Bharat Rakshak

The more interesting part of the savings data is the "composition" of the savings...Household savings show a secular growth over the last 60 years..PArt of it was driven by the policy-framework of attracting more savings (through tax breaks etc)...But the interesting feature is the growth in private sector savings, which really broke away from a 1.5% range almost from the time reforms were launched...And today, 8-9% of GDP is savings in the private corporate sector...This is a direct fallout of the reforms process in 2 ways:

1. the corporate sector was allowed entry in newer sectors and allowed greater freedom, which enbabled them make larger profits..
2. Lowering of tax rates meant that the incentive for "profit reptriation" abroad (euphemism for black money) was much lesser for the entrepreneurs...

Compare that with public sector savings - it shows enormous variability over teh years and never really took off on a sustained basis..Unfortunately, one of the fundamental axioms behind policy-making in the '50s was that of channelising household savigns to the "super miultiplier" sectors, reservign those sectors for the government, and "saving" a large portoin of the surplus for future investments (as opposed to the assumption that pvt sector would spend it away)...the problem was that the public sector never generated on a sustained basis the surplus that policy-makers assumed it would...the inefficiencies were too large...As a result, public sector savings were low, and ICOR reached levels of 5 and even more in crtain years...All of it contributed to a sustained period of low growth..



FDI wasnt an option in the '50s...there was only one capital surplus country - the US..and it had many opportunities domestically to invest (post war boom, baby boomers etc) for it to be interested in FDI...Most "foreign investment" was govt directed, as aid, and driven politically...The concept of FDI picked up only when growth in the US plateau-ed and the East Asian econmies started posting impressive growth on the back of exports....Even today, as Suraj says FDI isnt a big factor in growth, though it is now a HUGE factor in sustaining the external sector balances (given that we run large current a/c deficits)...

It is therefore not surprising why policy-makers took the position they did in the '50s...For a newly independent country with big ambitions, the objective function had to be growth..Resources within the country were limited, and private sector too timid in various ways...

That is debatable, but what they did in the 50s is less of a concern than the restrictions in place today. It looks like an oligarcy has assumed control of the country and is intent on keeping competitors out.

Somanth you have identified a major factor here.

In fact looking at the savings rate between India and China the difference between us comes down to the 'Corporate savings rate'. China's has consistently been 15% or even 20%, while ours was 4% or so with a recent spike to 10%. The difference between their GDP and ours comes down to this contrast.

A major part of the blame was the tax rate. We like to castigate Nehru but he was a creature of his times. Wealth back then was considered a bad thing and anyone who came to power would have acted in a conficatory manner. In fact the worst meddler was Charan Singh who instituted a Wealth tax of 5%. i.e. he took Rs5 of every Rs100 you had in a bank just because...

Close behind was Indira Gandhi in her populist phase. Marginal individual income tax of 97% at one point. Including the Wealth tax it could often be more that 100% Corporate tax of 80% and never less than 60%. The story of her war on imports has spawned several books. At one point there was a 350% import duty on computers for instance!

Instead of profits going towards investment it was directed to Government.

One of the great unsung reforms has been the complete reformation of the tax system. By focusing on Personal income tax, Profession tax and VAT, it has pushed taxation further back in the value chain, there by freeing up the bottom line. This allows any profit to be mostly unencumbered of taxation and therefore encourage investment. The mindset that allowed this to happen was all pervasive in India then and still is present. The private sector is rapacious, it must be controlled and exterminated if possible.

Absolutely, and a large measure of credit for that goes to Raja Chelliah, who worked on a massive tax reforms report which was the blueprint followed by first MMS and then PC (in his so called "dream budget")...Its quite illustrative to note that the last major piece in the jigsaw of direct tax reform got done in 1997, and corporate savings went up as if on cue! Interstingly, the major blows for reforms came from those people who have been variously dubbed as "commie", "pinko" etc -MMS, Raja Chelliah were all trained in the '50s school...



Not too many restrictions on Indian businesses anymore...There are some areas barred/restricted to foreign investors..Not sure what you mean by an oligarchy keeping competition out...ACross industry sectors, there is massive competition either domestic or imports...

Suraj, Somnath and others - thanks for some insightful posts.

The correlation between investment / savings rate and GDP growth does seem to be strong; and a case can be made out for stating that >30% investment / GDP ratio is a necessary condition for ~ 9-10% growth. I am not sure though, that it is a sufficient condition - in other words, is it the only parameter that needs to go right or are there others (I presume the latter)?. Here's an interesting article that I came across on this theme - though it does not get into the details of what some of the other parameters might be: Investment, Savings and Growth - International Experience. I presume one explanation is that ICOR is not necessarily a constant figure and may vary based on other factors.

Secondly, it seems to me that investment rate in itself is a function of the rate of growth of the economy (investment always seeks higher returns and in turn is a function of available growth opportunities) - which seems to point to a virtuous cycle on this front.


This would be a good exercise. Needs to be two step - listing of all the major liberalization / anti-liberalization policies that were undertaken from 60s to 90s, and quantifying each in terms of effect on investment / savings / growth rate. To begin with, would there be a listing of the former available anywhere?

One aspect common to Japan, Korea, China is exports-led growth. In some sense, India also kicked off the high-growth phase based on export-led growth of one sector - software; though India's overall GDP is primarily domestic consumption driven and not export-led.

Many non-communist "third world" states embarked on a state-driven import-substitution industrialisation model assuming that this would increase political independence and generate middle class job growth. The pioneers in that regard were in Latin America - Mexico, Argentina and Brazil.

When this kind of autarky is combined with enforced limitations on domestic competition, investment in quality and innovation really suffer.

The fundamental problem with this as with any kind of autarkic economic model is that you still need trade to pay for your inputs. Of course with uncompetitive industries they are forced to rely on commodities - timber, oil, cocoa, cotton, whatever. Which is why the estate owning brown sahibs who replaced the white ones were important - that tea and coffee was needed either for hard currency, or to swap with the Soviets.

Unfortunately governments that embraced ISI only very rarely committed to being competitive in the global market they sought to insulate themselves from - that is where countries like Japan, Korea and to a lesser Brazil extent stand out.

Brazil for example like India started out heavily dependent on commodity exports, and those remain an important part of their economy - but they were also keen at a much earlier stage to make expensive projects like Embraer produce civil aircraft for the global market.

Now obviously this sort of strategy becomes much harder after 1974 when the Nuclear Suppliers Group tightens up high technology commercial exports to India, but it doesn't explain the ideological disinterest in building industrial exports before that.

It is not a sufficient condtion, but is a NECESSARY dondition...All growth stories of the 20th century have been on the back of strong domestic savings - Japan, South Korea, East Asia and now India..The reasons are tautological...Investments in infrastructure, basic industry and social services (esp education) can only be done thorugh domestic savings...And even an export-led growth strategy needs a ceteris paribus condition of the above. And high investment can only be sustained out of domestic savings..The only example of high investment sustained out of foreign savings is the US - and that is an outlier case, being the beneciary of what is called "siegniorage" gains...



Well, not so fast...It is fashionable to term some of these things like "auturky" in hindsight...But one has to make a distinction between what was possible in the '50s vis a vis what became possible in the late '60s and thereafter...The big factor is global trade...GLobal trade outside commodities wasnt such a large piece of the global economy in the first half of the last century...WWII changed that a bit, but all third world nations by definitions had a skewed terms of trade..In other words, import substitution was pretty de rigeur in the '50s even in the Washington crowd...And the success of Japan, South Korea and EAst Asia has got a lot to with that initial burst of setting up domestic capacity...The difference with India was simply a function of efficientcy - the relative fortunes of POSCO and SAIL is synptomatic of the difference...The initial pain was taken by all -whether that generated enough surplus was the question...



The nuke sanctions after 1974 is an absolute non sequitor of an excuse for performance..First up, the sanctions were in few areas, and not enormously important to the economy per se...Second, even in defence areas, while the US imposed sanctions, Europe/Russia diddnt..the Embraer example is important - it is the rank underpefromance of the public sector that was the issue...Difference in the trajectory of HAL and Embraer is just one more example..

The takeaway, it seems to me, is that all the 'miracle economies' did start off with an import-substitution phase and then moved on to the exports-driven growth phase. What differentiated some from the others was the speed at which they were able to transition from the former to the latter.

The other major factor to consider, which is getting its recognition today - is the demographic dividend of having a large section of the population in the working age group. That in itself is not a sufficient condition - the working age group population needs to also have the ability of going up the curve in skillsets as required for a more advanced economy, and additionally there needs to be another external spark (such as export led growth in some sectors) - in order to ignite growth in the economy as a whole. When this demographic dividend is reversed & turned on its head, 'de-growth' is inevitable - as we are witnessing in Japan and several other economies today.

Coming back to Johann's point, India's public sector units somehow never made the transition from the import substitution philosophy to exports as a plank. Johann has used the term 'ideological disinterest' to explain this, while Somnath has stressed on the known reputation for inefficiency of the Indian public sector.

I believe the truth lies somewhere in between.

Certainly the Indian public sector has been mismanaged, and the Indian growth story has been largely on account of private enterprise (which in turn was highly restricted till the 90s). However, I do think part of the blame lies with JLN and IG in that they seem to have, in some sense, bought into the western notion of India as a 'third world' nation that could not seriously aspire to have a world-beating industry. It seems to me that right at the topmost levels of government there was not the belief in 'Indian exceptionalism' in the same manner as the Chinese, Japanese, Koreans, and may be others had in regard to themselves.

I had earlier briefly alluded to the fact that it is possible Netaji and maybe leaders from the other parts of the political spectrum might have made a difference in having this belief in 'Indian exceptionalism'. This belief in India's ability to be a world-beater remained only within pockets of India's industrialists and entrepreneurs - and the country essentially rediscovered its own lost potential through these entrepreneurs.

As long as we are discussing the British management/mis-management of the Indian economy, the real damage done was not in 1947 but in the centuries of rule earlier.

- After the mutiny the British, being unrepresentative rulers, lacked the courage to deploy a progressive tax system (you know tax the rich more to pay for services to the poor, namely education, etc). This meant that investment in the Indian people was non-existant.

- Most years 40% of the budget went to the military. This would mean that our military budget would be about $100 Billion right now. Not only that, Indian soldiers were expected to deploy on all the silly British wars from Africa, to the Middle East to Europe to Afghanistan. These military adventures, including the charge of the light brigade, were funded by the Indian government. In 1916 the British managed to lose an entire Indian Army of about 30,000 in Iraq of all places after committing about 60,000 troops various misconceived expeditions. Most of it at Indian tax payer cost. This was one of dozens of such disasters.

- The railways in India were built on a guarantee scheme. Investors were guaranteed 5% return on capital deployed irrespective of revenue. At one point around 1870 the outflow on this one account amounted to 10% of the budget or around Pds 3 Million per year.

- The 300,000 British people were paid according to British wage scales in India. In the modern context this would mean a average per employee cost of $200,000 or so after benefits/pensions/insurance/allowances, etc. Now this may not have been sumptuous by British standards but the impact on the Indian budget was dramatic. Even now this would mean an outflow of $60 Billion dollars per year. Back then this amounted to about 30% of the budget.

- An incredible 15% of the budget was permanently reserved for the PWD. Yes the same PWD we rail against today. About half went for military accommodation, barracks, fortification, etc to the finicky standards of the European mercenaries brought in after the mutiny. The rest went for all the colonial era palaces we ooh and aah about today.

All these were the actions of a non-representative system. It wasn't specifically malicious but the effect on the development of India was staggering. No way a democratic systems sustains these policies for 100 years.

They didn't particularly care what happened to us, they just wanted a system that did not kick them out.

Well, dont think that is the issue..Certainly not to start with...the scale at which the initial public enterprise was envisaged - whether its the Bhakra dam, or the steel plants...Just as the Congress had, in the words of Nehru created history (and not repeated it) in our method of fight for freedom, the attempt was to create history..There was a lot of exceptionalism being expected of India...And while there are efficiency benefits of entrepreneurship, ownership differentials globallly hasnt been proven to be a barometer for economic success of firms...

the real reason for the inefficiency of the public sector was really two-fold..One, to start with, managerial expertise was limited...But the bigger reason was the policy governing the market structure...In most areas, the market was either a public sector monopoly or geared to preserve one...There was no competition facilitaed either through lower barriers of entry or imports...And that is the poliocy deficit of the '60s - the inability to reform the structure of the markets...A lot of the reason for the same was that politicians realised that the public sector was a useful tool to create patronage networks, rent seeking in econimic terms...And therefore was loathe to "kill" the golden goose, while being able to bleed it continuously...

Since the '90s, the same public sector has improved in its performance, its patchy, but the trends are there....

A useful rport on PSU performance...
http://www.igidr.ac.in/~nag/Personal/Pu ... 201950.pdf

Theo, discussing the "unbritish" rule of India is interesting, but really all that has to be said has been said on that, and more...It was classic colonial rule, it had some positive networkd externalities for the countyr, but largely drained the country of its wealth...But that has got nothing to do with our performance since 1947....

For someone who uses big word like "market structure", it takes very little to realize that the market structure during the decades until 1991 was purely by design. Nay, it was distilled into an ideology called "Commanding heights" and the idea was political control via monopolies of the Public Sector was a good and noble idea in itself (political control via "democracy" was supposed to mean that the "excess" of the monopolist was shared efficiently..er forget about the lost value due to monopoly that any undergrad e-con-o-mix student will tell you about).

Add to that some stupid autarky /self sufficiency fetish in ridiculous extents and something called "export pessimism", all combined to make a toxic macro economic situation and a terrible underperformance.

Of course "Gandhians" like L.C Jain and his wife Devaki Jain would sing hosannas about the virtues of self restraint and the soup-e-rear "planning model" (being poor is good . You will remain pure!), maybe someone ought to ask their son Sreenivasan Jain who shows up on Undie TV about it and the role his parents and other "intellectuals" played in creating a make believe climate of self delusion.

The point we were trying to address is that Indian public sector units never made the transition in the 60s - 80s period from import substitution to export-led growth - whereas several other Asian public & private entities did rather successfully. This is not entirely explained by the undoubted inefficiency of the Indian public sector.

Fundamentally, there was neither any will nor conscious push towards the exports route. If JLN / IG or their commerce / industry ministers really believed in the thesis of export-led growth, they would have been following up every month with the PSU units on progress. But other than grandiose statements such as the 'temples of modern India' one, there was no systematic effort in this direction.

One can either presume that the will was there but followup / execution was extremely shoddy, or be somewhat more charitable and conclude that there was no real belief in the model at the highest levels.

I am surprised nobody mentioned socialism which was pushed in 70s and 80s.
Innovation and development is suppressed in PSU and socialism does not encourage entrepreneurship


India had a chance to joint the ASEAN trade block in the 70s. IG did not make the decision to join and India was pushed out of all external market and stimulus to industry development for 10-20 years. That was the turning point.

To be sure, it isnt the job of the PM to monitor day-to-day performance of PSUs! Their job is to lay down policy and run with the legislative business of the same..The export pessimism of the '60s (onwards) is a byproduct of all that went wrong in policy-making per se...License-permit-ism, ideology, "anti imperialism" etc etc dovetailed with a strange mishmash of rent seeking behaviour...I would put Indira Gandhi as the main "culprit" in the case...There were multiple opportunities to break away and set a new path, and by the '70s the conditions globally were more propitious for both trade and foreign investment...And the intellectual and empirical argument in favour of the same was much stronger - Jagdish Bhagwati led the former, South Korea the latter...Instead she embarked on a path that can truly be described as the "auturky"..



Any "market structure" is by design (unless one is referring to IPL auctions! ) The same undergrad econ student btw would/should also explain the concept and context of natural monopolies . When we started off, large swathes of what is called "mother capital goods", or infrasturcture (those termed as the "commanding heights") were deemed to be natural monopolies in the conventional wisdom of the day...And natural monopolies are always best kept in the public sector..The issue was a) inefficiencies eroded naturual monopoly gains and b) policies did not change to reflect both "a" as well as changes in technology and global eonomy that rendered hitherto natural monopolies perfectly amenable to efficeint competition..

Its a bit unfair to ascribe "blame" for Sreenivasan Jain's shenanigans to his parents - LC Jain, we can have ideological differences, but was among a vast diminishing breed of conscientious public intellectual in India...It seems to be a bit of conundrum, it is said that children need to carry the burden of their parents...In this case, parents (like Nehru) often end up carrying the burden of their children (IG) retrospectively!!

True. That market structure was designed to keep the downward hand towards private enterprise operative, so that the PSU's "come up". All easier when you make the public sector the much larger part of the industrial base of the country.



Er.. That is the received wisdom from Oxbridge via 2nd hand routes in St Stephen's, DSE and later JNU (the necropolis of learning). Natural Monopolies need to be REGULATED for the larger public good. Ownership structure is secondary to it. Case in point AT&T vs Indian Telephones. The latter was an abusive monopoly under govt control , while a former was a well regulated natural monopoly which pushed the state of art in science and engineering and made fundamental discoveries and innovations and of course provided the best telephone service at that point in time in the world!

What the "public intellectuals" conspired and winked at each other was under the guise of "democracy" , public ownership was by itself a necessary and sufficient condition for a natural monopoly to be regulated for public good rather than public abuse.



It is perfectly right to call into account LC and his wife Devaki's contributions to the intellectual charade that was played out..The folks who played that were many. Every former member of the planning commission and drummer boy of that intellectual movement (including Amartya Sen) needs to be called out for condemning 3 generations of Indians to grinding poverty for longer than what was needed , all in pursuit of their hare brained intellectual theories.

That is where ownership structure is/was extremely important. A private company can never ever survive without profits, whereas in India when JRD Tata warned Nehru that the public sector steel plants were badly run and were not making profits, Nehru replied "Dont mention that dirty word profits". No efficiency --> NO PROFITS!

As for HAL and Embraer , their trajectories were largely similar until mid 1980s when Embrear was PRIVATIZED.

That is a) hindsight 20:20, b) not uniformly aplicable even today.

What was the level of technical and managerial expertise available to the country in 1950 to have both a private sector monopoly AND a competent regulator functioning at the same time? Not just in one sector, but across various infrastructure and heavy industries..There was a grand total of ONE lgacy regulator - RBI, and its efficacy/competence was an open question...

Even today, with such multiplication of skill sets and experience, it is tough to get competent regulators up and running..Look at telecom! Look at SEBI - it is gaining some confidence only now, 20 years after it was setup - its main problem, artilluated by all Chairmen since Damodaran, is getting enough talented people...Therefore, the options before a new govt in 1950 were immeasurably lesser...

I therefore very strongly split the poliy planning process into three halves - the '50s (till the 2nd Plan), everything else till the '90s, and post '90s...

Well, fat lot of good any of that did to the country , except grievous harm. I have always maintained this and may be this can be the phase post 2011.

Turn Yojana Bhavan into a public toilet for the citizens of Dilli and kick those babus out and let them earn a day's honest living. And err. Hand over that Yojana Bhavan toilet to Sulabh, if you let the Yojana Bhavan babus run it, it will be the worst run toilet in the world. Those babus dont have it in them to run a vegetable push cart and those faceless and feckless babus decided the fate of the nation and the direction of capital and investment flows and industry structures.

No great empirical evidence of ownership structure and efficiency..Market conditions are more important than ownership strutures - typically more the competition, better the firm....



Embraer was privatised in 1994! And even then (Embraer was in financial trouble), Embreaer had built up a technological, innovation and design niche (in regional aircraft) that HAL lacks even today..

Well on that Montek Ahluwalia has the right ideas...Arun Maira is looking into a fresh "mandate" for the Planning Commission..It is being converted into a long term policy planning think tank of the govt..In any case, there is no "executive" powers with PC anymore...

Summarising the above discussion, and rating each of the post-independence governments on economic policies-

Nehru: Rating on economic policy and achievement- Neutral. Subscribed to discredited socialist theories. However kickstarted the industrial program post-independence with stress on import substitution, and public sector at the 'commanding heights' of the economy. Given benefit of doubt since this was the initial investment period, and did not have as many models to choose from.

Indira: Rating - Disaster. From early seventies, had other successful export-led models to choose from as well as Indian advisors who were arguing for this path. But her poor strategic choices, as well as shoddy execution on the PSU front, set India back by at least 15 years in comparison to other successful Asian nations.

Rajiv: Rating - Neutral to Mildly Positive. Did not address the severe bottlenecks constraining Indian industry - but apparently eased some tax and licensing issues.

PVNR: Rating - Excellent. Undertook measures on fiscal front, taxation, foreign trade policy, FDI regulations, exchange controls & licensing that allowed greater freedom to the private sector.

NDA: Rating - Extremely Positive. Largely added momentum to the liberalization process through measures on telecom deregulation, trade policy, removal of reserved items under SSI, privatization etc

UPA-1: Rating - Mildly positive. Return of anti-liberalization mindset based on election results. Some tax and SSI reforms undertaken.

UPA 2: Rating - Neutral thus far.

I have ignored some of the almost forgotten, shorter-term governments that were seen in between, from the above list.

Given that (a) we are witnessing the fruits of PVNR and NDA government policies today, and millions of Indians have to thank these governments for the improvement in their lives, and (b) that reforms are a continual process to keep up with the best of global economies - I am concerned that the UPA government's attitude is going to result into a net negative for the country and many millions, maybe 3 - 7 years down the road.

One example is the banking industry - which has not seen any new additions to the existing list of providers, over the last several years. The opportunity loss in terms of losing out on a vibrant and financially inclusive banking network which could have achieved results similar in scale to the telecom revolution in the country - is huge.

The country remains highly vulnerable to supply-side shocks - and inflation is a serious challenge at a juncture when global commodity prices are on a long-term upward climb. Labour reform and land acquisition reforms necessary for infrastructure growth are nowhere in sight. Key reforms pertaining to subsidies and the agriculture sector are yet to be made. Overall, it is surprising that Manmohan still carries the tag of a 'reformist' PM on him....

Any alternate thoughts?

^^^Its perhaps a bit simplistic, but if one were to really evaluate governments on growth, UPA I and UPA II have been the "BEST" - over its combined term, they have averaged nearly 9% growth (despite the financial crisis)..The BJP govt averaged about 5.7% odd, the same as PVNR (despite PVNR's reign buffeted by India's own crisis on one end)..

In terms of "reforms" policy, nothing beats PVNR..The crucial element of direct tax reforms was achieved by PC in the short lived UF government...The BJP govt had one big policy measure - the highways programme, but really little else in terms of substantive policy..Incremental reforms, yes, but no big bang..Privatisation was tried, and was in good hands (Arun Jaitley first and then Arun shourie), but was stymied, largely because the RSS crowd of swadeshis werent in favour...Again in terms of receipts out of disinvestment, UPA I and II probably (I dont have the numbers) have far better numbers than NDA...

UPA I & II dont have anything substantive on the "reforms" policy either - though there will be if the GST provision goes through (as it looks likely), and if the petrol price decontrol sustains....(the BJP abolished the APM, but preserved the pricing discretion of the govt!)...

The NDA govt started with a lot of rubbish on swdeshi, public sector etc...But thankfully they realised quickly enough and didnt do anything stupid..ABV wanted Jaswan Singh as FM, but again RSS didnt, and we had the third rate Yashwant Sinha for 5 years...To be honest, ABV had 3 major policy objectives - nuke weapons/policy, the highways programme and Pakistan..



Well, the govt will award 5 new licenses this year! but quite frankly, the issue is not of the number of banks...It is of penetration - India is an underbanked country with lots of banks...The issue is with the last mile...Mobile banking will be a way out, provided the regs around it are formulated..

BTW, the financial sector is quite vibrant per se....India has perhaps THE best regulator in the world in this area, and a clutch of very well managed banks as well...

the reforms agenda now is around legislation - on land acquisition, on mining policy..there is a huge agenda on execution - reall that is key now...

Somnath,

Generally agree with your assessment but with a caveat. Even though the NDA government till 2004, achieved an average growth of 4 per cent, it did set the stage for future growth - especially in the agriculture sector - due to many of the policies they put in place. So to an extent the UPA1 did enjoy the domino effect of those policy measures. You'll note I use policy measure and not reforms per se because I agree with you that there weren't - apart from the highway programme - no big ticket reforms projects.

Regarding reforms, one needs to understand that in the initial years, PVNR, PC in the UF govt and the initial years of NDA, they could go for the "low hanging fruits" as far as the reforms agenda goes. Once these were taken care of the other reforms became politically more challenging and hence the nature of coalition governments is such that no frontal assault on these have been attempted - labour reforms, agricultural income tax, retail, privatisation and many others.

What we are witnessing now is, what I like to think about as reforms by stealth, a little push there; a nudge here; creative policy measures (one of the drivers of SEZ, IMO, is to get around the labour reforms constraints) etc. I think this the way forward irrespective of which dispensation comes to power as long as coalition govts are the norm.

Note: GST would be an exception, that is a big ticket reforms because if implemented properly, it is likely to add at least 2 percentage points to our GDP growth.



A valid point. The problem with the Indian banking industry is not the number of players but the small size of each bank. Even SBI is a small bank when compared to international banks. And so it can't take part in the big international deal making, which is the main money spinner for large multinational banks. If anything, actually the large public sector banks need to be merged to great larger banks which would be able to be major international players.

Just compare the size of the Indian banks with the Chinese ones for example.

And yes I agree that RBI has been the world's best regulator, the way it navigated through the tsunami during the financial crisis. If at all any criticism can hurled against it, it is that it's been a tad too conservative. However, is that a bad thing?

Not sure what exactly they did with agriculture...there was one year (2003-04) when agri growth was very hihg, but that was a base effect (because the growth was negative in the previous year)...The whole agri thing has been paid lip service to for the last 20 years, without anything meaningful..

you are right about the reforms...While I dont like the term "low hanging" - the reforms during PVNR's time were as radical as they get - anything pretty much after 1992 (babri masjid) has been a case of stealth reforms...The only big ticket measures have been a) PC's firect ta reforms in 1997, and b) GST, if it goes through now..

I agree on the question of larger bank as well..TO be honest, if they dont do it wth the PSBs, some pvt sector bank will...

This is simplistic, as you correctly preface your comment with. Reforms unfortunately show their effect only 3 - 5 years after they have been initiated. Credit for the current rate of growth should solely go to the PVNR and NDA regimes. What is the concrete measure taken by UPA since '04 to justify crediting them with the current growth?

Agree PVNR government was the best. But, the NDA government to its credit had not just highways, but also insurance and telecom sectors as major achievements. In addition they continued with major reforms on the foreign trade side by reducing tariffs significantly for imported items.

As regards privatization, why do you say it was stymied..? IPCL, VSNL, BALCO, Paradeep Phosphates and Hindustan Teleprinters - no other government has ever pushed through as many as the NDA did!!!

Disinvestment in profit-making enterprises will always lead to more receipts than privatization of loss-making ones, and frankly with the number of i-bankers wanting to work for free - does not take too much to achieve. The virtues of disinvestment of profitable enterprises for the purpose of shoring up the unprofitable ones - is highly debatable in any case.

The NDA track record on liberalization is widely considered to be much better than the UPA's - there is enough and more literature on this front.


Seems like you view the RSS as the red devil with horns, negatively influencing the BJP- my view is that the dynasty fulfills the same, if not worse, role on the INC side. The dynasty's track record on the economy front and their economic instincts have been, and continue to be, absolutely abysmal. It is not a coincidence that the only successful INC PM was also the only non-dynast ever to lead the party !!!!


Number of banks IS an issue. India has only 50 odd local scheduled commercial banks for an industry size of $50 Bn. This compares very poorly with most other countries that I am aware of (the US has 6000+ for industry size of $500 Bn; Indonesia has 200+ for a smaller industry)

I am afraid we need to learn to set higher bars for ourselves. We don't need the types that pat themselves on the back for building a SAIL, but the ones that say why we haven't built a POSCO. India's financial sector does not compare well with competitors in other emerging nations, forget the developed markets.

Well, these numbers are not correct...There are 170 commercial banks (scheduled, non-scheduled ) in Inidia...Add to that cooperative banks (nearly 3000) ...So there are lots of banks..The size of the banking sector is about 17 lac crore - 400 billion dollars...The size of the US banking sector is a LOT bigger than 500 billion...



Like? On what grounds are we behind? In quality of regs, technology, size - how is the Indian banking indurtey behind any other emerging market?

There are precisely 77 scheduled commercial banks today....This number does not include scheduled cooperative banks nor regional rural banks (RRBs). Out of the 77 scheduled commercial banks, if you eliminate the foreign banks - you are left with less than 50 (comprising SBI and affiliates, other nationalised banks, old private sector and new pvt sector banks).

Also, the $50 Bn number is for revenues, I presume you are talking in terms of assets. Again, revenues are defined as Net interest income + non-interest income. US banking revenues are in $500 - 600 Bn range. The Indian numbers are from RBI site, and the US figures are from FDIC.

Why do so many exclusions? HEre are the details of commercial banks.

http://www.rbi.org.in/scripts/Publicati ... x?id=11960

Including cooperative banks, it is a very large number of banks indeed...

In the US, a vast majority of the 6000 banks are small city union banks, very similar to our cooperative banks in mandate and objective...The market at an aggregate level is quite concentrated - the big 5/6 banks all have nearly 10% each in marketshare (which is the regulatory cap)...In India, only SBI has that kind of marketshare (and ICICI comes close) - typical marketshare for large banks in India is 2-3%...We are a very fragmented industry, cpmoapred to the US...

And if banking revenues in the US is 10 times that of India, we are doing very well indeed! It is in line with relative GDP, and given that we scope to grow that proportion, it only means we have done very very well...

I think it needs to be recognized that Japan/China/Korea are qualitatively different from the manufacturing base point of view.

Japan in particular needs to be carefully analyzed. They maintained their independance from western powers because they had few resources and were not seen as a threat (partly because they were dependant on imports for supplies which could be blocked off). They were able to secure massive aid from the west in the 19th century for modernization of their navy and army, with the result that as far back as 1905 they were able to defeat Russia - the first time any asian power was to be able to defeat a western power. See this for example - http://en.wikipedia.org/wiki/Imperial_J ... gunal_Navy
By WW2 they had the world's most advanced navy.

As a result their manufacturing technologies were thoroughly modern from an early age. Things like interchangeable parts and assembly line were adopted early on. Creating uniquely identifiable precise reusable parts is what has made modern mass manufacturing so successful and streamlined. It's not clear these innovations have been widely adopted in India even now, as manufacturing still suffers and tools are relatively scarce while human labor abounds.

In contrast to the West and Japan, the Indian manufacturing was suppressed and the British actively ensured that skilled competition to them did not arise for both military and trade reasons. When manufacturing dies out for more than a generation as it did in India, it arguably needs at least a generation to recover.

Korea and Shanghai/Beijing grew as satellites to Japan, by borrowing technology and finances from them. Proximity and cultural fit helped.
Hyundai in South Korea is now the world's largest shipbuilder, building 15% of the world's ships. http://en.wikipedia.org/wiki/Hyundai_Heavy_Industries .

In the light of the completely different state of the Indian industry, it appears that the protectionist era between 1947-91 is less easy to criticise. Indian industry needed time to recover and mature. The government needed definite signals that private enterprise would be able to compete internationally - that India had a comparative advantage in certain areas - and some of these signals had appeared by the mid 80's.

India's previous path to a century long foreign rule had started with openness to foreign trade, where the domestic interests were neither unified nor protected. It had been possible for foreign competitors to play one party against the other and take them all down in a dominos fashion. The domestic policies were, I believe, set in response to these fears. It's much harder to turn the clock back once things have been liberalised.

Had IBM been let in in the 70s, we may not have had a Satyam or TCS or Wipro. Having an export led path is perhaps easier for Japan and Korea, who do not have to worry about giving a large share of their domestic market in return in the trade negotiation, because that would never come up. But it certainly would with India. US for example has a surplus of $136billion in services - it's important to realise who you're playing with and their global interests.

People who have championed free trade invariably have been in an advantageous position where free trade helped them profit. Ironically the first champion of free trade was the East India Company - a global monopoly! Free trade for them meant unfettered access to the european market.

This is not to say that public sector underperformance is not an issue. But it is global industry readiness and competitiveness which are the real issue and which needs to be forged/encourage/innovated/discussed, regardless of whether it is public or private.

Perhaps in addition to east asian countries, one can compare to Russia as well - suddenly transforming to the privatisation route led to uncontrollable collapse in the 80s. The state enterprises stayed unprofitable and the private enterprises were not able to make any profit.

Also can someone post a reference correlating domestic savings rate with GDP growth ? Thanks.

I would judge the competitive robustness of the Indian banking sector on three parameters (& I am excluding the capital markets, asset management, insurance and NBFC segments from the discussion, which have their own set of challenges. This relates purely to scheduled commercial + retail banking)

1) Risk standards - how safe is the Indian banking system both from the consumer / depositor standpoint as well as from a standpoint of systemic risk to the overall financial system. The Indian banking system scores well here - but excessive conservatism is not always a virtue (it was during 2008-09, but it could be a liability on other occasions).

2) % of individuals and SMEs across India that are able to access basic banking facilities (including deposit & loan facilities)....goes under the terminology of 'financial inclusion' today.. Objectives for financial inclusion can be at odds with objectives for risk mitigation (since we are essentially talking of taking on more 'sub-prime' risk). India scores poorly on this front even against the other leading emerging economies. Eg, mortgage loanbase stands at only 7% of the country's GDP (against 10% in China and much higher in the developed economies, total private sector credit stands at 55% of GDP, as opposed to 100% in China and much higher in the US). Further since there is hardly any bond market (other than for government), Indian corporates are forced to depend on the banking system for their borrowing needs.

3) Presence of homegrown firms amongst the top few globally, setting global benchmarks. India scores miserably on this front. Both Brazil and China have far larger competitors (China's banks are 10x the size of SBI...!) and the RBI's excessive caution has led to aggressive Indian businesses that know a thing or two about entrepreneurship - being totally left out of the game. SBI does not figure in the top 20 or 30 odd global banks !! Indian banks have not only been conservative in spreading wings across India, but also outside the country through acquisitions or otherwise.

Btw, the US banking system revenues stands at $600 Bn for 2009 - and this was for their worst ever year. So when the US in its worst year is at 12X of Indian industry, I would estimate it would have been 14 - 15 x in a normal year....

^^^Given that the discussion somehow has come to banking, my random thoughts on the status of Indian banking...

1. Complexity - banking globally is hugely complex, with a cpital H...Not only is it connected to every single segment of the so-called "real" economy, it is mighty networked to other, equally complex parts of financial services - funds management, insurance, broking, hedge funds, you name it...And over the years, the system in order to manag this complexity (and in some case even perpetuate the same!) has become incredibly efficient..So efficient that there is no slack (as Nassim Taleb puts it) - even a loose rivet can cause the system to practically collapse...For regulators therefore, managing this complexity is the biggest challenge......there are multiple tools for regulators to do that, I wont get into the details, but primarily risk management protocols and regulatory capital are the primary tools that regulators use...RBI has done better than most in management of this complexity..At the macro end, its discretion on capital a/c controls ensured that India remained somewhat ringenced from the global contagion (it was the same case in 1998, during the Asian crisis)..And very strong regulatory capital norms meant that no bank in India suffered a "run"...

2. Size - banks have grown huge, again with a capital H and a few more to add....And that ha spawned a new paradigm "too big to fail"...In the US, we saw how the failure of a relatively modest sized bank (Lehman) precipitated a meltdown....Iceland, UK, Spain - all have problems of banks that are insolvent, and make up signifiant part of the GDP (in case of Iceland, a few times its GDP)...But because of their size and catastrphic impact of their failure, the sovereign is forced to bail them out........For regulators and governments therefore, a bank that is too big to fail is a bank that should not ideally exist..That is precisely why the got is asking Citibank to downsize itself..Ditto with a number of British banks... In India, the lack of large size while being a constraint in some forms, is a big relief in a lot of more fundamental areas....History has borne this out many times...The Japanese banks were big (they still are) - they used to be the biggest in the '90s...they were part of the reason for the prolonged funk in the Jap economy...Us banks were/are big - one of them caused a global crisis, the others had to be bailed out nby the taxpyer..UK banks were BIG - the bailout broke Britain's back, fo decades...Chinese banks are big, and Chinese regulatory norms are decades behind international norms - who knows what can happen?

3. Financial inclusion - has two aspect o it..One, access to a bank ccount..and Two, access to credit...The bigger challenge currently is the former...The challenge there is not credit appetite, but operational costs of the last mile..I mentioned before, mobile banking has huge potential in the area...Once we get the regs right...Access to credit is trickier..Do we want banks to do micro credit? Or is it best left to other instittuions like MFIs? The jury is frankly out on this one..Its a tough call, morally, socially and in terms of economics...


JMT...

Good interview of Raghuram Rajan by Shekhar Gupta...

http://www.indianexpress.com/news/a-lot ... e/744386/0

Nothing terribly new, but something struck me..



Somehow some people will get worked up over this and proclaim civilisational offence!!

Would not agree with that. IBM quit India in '78 (in response to the new FERA regulations requiring them to dilute stake) and then reentered in mid-nineties. Their primary focus till nineties was pretty much on the hardware side - and even if they had been present in India they would not have stepped into offshore services. Infosys, TCS et al were that much more nimble and desperate to win business and would have shown the same growth even if IBM had been in India. In any case IBM setup its offshore services business in '97 when it saw the changing winds - don't think they would have set it up any earlier if they had been present in India in the eighties.

As regards the export story, what we must accept is that based on hindsight (which is always 20-20) - the export-led model was the best one to have pursued and India should have initiated it in the seventies. As to why India did not, there can always be justification. If India had the colonial experience, so did China and China was not scared away..!

I do agree this is hindsight - but leaders of firms and countries are always evaluated on their strategic decisions which get to be validated or debunked only subsequently.

Yes...also reiterates my point that there is way too much complacency regarding GDP growth now. The UPA government better get on with next-gen reforms fast, else they will be held responsible for several lost years and countless millions in misery - like previous rulers from the Nehru dynasty have been.

Wow the thread has moved very fast.

I have a few comments:



Boss, while I agree that PVNR and the NDA govts did good work, you can't discount the UPA. If we use your own logic, that policy decisions taken today takes 3-5 years to fructify then one could argue that decisions taken by the UPA after 2004 have helped it to steer the Indian economy through the extreme turbulent waters during the crisis and also is the result of the high growth rates that we will witness in 2010 and 2011.

The truth IMO is in between. Despite political rhetoric every single govt since PVNR's time has stayed on course with reforms. However, the nature of coalition govts over this period is such, that there have been no big bang reforms the kind which PVNR initiated.

However, I did say PVNR was able to handle the "low hanging fruits" and Sommnath (rightly) pointed out that his reforms were also radical. I concede on that point but would like to point out is what I meant was that those reforms were not politically as difficult (in terms of the results at the hustings) as would be things like labour reforms and agri income tax to take just two. Also the state of the economy was such in the early 1990s that even a small tweak would have a multiplier effect. When talking about reforms of different governments over the past two decades we need to keep in mind that the Indian economy was a different beast in 1992, it changed into another beast around the turn of the century and today it is yet again another beast. IMO its easier to get effect from reforms for a <$500 million economy than it is to get the same kind of traction for a >$1.3 trillion economy.

Bottomline I would think it would be too simplistic to give scores to different governments. Each tackled/is tackling their own set of problems. Some of it has been good, some bad but the intention has been consistent, that's the important part.

Can you list the particular reforms or decisions that you think have contributed to current growth ? One can clearly list out the PVNR decisions and see how they have contributed to where we are today; I have in one of my posts also listed out the NDA reform measures that have contributed. If you could list out the same for UPA 1 & 2, we can certainly debate their contribution to economic growth as well.

Hi Somnath,

If you go back to my post you will see that my criticism is not of ISI per se, but the lack of focus on competing, or building towards competing on the world market. It is perfectly possible for a state owned, but market focused enterprise to be globally competitive. Many French companies fell in this category.

Secondly, the kind of license raj mentality that accompanied the ISI prevented companies inside countries like India with a huge, but protected internal market from achieving higher levels of competitiveness.

This is something that took place even in economies like Japan, where the state allowed real internal competition only in a few areas that were targeted for export growth. The result is that while Japan has many world-class automobile and consumer electronics companies, there huge areas where they ought to be competitive that they are not. In this respect I believe India's reforms have been more radical than Japan's, and it is reaping the benefits.





If you are talking about an industrial growth pattern that concentrates on the lowest entry level of price, quality, and complexity, then yes, its a non sequitor. India could have certainly competed with countries like China and Hong Kong.

However Taiwan, Japan and yes Brazil are another story. Aircraft, electronics, etc require access to a wide range of high end dual-use components and machinery. Avionics, microprocessors, CNC controlled lathes, certain kinds of software, etc, etc.

One of the little known facts of the Cold War is that despite elaborate NATO-Japanese technology denial regimes, industrial espionage gave the Soviets access to a great deal of contemporary Western technology. However strict levels of classification slowed the rate of transfer to transfer to Soviet military industry, and what made it to military-supervised industry never made it to Soviet civilian supervised industries. Soviet military industries often had much more efficient production technology, as well as better designed products than equivalent civilian industries for everything from ball bearings to footwear.

Again China circumvented these problems by starting out at the low end, but further growth did rely on the US easing controls on access to commercial technology in the Clinton years in order to allow manufacturing outsourcing.

Still without such agreements I don't see how HAL could compete in the world market with Embraer.

Sorry boss I'm not in the game of keeping tallies and assigning scores. Reforms is a continuing process and if a successor government keeps a particular reform initiated by a previous regime, then it also becomes a stakeholder in that particular reform. It is so easy and many times tempting to rollback for short-terms games. Having said that there have been many small incremental steps taken by the UPA which are a continuation of the work done before. Also, if they can manage to get GST through that would be as big bang a reform as any.

Economic reform is not discrete in nature, it is a continuous process which requires fine-tuning. You don't press a button and then the process becomes irreversible or autonomous.

I think you missed the essence of my post, the nut graf, if you will. I'll repeat it:

Like Amit said, its tough to give "marks" in that fashion. Most of the agenda was set by the PVNR/MMS efforts...Threafter it was a question on legilative execution..You mentioned telecom - well, telecom was opened up in PVNR's time, 1994...NDA's telecom policy gave rise to as many questions as Raja's ...Insurance - the bill was left hanging for 4-5 years because the opposition would not agree, and that included the BJP! That is why it was easier for YAshwant Sinha to get IN supprt for the bill - it was basically INC's own baby! Seen in that respect, the only big ticket movement in ABV govt was the highways programme, including the funding model (thru the cess on petrol)...

On the economy, quite frankly BJP when it came in was substantively influenced by jokers like Datopant Thengadi and the RSS crowd...they took 2-3 years to settle down and understand..To their credit even in the interim they did nothing to rock the boat..ABV had the right instincts, but the BJP top brass didnt have a lot of econmic talent - no wonder YAshwant sinha was their FM!

But under Jaswant Singh, things moved much faster...He had the riht instincts again, and political heft to move the system (YAshwant Sinha had neither)...But JS was in saddle for too short a time...

Net net, UPA I/II is as bad/good as any of the govts post PVNR - reforms by stealth, as Raghuram Rajan puts it as well!

Hey Somnath, I also used the term 'reform by stealth' earlier on this page!

Jokes apart I think that's a very apt description of what's going on.