Economic Development & National Security The Case of India Foreign Investment & Economic Development

1. Economic Development & National SecurityThe Case of IndiaForeign Investment & Economic Development Dr. S A Dave Chairman Centre for Monitoring Indian Economy Pvt Ltd.

2. Inward Looking Strategy during 1950-80 • For first 30 years Indian growth strategy was inward looking and depended on import substitution with a maze of controls. • State assumed a dominant role as promoter. • All allocation agencies were state-owned and were regulated by the state. Dr. S A Dave

3. Beginning of Liberalization – The Eighties • First need was to privatize the private sector by reducing regulations. • Fragmentation of capacities had to give way to minimum economic capacities. • Licenses had to broad-based so that some diversification was possible. Dr. S A Dave

4. Consensus for Reforms & Rapid Strides • 1990s saw correction of interest rates and exchange rates. • Personal and corporate taxes were reduced and rationalized. • Licensing was removed except for a few industries. • Banks subjected to Basle norms and restrictions on branch-network removed. Dr. S A Dave

5. Consensus for Reforms & Rapid Strides • Capital markets reforms • Independent Regulator: Securities & Exchange Board of India • Fully automated exchange:National Stock Exchange • Compulsory dematerialization of shares:National Securities Depositories Ltd • Insurance sector opened up to private sector and independent regulator established:Insurance Regulatory Authority of India • Telecom Regulatory Authority of India Dr. S A Dave

6. Persistent Fall in Customs Duties Dr. S A Dave

7. Inflation Drops Sharply Dr. S A Dave

8. Rapid Rise in Personal & Housing Loans Total Outstanding Credit (Rs. Crore) Personal Loans Outstanding (Rs. Crore) Other personal loans Outstanding Credit (Rs. Crore) Housing loans Personal loans Professionals Consumer durables loans Transport operators Dr. S A Dave

9. Current account balance in control Current Account Balance (Rs. Crore) Foreign Exchange Reserves (Rs. Crore) Dr. S A Dave

10. Multinationals Lead on Profit Margins Profit after Tax as per cent of Capital Employed Multinationals Private Sector Public Sector Dr. S A Dave

11. Foreign Investments Accelerate Dr. S A Dave

12. USA Dominates in Source of FDI Dr. S A Dave

13. FDI & Investment Climate • Rapid economic growth is not only a function of savings and flow of funds, but overall investment climate. Locations have to be investment friendly and investment conducive. Funds move to such locations. • There has to be good macro political and economic stability and favorable policy toward foreign trade and investment. • Efficacy of regulatory framework. • Quality and quantity of infrastructure. Dr. S A Dave

14. Household Savings Rise post-1997 Gross Domestic Savings as per cent of Gross Domestic Product Households Private Corporate Public Sector Dr. S A Dave

15. Rise of Physical Assets in Household Savings Share in Household Savings Physical Assets Financial Assets Dr. S A Dave

16. Portfolio Investments Takeoff in 2004 Foreign Investments (USD Million) Foreign Portfolio Investment Foreign Direct Investment Dr. S A Dave

17. Areas of Immediate Concern • Real estate boom and flows of liquidity into this sector. • Hardening of interest rates consequent to what happens in USA. • Volatility in net foreign portfolio investments. Dr. S A Dave

18. India’s Potential is High • In a study of comparison of investment climate indicators among China, Thailand and India, India lags behind many indicators. But that shows its potential. • Compared to China, India scores high on corporate governance and rate of return on assets. India also enjoys the advantage of skilled workers. • China had an early edge, but growth momentum is picking up in India thanks to wide-scale growth in income and its impact on physical savings. Dr. S A Dave

19. Silent Labor Reforms • Several restrictions on managerial income, commissions were removed. Employee stock options were introduced. • Voluntary retirement schemes offered to rationalize labor. • These had a cumulative effect on household income and savings. • Along with liberal bank credit, this resulted in increase in demand for real estate, transport vehicles and consumer durables. Dr. S A Dave

20. Higher Probability for Better Performance • Industrial performance has been good • Real estate and automobile sectors doing well, thanks to credit to swelling middle class. Household savings expected to go up. • FII inflows, though unpredictable, have been responsive to positive prognosis of the economy. Dr. S A Dave

21. Long-run is Very Promising • Direction of reforms is very clear though speed cannot be predicted. • There is great emphasis on transparency and corporate governance. • Public sector dis-investment and pension sector participation would make capital markets more vibrant. Dr. S A Dave

22. Economic Development & National SecurityThe Case of IndiaForeign Investment & Economic DevelopmentThank you Dr. S A Dave Chairman Centre for Monitoring Indian Economy Pvt Ltd.