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1 India Globalization & Convergence Week 8. 2 What benefits does India have? One of the largest economies in the world. One of the largest economies in.

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Presentation on theme: "1 India Globalization & Convergence Week 8. 2 What benefits does India have? One of the largest economies in the world. One of the largest economies in."— Presentation transcript:

1 1 India Globalization & Convergence Week 8

2 2 What benefits does India have? One of the largest economies in the world. One of the largest economies in the world. Strategic location - access to the vast domestic and South Asian market. Strategic location - access to the vast domestic and South Asian market. A large and rapidly growing consumer market up to 300 million people, estimated to be growing at 8% per annum. A large and rapidly growing consumer market up to 300 million people, estimated to be growing at 8% per annum. Demand for several consumer products is growing at over 12% per annum. Demand for several consumer products is growing at over 12% per annum. Foreign investment is welcome, approval is required but is automatic in sixty categories of Industries. Foreign investment is welcome, approval is required but is automatic in sixty categories of Industries. Skilled man-power and professional managers are available at competitive cost. Skilled man-power and professional managers are available at competitive cost. One of the largest manufacturing sectors in the world, spanning almost all areas of manufacturing activities. One of the largest manufacturing sectors in the world, spanning almost all areas of manufacturing activities. One of the largest pools of scientists, engineers, technicians and managers in the world. One of the largest pools of scientists, engineers, technicians and managers in the world.

3 3 What benefits does India have? Rich base of mineral and agricultural resources. Rich base of mineral and agricultural resources. Long history of market economy infrastructure Long history of market economy infrastructure Sophisticated financial sector. Sophisticated financial sector. Vibrant capital market Vibrant capital market Well developed R&D infrastructure and technical and marketing services. Well developed R&D infrastructure and technical and marketing services. Complete exemption from Customs Duty on industrial inputs and Corporate Tax Holiday for five years for 100 per cent Export Oriented units and units in Export Processing Zones. Complete exemption from Customs Duty on industrial inputs and Corporate Tax Holiday for five years for 100 per cent Export Oriented units and units in Export Processing Zones. A long history of stable parliamentary democracy. A long history of stable parliamentary democracy.

4 4 Capital Markets 23 stock exchanges across the country 23 stock exchanges across the country Major Exchanges Major Exchanges –The Stock Exchange, Mumbai (BSE) –The National Stock Exchange (NSE) Exchange regulation via Securities and Exchange Board of India Exchange regulation via Securities and Exchange Board of India Both BSE and NSE provide fully automated, screen based trading systems Both BSE and NSE provide fully automated, screen based trading systems There are approximately 7,300 companies listed on the BSE and 800 on the NSE There are approximately 7,300 companies listed on the BSE and 800 on the NSE

5 5 Comparison with China Socialist China Socialist China Independent India Independent India Massive Economies Massive Economies China 21% world population China 21% world population India 16.5% world population India 16.5% world population Why is India not challenging China? Why is India not challenging China?

6 6 Why the lack of development? Slow development of economy Slow development of economy Lack of privatisation Lack of privatisation Protectionism Protectionism Restrictive Labour Laws Restrictive Labour Laws Over subsidisation of State-owned enterprises Over subsidisation of State-owned enterprises

7 7 Privatisation Why has privatisation been so slow? Why has privatisation been so slow? Historic precedents post-independence Historic precedents post-independence Under 5 year plans Indian government took responsibility for investment and direction of private sector Under 5 year plans Indian government took responsibility for investment and direction of private sector Should market forces dictate resource allocation? Should market forces dictate resource allocation? Indian economy has such extreme disparities in incomes that the free market as allocator of resources carries too much risk Indian economy has such extreme disparities in incomes that the free market as allocator of resources carries too much risk

8 8 Privatisation Private sector did not have sufficient resources nor Private sector did not have sufficient resources nor Could it be expected to bear long- term small returns on projects Could it be expected to bear long- term small returns on projects SOEs as social safety net SOEs as social safety net The overriding problem of poverty The overriding problem of poverty

9 9 How to solve poverty Nehru, Premier from 1947 to 1964, saw industrialisation as the key to alleviating poverty Nehru, Premier from 1947 to 1964, saw industrialisation as the key to alleviating poverty Believed a powerful state with a centralised planned economy to be essential if the country was to industrialise rapidly Believed a powerful state with a centralised planned economy to be essential if the country was to industrialise rapidly Poverty reduction through industrialisation guides economic policy Poverty reduction through industrialisation guides economic policy Has become ingrained belief Has become ingrained belief If policies which support industrialisation are altered then poverty will increase If policies which support industrialisation are altered then poverty will increase

10 10 Poverty Levels Year All India % Rural % Urban % 197354.956.449.0 197851.353.145.2 198344.545.740.8 198838.939.138.2 199436.037.332.4 199926.127.123.6

11 11 Protectionism Isolating Indias economy from rest of world reduces effects of external shocks Isolating Indias economy from rest of world reduces effects of external shocks Method… Method… High tariffs to prevent imports High tariffs to prevent imports Effect of 1991 financial crisis Effect of 1991 financial crisis dismantled investment and import licensing dismantled investment and import licensing removed dysfunctional controls on capital issues and foreign investment. removed dysfunctional controls on capital issues and foreign investment. Tariffs were reduced from an average of 87% to 25%. Tariffs were reduced from an average of 87% to 25%.

12 12 Protectionism Positive effects Positive effects Avoided effects of Asian crisis 1997 Avoided effects of Asian crisis 1997 Less impact of world economic slowdown Less impact of world economic slowdown Negative effects Negative effects Historic capital controls Historic capital controls Low levels of FDI Low levels of FDI

13 13 FDI India is not a favourite destination of foreign investors India is not a favourite destination of foreign investors Total inflows of foreign direct investment was around $2.2 billion in 1999 Total inflows of foreign direct investment was around $2.2 billion in 1999 Compared to Thailands $6 billion and Chinas $40 billion Compared to Thailands $6 billion and Chinas $40 billion Or… Or… 2001 – FDI in India = ½% of GDP 2001 – FDI in India = ½% of GDP 2001 – FDI in China = 5% GDP 2001 – FDI in China = 5% GDP

14 14 FDI (or lack of it) Lack of FDI led to self-funding of industrialisation via government credits Lack of FDI led to self-funding of industrialisation via government credits One of the contributory causes of the macro-economic crisis of 1991 was the combined fiscal deficit of central and state governments One of the contributory causes of the macro-economic crisis of 1991 was the combined fiscal deficit of central and state governments Ran at unsustainable 10% of GDP Ran at unsustainable 10% of GDP

15 15 Bringing in FDI Structural and regulatory changes are required to boost FDI Structural and regulatory changes are required to boost FDI Which will increase growth in economy Which will increase growth in economy And provide spillover effects And provide spillover effects Barriers to FDI Barriers to FDI –cumbersome approvals process –questions regarding the legal system –regulatory impediments to doing business –poor infrastructure –perceived slowdown in the pace of economic reform

16 16 Reform Programme Programme of reform instituted since 1991 Programme of reform instituted since 1991 But still retain problems with But still retain problems with Lack of commitment to full privatisation of SOEs Lack of commitment to full privatisation of SOEs –Since 1991 minority equity sales have occurred in only 40 of the 240 central public enterprises Failure to implement strong bankruptcy laws Failure to implement strong bankruptcy laws Failure to reform labour laws Failure to reform labour laws

17 17 The grip of organised labour Rigid labour laws have long been identified as obstacles to growth and equity Rigid labour laws have long been identified as obstacles to growth and equity Probably the most highly protective of labour interests in the world. Probably the most highly protective of labour interests in the world. There is practically no link between output and remuneration - hiring and firing are highly restricted. There is practically no link between output and remuneration - hiring and firing are highly restricted. It is extremely difficult to maintain an economic level of productivity or improve productivity. It is extremely difficult to maintain an economic level of productivity or improve productivity. The present form of protection of organized labour constitutes about 5-6% of the whole population The present form of protection of organized labour constitutes about 5-6% of the whole population

18 18 The grip of organised labour This tiny labour aristocracy is employed in the public and organized private sectors. This tiny labour aristocracy is employed in the public and organized private sectors. They do not represent the interests of the overwhelming majority of Indias workers, who are either self-employed or work as casual labour They do not represent the interests of the overwhelming majority of Indias workers, who are either self-employed or work as casual labour They do not enjoy job protection or any other benefits conferred on the aristocracy by the labour laws. They do not enjoy job protection or any other benefits conferred on the aristocracy by the labour laws. The aristocracy also consists of members of one or the other of the labour unions affiliated with ruling and opposition political parties. The aristocracy also consists of members of one or the other of the labour unions affiliated with ruling and opposition political parties. Labour unions has been particularly effective in preventing privatization of public sector enterprises Labour unions has been particularly effective in preventing privatization of public sector enterprises Some privatised companies have no social utility value (eg hotels, airlines) Some privatised companies have no social utility value (eg hotels, airlines)

19 19 Indias problem is bureaucracy, not democracy The combination of The combination of Vested interests Vested interests Continued reliance on belief in industrialisation as key to poverty and Continued reliance on belief in industrialisation as key to poverty and The need to retain protectionist measures to sustain industrialisation The need to retain protectionist measures to sustain industrialisation Leads to slowdown in growth and development Leads to slowdown in growth and development

20 20 Evidence against Improvement in poverty since 1991 start of reform Improvement in poverty since 1991 start of reform No matter what the data source, survey or national accounts, growth is shown to lead to poverty decline, almost one for one No matter what the data source, survey or national accounts, growth is shown to lead to poverty decline, almost one for one No growth, no poverty reduction is the only conclusion No growth, no poverty reduction is the only conclusion

21 21 WTO and the end of protectionism? As signatory to Uruguay Round agreement 1994 As signatory to Uruguay Round agreement 1994 India has removed quantitative restrictions on imports of agricultural commodities and consumer goods India has removed quantitative restrictions on imports of agricultural commodities and consumer goods But replaced with high tariffs But replaced with high tariffs Has stated will use all steps available under WTO rules to protect economy from imports Has stated will use all steps available under WTO rules to protect economy from imports Is 4 th largest user of antidumping regulations Is 4 th largest user of antidumping regulations Is most protected economy in Asia Is most protected economy in Asia

22 22 Economic Conclusion Despite a range of impediments Despite a range of impediments There is slow reform There is slow reform Reform positively assists poverty reduction through growth Reform positively assists poverty reduction through growth To sustain growth further liberalisation of all economic aspects must continue To sustain growth further liberalisation of all economic aspects must continue Merrill Lynch believes that GDP will grow by an average of 8.5% a year in 2005, 2006 and 2007, buoyed by rises in foreign investment Merrill Lynch believes that GDP will grow by an average of 8.5% a year in 2005, 2006 and 2007, buoyed by rises in foreign investment

23 23 Entrepreneur effects Need to stimulate small business Need to stimulate small business More acute access to funds More acute access to funds Higher investment in education at low end Higher investment in education at low end Development of labour intensive export potential Development of labour intensive export potential Skewed to hi-tech without much positive export success Skewed to hi-tech without much positive export success Foreign business opportunities in privatisation of infrastructures Foreign business opportunities in privatisation of infrastructures

24 24 Prahalads imperatives for management India has hardly felt the impact of SE Asian crisis. India has hardly felt the impact of SE Asian crisis. While many think it is good news, actually it is not. While many think it is good news, actually it is not. It means that after five years of active liberalization, India is still not part of the global economy. It means that after five years of active liberalization, India is still not part of the global economy. It is at best a marginal, global player. It is at best a marginal, global player.

25 25 Prahalads imperatives for management – The New Economy Deregulation & Privatisation Deregulation & Privatisation Globalisation Globalisation Open Standards Open Standards Digitalisation Digitalisation Volatility Volatility Focused Competitors Focused Competitors Eco sensitivity Eco sensitivity Transparency & Accountability Transparency & Accountability –Indian managers must come to terms with the fact that they represent about 20% of humanity and that they should have a say in how the global economy evolves

26 26 Practical level pragmatism - management practice Gopalan & Stahl (2001) Gopalan & Stahl (2001) Argue for cross-vergence – hybrid combination of domestic & imported concepts Argue for cross-vergence – hybrid combination of domestic & imported concepts –Widespread usage of English –Familiarity with western education –Urban access to internet Lead Indian management thinking to a point where Lead Indian management thinking to a point where –Some ideologies equate to western practice (ie reject Indian national cultural values) –Others reflect national cultural values = combination of indigenous & imported approaches to managing people at work = combination of indigenous & imported approaches to managing people at work suggest eg – Loyalty will be strong suggest eg – Loyalty will be strong preferential hiring of family members will be weak preferential hiring of family members will be weak

27 27 Business performance Rajpal & Sagar (2003) identify that performance of Indian business is good at MNC level but problems emerge lower down Rajpal & Sagar (2003) identify that performance of Indian business is good at MNC level but problems emerge lower down They suggest local businesses are in need of radical improvement if they are to meet global challenges (Chinese) They suggest local businesses are in need of radical improvement if they are to meet global challenges (Chinese) Need to develop key traits Need to develop key traits Having key customer insights Having key customer insights Focusing business strategies on customer value Focusing business strategies on customer value Quality commitment Quality commitment Upgrading knowledge & processes Upgrading knowledge & processes Management by facts & feedback Management by facts & feedback

28 28 The key of privatisation Gupta (2005) Gupta (2005) Most privatization programs begin with a period of partial privatization in which Most privatization programs begin with a period of partial privatization in which only non-controlling shares of firms are sold on the stock market. only non-controlling shares of firms are sold on the stock market. Since management control is not transferred to private owners it is widely contended that partial privatization has little impact. Since management control is not transferred to private owners it is widely contended that partial privatization has little impact. This perspective ignores the role that the stock market can play in monitoring and rewarding managerial performance even when the government remains the controlling owner. This perspective ignores the role that the stock market can play in monitoring and rewarding managerial performance even when the government remains the controlling owner. Using data on Indian state-owned enterprises we find that partial privatization has a positive impact on profitability, productivity, and investment. Using data on Indian state-owned enterprises we find that partial privatization has a positive impact on profitability, productivity, and investment.


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