Is it a Better Tomorrow?

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Raveena Mital's picture

Is it a Better Tomorrow?

Liberalize diesel and cooking gas prices. Open FDI into the retail and civil aviation sectors. Introduce rural employment programs. Let the “Market” rule. Such small phrases are enough to twist around India’s entire economic progress as of now and stem fierce debates among various stakeholders. This is exactly what is going on after Prime Minister Manmohan Sing made his announcement regarding the massive financial, retail, and energy-based reforms for the country from September 2012.

His proposals carried no shocking surprise since India’s economic growth has been suppressed lately, with it threatening possible signs of downturn in the future. For example, statistics forecasted the country’s GDP to only increase by less than 5% as of 2012 (which was below the 6.8% growth witnessed in 2011 and 10.1% in 2010).1 Hence, reforms at the present day are inevitable if India is to maintain its emerging markets among the other rising BRIC economies.

Keeping such in mind, Singh has proposed the following major changes: Remove subsidies on fuels and gas, letting diesel prices rise by 14%; allow much more FDI into key sectors such as making foreign stake be 51% in multi-brand retail, 49% in local airlines and some parts of the power sector, and 74% in broadcasting.2 With that, projects such as the Mahatma Gandhi National Rural Employment Guarantee Scheme will be introduced to lower poverty out of the funds gathered from the removal of subsidies. Singh believes that such basic measures, led under the influence of new leaders, will guarantee economic prospects for the country.

Such a plan sounds crisp and promising. However, are we really heading to 1991 when Singh brought large-scale liberalization in India? Or will changes be minimal this time? This essay argues that despite strong opposition, India’s current proposed economic reforms will make a large positive difference in society, probably even larger than 1991. It specifically uses the approach of the “3-Os Model” (which stands for Objective, Opportunities & Optimization) to examine why what we have today is a success recipe.

 

 To begin with, although India’s present condition is completely different from what it was in 1991, the reforms under both time frames have the same objective: to encourage liberalization and hence raise the living standard of the country.

Certainly, India’s balance-of-payment crisis left it with little choice in 1991.  After getting itself bailed out by the IMF for roughly US$6 billion, the country had to obey the conditions set beforehand of opening up different economic sectors and adopting pro-liberalization practices.3 As put by Minister Shashi Tharoor, meeting such requirements were a challenge since when Singh took office as a Finance Minister, the country was suffering from a deeply inefficient centrally-planned economy where protectionist barriers were rigid and resources were misallocated among inefficient sectors.4 Hence, the dramatic changes Singh still managed to implement nonetheless, signal as if a major crisis is needed to dismember a poorly organized political structure from the roots. India is not in the same situation now since no major crisis exists that can force the country to have to meet certain standards.

However, this does not mean that Singh’s newly proposed economic reforms will go to waste. Firstly, despite the absence of one dramatic crisis, India still has numerous issues on its plate to solve; such include those of lost consumer confidence and the widening gap between the rich and the poor. Moreover, Singh’s objective is still as clear as it was in 1991; that is, to target liberalization and growth for the aam aadmi (common man) by identifying sectors that need improvement and increasing foreign-involvement for greater efficiency. This time those sectors identified are the retail, energy and financial sides of the country. Not to forget, Singh’s power status has also increased (from being a Finance Minister to Prime Minister) from 1991, which means he can exert a greater influence in policy-making. Therefore, since his clear objectives will be able to reach out and connect with the majority of the Indian population directly this time, they will not only reduce unnecessary opposition be also be able to boost the country’s GDP rapidly.

To continue with, India’s current reforms can make a large difference since they do not only stem from clear-cut objectives, but also because many opportunities exist for the nation now than in 1991.

For example, Singh has proposed to increase the amount of foreign capital in insurance companies and pension funds; the rationale here is that more foreign involvement means more funds in the finance industry. As a debt-ridden country, India can really make use of this additional capital to fund various projects and investments. However, simply opening up an industry is not enough since investors worldwide should also be willing to contribute capital. India currently has this opportunity since it enjoys “investment grade rating” by the various rating agencies worldwide, which was not the case in 1991.5 Therefore if the financial sector heeds Singh’s advice, companies can attract many investors, leading to more funding for economic growth.

Moreover, the establishment of various multinational institutions in India presents the country with the opportunity to successfully engage in mergers & acquisitions and other complex transactions with clients from abroad. Such can especially help with the implementation of another one of Singh’s reforms of inviting large foreign holdings and companies in the retail sector. For example, companies like Credit Suisse, which actively engage in providing its global clients with specialist advice on India’s emerging markets, can competently guide foreign investors and help them identify key areas for growth that will benefit both the host and foreign parties.6

The technological advancement since 1991 has also created numerous opportunities. Singh’s proposed reform to hike diesel and cooking gas prices to market levels does not seem unrealistic since consumers today have access to market prices anyways. No ambiguity remains as market fluctuations are recorded and reported at real-time. Moreover, the development of the RTGS (Real Time Gross Settlement) system in banking has lowered counterparty risk by making the transfer of money and title possible simultaneously.7 Therefore, corporations in India (such as those in multi-brand retail) can easily collaborate with foreign holders in different locations, without having to worry about serious defaults.

In a broader sense, India has various opportunities in hand today than it did in 1991 to take Singh’s proposed reforms to a different level. This brings us to our final “O” in the model- how the interplay between Singh’s objective reforms and external opportunities can lead to optimization.

As a definition, optimization refers to “the process or methodology of making something as fully perfect, functional or effective as possible.”8 In the case of India, its present-day situation, Singh’s objective reforms and the wide variety of external opportunities aforementioned, make it possible for the country to implement optimal strategies for economic prosperity and social progress.

For example, unlike China (which is heavily built upon the manufacturing sector), India generates its revenues from the tertiary sector (or services). The retail industry accounts for a large portion of this. Hence, if foreign investment is increased here currently, not only would it make the retailing market more efficient by inviting competition, but also create thousands of more jobs for the local population. Given that the average Indian is more educated now and has preferences for working in call centers and departmental stores, this should be a big booster for employment.

Optimization would also occur in other areas. For example, food prices have risen drastically in the country till now. However, as pointed out by Lord Green, if commodities are allowed to reach market price-levels, the inflation in food can dampen.9 Meanwhile, the government can also gain from comparative advantage by partnering with trading partners like the UK though liberalization. It can then channel the extra revenue generated from efficient trade and the cutting of subsidies in energy-based commodities, to projects that aim to help the poor. This overall optimization would thus be beneficial for the entire Indian society, to an extent greater than that in 1991.

To sum up then, the current proposed economic reforms can bring many positive stimulants for India’s GDP and make it stand as a real rising power. Although Singh had made the country stand upon its feet during his office in 1991 as well, his current reforms will not simply be a repeat of what he did 22 years ago. This is because his clear-cut objectives this time are coupled with the various opportunities available for the country at its present state. If India makes use of these opportunities, it can create a win-win situation by optimizing growth in many of its sectors and through various dimensions.

Therefore, just as resources and capabilities are the key ingredients for firms to develop core competencies (which can lead to competitive advantage later on), clear objectives and opportunities are the ingredients that lead to optimization on a national scale. Hence, as the figure below shows, this optimization is what eventually stimulates the entire economy successfully.

Bibliography

  1. Shashi Tharoor, Manmohan Singh's Second Wind, Project Syndicate, http://www.project-syndicate.org/commentary/india-s-prime-minister-relau... (February 4, 2013).
  2. Slew of reforms: Manmohan Singh scores a decisive victory, stakes claim to his legacy, http://articles.economictimes.indiatimes.com/2012-09-19/news/33952476_1_foreign-retailers-fdi-cap-reform-package (January 12, 2013). 
  3. The world's most economically stable countries and economically unstable countries, http://www.expatinvesting.org/the-worlds-most-economically-stable-countr... (February 1, 2013). 
  4. http://articles.economictimes.indiatimes.com/2012-09-19/news/33952476_1_foreign-retailers-fdi-cap-reform-package
  5. Rajesh Bhayani, Reforms then and now, http://www.business-standard.com/article/economy-policy/-b-rajesh-bhayan..., (January 25, 2013).
  6. India, https://www.credit-suisse.com/markets/emerging_markets/en/india.jsp (February 8, 2013).Dr. Patrick Leung, lecture, January 21, 2013.
  7. Optimization, http://www.merriam-webster.com/dictionary/optimization (January 20, 2013). 
  8. Lord Green encourages liberalization agenda in India to strengthen trade ties, http://www.ukti.gov.uk/uktihome/media/item/127780.html (February 1, 2013). 
  9. Duane, R., Hoskisson, Robert E., Hitt, Michael A. (2013). The Management of Strategy. Canada: South-Western Cengage Learning.
  10. Hong Kong Institute of Bankers. (1999). Hong Kong Banking Systen and Practice. Hong Kong.
  11. Ho, Simon S.M., Scott, Robert Haney., Wong, Kie Ann. (2004). The Hong Kong Financial System: A New Age
  12. Kotler, Philip., Armstrong, Gary., Ang, Swee Hoon., Leong, Siew Meng., Tan, Chin Tiong., Hon-Ming, Oliver Yau. (2009). Principles of Marketing: A Global Perspective. Singapore: Pearson Education South Asia.
  13. PM congratulates President Barack Obama, pmindia.nic.in/press-details.php?nodeid=1535 (February 9, 2013). 

Comments

A very nice read, especially the implementation of 3 O's model, but I partially agree with your view about comparision of present reforms with 1991 reforms. 1991 was the start of reform process and present reforms are just its continuation. Also, The situation that time was far more worse. So stating that recently announced reforms can be compared to 1991 reforms is not entirely correct. Will like to have views.

Hey thanks for your comment and feedback! Much appreciated and glad you found the essay interesting.
You are surely right- the 1991 reforms were definitely a start of something new for India and thus entirely changed the system. But due to India's lack of capital and institutional development that time, Singh's reforms were slow make effect in many areas, especially in the financial/banking industry. Also, the opportunities present for India that time were not that great since the presence of MNEs were limited and most of the contact with other countries involved trade. Hence, even though Singh's objective was clear and the reforms were big, their implementation took time. Now in today's sense, even though these reforms are just a continuation from before, India is way more developed economy to embrace these reforms quickly and grab the wide variety of market-based opportunities now present in the globalized environment. This in my sense, can make thees present-day reforms comparable to the 1991 reforms since the changes they heavily and quickly boost the Indian economy.

Sorry- some typos in the latter part of my first comment. To sum up, because from what I said in the first comment, the present-day reforms may still be compared to the 1991 reforms because of the ability to heavily and quickly the boost the Indian economy.