The Indian Economy
Pranab Majumder
February 20101
1
This teaching note was written by Professor Pranab Majumder for use in the Global Consulting Practicum (India)
course at the Fuqua School of Business at Duke University. © Pranab Majumder 2010. Version 1.01
Index
1. The Indian Economy ................................................................................................................... 3 1.1. The Colonial Context (1750 CE- 1947CE).......................................................................... 4 1.2. The Optimistic Period (1947-1975) ..................................................................................... 5 1.3. The Frustrating Decades (1975-1991) ................................................................................. 6 1.4. The Unleashing (1991-2010) ............................................................................................... 7 1.5. Entrepreneurship in India ..................................................................................................... 9 1.6. The Economic Outlook Today ........................................................................................... 11 2. Political System ........................................................................................................................ 13 2.1. Political Parties .................................................................................................................. 13 2.2. Coalition Politics................................................................................................................ 14 2.3. Separatists and Insurgents .................................................................................................. 14 2.4. Terrorism............................................................................................................................ 15 3. Main Themes ............................................................................................................................ 16 3.1. Agriculture ......................................................................................................................... 16 3.2. Poverty and Urban Migration ............................................................................................ 17 3.3. Subsidies ............................................................................................................................ 18 3.4. Financial Markets............................................................................................................... 19 Index of Figures
Figure 1: Callie with a block print artist (Jaipur, GCP India 2009) (by Lindsey Fishleder). ......... 3 Figure 2: Gandhi (Wikimedia Commons). ..................................................................................... 4 Figure 3: Nehru (Wikimedia Commons). ....................................................................................... 5 Figure 4: A taxicab based on the 1950s Morris Oxford (Calcutta, March 2008). .......................... 6 Figure 5: Apartments and offices in Gurgaon all built after 2001 (New Delhi, GATE 2006). ...... 7 Figure 6: Jason Park with street vendors (Jaipur, GCP 2009) (by Jen Glasgow). .......................... 8 Figure 7: A drink vendor (Jaipur GCP 2009) (by Elly O'Rourke).................................................. 9 Figure 8: A saree shop (Jaipur GCP 2009) (by Nathan Mah)....................................................... 10 Figure 9: Selling books in traffic (New Delhi, GATE 2006). ...................................................... 11 Figure 10: Product hoardings in a market (New Delhi, GATE 2006). ......................................... 12 Figure 11: An election poster for the Congress Party (Jaipur, GCP 2009) (by John Troy).......... 13 Figure 12: Kids of construction workers (Agra, GATE 2006). .................................................... 14 Figure 13: Fishing Boat (Kerala, GATE 2005). ........................................................................... 15 Figure 14: On the road to Agra (GATE 2005). ............................................................................. 16 Figure 15: Tim Scheu sharing pictures at a school for kids (Hyderabad, GATE 2006). .............. 17 Figure 16: On the village road (Hyderabad, GATE 2007). .......................................................... 18 Figure 17: Waiting for the closing bell (Bombay Stock Exchange, Mumbai, GATE 2008). ....... 19 The Indian Economy
© Pranab Majumder 2010
Version 1.01
Unless otherwise stated, all photographs © Pranab Majumder.
Cover Picture: Delivery motorbikes outside a McDonalds in Mumbai (India GATE 2008).
The Indian Economy: Page 2 of 19
1. The Indian Economy
Here is a very insightful analogy we heard from one of the managers of Coca Cola India.
It is illustrative of the way market researchers segment the country at an aggregate level. With
the caveat that this is full of stereotypes, it is nonetheless useful.
“India is an Australia embedded in a Mexico in the middle of Africa.” (Paraphrased).
About 5%-10% of India’s
1,000 million people are rich and
globalized. This is approximately
the population of Australia, and their
per capita GDPs are similar. These
Indians travel between global cities
and can converse with you about the
NY Yankees, or Manchester United,
or the McLaren F1 team. About 6 or
7 of the world’s richest individuals
are Indians. There are more
billionaires in India than in Japan.
They purchase global brands and
there are many entrepreneurs among
their ranks. These are the Indians
Figure 1: Callie with a block print artist (Jaipur, GCP
whom the world sees today. They
India 2009) (by Lindsey Fishleder).
have “arrived”.
Another 15%-20% of all Indians are almost there. They form the middle class, and work
very hard to make it to the first group- if not for themselves, then for their children. They value
literacy, aspire to enter the IITs and IIMs, and go abroad for higher education or a better life.
Their ranks contain large number of doctors, engineers and managers. In terms of per capita
GDP, these comprise the Mexico in India. You have seen many of these people too. I belong to
this group.
Finally, about 75%-80% of the people in India have absolutely no hope of getting to
either the middle class, or the first group. They are either poor, or live at a subsistence level.
They have abysmally poor access to health care, housing, education or jobs. You have never
seen these people, but will notice them the first thing in India, as well as all the time we will be
working with NGOs. These are your bottom of the pyramid equivalent of Africa.
These numbers are really so large that even the “Australia” in India is 100 million people.
That is enough to support Mercedes-Benz and Gucci showrooms in the larger cities. For
example, with all the IT and outsourcing revolution that has taken place in India during the
2000s, it has directly affected only about 2-4% of the population. A small fraction, but that is
already 20-40 million people.
What is amazing about India is not that there is disparity. What is striking is that all three
occupy the same space and can be seen at the same time on the streets of any city. Be prepared
for all the contradictions that this entails.
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1.1. The Colonial Context (1750 CE- 1947CE)
In 1750, before the industrial revolution had transformed the world economy, the percapita GDP of every country was determined by agriculture. There really was not that much
difference between “rich” and “poor” countries. With its vast fertile river plains and lack of a
real winter, India was home to a large population. India was rich, and had an active trade surplus
with the rest of the world.
The colonial years changed that. Well, let me restate that- the real problem is that the
colonial period prevented any change. While many parts of the world started on the industrial
revolution, India remained agricultural. The British Colonial economic philosophy was simplethe rest of the world (i.e. the colonies) was sources of raw material as well as a market for
manufactured products. Britain herself was the industrial base where all the production was
concentrated.
Through policies of active discrimination and passive neglect the rulers prevented the
establishment of any domestic industrial base. A study of US history shows the same colonial
attitude towards the American colony in the 1750s. Fortunately for the US, independence came
in the late 1700s. Unfortunately for India, independence came in the mid 1900s.
During the first half of these two centuries it was the British East India Company which
ruled India. Charles Cornwallis (later Lord) who surrendered to Washington in 1781
subsequently went to India and was the Governor General of India for many years, and played a
pivotal role in the defeat of the Indian state of Mysore. During this period the British objective
was to consolidate their hold on India, and to make profits.
After the Mutiny of 1857 Queen Victoria became the
direct ruler of India. This period saw the expansion of the
railways as a transportation network to extract raw material to
the ports of Bombay, Calcutta and Madras as well as transport
finished textiles and other goods to the interior. It also saw the
expansion of the administrative branch of the colonial
government which was now no longer a profit maximizing
private firm. In order to administer India better the British saw
it fit to try and create a “middle class” of Indians who would
be educated in British public schools and adopt progressive
ideas and lifestyles. They were called the “brown sahibs”
(“sahib” is an Indian term for the British rulers).
Unfortunately, this backfired by creating a group of people
Figure 2: Gandhi (Wikimedia
who saw the ironic contradiction between British ideals and
Commons).
colonial oppression.
The considerable bloodshed during India’s independence did not come from the
widespread massacre of the British rulers. In fact, the transition was very peaceful, with a large
amount of pomp and ceremony. The pain came from the arbitrary partition of India into two- the
Hindu majority India, and the Muslim majority Pakistan (which had two parts- West Pakistan,
and East Pakistan which became Bangladesh in 1971).
The main post-independence economic philosophies were derived from the views of
Gandhi and Nehru.
The Indian Economy: Page 4 of 19
1.2. The Optimistic Period (1947-1975)
Gandhi, the main figure in India’s independence, also
believed in the self-sufficiency of India at the very micro level.
He believed in an ideal state of the economy in which every
village was self sufficient and produced what it needed. Given
the endemic poverty in India, this was a way to empower the
masses to control their own destiny- grow your own food, and
weave your own cloth. It was also a way to include them in
breaking the colonial economics which involved exporting the
cotton grown in every village and selling them imported cloth
manufactured in the mills of Manchester and Lancashire. While
these industrial mills were powered by water and steam, Gandhi
advocated hand spinning the yarn and then hand weaving the
Figure 3: Nehru (Wikimedia
cloth.
Commons).
After Gandhi was assassinated by a Hindu
fundamentalist (they believed that he pandered to the Muslim sentiment) it was left to Nehru, the
other pillar of the independence movement to carry forward the task of rebuilding India’s
economy. He studied at Harrow and came back to practice law in India before getting involved
in the movement for India’s independence. He was recognized as the political heir to Gandhi,
and is the longest serving Indian Prime Minister to date.
Nehru believed in socialism, but also knew that India had to develop its own economy.
Thus his plan was to develop a mixed economy where a large segment was operated run by the
government and the rest run by carefully controlled private enterprise. To understand the need
for control of private enterprise, we must remember that “capitalism” in the first half of the
twentieth century was essentially complete corporate freedom- this gave rise to the robber barons
in America, as well as the stock market crash of 1929.
The sectors deemed to be essential for India’s economy were nationalized- defense,
electricity, transportation, steel, ports, inputs to agriculture and many others. Some sectors were
open to private investment, but controlled through permits and regulation. In addition, there
were strict laws governing labor conditions- these effectively served as exit barriers. Imports
were closed off by punitive duties to give local industry a change to grow.
In 1947 India did not have the capability to manufacture any industrial or consumer
product. Some industry had developed because during the two world wars British shipping was
disrupted and they had allowed some local industry (notably in iron and steel). Faced with this
state of the economy Nehru initiated a staged investment plan in the form of 5-year plans. These
were modeled on the Soviet system of central planning but were not as extensive, since India
was a mixed-economy. Due to various geo-political reasons as well as Nehru’s idealism, in
these early years India came to align itself more closely with the USSR than with the US.
These were the optimistic years when India was riding high on autonomy and self-control
after centuries of colonial rule. There was a common belief that India would once again be able
to take its rightful place among the other major countries of the world.
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1.3. The Frustrating Decades (1975-1991)
The optimism of the early years was soon replaced by a more introverted and closed off
attitude.
The politicians who had gained the trust of the people through years of struggle against
the colonial rulers were gradually replaced by a group who did not command that stature.
Increasingly they were corrupt and opportunistic. Nehru’s political party, the Congress, was
subject to fissures and divisions after his death when the next line of aspirants tried to grab
power. Even though his daughter Indira became his successor, many prominent members left
Congress to form their own political parties. The other parties were not an effective opposition
and even though they did briefly come to power in the late 1970s, they could not hold on to it.
The planned model of the
economy led to severe problems in
every way. The state-owned
industries became large cumbersome
bureaucracies where the main
objective seemed to be providing
employment to everyone.
Productivity was very low and
stagnant since no investment was
made in newer technologies or
processes. Since it was owned by the
government, these factories were
under no pressure to generate profits.
Figure 4: A taxicab based on the 1950s Morris Oxford
The private sector was not
going anywhere either, even though (Calcutta, March 2008).
there was the profit motive. Since there was an extensive system of controls and production
quotas, it was impossible of new entrants to start up. Thus, almost all industries become
oligopolies, with little incentive to innovate. The chronic example of this was the auto industry,
where for decades there were only two firms which continued to produce one model each which
were borrowed from other countries in the 50s. During these periods “profit” was a dirty word,
and politicians outdid each other in curbing any entrepreneurial activity.
Although Nehru had also set up a small number of engineering and management schools
in his attempt to make India self-sufficient in these disciplines, there was little need for these
skills in India itself. This period saw the flight of many of India’s brightest to other countries
like the UK and the US, and this process is commonly termed the “brain drain”. Those that
stayed in India were often frustrated by the lack of opportunity.
For the common man, success seemed to be more about who you knew rather than what
you could do.
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1.4. The Unleashing (1991-2010)
Although India was economically closed off she still needed to import crude oil.
Unfortunately she also had very few manufactured exports, and hence was perennially starved
for convertible currencies with which to buy oil. This came to a head in 1991, when there were
foreign currency reserves for only a few weeks worth of imports. India had to borrow money
from the IMF by pledging its gold reserves. That loan carried stipulations to open up the
economy.
This was the turning point for India’s economy. In retrospect, all the elements for
integration into the global economy were present. But there was no will to take the politically
unpleasant step of opening up the economy due to the inevitable short term pain. No politician
had to take the fall for this since it was forced by the IMF loan.
In fact, its effects were quite innocuous in the beginning. For a few years there was no
noticeable effect at all. I finished my MBA in 1993, and when I joined Madura Coats (a
manufacturer of threads and dress shirts), our dorm discussions always came to the conclusion
that firms hired MBAs in India because they wanted corporate jewellery. There was no real
threat of competitors or bankruptcy. However, that was surely changing. McKinsey came to our
campus for the first time in 1992. Their salary packages were about ten times more than the
norms for Indian firms.
The jump start to India’s
economy came from the fix
needed for the Y2K scare. The
beneficiaries of the scare were
Indian software firms. Most of
the systems under threat were
mission-critical systems which
were commissioned decades
ago but were never upgraded
because they were so important.
With the brain drain from India
over the past few decades there
was now a whole community of
engineers and entrepreneurs all
over the US and specifically in
the hi-tech industry. They knew
about India and were able to
quickly cobble up the
Figure 5: Apartments and offices in Gurgaon all built after
arrangements to get this
2001 (New Delhi, GATE 2006).
massive amount of work done.
This kept a small portion of India busy until 1999.
The taste of cheap IT outsourcing, however, was extremely addictive, and soon a small
portion of IT work was being done in India. While small by US terms, it was quite large for
India’s emerging IT sector. Soon, instead of sending bodies over to the US to spend a few
The Indian Economy: Page 7 of 19
months at client sites, IT firms started setting up dedicated centers in India. The telecom and
dotcom post-bubble glut of bandwidth helped this process, and soon most US companies started
opening divisions in India to get in on the action.
Along with this there were gradual changes in the financial markets. India is currently in
the middle of restructuring the insurance
markets as well. India is also beginning
to create the infrastructure for a national
ID system. Real estate is booming, even
though the pace has slowed down after
2008. Malls, multiplexes and retail
stores are coming up in smaller towns as
well, showcasing both international and
Indian brands. At the same time, many
Indian brands are going global.
But, with all of that, this boom
directly affects less than 5% of the
population (that is 50 million, by the
way). Agriculture still accounts for
more than half the economy.
Figure 6: Jason Park with street vendors (Jaipur,
GCP 2009) (by Jen Glasgow).
The Indian Economy: Page 8 of 19
1.5. Entrepreneurship in India
Entrepreneurship is a new concept in India, although there are lots of entrepreneurs. The
western (or perhaps uniquely American) concept of entrepreneurship is not a common idea in
most of India.
Following the
specialization of tasks
embodied in caste and various
occupational groups it should
come as no surprise to you
that trade and business is also
a socially specialized activity.
In fact, all over India there are
certain communities who are
labeled as businessmen- many
come from the state of Gujarat
and neighboring areas. It is
quite common to find
“smaller” communities of
Gujaratis in every large city
who specialize in wholesale
trading and business. Other
Figure 7: A drink vendor (Jaipur GCP 2009) (by Elly O'Rourke).
communities too are known
for business skills. In fact, any wholesale market in India can easily serve as a setting for a
sociological study of different communities, down to specific families associated for generations
with the trade in specific commodities or spices.
In such a situation every aspect of business can be different. There are no business
schools- there is family tradition. There are no banks; there are family/community-based lines of
credit. There is no business code; there is merely peer and community pressure (including, in
extreme cases, the inability to find a suitable spouse for your child). Clearly, these “rules”
transcend national boundaries and the lifespans of nations and banks. There is an ancient system
of money transfer called “hawala” (which currently falls afoul of anti-terrorism finance laws).
Another interesting aspect of businesses in India is the diversified conglomerate. Late in
the colonial period a form of organization came up which was run by “agencies”. There were
holding companies, and these agents were the operators of the individual firms within the
holding company. Because of the dearth of opportunities these conglomerates were diversified
in unrelated industries. This started out in Bombay and many of the prominent owner-managers
were from the Parsi community. These were a community of Zoroastrians who, according to
legend, escaped Persia about a thousand years ago to escape persecution from the majority
Muslims. Some prominent Parsi names include the Tatas and Freddie Mercury (although he was
clearly not a businessman).
Thus, in the beginning the private sector in India consisted of business families and their
associated conglomerates. In the early years their operating style was significantly different
The Indian Economy: Page 9 of 19
from the “professional” companies (which were more aligned international norms of
management and organizational structure). Most of family businesses have transformed
themselves into professional organizations, and many current owners are active members of the
global business community.
While there are
always a large number of
small scale entrepreneurs,
like taxicab drivers,
shopkeepers and others, a
number of factors kept
dynamic entrepreneurship
from going mainstream.
The first factor is that
“entrepreneurs” were
always members of a
specific community and
for a long time money
and profits were
“material” pursuits.
Becoming a trader was
beneath the dignity of
Figure 8: A saree shop (Jaipur GCP 2009) (by Nathan Mah).
many groups. A more important constraint was lack of credit- the government was not interested
in promoting entrepreneurship. Unless your social community was already into business,
nobody would extend you any credit. Finally, there was no institution to teach business or
incubate new ventures. In fact, a new entrepreneur would be a fish out of water if he/she tried to
compete with entrenched trading communities with their long-standing business relationships
and support structures. While many of these constraints are less restrictive today, business in
India is still very community and relationship-driven.
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1.6. The Economic Outlook Today
India today is heavily optimistic. After visiting a number of Indian companies one of my
students from Japan mentioned that he finally had reason to be concerned since the unbridled
enthusiasm that was evident everywhere in India was missing in Japan. Let me explain why
India is so optimistic.
A word of context. India used to have a punitive tax regime with the highest income tax
bracket being 97%. In addition, due to a natural
conservatism, most people kept their savings in
gold and free cash instead of investments in
banks and stocks of companies. While the
government is attempting to crack down on the
parallel economy and “black money”, it is fair to
say that the real Indian economy is probably a
multiple of what shows up in official figures.
Thus, there is a large savings cushion to buffer
the country from global shocks. In addition, till a
few years ago there was no system of credit, so
very few people had mortgages or any long-term
loans. The change that has come about in the last
15 years is quite enormous.
First, there has been a flood of global
goods and brands. When I was growing up I had
only seen pictures of Mercedes and BMWs with
a sense of longing, since they were simply not
sold in India, and nobody I knew could afford
one. Now many of my classmates in India can
Figure 9: Selling books in traffic (New
buy these cars (with or without a loan). Thus,
Delhi, GATE 2006).
there is no longer a feeling of being left out of the
global flow of luxury goods. Due to the beginnings of a consumer credit infrastructure,
employed individuals can consume these products when they are just starting their careers,
instead of saving for their whole lives in order to buy an expensive item like an apartment or a
car (like my parent’s generation had to).
Next, there has been a revolution in the kinds of career opportunities available to
everyone. When I was finishing high school the pressure to get into a “good” engineering or
medical school was beyond character-forming. I can remember all the times I cried to myself
over my books and notes during the years I had to prepare for the entrance exams. But today,
although the pressure is still there, there are so many other kinds of jobs- hospitality (hotels and
airlines), media and broadcasting (DJs and radio announcers), etc. I am not even counting the
millions who go for IT and IT-enabled services. It is as if engineering and medicine have
become old conservative professions.
Next, there are prominent examples of Indians who have started from “nothing” and gone
global from India within their own lifetimes (e.g. Infosys). Rather than the long-term payoff for
your children or grandchildren, people now see that it is possible to be successful in your own
lifetime, with enough time left to enjoy the fruits of your labor.
The Indian Economy: Page 11 of 19
Finally, India has
broken out of the anemic
2-3% annual rate of
growth and now enjoys
close to 10% rates of
growth. Every person is
proud of their country,
and having India
recognized as a valid
global economy, rather
than a country of
Maharajas and
elephants, is certainly
satisfying for Indians.
India is also in
the middle of enjoying a
demographic dividend.
Most of India is youngFigure 10: Product hoardings in a market (New Delhi, GATE 2006).
about 30% of the
population is less than 15 years old, and perhaps two-thirds of the population is less than about
30-35 years of age. This means that most of the population is productive now, or will be so very
soon (in theory).
In an economic sense many Indians are breathing freely for the first time in generations.
It is often a rude reminder of reality when they have to face poverty and lack of access. Every
Indian is aware of the reality of the situation. I guess what they want is some time to enjoy their
newly found economic freedom before tackling the really difficult problems. Large numbers of
conscientious people are already tackling these issues, and these social entrepreneurs do get the
recognition that they rightfully deserve. In fact, I would claim that the awareness of their own
responsibility and a desire to do something concrete is higher among the 20-year olds than it is
among people a generation older.
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2. Political System
India’s constitution was created by borrowing from the best of the world constitutions
known at that time, and is consequently the longest written constitution. A lot of things a
specified in great detail, with the inherent contradictions that that must entail. In addition, if ever
something was a living document, it is the Indian Constitution, which has gone through an
amendment almost every year in the 60 years that it has been around.
2.1. Political Parties
There were two major
parties which partnered for
independence- the Indian
Congress, and the Muslim
League. (There were others
too who did not agree with
every policy of these two.)
With independence and
partition, the Muslim League’s
influence shifted to Pakistan,
and there was just the
Congress party left in India.
For many years the Congress
ruled in India- both in the
Center (in the form of the
Prime Minister), and in the
Figure 11: An election poster for the Congress Party (Jaipur,
various states (Chief
GCP 2009) (by John Troy)
Ministers). There were some states where some movements like Communism were prominent,
and some other states where local Congress stalwarts broke off and started their own independent
parties. But for the most part, there was no national alternative to the Congress.
This changed around the mid-1980s with the rise of the next generation of leaders, as
well as the maturation of other political movements (e.g. representation for the majority Hindus).
From then on the political map in India has been like a quilt formed out of many different parties
and political philosophies. Today the main theme is coalition politics, since none of the major
parties can claim majority on their own- they create alliances with other smaller parties to reach
the magic number of 50%+ in the Lok Sabha. The major national parties are the Congress and
the BJP. In addition there are a number of regional parties who play a significant role.
It is extremely easy to form a political party and put up a candidate for an election. You
and I could do it, with a few hundred dollars (not that we would get many votes). Thus there are
a lot of independent candidates and one-man political parties. Many may run on regional
agendas, or on ethnic or social affiliations in a district where they are the majority.
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2.2. Coalition Politics
India does not really have a separation of powers. This is because the Prime Minister
must be able to prove majority in the Lok Sabha (like the House of Representatives in the US).
Thus you can never have a situation equivalent to the President being a Democrat, and the House
controlled by Republicans. However, the judicial system is independent (but it is a different
system from that in the US, and severely overloaded). Thus, for the first few decades there was
neither the separation between the executive and legislative, nor an effective opposition party or
coalition.
Today, however, the situation is different. Because of the nature of coalition politics,
smaller parties often have a disproportionate share of voice. This happens when the two major
parties are close, but not quite at the simple majority level. This serves as a very effective
balance to the power of an individual political party since there is no predicting which parties
will have a powerful voice in national politics. For example, in recent years the Communist
Party has been able to influence national policy by threatening to withdraw support to the
Congress on the issue of nuclear agreements with the US.
2.3. Separatists and Insurgents
The state of the union in terms of a
national identity was very poor at the time of
Independence. This was because at that time
the colonial rulers did not really attempt to
create a unified nation- that would have been
politically inadvisable. So, they followed a
divide and conquer strategy as it suited them,
emphasizing caste and religious differences. In
addition, much of the country was nominally
under the rule of individual princely states with
their own regional history and identity (their
rulers were called princes since there was only
one monarch- the king/queen of England). The
colonial rulers did not interfere in the internal
administration of these states. Thus, the state
of progress in these states was very diverse.
Some had universities and hospitals, while
others were pretty much completely rural and
feudal.
Figure 12: Kids of construction workers (Agra,
After independence all these states were GATE 2006).
incorporated into India and ceased to have an
independent existence. A large number of the ruling families made a successful transition into
politics, since the reverence and respect for the ruling kings and queens easily translated into
popular votes. However, in spite of a lot of developmental effort, much of the rural countryside
remains very poor and marginalized.
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In recent decades a lot of states have seen political movements whose stated objective
was independence or secession from India. Some of these have been suppressed in a very heavy
handed military manner,
which merely pushed the
separatists to guerrilla tactics.
Often these movements make
the successful transition into
politics and come to power in
a specific state, at which
point of time their radical
wings break off and continue
the good struggle. A related
development has been the
splitting up of existing large
states into two smaller states
to reflect the identities of the
parts. Thus, some analysts
have argued that separatist
movements in India were a
part of the political process of
regional recognition and local Figure 13: Fishing Boat (Kerala, GATE 2005).
political identity.
However, over the last decade, there have really been large scale attempts in some remote
areas to completely throw off the national administration and set up an independent people-based
state with its own system of revenue collection and policing. These movements are termed
Maoists (after the Communist leader), and they are usually very violent- blowing up railway
lines and police stations. These regions are usually in semi-arid areas where agriculture is poor
and the people are, if anything, at the lowest level of the bottom of the pyramid. Their
contention is rather simple- 6 decades of independence have not changed their situation, and
removing the oppressive Indian administration is an acceptable response.
2.4. Terrorism
You do see the transition from separatism to terrorism in India. If out of ten bombings in
various parts of India seven are claimed by separatist groups and three by terrorist organizations,
then it becomes difficult to definitively differentiate between the motives behind each.
While I write this, in February 2010, two incidents have just taken place. In once a
bakery in the city of Pune (near Mumbai) was the site of a bomb attack where some young
college kids and a couple of tourists were killed. Credit was claimed by a breakaway faction of a
radical Muslim organization in Pakistan. Meanwhile, a camp of about 30 policemen near
Kolkata was attacked and all were killed by about a hundred tribal separatists.
If there are legitimate grievances among the people it is much easier for radical
movements to gain a following. Unfortunately, with more than a billion people and extreme
diversity in India, there will always be legitimate grievances.
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3. Main Themes
In addition to all that can be written about the Indian economy, there are some underlying
themes that color every context and should be a factor in any study.
3.1. Agriculture
More than half of India’s
economy is agriculture or
agriculture dependent. Thus
GDP figures depend a lot on a
good harvest. This is also an
extremely important political
driver- if any government is
perceived to be anti-agriculture,
its days are numbered.
While there are large and
rich farmers in India, and while
there are certainly parts of India
which are relatively affluent,
most of the farmers in India are
poor and live at the margin of
starvation. Many of them do not Figure 14: On the road to Agra (GATE 2005).
own their own lands and are effectively share croppers (i.e. they work on the land for a share of
the harvest).
Right after independence the first few 5-year plans focused on making India selfsufficient in terms of food grain production. India expanded the network of canals to increase
the total area under irrigation. Extensive research was initiated in developing high yielding and
pest-resistant versions of seeds and crops, and these were distributed to farmers. This was called
the green revolution, and was also followed by a white revolution aimed at increasing production
of milk.
A large number of inputs are made available free or below cost to rural communities.
Electricity is not charged for agricultural use (which also means that there is a chronic shortagesome areas may get only a couple of hours of electricity each day). They also do not have to pay
any income tax.
Most urban Indians are only a generation away from their rural roots, and usually trace
their ancestry to a particular village or town. Hence urban lifestyles have a large mix of rural
conventions in them. Except in the very largest cities the “village” is just about an hour away,
and serves as an escape from the pollution, crowds and the rat race.
Many of the themes in religion and the religious calendar revolve around the seasonal
nature of agriculture. Holi, the festival of colors, welcomes spring, the monsoon and summer,
depending upon where in India you live. Each region has its own specific religious celebrations
revolving around the lunar calendar. Thus, religion, agriculture and lifestyles intermingle in a
natural manner even if you are totally “Westernized” and urban.
The Indian Economy: Page 16 of 19
3.2. Poverty and
Urban Migration
Every time that there
is an increase in the cost of
fertilizers, or there is low
rainfall, there is a spate of
farmer suicides in the affected
regions. That is the most
extreme result- for those who
have no other recourse. The
more common path is large
scale migration from villages
and towns to the larger cities.
India does not restrict
internal migration. This
means that the infrastructure
of every city is taxed by the
masses of people migrating
there every year. Water,
Figure 15: Tim Scheu sharing pictures at a school for kids
sanitation, and hygiene(Hyderabad, GATE 2006).
nothing works as designed
since each is stressed beyond its ability to work satisfactorily.
This also means that there is a perennial stream of workers in most cities to do menial
labor-intensive tasks. Some of these may also involve child labor- washing dishes in restaurants,
washing cars and busses, serving households and many other examples abound. The real
question is not whether these should be banned- there is no argument that this is exploitative and
wrong. The main issue is what would happen to these kids if the child labor ban were enforced
rigorously. These kids would go underground- a study by UNICEF in 1997 (“State of the
World’s Children 1997”) found that the Child Labor Deterrence Act in the US pushed about
50,000 kids in Bangladesh from their garment industry jobs into more harsh jobs like stonecrushing and even prostitution.
It is not just kids, of course. There are many adults who migrate to the cities with almost
no employable skills except manual labor. But they make the transition so that their kids may
have a better life than the harsh exploited and uncertain life they had in their village.
The village still matters, though. Most of them make the move to specific city because
others from their village or district (county) are already there- this serves as a social network and
support structure. Often all migrants from a specific village go to work in the same industry or
similar jobs, e.g. construction, or hauling goods from one place to another, or coolies in railway
stations.
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3.3. Subsidies
Because of the original socialist character of
India’s economy and the huge investments made in
specific areas, many areas of the economy started out
with large subsidies from the Central and State
governments and still dependent upon receiving them.
The first one is agriculture, as we have already
seen. Electricity, irrigation water, seeds, fertilizersall are subsidized to some degree or the other. In
addition, since originally the government also had the
role of procuring and distributing the agricultural
output there were also mandated procurement prices,
with all the distortions that any microeconomic theory
student can list- shortages and gluts in different
commodities since the fixed prices did not transmit
demand and cost signals.
Many other important commodities are
subsidized- gas (called petrol), cooking gas and oil,
and many others. Some services, like public
transportation (busses and railways) and higher
education are also subsidized. While originally the
subsidized prices may have been reasonable, the
march of inflation and the political danger of
increasing listed prices have ensured that until 1991
many of these prices were absurd. For example, I
paid only about $10 per semester to study engineering Figure 16: On the village road
(Hyderabad, GATE 2007).
at a school that counts itself as one of the best
undergrad engineering schools in the world. My boarding cost much more- $30 a month. Sadly,
even this was too expensive for some of my friends.
Since historically personal income tax collection in India has been very poor, most of the
tax revenue comes from corporate income taxes, excise duties and sales tax. The smaller role of
state taxes means that almost all the subsidies are determined at a central level. This makes it an
extremely political process with a lot of noise and posturing.
Things have changed a bit since 1991. The government has been selling off the
marketable public-sector firms (i.e. those that have some profits or a viable business model) in a
sporadic manner (depending upon how much public outcry takes place). They have been trying
to reduce the subsidies in many areas. This means that softer targets like higher education
institutions have had to suddenly change their outlook on students, alumni, revenues and
endowments.
Tax holidays have also been actively used to promote investment in completely backward
areas of the country far away from all cities, highways, sources of raw material, or, indeed any
business and economic logic. This continues to this day, and can often be a result of political
negotiations.
The Indian Economy: Page 18 of 19
3.4. Financial Markets
Financial markets have
existed in India for a very long time,
and the larger stock exchanges, like
the Bombay Stock Exchange (BSE)
have a long and illustrious history.
However, due to various reasons the
stock markets are more volatile, and
until recently were often subject to
manipulation and irrational bull runs.
A large part of the reason has
to be the poor financial literacy of
the average Indian. Chasing hot tips,
being manipulated by outrageous
promised returns, getting into
Figure 17: Waiting for the closing bell (Bombay Stock
pyramid schemes- I have seen
Exchange, Mumbai, GATE 2008).
examples of this during my
childhood and later. One of the possible reasons for poor financial literacy may be the lack of an
open economy, as well as the paternalistic socialist rhetoric in the role of the state in the citizen’s
life and retirement. The entire capitalist setup is rather new to India.
When I was about ten years old and lived in Calcutta a pyramid scheme of epic
proportions hit the city. Everyone was talking about how much money could be made, and I
believe it was of the order of doubling your money every two years. Its rise was meteoric, and
pretty soon, it fell too. Some people had been savvy enough to take out their original investment,
but most investors lost a lot of money. This was in the late 1970s. At its peak it seemed that
everyone I knew (with disposable income of a particular size) was an agent for the firm.
Similarly, around the time I was in the middle of my MBA in the early 1990s there was a
very famous trader who worked the stock markets so much that there was a bubble caused by his
activities. When the market crashed he was at the receiving end of a lot of belated regulatory
fiery, but the damage had been done. Since the markets were not mature or very well regulated
in those days this fed into the socialist stereotypes of “capitalism” and all its evils. It also caused
most middle-class individuals to shun the market and instead invest in government run schemes.
These government-run schemes were usually life insurance policies and mutual funds
with an implicit backing of the government. In addition, investors in these policies got some tax
advantages. However, recently it has been revealed that the government-run mutual fund
blatantly overstated its net assets.
Over the last twenty years a lot of multi-national investment banks and brokerage firms
have started operations in India. However, their basic objective is diversification into India, and
their investments tend to be very responsive to market condition, and their decisions often affect
the market itself and cause it to be much more volatile.
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