packaged food industry and other consumer goods.

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Banking

The three major changes in the banking sector after liberalization are:

Step to increase the cash outflow through reduction in the statutory liquidity and cashreserve ratio.

Nationalized banks including SBI were allowed to sell stakes to private sector and private

investors were allowed to enter the banking domain. Foreign banks were given greater

access to the domestic market, both as subsidiaries and branches, provided the foreign

banks maintained a minimum assigned capital and would be governed by the same rules

and regulations governing domestic banks.

Banks were given greater freedom to leverage the capital markets and determine their

asset portfolios. The banks were allowed to provide advances against equity provided as

collateral and provide bank guarantees to the broking community.

Prime Minister Indira Gandhi nationalised 14 banks in 1969, followed by six others in

1980, and made it mandatory for banks to provide 40% of their net credit to priority

sectors like agriculture, small-scale industry, retail trade, small businesses, etc. to ensure

that the banks fulfill their social and developmental goals. Since then, the number of bank

branches has increased from 8,260 in 1969 to 72,170 in 2007 and the population coveredby a branch decreased from 63,800 to 15,000 during the same period. The total deposits

increased from 5,910 crore (US$ 1.34 billion) in 1970-71 to 3,830,922 crore

(US$ 869.62 billion) in 2008-09. Despite an increase of rural branches, from 1,860 or

22% of the total number of branches in 1969 to 30,590 or 42% in 2007, only 32,270 out

of 500,000 villages are covered by a scheduled bank.The public sector banks hold over

75% of total assets of the banking industry, with the private and foreign banks holding

18.2% and 6.5% respectively. Since liberalisation, the government has approved

significant banking reforms. While some of these relate to nationalised banks (like

encouraging mergers, reducing government interference and increasing profitability and

competitiveness), other reforms have opened up the banking and insurance sectors to

private and foreign players.

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Insurance Sector

The Insurance Regulatory and Development Authority Act 1999 (IRDA Act) allowed theparticipation of private insurance companies in the insurance sector. The primary role of IRDA

was to safeguard the interest of insurance policy holders, to regulate, promote and ensure orderly

growth of the insurance industry. The insurance sector could invest in the capital markets and

other than traditional insurance products, various market link insurance products were available

to the end customer to choose from.

AGRICULTURE

1991 has been marked by reforms involving, among other things, change in exchange rate and

liberalization of external trade. Measures have been taken to promote integration of domestic

economy with global economy. These changes in turn have affected domestic prices of several

commodities and, terms of trade for agriculture have undergone changes during the decade of

1990s. Alongwith liberalization of trade, private sector has been allowed and encouraged to

participate in the import and export of major agricultural products. Two, domestic prices of

cereals, through government intervention in minimum support prices and open market

operations, were given substantial hikes to reduce dis-protection to agriculture because of

domestic prices being lower than the international prices of several commodities. This way,

prices have become the major driving force for growth and development of agriculture sector

during 1990s. The process of reforms, particularly trade reforms, further intensified since 1995

following implementation of WTO agreement on agriculture.

India ranks second worldwide in farm output. Agriculture and allied sectors like forestry,

logging and fishing accounted for 15.7% of the GDP in 2009-10, employed 52.1% of the total

workforce, and despite a steady decline of its share in the GDP, is still the largest economic

sector and plays a significant role in the overall socio-economic development of India.Yields per

unit area of all crops have grown since 1950, due to the special emphasis placed on agriculture in

the five-year plans and steady improvements in irrigation, technology, application of modern

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agricultural practices and provision of agricultural credit and subsidies since the Green

Revolution in India. However, international comparisons reveal the average yield in India is

generally 30% to 50% of the highest average yield in the world

India is the largest producer in the world of milk, cashew nuts, coconuts, tea, ginger,

turmeric and black pepper. It also has the world's second largest cattle population with 175

million heads in 2008.It is the second largest producer of rice, wheat, sugarcane, cotton and

groundnuts, as well as the second largest fruit and vegetable producer, accounting for 10.9% and

8.6% of the world fruit and vegetable production respectively. India is also the second largest

producer and the largest consumer of silk in the world, producing 77,000 million tons in 2005.

Foreign direct investment in India

As the fourth-largest economy in the world in PPP terms, India is a preferred destination for

foreign direct investments (FDI); India has strengths in telecommunication, information

technology and other significant areas such as auto components, chemicals, apparels,

pharmaceuticals, and jewellery. Despite a surge in foreign investments, rigid FDI policies

resulted in a significant hindrance. However, due to some positive economic reforms aimed at

deregulating the economy and stimulating foreign investment, India has positioned itself as one

of the front-runners of the rapidly growing Asia Pacific Region. India has a large pool of skilled

managerial and technical expertise. The size of the middle-class population stands at 300 million

and represents a growing consumer market

During 2000-10, the country attracted $121 billion as FDI. The inordinately high investment

from Mauritius is due to routing of international funds through the country given significant

capital gains tax advantages; double taxation is avoided due to a tax treaty between India and

Mauritius, and Mauritius is a capital gains tax haven, effectively creating a zero-taxation FDI

channel.

India's recently liberalized FDI policy (2005) allows up to a 100% FDI stake in ventures.

Industrial policy reforms have substantially reduced industrial licensing requirements, removed

restrictions on expansion and facilitated easy access to foreign technology and foreign direct

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investment FDI. The upward moving growth curve of the real-estate sector owes some credit to a

booming economy and liberalized FDI regime. In March 2005, the government amended the

rules to allow 100 per cent FDI in the construction business. This automatic route has been

permitted in townships, housing, built-up infrastructure and construction development projects

including housing, commercial premises, hotels, resorts, hospitals, educational institutions,

recreational facilities, and city- and regional-level infrastructure.

A number of changes were approved on the FDI policy to remove the caps in most sectors.

Fields which require relaxation in FDI restrictions include civil aviation, construction

development, industrial parks, petroleum and natural gas, commodity exchanges, credit-

information services and mining. But this still leaves an unfinished agenda of permitting greater

foreign investment in politically sensitive areas such as insurance and retailing. FDI inflows intoIndia reached a record $19.5 billion in fiscal year 2006-07 (AprilMarch), according to the

government's Secretariat for Industrial Assistance. This was more than double the total of

US$7.8bn in the previous fiscal year. The FDI inflow for 2007-08 has been reported as $24

billion and for 2008-09, it is expected to be above $35 billion. A critical factor in determining

India's continued economic growth and realizing the potential to be an economic superpower is

going to depend on how the government can create incentives for FDI flow across a large

number of sectors in India.

Energy and power

India's oil reserves meet 25% of the country's domestic oil demand. As of 2009, India's total

proven oil reserves stood at 775 million metric tonnes while gas reserves stood at 1074 billion

cubic meters. Oil and natural gas fields are located offshore at Mumbai High, Krishna Godavari

Basin and the Cauvery Delta, and onshore mainly in the states of Assam, Gujarat and Rajasthan.

In 2009, India imported 2,560,000 barrels (407,000 m3) of oil per day, making it one of largest

buyers of crude oil in the world. The petroleum industry in India mostly consists of public sector

companies such as Oil and Natural Gas Corporation (ONGC), Hindustan Petroleum Corporation

Limited (HPCL) and Indian Oil Corporation Limited (IOCL). There are some major private

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Indian companies in oil sector such as Reliance Industries Limited (RIL) which operates the

world's largest oil refining complex.

India has the world's fifth largest wind power industry, with an installed wind power capacity of

9,587 MW. Shown here is a wind farm in Muppandal, Tamil Nadu.

As of 2010, India had an installed power generation capacity of 164,835 megawatts (MW), of

which thermal power contributed 64.6%, hydroelectricity 24.7%, other sources of renewable

energy 7.7%, and nuclear power 2.9%. India meets most of its domestic energy demand through

its 106 billion tonnes of coal reserves. India is also believed to be rich in certain renewable

sources of energy with significant future potential such as solar, wind and biofuels (jatropha,

sugarcane). India's huge thorium reserves about 25% of world's reserves is expected to fuel

the country's ambitious nuclear energy program in the long-run. India's dwindling uranium

reserves stagnated the growth of nuclear energy in the country for many years. However, the

Indo-US nuclear deal has paved the way for India to import uranium from other countries.