macro final report

8/14/2019 Macro Final Report

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How far has India

Globalized? A Report

COURSE : Macro Economics and Public Policy


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TABLE OF CONTENTS

Content Page Number

Executive Summary 5

Introduction 6

Financial Sector & Reforms 8

Monetary Policy 9

Banking Sector 13

Financial Markets 16

Trade Reforms 21

Conclusion 27

References & Bibliography 28

Annexure 29

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ACKNOWLEDGEMENT

Above all, we would like to thank God for giving us the immense strength to complete the

project.

We would like to express our heartfelt gratitude to all those who expressed their support for the

completion of this project report.

And most importantly, we would like to thank our learning facilitator of the Business

Environment course,Dr. Jitendra Kumar Mishra, for his teaching methodology which gave usan insight and better understanding of the course contents, which in turn were instrumental in

completion of this project.

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EXECUTIVE SUMMARY

Globalization simple means the integration of one economy with the rest of the economies of the

world. The wave of globalization appeared on Indias shores only in 1991, much after Chinas

and some other Southeast Asian countries such as Malaysia, Singapore and Hong Kong. As a

new participant in the globalization wave, India went through several structural and policy

changes only in early 1990s. With almost 20% devaluation of the Indian rupee in 1991, the

process began that for a while slowed down a little but rarely anyone was in doubt about its

existence.

This report attempts to study the extent of Indias globalization process viz. the Financial Sector

and the Trade Reforms. The Financial Sector is further divided into three sections MonetaryPolicy, Banking and Capital Markets; and attempt has been made to study and analyze the

conditions pre and post the new economic policy of 1991. Regarding the Trade policies, the

import and export volumes before and after globalization has been attempted to study.

The findings of the study established some important results. The GDP growth rate has increased

significantly post new economic policy in 1991 from 1.4% in the crisis year of 1991 to 8.6% in

2003-04 which has reduced to approximately 7% in 2008 due to recession in USA. On the other

hand, inflation has reduced from an all time high of 13.7% in 1991 to 4.9% in 2003-04 to 2006-

07. The share of non-performing assets has also significantly reduced from their share of 8.1% in

1996-97 to 1% in 2006-07. During the crisis of 1991 the cash reserves were limited to only two

categories i.e. Money Market with 66 billion dollars and Government Securities with 4 billion

dollars only. Post New Economic Policy of 1991, the share in these two categories increased to

888 billion dollars and 49 billion dollars respectively as in 2006-07. Also, new channels of

regulating money opened up like FOREX with 540 billion dollars, Equity Cash with 118 billion

dollars and Equity Derivatives with 298 billion dollars. The exports and imports volumes have

also increased significantly from 18.09 and 21.08 billion dollars respectively in 1991 to 65.09and 77.03 billion dollars in 2004.

INTRODUCTION

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Globalization is the term used to describe the process of removal of restrictions on foreign trade,

investment, innovations in communications and transport systems. These changes have

encouraged nations to reduce the high levels of protections between countries and to adopt

policies to liberalize their economies in order to increase their volume of trade. In simple terms,

it means the integration of an economy with the economies of the world.

The wave of globalization appeared on Indias shores only in 1991, much after Chinas and some

other Southeast Asian countries such as Malaysia, Singapore and Hong Kong. Moreover the

intensity of opening countrys borders is much higher in other countries than in India where

democratic political forces delay decision making significantly. Nonetheless the Indian economy

has broken the shackles of protectionism with great vigor which has led to some positive

developments. As a new participant in the globalization wave, India went through several

structural and policy changes only in early 1990s, even if the awareness of need for opening up

countrys borders was started in late 1980s, when Mr. Rajiv Gandhi was at the helm of policy

design. With almost 20% devaluation of the Indian rupee in 1991, the process began that for a

while slowed down a little but rarely anyone was in doubt about its existence. The recent reports

show that Indian economy grew at the record breaking and astonishing pace of 8% growth in real

GDP in 2003-2004.

Objective

The objective of the study is to study and analyze the extent of Indias globalization process with

respect to the impact it has created on the following aspects

FINANCIAL REFORMS With discussions in terms of Monetary Policy, Banking

Sector and Financial Markets.

TRADE POLICY With reference to the impact on the volume of import and exports pre

and post NEP-1991 (New Economic Policy of 91).

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Methodology

The methodology followed for the project work can be classified into the following steps

1. Critically study and analyze the following areas

a. Financial Sector Monetary Policy, Banking sector and Capital Markets.

b. Trade of Goods and Services, contribution and distribution of GDP.

2. Study the available factual data and figures.

3. Suggest recommendations if any and draw an inference.

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FINDINGS OF THE STUDY

1. FINANCIAL SECTOR REFORMS AND OUTCOMES

Until the beginning of the 1990s, the state of the financial sector in India could be described as a

classic example of financial repression (MacKinnon 1973; Shaw 1973). The sector was

characterized, inter alia, by administered interest rates, large pre-emption of resources by the

authorities, extensive micro-regulations directing the major portion of the flow of funds to and

from financial intermediaries, relatively opaque accounting norms and limited disclosure, and

dominant public ownership. Compartmentalization of activities of different types of financial

intermediaries and strong entry barriers thwarted competition resulting in low levels of efficiency

and productivity and severe credit constraints on the private sector, especially in the absence ofany access to external finance. Capitalization levels were low due to lack of commercial

considerations in credit planning and weak recovery culture which also resulted in large

accumulation of nonperforming loans. The predominance of Government securities in the fixed-

income securities market of India mainly reflected the captive nature of this market as most

financial intermediaries were mandated to invest a sizeable portion of funds mobilized by them

in such securities to finance high Government borrowings at administered/concessional interest

rates. In the capital market, new equity issues were governed by a plethora of complex

regulations and extensive restrictions with very little transparency and depth in the secondary

market trading of such securities. Comprehensive exchange control resulted in little depth in the

foreign exchange market with most external transactions governed by inflexible/low limits and

prior approval requirements. Monetary policy was subservient to the fiscal policy. The provision

of fiscal accommodation through ad hoc treasury bills led to high levels of monetization of fiscal

deficit during the major part of the 1980s. The expansionary effects of fiscal spending were

sought to be curbed through interest rate regulations, credit rationing and high reserve

requirements, effectively preventing the development of financial markets. Here is an evaluation

of the financial sector reforms in terms of actual outcomes, specific aspects of policy measures

for the banking sector, non-bank financial companies, term lending institutions and other

financial intermediaries; development of financial markets; and changes in the monetary policy

framework (Mohan, 2004; Mohan, 2006c).

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A. Monetary Policy

While assessing monetary policy, it would be reasonable to assert that it has been largely

successful in meeting its key objectives in the post-reforms period since the early 1990s.

Inflation has averaged close to five per cent per annum in the decade gone by, notably lower than

the average of 7-8 per cent in the previous four decades. Structural reforms from the early 1990s

coupled with improved monetary-fiscal interface and reforms in the Government securities

market enabled better monetary management from the second half of the 1990s onwards. A

number of other factors such as increased competition, productivity gains and strong corporate

balance sheets have also contributed to this low and stable inflation environment, but it appears

that calibrated monetary measures had a substantial role to play as well. More importantly, the

regime of low and stable inflation has, in turn, stabilized inflation expectations and the threshold

level of inflation tolerance in the economy has come down significantly (Table 1).

Table 1: Growth and Inflation in India - A Historical Record (Per cent)

Period (Averages) GDP Growth Rate WPI Inflation Rate

1 2 3

1951-52 to 1959-60 3.6 1.2

1960-61 to 1969-70 4.0 6.4

1970-71 to 1979-80 2.9 9.0

1980-81 to 1990-91 5.6 8.2

1991-92 (Crisis Year) 1.4 13.7

1992-93 to 1999-00 6.3 7.2

2000-01 to 2006-07 6.9 5.1

2003-04 to 2006-07 8.6 4.9

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Source: Reddy (2007).

It is encouraging to note that despite the high international crude oil prices, other commodity

prices and elevated food prices, inflation remains low and inflation expectations appear to be

consistent and stable. Consequently, both nominal and real interest rates have fallen. Due to both

financial restructuring and low interest rates in recent years, the growth rate in interest expenses

of the corporate has declined consistently since 1995-96; such decline has significant

implications for the improvement in bottom lines of the corporate sector as a whole and their

resilience to financial shocks. In terms of the monetary policy framework, Indias approach has

been somewhat unorthodox. Traditionally, central banks have pursued the twin objectives of

price stability and growth or employment, while in recent years, greater attention has been given

to the maintenance of price stability through inflation targeting regimes. Although there is no

explicit mandate for price stability in the Indian context, the objectives of monetary policy in

India have evolved as those of maintaining a judicious balance between price stability and

ensuring adequate flow of credit to the productive sectors of the economy. Considerations of

financial stability, however, have ascended the hierarchy of monetary policy objectives in recent

years in view of the increasing openness of the Indian economy, financial integration and the

possibility of cross border contagion.

In the wake of financial sector reforms and opening up of the economy in the 1990s, the ReserveBank switched over in 1998-99 to a multiple indicator approach whereby macroeconomic and

financial market data on both quantum and rate variables are all examined, along with output, in

framing monetary policy. We believe that the specific features of the Indian economy, including

its socio-economic characteristics, make it necessary for the monetary authority to operate with

multiple objectives and indicators for some time to come. A single objective for monetary policy,

as is usually advocated, particularly in an inflation targeting (IT) framework, is a luxury that

India cannot afford, at least over the medium term. As regards IT, even though there has been an

increase in the number of central banks adopting IT since the early 1990s, a number of central

banks, notably the Federal Reserve, retain multiple objectives. Indeed, in the recent episode of

financial market turmoil, even central banks with explicit inflation targeting or price stability as

the predominant objective were forced to scale down the emphasis on price stability,

notwithstanding continued inflationary pressures. Such central banks had to inject liquidity and

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reduce policy rates in some cases, holding back the earlier expectations of tightening as they

had to lay greater emphasis on financial stability and growth. The overall macroeconomic record

of the Indian economy since the early 1990s indicates an acceleration in growth and a significant

reduction in inflation. Inflation has averaged below 5 per cent in the current decade so far,

substantially lower than that of around 8 per cent in the preceding two and a half decades. Pre-

emptive monetary and prudential measures have led to this welcome situation of a reduction in

inflation and acceleration in growth while ensuring financial stability. Indeed, a cross-country

comparison of major EMEs that have adopted IT indicates that growth in India has been amongst

the highest while inflation remains relatively low (Table 2). Amongst the sample of G-20 and

major Asian countries, growth in India during 2000- 2007 was the second highest after China.

Inflation in India during the current decade has halved from that prevailing during the 1990s and

is, at present, lower than many developing economies. A recent survey by McKinsey and

Company of CEOs across the world, in both developed countries and Emerging Market

Economies (EMEs), found that among all the countries surveyed, India had the highest

proportion of CEOs, 40 per cent, who did not expect inflation to increase in coming years

(McKinsey Quarterly, 2007). Thus, it would appear that, at least, among business leaders,

inflation expectations are well-anchored in India. Although there has been above average growth

in monetary and credit aggregates in the past 3-4 years, financial stability has been maintained

through a judicious use of monetary and prudential measures. Thus, the recent record ofmacroeconomic management in India is exemplary, even amongst the EMEs that target inflation.

The challenge for monetary policy now is to reduce inflation further in the medium term towards

international levels, while maintaining the momentum of high growth and preserving financial

stability.

Table 2: Real GDP Growth and Consumer Price Inflation: Cross-Country Comparison(Annual Averages, per cent)

Real GDP Growth Consumer price Inflation

Country 1990-99 2000-07 2003-07 1990-99

2000-07

2003-07

1 2 3 4 5 6 7Argentin 4.3 3.4 8.6 253.7 9.0 9.6

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a

Brazil 1.7 3.3 3.6 854.8 7.3 7.2

China 10.0 9.9 10.6 7.8 1.7 2.6

India 5.7 7.0 8.5 9.6 4.5 4.8

Indonesia 4.3 5.1 5.4 14.4 8.7 8.6

Korea 6.3 5.1 4.4 5.7 3.0 2.9

Malaysia 7.2 5.4 5.9 3.7 2.0 2.2

Philippin

es

2.8 5.0 5.6 9.7 5.0 5.3

Russia -3.8 6.8 6.9 222.2 14.2 11.0

SouthAfrica

1.4 4.2 4.5 9.9 5.3 4.4

Thailand 5.3 4.9 5.4 5.0 2.5 3.1

Turkey 9.9 5.0 6.6 76.7 26.8 12.0

Mexico 3.4 2.9 3.2 20.4 5.2 4.1

Developed economiesAustralia 3.3 3.3 3.3 2.5 3.2 2.7

Canada 2.4 2.9 2.7 2.2 2.3 2.2

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France 1.9 2.0 1.8 1.9 1.9 2.0

Germany 2.3 1.4 1.4 2.4 1.7 1.7

Italy 1.4 1.3 1.0 4.1 2.4 2.3

Japan 1.5 1.7 2.0 1.2 -0.3 -0.1

United

Kingdom

2.1 2.8 2.8 3.3 1.6 1.9

UnitedStates

3.1 2.5 2.8 3.0 2.8 2.9

Source: World Economic Outlook Database, IMF.

B. Banking Sector

In the post-reform period, banks have experienced strong balance sheet growth in an

environment of operational flexibility. Concomitantly, the financial health of banks has improved

significantly, both in terms of capital adequacy and asset quality. Moreover, this progress has

been achieved while setting the ground work for the adoption of international best practices in

prudential and accounting norms. Increased competitiveness and productivity gains have also

been enabled by proactive technological deepening and flexible human resource management.

These significant gains have been achieved even while renewing our commitment to socialbanking viz., maintaining the wide reach of the banking system and directing credit towards

important but disadvantaged sectors of society. The banking system's wide reach, judged in terms

of expansion of branches and the growth of credit and deposits indicates continued financial

deepening (Mohan, 2006a). On the liability side, deposits continue to account for about 80 per

cent of the total liabilities while on the asset side, the shares of loans and advances and

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investments have seen marked cycles, reflecting banks' portfolio preferences as well as growth

cycles in the economy. In this regard, while the share of loans and advances declined in the

second half of 1990s on account of the industrial slowdown as well as tightening of prudential

norms, banks' credit portfolio has witnessed sharp growth in the period 2003-07.

Despite tightening prudential norms in terms of classification of non-performing assets, the

resulting measured asset quality of banks has improved considerably as the share of non-

performing loans (NPLs) (as ratios of both total advances and assets) have declined substantially

and consistently since the mid-1990s. In fact, the ratio of net NPLs to net advances at 1.0 per

cent in India is now comparable to that of several advanced economies (Table 4). Improvement

in the credit appraisal process, upturn of the business cycle, new initiatives for resolution of

NPLs (including promulgation of the Securitisation and Reconstruction of Financial Assets and

Enforcement of Security Interest (SARFAESI) Act), and greater provisioning and write off of

NPLs enabled by greater profitability, have contributed to the reduction in incremental NPLs.

Table 4: Non-Performing Loans (NPL) of Scheduled Commercial Banks(Per cent)

End-March GrossNPL/ GrossNPL/Assets NetNPL/Net Net NPL/Gross advances advances Assets

1 2 3 4 5

1996-97 15. 7. 7 8.1 3.3

1997-98 14.4 6.4 7.3 3.0

1998-99 14.7 6.2 7.6 2.9

1999-00 12.7 5.5 6.8 2.7

2000-01 11.4 4.9 6.2 2.5

2001-02 10.4 4.6 5.5 2.3

2002-03 8.8 4.0 4.4 1.9

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2003-04 7.2 3.3 2.8 1.2

2004-05 5.2 2.5 2.0 0.9

2005-06 3.1 1.8 1.2 0.7

2006-07 2.4 1.5 1.0 0.6

Source: Reserve Bank of India

In consonance with the objective of enhancing efficiency and productivity of banks through

greater competition, there has been a consistent decline in the share of public sector banks in

total assets of commercial banks. Nevertheless, public sector banks appear to have responded to

the new challenges of competition, as reflected in their increased share in the overall profit of the

banking sector. This suggests that, with operational flexibility, public sector banks are competing

relatively effectively with private sector and foreign banks. Shares of Indian private sector banks,

especially new private sector banks established in the 1990s, in the total income and assets of the

banking system have increased considerably since the mid- 1990s (Table 6).

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Table 6: Bank Group-wise Shares: Select Indicators (Per cent)

Item 1995-96 2000-01 2004-05 2005-06 2006-07

1 2 3 4 5 6

Public Sector Banks

Income 82.5 78.4 75.6 72.4 68.4

Expenditure 84.2 78.9 75.8 73.0 68.9

Total Assets 84.4 79.5 74.4 72.3 70.5

Net Profit -39.1@ 67.4 73.3 67.3 64.6

Gross Profit 74.3 69.9 75.9 69.8 64.1

New Private Sector Banks

Income 1.5 5.7 11.8 14.4 17.8

Expenditure 1.3 5.5 11.4 14.1 17.9

Total assets 1.5 6.1 12.9 15.1 16.9

Net Profit 17.8 10.0 15.0 16.7 17.1

Gross Profit 2.5 6.9 10.7 13.8 16.7

Foreign Banks

Income 9.4 9.1 7.0 8.0 9.0

Expenditure 8.3 8.8 6.6 7.4 8.3

Total Assets 7.9 7.9 6.8 7.2 8.0

Net Profit 79.8 14.8 9.7 12.5 14.7

Gross Profit 15.6 15.7 9.0 12.2 14.6

@: Public sector banks, as a group, had recorded net losses during 1995-96.

Source: Reserve Bank of India.

C. Financial Markets

The most notable impact of financial sector reforms is clearly discernible in the

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development of various segments of financial markets in India. The reforms since the early

1990s have led to a regime characterised by market-determined interest and exchange

rates, price-based instruments of monetary policy, current account convertibility,

substantial capital account liberalisation and vibrant government securities and capital

markets. Derivative instruments have been cautiously introduced in a phased manner, both

for product diversity and, more importantly, as a risk management tool. All these

developments have facilitated the process of price discovery in various financial market

segments. There has been a significant increase in trading volumes and market

liquidity (Table 8). Illustratively, average daily turnover in the money market has

increased from Rs.427 billion in 1997-98 to over Rs.888 billion by 2006-07. The

operations under the liquidity adjustment facility (LAF) have largely been able to steer

overnight rates within the corridor set by the policy rates. Under the LAF, the Reserve

Bank absorbs (reverse repo) as well as injects (repo) liquidity, depending upon the liquidity

conditions and consistent with the overall monetary policy stance. Changes in fixed

reverse repo/repo rates set by the RBI from time to time for the conduct of LAF,

under which the central bank conducts daily auctions for the banks, have emerged as

the main instruments for interest rate signaling in the Indian economy.

Table 8: Depth of Financial Markets in India Average Daily Turnover (Rs. billion)

Year Money

Market*

Governme

nt

Securities

Market

Foreign

Exchang

e

Market #

Equity

Market

(Cash

Segment

) **

Equity

Market

(Derivati

ve

Segment

--NSE)

1 2 3 4 5 61991-

92@

66 4 n.a n.a n.a

2000-01 427 28 212 93 0.1

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Year Money

Market*

Governme

nt

Securities

Market

Foreign

Exchang

e

Market #

Equity

Market

(Cash

Segment

) **

Equity

Market

(Derivati

ve

Segment

--NSE)

2002-03 768 71 242 37 18

2003-04 287 84 307 63 84

2004-05 385 48 400 66 101

2005-06 600 36 564 95 192

2006-07 888 49 840 118 298*: Includes the call money, the notice money, the term money, the

CBLO and the repo markets.

#: Inter-bank turnover only.

@: Data for G-Sec and equity market relate to 1995-96.

**: Include both BSE and NSE.

n.a.: not available

Inter-bank turnover in the foreign exchange market has nearly quadrupled between 2000-

01 and 2006-07 to Rs. 840 billion. Average daily turnover in the foreign exchange market

(inter-bank as well as merchant) has increased from US $ 5 billion in 1997-98 to US $ 23

billion by 2006-07. The exchange rate of the Indian rupee has exhibited significant two-

way movements in the recent years. Efficiency in the foreign exchange market has also

improved as reflected in the decline in bid-ask spreads.

In the government securities market, the issuance of long-term securities has enabled the

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development of yield curve across 30-year maturity. In the government securities market,

the drop in turnover in 2004-05 and 2005-06 could be attributed to factors such as buy and

hold tendency of the participants such as insurance companies, which now hold a

substantial portion of government securities, particularly those of longer maturities.

Furthermore, certain regulatory changes introduced in late 2004 allowing banks to hold a

larger proportion of their investment portfolio in the held to maturity (HTM) category

reduced the proportion of portfolio used for trading, thereby affecting the magnitude of G-

sec trading. The decline could also be attributed to the increase in interest rates over the

period, which prompted banks and other players to hold rather than trade, so as to avoid

trading losses. To keep the markets liquid and active, the Reserve Bank has recently

allowed short selling in government securities among eligible participants, and trading in

the when issued segment, but these facilities have not seen much activity yet. Efforts are

also on to increase liquidity through the active consolidation of existing securities.

D. Indian Reform Outcomes in the International Context

Some commentators have criticized the Indian approach to financial sector reforms as

unclear, timid and conservative in the context of the cross-country experience and have

advocated more bold and drastic measures so as to speed up the transition to higher

growth. There is also some discomfort with our approach to foreign banks, although even

in this regard, we are ahead of WTO norms and we have set up roadmaps and review

deadlines conditional upon broader consensus on international commerce in financial

services.

Admittedly, we have been cautious and somewhat conservative in our approach to

financial sector reforms relative to some other EMEs. In this regard, it is important to note

that not only has there been a steady upward shift in Indias growth path, but this has also

been accompanied by enduring stability. A remarkable feature of India's growth experience

has been its resilience to both global and domestic shocks. In this regard, while the broad

objectives of financial sector reforms were to enhance efficiency and productivity, the

process of reforms was initiated in a gradual and properly sequenced manner so as to have

a reinforcing effect. The approach has been to consistently upgrade the financial sector by

adopting the international best practices through a consultative process. With increased

deregulation of financial markets and increased integration of the global economy, the

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1990s were turbulent for global financial markets: 63 countries suffered from systemic

banking crises in that decade, and 45 in the 1980s. Among countries that experienced such

crises, the direct cost of reconstructing the financial system was typically very high: for

example, recapitalization of banks had cost 55 per cent of GDP in Argentina, 42 per cent in

Thailand, 35 per cent in Korea and 10 per cent in Turkey. There were high indirect costs of

lost opportunities and slow economic growth in addition (McKinsey & Co., 2005). It is

therefore particularly noteworthy that India could pursue its process of financial

deregulation and opening of the economy without suffering financial crises during this

turbulent period in world financial markets. The cost of recapitalization of public sector

banks at less than 1 per cent of GDP is therefore low in comparison.

A cross-country survey of crucial banking indicators reveals that the Indian banking system

is now comparable to those of developed economies in terms of key indicators (Table 10).

The capital adequacy ratio at 12.4 per cent for the system as a whole at end March 2006 is

comparable to that of most advanced economies. Similarly, banks non-performing loans to

total loans have steadily declined and are lower than many emerging economies. In terms

of return on assets, the Indian banking systems performance is comparable to that of

advanced economies such as Germany and the U.K.

Table10: Cross-Country Select Banking Indictors A comparison (Per cent)

Country Regulato

ry

Capital

to Risk-

Weighte

d

Assets

(CRAR)

Nonperformi

ng

Loans to

Total

Loans

Provisions to

Nonperformin

g

Loans

Return

on

Assets

(ROA)

2

002

2

006

2002 2

006

2002 2

006

2

002

2

0061 2 3 4 5 6 7 8 9

Developing Economies

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Argentina - - 18.1 3.4 73.8 130.

2

-8.9 2.0

Brazil 1

6.6

1

8.3

4.5 4.1 155.9 152.

8

2.1 2.5

China - - 26.0 7.5 - - - 0.9

India 1

2.0

1

2.4

10.4 3.5 - 58.9 0.8 0.9

Korea 1

1.2

1

2.8

2.4 0.8 89.6 175.

2

0.6 1.1

Russia 1

9.1

1

4.9

5.6 2.6 112.5 159.

3

2.6 3.2

South

Africa

1

2.6

1

2.3

2.8 1.2 46.0 - 0.4 1.4

Mexico 1

5.7

1

6.3

3.7 2.1 138.1 207.

4

0.7 3.1

Developed economiesAustralia 9.6 1

0.4

0.4 0.2 106.2 204.

5

1.4 -

Canada 1

2.4

1

2.5

1.6 0.4 41.1 55.3 0.4 1.0

Japan 9.4 1

3.1

7.4 2.5 - 30.3 0.7 0.4

United

Kingdom

1

3.1

1

2.9

2.6 0.9 75.0 - 0.4 0.5

United

States

1

3.0

1

3.0

1.4 0.8 123.7 137.

2

1.3 1.3

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Source: Global Financial Stability Report, 2007, IMF

2. TRADE REFORMS

In 1980s there were some signs of policy change in Rajiv Gandhis Prime Ministership, but

the Macro-economy was already damaged by earlier faults. As Aggarwal (2004) puts it

The Macroeconomic crisis reached its peak in 1990 with combined fiscal deficit of Centre

and State governments standing at 10% as percentage of GDP, current account balance at

3.3% of GDP backed by a rate of inflation 9.9% despite Indias record economic

performance measured in terms of rate of growth of GDP, 6.0 percent, due to high rates of

industrial growth of 5.9% and domestic saving ratio of 21.9% of the GDP. (see Aggarwal,

(2004) page 47). Nonetheless this growth was accompanied by strange macro-imbalances

that resulted into tremendous external borrowing, leading to heavy external debt of 28.7%.

As Joshi-Little (1997) pointed out, For the first time in her history, India was nearly

forced to the prospect of defaulting on her international financial commitment. Added

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burden of oil price shock due to Gulf War of 1991 put the country in such a precarious

condition that foreign reserves of worth only 3 weeks of imports were left in the treasury.

Something drastic had to be done.

In June of 1991, when the current Prime Minister Dr. Manmohan Singh was the Finance

Minister (and Mr. Narasinha Rao was the Prime Minister), country received first

significant shock of globalization and liberalization. This was also the product of strong

demand by some well known economists and policy planners for significantly changing the

policy structure. While the declared plan reduced the Rupee value significantly by

devaluating it by 21% in one day, it also made it abundantly clear that the old ways of high

tariff rates were almost completely over. The tariff rates were slashed, more foreign direct

investment (FDI) was invited and import quotas were demolished. There were essentially

2 parts of the liberalization program: Structural and Stabilization. Stabilization measures

were supposed to be of short-term nature, including such policies as the austerity in

governmental budgets, which was supposed to bring about the decline in aggregate

demand and therefore lower the inflation rate. The structural adjustment was to be of a

long-term nature with such measures as the convertibility on current account of the balance

of payment, lower restrictions on domestic business and export promotion.

In words of Aggarwal, Far reaching meaningful changes in trade and exchange rate

policies, viz., two bouts of devaluation of the Rupee, sweeping but phased reduction in

import tariffs, quantitative restrictions, and quota except on consumer goods, the

suspension of cash compensatory support of exports, trimming and rationalizing the

structure of mounting export subsidies, full convertibility of the rupee on current account

on balance of payment in 1993, moving from a dual exchange rate system in 1992 to a

single market determined unified exchange rate system, have been made ( see Aggarwal,

(2004), page 48). These steps not only made a complete switch in the policy moves

heretofore, but also showed policy makers inclination to move to market oriented

economy as the blunders of governmental controls were becoming more and more visible.

All in all, these reforms aimed to achieve stability, curb the inflationary pressure and

release the breaks on production and productivity. (Aggarwal, page 49).

The post reform years showed quick and efficient recovery from the acute macroeconomic

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Table 2

Macroeconomic Performance in Post 1991 Years

Year Real GDP Inflation Interest Unemployment Money Supply

Growth Rate Rate ( No. in Millions) (Billions of Rs)

1991 .96 8.9 17.88 36.3 1046.1

1992 2.3 13.7 18.92 36.75 1120.9

1993 1.5 10.1 16.25 36.27 1330.2

1994 5.9 8.4 14.75 36.69 1695.0

1995 7.3 10.9 15.46 36.74 1883.5

1996 7.3 7.7 15.96 37.43 2148.9

1997 7.8 6.4 13.83 39.14 2419.3

1998 6.5 4.8 13.54 40.01 2703.5

1999 6.5 6.9 12.54 40.37 3161.2

2000 6.1 3.3 12.29 40.34 3495.9

2001 4.0 7.1 12.08 41.99 3846.0

2002 6.2 4.7 11.92 42.36 4318.6

Table 2 cont.

Macroeconomic Performance in Post 1991 Years

Year Real GDP Inflation Interest Unemployment Money Supply

Growth Rate Rate ( No. in Millions) (Billions of Rs)

2003 5.5 5.1 11.50 43.10 4822.3

2004 8.0 4.5 10.60 42.50 5402.3

Source: Some figures are from Aggarwal (2004) and some are from IMFspublication, International Financial Statistics Yearbook, 2003.

While the international trade policy was further liberalized, at a slower rate than many of

the academicians argued for, there were signs for further opening up, by reduction in

import tariff, convertibility on the current account transactions, freer availability of foreign

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reserves, and increased zest for inviting foreign direct investment. It appeared that policy

makers by 1995 were convinced that globalization is what is needed for faster economic

growth. Success sometimes breeds upon itself, and policy makers usually are fast learners

especially when political benefits are high. However the growth of 1994-19917 was not

perfectly matched by accelerated growth in 1997-2000 periods. As Chitre (2003) points

out, this sluggishness was due to the slow growth in agricultural sector, not because of

industrial slowdown. The international trade as witnessed in Table 3 did not perform

poorly either.

Better monsoons of years 2000 to 2004 helped not only the agricultural sector grow faster

but also the manufacturing, trade and services sectors moved admirably. In 2004 it became

official that Indian economy was second fastest growing in the world, second only to the

Chinese economy. In fact, the Chinese economys growth is also primarily explained by

her newly found affection for openness. The Indian economy, much like the world

economy, went through technological change. While the computer mega cities such as

Bangalore (that now has 1500 foreign company offices), Hyderabad and Pune grew at a

unprecedented rates, the repercussions of this industrial growth was felt in many of the

adjacent rural areas. In fact in April 2005, it was confirmed that India officially achieved 8

percent growth in 2004 (Times of India, April 28, 2005).

Table 3

International Trade Performance Post 1991

Years Exports Imports BOT Exchange rate

---- In billions of US dollars for 3 columns-- Rs/SDR

1991 18.09 21.08 4.01 36.95

1992 20.01 22.93 4.71 36.02

1993 22.01 24.1 3.48 43.10

1994 25.52 29.67 6.31 45.81

1995 31.23 37.95 10.21 52.29

1996 33.73 43.78 13.98 51.66

1997 35.20 45.73 13.36 52.99

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1998 34.07 44.82 13.60 59.81

1999 36.87 45.55 11.44 59.69

2000 43.13 55.32 13.77 60.91

2001 43.82 50.53 5.97 60.54

2002 52.71 51.41 7.58 65.29

2003 63.45 61.42 8.69 67.27

2004 65.09 77.03 13.37 68.88

Source: IMFs International Financial Statistics Year book, 2003

Website:www.rbi.org.in/statisticsfor figures after 1999.

Table 3 shows the drastic turn around of the economy in 1990s in terms ofinternational trade patterns. While the exports increased drastically, the opening of the

borders and reduction in tariff rates also allowed the imports to go up. The balance of

trade figures were in a manageable amount (almost always less that $14 billion).

What is interesting to point out is that the non-oil imports and exports showed apositive balance of trade for the Indian economy since year 2000. Hence oil imports

formed the major drain on the foreign reserves and constituted the main reason for balance

of trade deficit. While the Services sector picked the exports considerably, important raw

material imports have also grown significantly. One of the major developments reported

in April 2005 was that software exports from Indias hi-tech hub, Bangalore rose more than

52 percent to $6 billion. (Times of India, April 28, 2005). However any economic spurt is

not with out a political controversy and Indian economic growth is not an exception.

Political skeptics have pointed out the increased inequality of income as an unwanted

result of the globalization. Some politicians (especially leftists and socialists) have also

complained about the increased salaries of computer scientists and information

technologists. The great digital divide has become somewhat of a worry for some

researchers. However, as Bhagwati (2004) has recently shown the globalization process

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has more benefits than costs and therefore needs to be supported to the fullest extent. In

fact the free trade for the whole world scenario is based on the validity of globalization

by all policy makers.

CONCLUSION

The GDP growth rate has increased significantly post new economic policy in 1991 from

1.4% in the crisis year of 1991 to 8.6% in 2003-04 which has reduced to approximately

7% in 2008 due to recession in USA. On the other hand, inflation has reduced from an all

time high of 13.7% in 1991 to 4.9% in 2003-04 to 2006-07.

The share of non-performing assets has also significantly reduced from their share of

8.1% in 1996-97 to 1% in 2006-07.

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During the crisis of 1991 the cash reserves were limited to only two categories i.e. Money

Market with 66 billion dollars and Government Securities with 4 billion dollars only. Post

New Economic Policy of 1991, the share in these two categories increased to 888 billion

dollars and 49 billion dollars respectively as in 2006-07. Also, new channels of regulating

money opened up like FOREX with 540 billion dollars, Equity Cash with 118 billion

dollars and Equity Derivatives with 298 billion dollars.

The exports and imports volumes have also increased significantly from 18.09 and 21.08

billion dollars respectively in 1991 to 65.09 and 77.03 billion dollars in 2004.

LIMITATIONS

The following were the limitations faced while carrying out the study of the extent of Indias

globalization process.

The data for the lending and borrowing by India viz. other developing nations was not

available.

Latest figures for parameters used in the report like import and export volumes, money

supply etc. was available to the max till 2006-07 and for some cases till 2003-04.

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REFERENCES/BIBLIOGRAPHY

(Including Web References)

1. Y.V. Reddy Towards Globalization in the Financial Sector in India Inaugural address

by Dr. Y.V. Reddy, Governor of RBI, at the 25 th Bank Economists Conference 2003,

Mumbai, 11 December 2003.

2. Dr. Kishore G. Kulkarni, Effect of Globalization on Indias Economic Growth.

3. Krishn A Goyal Impact of Globalization on Developing Countries (with special

reference to India) International Research Journal of Finance and Economics.

4. Reserve Bank of India http://www.rbi.org

5. Ministry of Finance http://finmin.gov.in

6. Justin Paul Business Environment Text and Cases

7. http://indiastat.com

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ANNEXURE

(Graphs and Figures used to support our study)

1. Foreign Exchange Reserves in US $billion.

2. Total Foreign Investment in US $ million

Page 30 of31

Foreign exchange reserves (US$ billion)

2.217.0

54.1

75.4

118.3

0

50

100

150

1990-91 1995-96 2001-02 2002-03 2003-04

103

5,138 5,3856,789

8,152

5,639

15,872

0

2000

4000

6000

8000

10000

12000

14000

16000

18000

1990-91 1994-95 1997-98 2000-01 2001-02 2002-03 2003-04

Total Foreign Investment (US$ million)

US$ million


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3. Import Duties Reductions after Liberalization (in percent)

4. Share of external trade in GDP

Reduction in Peak Customs Duties on Manufactured items

150

110

5038.5 30 25 20

42

0

20

40

60

80

100

120

140

160

1991 Mar-92 Mar-95 Mar-97 Mar-00 Mar-02 Mar-03 w.e.f March

2004

inp

ercent

Share of external trade in GDP

18.123.1 25.5

26.930.3 28.9

31.6 32

0

5

10

15

20

25

30

35

1991-92 1994-95 1997-98 1999-

2000

2000-01 2001-02 2002-03 2003-04

inp

ercent

macro final report

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