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Economic Development & National Security The Case of India Foreign Investment & Economic Development Dr. S A Dave Chairman Centre for Monitoring Indian Economy Pvt Ltd. Inward Looking Strategy during 1950-80

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Economic development national security the case of india foreign investment economic development l.jpg

Economic Development & National SecurityThe Case of IndiaForeign Investment & Economic Development

Dr. S A Dave

Chairman

Centre for Monitoring Indian Economy Pvt Ltd.


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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


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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


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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


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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




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    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


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    Current account balance in control

    Current Account Balance

    (Rs. Crore)

    Foreign Exchange Reserves

    (Rs. Crore)

    Dr. S A Dave


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    Multinationals Lead on Profit Margins

    Profit after Tax as per cent of Capital Employed

    Multinationals

    Private Sector

    Public Sector

    Dr. S A Dave




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    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


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    Household Savings Rise post-1997

    Gross Domestic Savings as per cent of Gross Domestic Product

    Households

    Private Corporate

    Public Sector

    Dr. S A Dave


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    Rise of Physical Assets in Household Savings

    Share in Household Savings

    Physical Assets

    Financial Assets

    Dr. S A Dave


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    Portfolio Investments Takeoff in 2004

    Foreign Investments (USD Million)

    Foreign Portfolio Investment

    Foreign Direct Investment

    Dr. S A Dave


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    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


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    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


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    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


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    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


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    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


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    Economic Development & National SecurityThe Case of IndiaForeign Investment & Economic DevelopmentThank you

    Dr. S A Dave

    Chairman

    Centre for Monitoring Indian Economy Pvt Ltd.


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