Background. Republic of India

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1 Republic of India Federal Republic, bicameral parliament, new prime minister (Dr. Manmohan Singh, Congress(I) Party) is head of government. 81% Hindus, 12% Muslims, plus Sikhs, Nestorian Christians, Buddhists, etc. Life expectancy = 62 m, 63 f. Infant mortality 85 per Illiteracy rate = 35% m, 62% f. Perceived corruption index and economic freedom index still at the low end. Background Continuous civilization since 2500 BCE (Mohenjodaro, Dravidian culture, early Hindu religion), but no unified state (more like European states, principalities). Aryan invasion 1500 BCE. Gradual development of caste system to differentiate conqueror from conquered: five main groups, including Brahmin(priest), Kshatriya(warrior), Vayisha (merchant) [all 3 ~ 20%], Shudra(peasant) [40%], and untouchables [20%]; 2400 specific castes. Very complex history, including invasions in north by Alexander, Arabs, Turkic peoples, Mongols, Tamurlane, and Moghuls (empire ). Portuguese arrived in Goa in 1498, then Dutch, French, British. British Raj: East India Company came in 1612 for trade, then came military conquest ( ) aided by divide to rule. Effort to conquer Afghanistan failed. Sepoy mutiny ( ) led to direct British rule through Viceroy. British brought legal system, educational system, and civil service system, but also British landlords, taxes, biased trade, and deindustrialization. 1

2 Geography and Population India s population is 1.1 billion people (currently growing at 1.7% per year). Will catch up with China by Roughly 30% of population is in urban areas. 1/3 <15 years. India s land area is roughly 1.1 million square miles, compared to 3.5 for the USA, but 49% is arable (versus 18% for U.S.). India s arable land is thus equal to U.S. India s average population density is almost 12 times that of the USA, but only 4.3 times as much per unit of arable land. Average density approximately equal to Japan s. The Mahatma In Hind Swaraj(1909), Mohandas Gandhi argued that Indian self-rule should not just try to recreate English rule without the Englishman; the tiger's nature but not the tiger." He believed that the British system and virtually all of its institutions --political, economic, bureaucratic, legal, military, and educational --were inherently unjust, exploitative and alienating. Industrialization was morally inadequate. He advocated simplicity, tolerance, poverty, and humility. Gandhi s approach focused on Satyagraha (nonviolence) together with civil disobedience to unjust laws, and both individual and national self-sufficiency to achieve Swaraj(self-rule). His approach appealed to British humanity, and over several decades this approach gradually convinced many British that their empire should be dismantled. After Gandhi s assassination in 1948 by a hindu nationalist, his advocacy of national and individual selfreliance led to policies of protectionism (importsubstitution). Gandhi also favored traditional, appropriate, and labor-intensive technology. 2

3 Indian Independence Independence movement led by alliance of Indian National Congress (Jawaharlal Nehru, Mohandas Gandhi, Netaji Bose) and Muslim League (Muhammad Jinnah). Boycott of British goods led to martial law, Amritsar massacre in Independence was eventually granted by British in 1947, East and West Pakistan were partitioned. Beginning in 1946, rioting erupted between hindus and muslims, then war in Kashmir. India became a federal republic in Congress Party dominated politics, and Nehru family dominated Congress Party: Nehru prime minister until 1964, Indira Gandhi prime minister , (assassinated after attack on Sikh-held site in Amritsar); Rajiv Gandhi Hindu Nationalist Party (BJP) competitive after 1991, Sonia Gandhi led Congress(I) Party to victory in India s Democratic Socialism Nehru influenced by British Fabian socialism, which advocated democratic, non-revolutionary means for state to acquire Ricardian rents. His approach favored political democracy and secular nationalism, and he was impressed by Soviet planning. He also favored Gandhi s principles of self-reliance, appropriate technology, nonviolence, and egalitarianism. Indian Planning Commission established 5-year plans, but planning was indicative, not directive. Private industries were licensed, size of private firms was capped to limit monopoly power, new SOEs created under Nehru, nationalization of firms expanded under Indira Gandhi s reservation system. By 1991, SOEs accounted for 24% of GDP. No comparison to USSR, CEE, even China: central government expenditures still only accounted for 14% of GDP. 3

4 India s Turnaround After Rajiv Gandhi assassinated in 1991, new P.M. Rao faced balance of payments deficit, budget deficit, inflation, foreign debt repayment problem, and financial crisis. New policies to get IMF loan: Reduction of budget deficit, inflation. Devaluation of Rupiah, dramatic reduction in tariffs and NTBs, reduction of rules on FDI. All this led to expansion of trade. Import competition improved quality of domestic goods, export competition opened opportunities for comparative advantage for English-speaking university graduates to outsource for the U.S. Private firms allowed to compete more with SOEs, but still heavily regulated. Gradual deregulation of banking: competition, interest rates. Continuing problems in SOEs: subsidies expensive, performance weak (e.g., electricity industry). India survived Asian Financial Crisis unscathed, both because it already implemented reforms, and because extent of foreign investment was relatively low. Real GDP Growth rate in 2003 around 8.5%. In 2006, India s GDP was $800 billion (or $4 trillion at PPP estimates). This is roughly $730 (or $3700 PPP) per capita. Agriculture 23%, industry 27%. Trade ratio ~ 23%. 25% below poverty line, growing middle class (about 33%); GINI = Income per state varies widely. Goa has ten times the average income of Bihar. India s real growth rate since 1992 roughly 6.2% per year (4.5% per capita). About 7% in 2005, and in 2006 expected to be 8.5%. Fast by India s historical standards, but not as fast as China. Rapid growth in both services and manufacturing. India s GDP 4

5 Educational Advantages English the most important language for national, political, and commercial communication. Hindi is the national language, but spoken primarily by only 30% of population. Other official languages include Bengali, Telugu, Marathi, Tamil, Urdu, Gujarati, Malayalam, Kannada, Oriya, Punjabi, Assamese, Kashmiri, Sindhi, and Sanskrit. Indian education based on British system. Very good universities, college graduation rate slightly higher than China. Internet and fiberoptic cables connect coastal India to global economy, now allowing access to U.S. market. India has a higher college graduation rate than China, and more overall than many countries, but fewer overall than either China or the U.S. 5

6 Foreign Trade and Investment India was relatively closed and protectionist before After 1992, Rupee was devalued, then floated. Tariffs and NTBs dramatically reduced (now 12.5% average), rules on FDI relaxed. Trade ratio rose from 18% to 26% by India currently running current account deficit, offset by foreign investment. Reserve Bank of India has increased its foreign reserves by 35% per year since 2001, helping Rupee from appreciating too much. Now 2.5 cents (40 per Dollar), was 2 cents (48) in Import competition improved quality of domestic goods, export competition opened opportunities for comparative advantage. Investment in India Investment almost 30% of GDP (twice the U.S., but less than China). Foreign investment low before 1992, focused on equity investment in 1990s. Foreign direct investment tripled to $16 billion in 2006 (roughly a fifth of what China received). Legal system protects property rights, but more democratic government means that things can move slower, plus more bureaucratic hurdles. AT Kearney: India is the best place to start a business. 6

7 Financial Markets India's financial system remains under tight government control. Regulation creates large spread. Interest rates are currently much higher than in China (for borrowers). CPI inflation rate is 4%, but some fear that it may soon increase. Mumbai stock market goes back to British Raj, and indices have increased four times in last four years (46% per year). Indian Financial Stability Like China, India survived Asian Financial Crisis in 1997 relatively unscathed. India had already implemented reforms, Rupee had floated, and extent of foreign investment was relatively low. 7

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