The impact of economic reforms has been that rich people have become richer and poor people poorer

 

In 1991, when the foreign exchange reserves had reduced to such an extent that India could barely finance three weeks’ worth of imports. Economic reforms were introduced in Indian economy. Before 1991, India was closed for foreign companies. It was a period very much known as License Raj. During this period, up to 80 agencies had to be satisfied before a firm could be granted a license to produce and the state would decide what was produced, how much, at what price and what sources of capital were used. The government also prevented firms from knocking off workers or closing factories. Indian economic policy was influenced by the colonial experience. There was monopoly in many sectors by state owned enterprises. This was the period which encouraged the corruption and red tape system in India. The annual growth rate for India during 1950 – 1980 was around 3.5 % compared to 9 % in 2009.

During the national economic crisis of 1991, when India was on the verge of Bankrupt, Government of India decided to bring up several economic reforms. Then PM, Mr. Narshimha Rao, appointed Manmohan Singh as a special economic adviser to implement the reforms. These reforms were mainly focused on liberalizing foreign investment and privatization of loss incurring government corporations. Some latest results have revealed that the scope and pattern of these reforms in India’s foreign investment and external trade sectors followed the Chinese experience with external economic reforms.

The impact of these reforms were seen in just few years as the total foreign investment in India grew from a infinitesimal US $132 million in 1991-92 to $5.3 billion in 1995-96. In initial years of reform, 1991–1992, poverty increased in India slightly. But, later on number of people below poverty line decreased. And, a steep declined in number of person below poverty line in between 1993 to 1998 was seen. Currently, number of middle class in India is expected to be 300 million, which is expected to double by 2025 to 600 million. It is sure that as the economy of India will boom, new millionaire and billionaire will join the list. There will be new addition in the upper class list, mostly coming out of present middle class. Also, the 300 million new middle class people must come from non-other than lower class or poor people list. These trends are taken from the last 5-10 years data. So, the poor are quickly transforming in middle class with increase in their earnings. This shows that the impact of economic reform is helping poor to convert them into middle class. So, impact of economic reforms has not been that poor people have become poorer. But, yeah rich people have become richer.

With revolution in many sectors in India, GDP of India has showed a tremendous growth. Telecom sector is very much saturated in metropolitan and many urban cities. Now, new companies are aiming at rural area with immense network of towers coming around rural sectors. Obviously, this is going to strengthen rural economy. Till now, urban economy has played a major role in economic progress of India after the reforms. However, with improving the network of roads in rural areas and good communication, our villages are going to see sure success. This all is going to help the poor.

 

Impact of IT/ITES on Indian Economy

Imagine two persons talking about the growth rate of India! Can they discuss it without the role of Information Technology (IT) and Information Technology Enabled Services (ITES) in Indian Economy? Now, think about another situation. Two persons are talking about the growth rate of India and the year is 1985. So, what do you think, would they be talking about the role of IT/ITES in Indian Economy? I don’t think so. Twenty five years back, no one would have dreamt of India as a major IT exporter. The nation lacking food & money would be a big player in computer sector. Today, it is one of the fastest growing nations and IT/ITES sector is busy writing the success story of India.

Today, India’s GDP is growing at a massive rate of 8.9% (estimated FY2010-11). It is expected that the share of IT/ITES industry in this GDP will be 6.1% as against 1.2% of 1998. For the past 10 years, GDP of India has grown on an average 6-7% every year. If a sector’s share in this growing GDP has increased from 1.2% to 6.1%, what could be the growth rate of that sector? Revenue of IT/ITES of India for FY2010 is expected to be 71.3 billion USD compared to merely around 6 billion USD in 2000. The growth in number of employees here for the past ten years has been 26%, making it largest employer in the organized private sector. Currently, direct employment by this sector is 2.3 million. Out of total Indian exports, 26% is the share of this sector for FY2010 as compared to 4 % in 1998. These are some figures which tell the story of storming by IT/ITES industry for the past ten years.

Indian economy has gained a lot from the development of IT/ITES sector. Research shows that out of every 1 job created in this sector, indirectly 4 additional jobs were created, 75% is for those who are SSC/HSC or less qualified, 15.85bn spent by this sector in the domestic economy in the FY2006, generated an additional output of 15.5 billion.

The development of this sector has not limited itself to Tier-I cities like Bengaluru, Chennai, Hyderabad or NCR. It is going deep into Tier-II or III cities. An example is Bhubaneswar, a Tier-III city where all 4 major Indian IT companies: Infosys, Satyam, TCS and Wipro are present. In 2006-07, Orissa’s exports has raised by 60% over 2005-06. To promote this sector, SEZs are being built around with improvement in roads, retail, entertainment and housing facilities. The ratio of employees – technical to non-technical is 80:20, 4% come from economically backward class, while 58% of total employment is from Tier-II/III cities, and 30 % are in the age group of 18-25 yrs. These data show how this sector is penetrating the national economy and enhancing it right from the root.

India was known for exporting low technology oriented products of low quality. Now, to compete in the global market, IT/ITES companies have adopted high quality standards. This in turn affects other sectors too. In the process, not just India’s IT product is becoming a quality brand. But, overall ‘Made in India’ is getting quality brand recognition. Listing of Indian IT/ITES companies in various global stock exchanges, which requires abiding by strict global accounting norms, has helped build a strong image of companies and sector outside India. Indian IT/ITES industry is taking a key role in different acquisitions and mergers of overseas companies. This sector had highest share, 23% in outbound M&A deals in FY2006.

Till the advent of IT/ITES industry, Indian corporate consisted of only 2 types of companies-either large family owned business or multi-national companies. First generation entrepreneurs were hard to find. Now, the funds are enormous to support them. Their success has given confidence to other middle class individuals to exploit their chance of success. In the process many new first generation billionaires have come up. Some IT/ITES companies adopted the practice of Employees Stock Option Plan (ESOP), which enabled them to share their wealth with the employees to get more effort-based efficient work. Later, other companies too adopted this practice. Thereby, this process created many salaried employees.

ROLE OF IT/ITES

Direct contributions:

•    Growing share of the country’s GDP.

•    Boosting the foreign exchange reserve of India.

•    Employment generation.

Indirect contributions:

•    Additional employment generation.

•    Driving growth of other sectors of the economy.

•    Encouraging balanced regional development.

•    Fuelling the growth of PE/VC funding.

•    Improving the product/service quality level.

•    Spurring 1st generation entrepreneurship.

•    Front runner in practicing good corporate governance.

•    Boosting the image of India in the global market.

Diversity in employment

•    Encouraging employment of differently-abled: 60% of the employees.

•    Opening opportunities for non-technical personnel.

•    Creating employment opportunities in smaller towns/cities: 33% to 50% employees.

•    Promoting women: over 30% and youth employment.

•    Creating opportunities for the ‘out-of-the-main-stream’ candidates.

Initiatives for HRD:

•    Training of workforce through collaboration with educational institutes.

•    Promoting higher education through scholarships and tie-ups with educational institutes.

•    Improving work environment by providing recreational facilities and work-life balance.

Socially relevant products and services:

•    Education

•    Employability and entrepreneurship

•    Health

•    Bridging the digital divide

Conclusion

The IT/ITES industry has made a beginning and with the encouragement and support of NASSCOM and NASSCOM Foundation, it is on track to set an example that would encourage others to emulate and help changing the face of India. It is apt to conclude with a remark made by Nobel Laureate Dr. Amartya Sen, about the Indian IT/ITES industry, during his key note address at the NASSCOM India Leadership Summit 2007 –

My point is not that the IT industry should do something for the country at large, for that it does anyway. It makes enormous contributions; it generates significant incomes for many Indians; it has encouraged attention to technical excellence as a general requirement across the board; it has established exacting standards of economic success in the country; it has encouraged many bright students to go technical rather than merely contemplative; and it has inspired Indian industrialists to face the world economy as a potentially big participant, not a tiny little bit-player. My point rather, is that it can do even more, indeed in some ways, much more. This is partly because the reach of information is so wide and all-inclusive, but also because the prosperity and commanding stature of the IT leaders and activists give them voice, power and ability to help the direction of Indian economic and social development.

India Spends Too Much On Its Defence

India is the largest importer of defence equipment in the world. Currently, India imports close to 70% of its weapons requirements largely from Russia, Israel, and more recently, the United States. The country’s defence expenditure will be around $112 billion by 2016. In July 2010, India signed a contract for six new submarines with Russia for $11 billion. It was the highest such contract in the south-Asia till now. Over the next one and a half year, India is going to buy 250-300 advanced fighter jets at a cost of $35 billion. India is building a $2.2 billion dedicated highly secure and state of the art optical fibre network for Indian Armed Forces. This will be one of the largest, closed user group networks for exclusive use for the million plus personnel of the Indian Armed Forces. Just on 9th of Jan 2011, some news came that India is in talks for defence contracts worth $8 billion with different foreign agencies. In the year 2009, India spent $36.3 billion as defence expenditure which was 2.6% of India’s GDP for FY 2008. In the same context, India’s neighbour and one of the enemies, Pakistan had spent $4.8 billion in 2009 as defence expenditure. Also, the share of this defence expenditure for Pakistan of its GDP was 2.6%. We know it very well that Pakistan is always blamed for over-spending for the defence purpose, plus it is facing clashes in its western border with Taliban. So, the natural question arises, is India spending too much on its defence, neglecting other sectors say education or infrastructure?

Apart from above data and facts, an interesting point is that Indian defence expense is calculated excluding several items, like the cost of ministry of defence, expenditure on military pensions which by itself amounts to 15% of the total defence outlay. Several other items like Jammu And Kashmir Light infantry (JAKLI) and the coast guards are also excluded. If we add all these missing items, India’s defence expenditure will be close to 3% of the GDP. If we compare India’s spending on education it is 4.1% of the GDP which stood at 81st rank in comparison with other nations. US are at 37th position with 5.7% and UK is at 46th with 5.3%. If we compare the global average it is 4.4%. Also, India is saying regularly for many years that India will increase its educational expenditure close to 6%. Not to mention, India had increased its defence budget close to 34% in 2010.

Now, if we see the same data presented above in a different way, the scene will be something else. Even though India is just spending 4.1% of its GDP on education, the average for central, east and south Asia is 2.8% only. India is sharing its border with two nuclear armed nations with whom it has territorial disputes and has gone to war over these issues in the past. India has nuclear deterrence but that does not mean neglecting its conventional forces. Also, one of our neighbours is undergoing its worse period of destabilisation and its nuclear asset falling in the hands of extremists cannot be ruled out. India has to prepare for such an eventuality and keep its options open.

As India is importing 70% of its weapon requirements, it has to pay close to 50% to 100% higher than usual price. In 2007, the Indian Air Force (IAF) signed a deal with Russia for a fast-track purchase of 40 Sukhois-30s for $1.6 billion. This amounted to $40 million per Su-30 fighter aircraft. However, a latest deal for an additional 40 Su-30 aircraft and two extra as replacements has been finalised for $4.3 billion. That amounts to roughly $102 million per SU-30 aircraft. Since the latest deal for 42 Sukhoi-30 aircraft is to be manufactured by Hindustan Aeronautical Limited (HAL) in India under licence from the Russian firm Irkutsk, it should be costing less. In fact, the increase in the price for Su-30 is close to 150 per cent with no additional enhanced features. The aircraft being manufactured by HAL does not have features such as the AESA (active electronically scanned array) radar. In comparison, the fifth generation American F-35 fighter planes have advanced features like AESA and cost roughly $100 million apiece. So, even though India is spending more than normal it is getting less.

After Bofors scandal in late 80s, there have been very few defence deals in India. More than 70% of inventories of Indian Armed Forces are 20-plus years of age, and needs to be replaced as well as augmented with the sophistication of modern technology. A major portion of India’s current defence budget is devoted to the ambitious modernization program of the country’s armed forces. Between 2007 and 2012, India is expected to spend about US$50 billion on the procurement of new weapons.

As India and China grow at a tremendous rate, sooner or later they will come into geopolitical conflict over resources to fuel their economies and the aspiration of more than 2 billion citizens of these countries. Therefore force projection will be an important factor in the coming future to ensure the uninterrupted supply of essential minerals, oil and gas, which both countries require in huge quantities.

Also, India is facing internal insurgencies in Jammu & Kashmir, Assam and several north eastern states. Plus blast and terrorist attacks, like 26/11 at several places needs to be keeping in check. And, who could forget the latest popular problem for India, Maoists? They are active in more than six states in India and have claimed lives of more than hundreds of Para-military personnel. There is a need for better hardware for the soldiers fighting this menace and all the hardware costs money.

It is true that India needs to develop itself as producer for these weaponries. This will certainly cost less. But, it will take both time and money to be in such a position. Currently, India has to make itself secure from contemporary threats. In spite of dangerous neighbours, India is still spending less than global average which is 2.7%. To be in a safe position, experts advocate that India needs to spend 3-3.5% of its GDP on its defence. The national security is vital for any nation. Currently, India is nowhere around China in terms of military power. But, it has to be in the position so that China never tries to trespass Indian territories again in the future. If we think at all the facts at the same time, keeping in mind that India has spent less in the past due to fewer pacts after Bofors, certainly India is not spending too much on its defence.