india and recession

8/3/2019 India and Recession

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Certainly there is a lot of effect of US recession on Indian economy. US recession has a

chain effect as US imports many things from other countries which includes India.

Primarily this has impact on export industry in India which includes textile industry,

granite processing industry, tobacco exports and so on. It is said that already 5 lakh

people have already lost their job in Indian textile industry.

This is not the end of the story. Now it has also started showing its direct effects on all

other industries as well which include IT and ITES. Proactively many of the companies

have started taking proactive steps to protect them self from the gloomy future. Many

small companies were closed and ready to close, increasing the unemployed people. This

will have lot of impact on peoples spending abilities and the supply chain effect carries

forward.

But is every one in India are effect? Yes, but many people may not realize it or many not

have any direct effects. Especially people living in cities will are more exposed to this

and people in towns are less exposed to this situation. This is especially because number

of employees working in private firms are susceptible to this situation and people

working for govt. and self employed are less (these people will have impact only at later

stages).

Whats the other side of the coin? Frankly its a overall loss to every one. But this is the

right time for govt. to attract good talent to join in govt. organizations. That way govt

can increase its efficiency and also help country to face this situation. But govt has to act

quickly for filling already vacant positions and creating new jobs.

For the global economy, August 2011 was a particularly bad month. A string of economicindicators released early that month suggested that close to four years after the onset of the

global recession in December 2007, a sluggish world economy was set to sink again.

Sentiment too was at an exceptional low. Though completely out of line and even irresponsible,the first-in-history downgrade of US Treasury bonds by Standard and Poor's did reflect the moodin the market. Though the assessment was based on wrong numbers, the fact that the debt ofworld's most powerful country that was home to its reserve currency was even considered to be ofsuspect quality was telling.

Besides the never-ending crisis in Europe, one factor explaining this despondency was the fear ofa second recession within half a decade. The news from almost all sources was disconcerting.Recovery from the recession was still sluggish in the US.

Japan, that had been experiencing long-term stagnation, had been devastated by a whollyunexpected exogenous shock. And, France had announced that it had experienced virtually nogrowth in that quarter. But the real dampener was the release of evidence that the strongesteconomy in the rich nation's club Germany - was losing all momentum, registering a growthrate of just 0.1 per cent in the second quarter. The real economy crisis had penetrated Europe'score, pointing to the possibility of a return to recession in the Eurozone as a whole (whichregistered 0.2 per cent growth).

For an India that is now more integrated with the world economy, this has to be bad news. But ifthe Government of India is to be believed, the Indian economy is not likely to be very adverselyaffected by the current round of global volatility. Finance Ministry sources argue that the Indianeconomic growth story is so robust that the current uncertainty will cause no more than a minor

blip in its confident trajectory.


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Consider, for example, the Indian government's response to the market collapse that followed theUS debt standoff and subsequent Standard and Poor's downgrade.

While acknowledging that India would be impacted, the effort was to play down the likelyintensity of that impact. Our institutions are strong and (we) are prepared to address anyconcern that may arise on account of the present situation, the Finance Minister, Mr Pranab

Mukherjee, reportedly stated. He also promised that the government will fast-track theimplementation of the pending reforms and keep a close eye on international developments.

That response misses the point. The problem is not that India is not adequately reformed, butthat past reforms have resulted in its greater integration through flows of goods, services andfinance with the global economy.

Fall in export revenue

One obvious and important consequence of the global downturn is bound to be a fall in exportrevenues. As Chart 1 shows, the European Union accounts for 20.2 per cent of India'smerchandise exports and the US for another 10.9 per cent. Thus, markets accounting for close toa third of India's exports are already stagnating or in recession. Only two regions can,hypothetically, counter this tendency: Developing Asia (excluding China) and the OPECcountries. The former accounts for a siezable 23.4 per cent of India's exports and the latter foranother 21.1 per cent.

However, most of developing Asia would be adversely affected by the OECD downturn to agreater extent than India. And unless geopolitical developments intervene, a global recessionwould moderate oil prices and dampen import demand from the OPEC bloc.

Finally, the hope that China would be a balancing force is of less relevance to India since itaccounts for just 6.5 per cent of the latter's exports. Overall, India is likely to take a hit in terms ofits exports of goods, which has been a source of buoyancy recently.

The other significant source of demand and revenue that is likely to be adversely impacted isservices. According to Balance of Payments data, gross revenues from exports of softwareservices amounted in 2010-11 to as much as 24 per cent of the gross revenues from merchandiseexports. In 2009-10, the US alone accounted for 61 per cent of India's total software exports.European countries (including the UK) followed with as much as 26.5 per cent. If these tworegions are the first to be hit by the recession, it is unlikely that software export revenues wouldremain unscathed.

Over the period 2004-05 to 2009-10, services accounted for 66 per cent of the increment inIndia's GDP. And revenues from software services amounted to 9.4 per cent of the GDP fromservices (excluding public administration and defence). The deceleration or decline in softwareexport revenues is bound to affect GDP growth adversely.

Exposure to global finance

Besides export volumes and revenues, the other reason why India is likely to be adverselyaffected by global uncertainty is exposure to global finance. Direct exposure to internationalfinancial assets, including the now less valuable debt issued by OECD governments, is only asmall part of the problem.

As the distribution of India's gross international asset position (Chart 2) indicates, the twoimportant forms those assets take is direct investment and accumulated reserve assets. Portfolioand other forms of investment are small or negligible. Since private players largely hold directinvestment assets, the squeeze in global demand would affect the overseas revenues of thesefirms, but possibly not do too much damage to the Indian economy.


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What is more of an issue is the fate of the $274 billion of foreign currency assets (out of a total of$305 billion of reserve assets) held by India. While $127 billion of these are held as deposits withcentral banks, the Bank of International Settlements (BIS) and the IMF, as much as $142.1 billionis invested in securities, consisting largely of government securities (Chart 3).

With the uncertainty surrounding the value and soundness of public debt, the danger of the

erosion of the value of those assets is now significant. For example, India holds $41 billion of USTreasury securities that have been downgraded recently by S&P. The balance is likely to be in theeven more suspect public debt of European governments.

In addition to this, banks in India reporting to the BIS have disclosed holdings amounting to$31.3 billion in financial assets abroad. Of these, $14.9 billion are the external positions of banksin foreign currencies vis--vis the non-bank sector abroad. These exposures too are vulnerablegiven the volatility in financial markets in the OECD countries.While the sums involved may besmall (relative to the $1.2 trillion held by China in US Treasury bonds, for example) they are ofsignificance because of the nature of India's reserves.

Unlike in the case of China, the reserves that insure India against adverse global responses are

not earned through current account surpluses, but are drawn from what foreign investors havedelivered in the past.

They represent liabilities that are being held as assets that on average yielded returns as low as2.09 per cent over the year ended June 201 (down from 4.16 during 2008-09). If the value ofthose assets is eroded, other things constant, India's ability to cover its liabilities is eroded aswell.

Besides this, there is the fact that because of the presence of legacy capital in the country(consisting, as of March 2011, of $204 billion of direct investment, $174 billion of portfolioinvestment and $265 billion of debt and other investments) India is vulnerable to global investorsentiment. International finance may assess its so-called fundamentals very differently from the

way they are assessed by the government.

Public debt

Consider the issue that now captures financial market attention: public debt. The experience inGreece, Spain, Portugal and elsewhere suggests that finance capital is increasingly intolerant ofwhat is perceived as excessive public debt.

Though India's gross public debt to GDP ratio declined from 75.8 per cent to 66.2 per centbetween 2007 and 2011, it still is among the highest in the region. India's 66.2 per cent levelcompares with Malaysia's 55.1, Pakistan's 54.1, Philippines' 47, Thailand's 43.7, Indonesia's 25.4and China's 16.5 (Eswar Prasad calculations quoted in Comparing the burden of public debt,interactive graphic on theFinancial TimesWeb site).

It is no doubt true that a number of factors make Indian public debt less of a problem than inmany other contexts. To start with, much of public debt in India is denominated in Indian rupeesand is owed to resident agents and therefore is unlikely to be adversely affected by uncertainty ininternational debt and currency markets. Secondly, within the country public debt is largely heldby the banking system dominated by public sector banks. They are subject to governmentinfluence and are unlikely to respond to developments in ways that make bond prices and yieldsextremely volatile. Given these circumstances, public debt is not a potential trigger for a crisisand in any case should not worry private financial interests.

But if a wrong downgrade can make a difference to US markets and interest rates, so can it for

India's. It is in that background that we should view reports of S&P's statement that fiscalcapacities in Asian emerging markets, including India, have shrunk relative to 2008. This, it has


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argued, would mean that in the event of a second global slowdown: The implications forsovereign creditworthiness in Asia-Pacific would likely be more negative than previouslyexperienced, and a larger number of negative ratings actions would follow.

If, for its own reasons, S&P needs a target to declare that some governments in the Asia-Pacificare excessively indebted, then India is in the firing line. India has been a favoured target of

foreign finance. And if it does not satisfy the latter's requirements, it can fall out of favour.Clearly, a fiscal surplus and a low public debt to GDP ratio are part of those requirements even iffor the wrong reasons. India has neither.

Contrast that with 9.3% growth on the eve of the crisis when India could do no wrong. "This time we

may be on weaker foundations," chief economic advisor Kaushik Basu told Washington Post last

week. Just before the crisis in 2008, the repo rate, the key rate in the economy, was 9%, which was

cut quickly to stimulate demand and investments. This time round the best the Reserve Bank can do

is to halt the rate increases because despite high borrowing costs consumption demand remains

strong and any policy reversal risks inflation going out of hand.

FASTEST GROWNING

India is today one of the six fastest growing economies of the world. The country ranked fourth in termsof Purchasing Power Parity (PPP) in 2001. The business and regulatory environment is evolving andmoving towards constant improvement. A highly talented, skilled and English-speaking human resourcebase forms its backbone.

The Indian economy has transformed into a vibrant, rapidly growing consumer market, comprising over300 million strong middle class with increasing purchasing power. India provides a large market forconsumer goods on the one hand and imports capital goods and technology to modernize itsmanufacturing base on the other.

An abundant and diversified natural resource base, sound economic, industrial and market fundamentals

and highly skilled and talented human resources, make India a destination for business and investmentopportunities with an assured potential for attractive returns.

Far-reaching measures introduced by the government over the past few years to liberalise the Indianmarket and integrate it with the global economy are widely acknowledged.

The tenth five year plan document targets a healthy growth rate of 8% for the Indian economy duringthe plan period 2002-07.

Selected Economic Indicators

India remained relatively unscathed from the 1997-98 Asian financial sector crisis and has maintained ahealthy growth rate of over 5 per cent despite recession in major world economies over the past two

years. This demonstrates the size, strength and resilience of the Indian economy.

India 's GDP for the year 2001-02 was US$ 422 billion. The real GDP growth varied between 6 to 8 percent per annum (average 6.5 per cent annum), during the 1990s.

Were it not for the resilience of china and India , the world economywould have been in deep recession in 2002.

Source: Morgan Stanley Dean Witter report.

The Sectoral composition of GDP reflects a transition. While theagricultural and industrial sectors have continued to grow, theservices sector has grown at a significantly higher pace - it currentlycontributes nearly half of India 's GDP.


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On the external front, Cumulative foreign investment inflows have been US$ 50 billion since 1991. Thisincludes over US$ 28 billion of Foreign Direct Investment (FDI) and about US$ 22.6 billion in portfolioinvestment.

Licensing has been removed from all but six sectors. The Indian government is determined to removeany remaining road blocks, real or perceived. India has one of the most transparent and liberal FDI

regimes among the emerging developing economies. The union government has been continuouslyopening up new sectors to foreign investment, while enhancing FDI limits in others. The year 2002 sawthe opening up of the defence, print media, housing and real estate and urban mass transportationsectors. Some of the key aspects of FDI in the country include:

100 per cent FDI is allowed in most sectors except telecommunications (49 per cent), insurance (26per cent), banking (49 per cent), aviation (40 per cent) and small scale industries (24 per cent). FDI isexcess of 24% permitted in SSI sector on 50% export obligation.

FDI inflows grew by 65 per cent over the previous year to reach US$ 3.91 billion during 2001-02. Thegrowth of 65 per cent is encouraging at a time when global FDI inflows have declined by 40 per cent.

The upward trend in FDI inflows has been sustained with FDI inflows during April-June 2002 beingdouble that of the corresponding period in 2001.

An Economist Intelligence Unit (EIU) report on 'World investment prospects 2002' projects and annualaverage FDI inflow of US$ 5.3 billion into India during 2002 - 2006.

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External sector

India 's external sector posted significant gains during 2001-02, despite the deepening of the globalslowdown and uncertainties owing to September 11, 2001 terrorist attacks. The current accountregistered a surplus after a period of more than two decades. The buoyancy in capital flows bolstered in

the foreign exchange.

FDI flows to India will go up: UNCTAD

"Worldwide FDI flows will decline this year - 25 per cent in

developing and 31 per cent in developed countries - but India is one

of the few countries where it will go up," Karl Sauvant, Director,

UNCTAD told UNI.

Source news report, 25 November 2002.

According to a recent report on global foreign direct investmentinflows, India has been rated the seventh most attractive destination in the world for FDI for 2001

Indicators of liquidity and sustainability of external debt improved further. The exchange rate of therupee remained broadly stable during the year.

Weak external demand adversely affected India 's export performance during 2001-02. This wascounterbalanced by the listless domestic demand for imports and the softness in international oil pricesfor a greater part of the year. As a result, the trade deficit, on balance of payments basis, declined fromUS$ 14.4 billion during 2000 - 01 to US$12.7 billion during 2001-02. The invisible account continued toprovide support to the balance of payments with the surplus increasing from US$ 11.8 billion during2000-01 to US$ 14.1 billion during 2001-02. The current account recorded a surplus of US$ 1.4 billion.Net capital flows were higher at US$ 9.5 billion during 2001-02.

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MNCs happy operating in India , 61% in black
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".A survey on FDI conducted by FICCI shows that the performance of 385 foreign investors operating inIndia was satisfactory, with 61 per cent reporting profits or break-even. And around 51 per cent of therespondents have expansion plans on the cards. Despite the overall conditions of slowdown, over 71 percent respondents reported a capacity utilization of 50-75 percent.

As many as 93 percent of the respondents find the handing of approvals and applications at the center

to be good average. The simplification of the approval procedure at the centre can be gauged by the factthat number of applications going through the automatic route has risen from 16 per cent in 2000 to 29per cent in 2001. Also the ratio of FDI inflows to approvals had gone up to 52.8 per cent in 2000compared to 29 per cent in 1996.

Around 63 percent find the overall policy framework to be the good to average. " The apparent increasein the FDI inflow shows that the improved policy environment is having a positive impact ," Say a seniorofficial at FICCI. FDI this year has risen by 61 per cent to US$ 2.37 billion in April - November 2001compared to US$ 1.47 billion in the corresponding period last year. Besides 70 per cent feel thatbringing funds in to the country is relatively easy and 69 per cent say that funds repatriation can becarried out fairly easily."

Source: India business world, April 2002.

India 's foreign exchange reserves have risen significantly to overUS$ 68 billion by the end of December 2002. This has provided themuch needed stability to the exchange rate and strengthening ofthe rupee.

The external debt to GDP ratio of the country

has improved significantly from 38.7 per cent in 1992 to around 22.3 percent in2001. Among developing countries, India has one of the lowest external debt to GDPratios.

The value of foreign trade has increased substantially. Both exports from andimports into India are increasing. The total volume of foreign trade in 2001-02 wasover US$ 95 billion. In order to boost exports and attract foreign investments, thegovernment had announced in April 2000 the establishment of special EconomicZones (SEZs) policy. The SEZs would offer world class infrastructure, attractivefinancial and tax incentives and procedural ease of a duty-free trading area. For all practical purposes,units located in the SEZs are given deemed foreign territory treatment.

A unique feature of the transition of the Indian economy has been an element of high growth withstability. Both at the central and state levels and across political affiliations of the Indian federal and

state polity, there is consensus on further economic liberalization. The reforms programme and themarket oriented policies of the government are irreversible.

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Agriculture

Two thirds of India 's population lives in rural areas. Agriculture andrelated activities are the main source of livelihood for them. Theperformance of the agricultural sector has continuously beenimproving (Over many decades), helping the country achieve asurplus in the food grains production. This has been facilitatedthrough new agricultural techniques and tools acquired by Indian

farmers, mechanization, use of high yielding varieties of seeds,increasing use of fertilizers and irrigation facilities, on goingoperational research in the country's numerous agricultural
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universities and colleges, etc. with liberalization of trade in agricultural commodities, India enjoys acompetitive advantage in a number of agricultural and processed food products exports.

While the share of agriculture in GDP (26.6 per cent in 2000-01) is declining because of faster growth ofthe services sector, production in absolute term has been steadily rising. Agriculture accounts for 62 percent of total employment. Some other key highlights include:

India had a buffer stock of foodgrains (wheat and rice) of nearly 50 million tones (Dec.02) as againstthe target of 20 million tones at any given point in time. This has helped India enter the foodgrainsexport market in a significant way.

India is the largest producer and consumer of tea in the world and accounts for 28 per cent of worldproduction and 15 per cent of world trade.

Agri-export account for 13 - 18 per cent of total annual exports of the country. Agri-export amountedto over US$ 6 billion in 2000-01.

The value of agricultural imports of inputs like fertilizers, etc. are approximately one-fourth the valueof exports.

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Manufacturing

India has moved from an agrarian to a manufacturing and servicesled economy. The manufacturing sector contributes around one -fourth of total GDP. The country has built a diversified industrialbase comprising traditional handicrafts, small, medium and largemanufacturing companies and high technology-oriented product.The industrial output has grown to approx US$ 65 billion.

The Country has emerged as an important global manufacturing

hub - many multinational corporations (MNCs) like Pepsi, GeneralElectric (GE), General Motors (GM), Ford, Suzuki, Hyundai, Gillette, LG, etc. have followed India 'seconomic liberalization process from close quarter and set up successful operations in the country inrecent years. They have been able to leverage cost advantages while adhering to global manufacturingfacilities.

Companies in the manufacturing sector have consolidated around their area of core competence by tyingup with foreign companies to acquire new technologies, management expertise and access to foreignmarkets. The cost benefits associated with manufacturing in India , have positioned India as a preferreddestination for manufacturing and sourcing for global markets.

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Services

The services sector currently accounts for almost half of the country's GDP. Expanding at the rate of 8-10 per cent per annum, services is the fastest growing sector in the Indian economy. In fact the growthin India 's GDP, despite the global slowdown, is attributed largely to its strong performance.

Availability of highly skilled workers has encouraged many international companies to carry out theirresearch and development activities in India . IT, biotech, tourism, health, financial services andeducation hold the promise of sustainable high growth. To give a perspective:

The Indian IT industry has grown from US$ 0.8 billion in 1994-95 to US$ 10.1 billion in 2001-02.Domestic software has grown at 46 per cent while software exports have grown at 62 per cent over thelast 5 years.

The last decade has seen the Indian entertainment industry grow exponentially. The key drivers forthis have been technology and the government's recognition of the importance of the sector. The


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industry is expected to grow at a compound annual growth rate (CAGR) of 27 per cent. Revenues areprojected to increase from US$ 3 billion in 2005.

Information Technology enabled services (ITeS) with elements like call centres, back officeprocessing, contents development and medical transcription are key to rapid growth. The sector has anemployment potential of 1.1 million by 2008.

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Infrastructure

The infrastructure sector in India , traditionally reserved for the government, is progressively beingopened up for private sector participation.

Ports

The country has a 7500 km long coastline dotted with numerousmajor and minor ports. The area that have been identified forparticipation and investment by the private sector include leasing

out existing assets of the ports, construction of additional assetssuch as container terminals, cargo berths, handing equipment,repair facility, captive power plants and captive facilities for portbased industries. Foreign investment up to 100 per cent equityparticipation is permitted in ports through the automatic route forconstruction and maintenance of ports and harbours.

A number of private companies have already set up port facilities in the country. Two Greenfield portsi.e. Pipavav and Mundra in Gujarat have been set up through private participation and these have beenable to compete with existing major ports. Many multinational and domestic player have taken overexisting port facilities and are operating them. Recently the container terminal at Chennai Port has beentaken over by an Australian port major.

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Roads

India has the second largest road network in the world, spanning 3.3 million kilometers. Most of theprivate investment in this sector has traditionally been through the build - operate- transfer schemes.However, now many new projects are being bid out on toll collection mechanism.

Currently, the National Highways Authority of India (NHAI) is implementing the national highwaysdevelopment project (NHDP). NHDP is the largest ever highway development project to be undertaken inthe country. The project involves widening of over 13,000 km of highways in the country. Theinvestment for this project is estimated at US$ 13.2 billion at 1999 prices. The project has been brokenup into a large number of smaller segments, many of which have been commissioned. Currently workhas been completed on 1976 kilometers and another 5222 kilometers of length is under construction.

Airports

India has 122 airports, controlled by the Airports Authority of India (AAI). The total passenger traffichandled by these airports in 2001-02 was over 40 million, while the cargo traffic handled was around854,000 tonnes. The government is in the process of leasing out the four major international airports atDelhi , Mumbai, Chennai and Kolkata to private operators.

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Power

Power sector, hitherto, had been funded mainly through budgetarysupport and external borrowings. But given the budgetary supportlimitation due to growing demands from other sectors, particularly
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social sector and the severe borrowing constraints, a new financing strategy was enunciated in 1991allowing private enterprise a larger role in the power sector.

The all India installed capacity of electric power generating stations under utilities was 104917 MW as onMarch 2002 consisting of 26261 MW hydro, 74428 MW thermal, 2720 MW nuclear and 1507 MW wind. Acapacity addition target of 4764 MW consisting of 1536 MW of hydro and 3228 MW of thermal was

envisaged for the year 2001-02 of which 3115 MW consisting of 1106 MW of hydro and 2009 MW ofthermal was achieved.

Presently, restructuring and regulatory reforms include bringing about reforms in the state Electricityboards (SEBs) through establishment of the state Electricity regulatory commission. Reforms areprogressing steadily in the sector and privatisation of SEBs have already begun. The government is alsoplanning a massive restructuring of the finances of SEBs and is looking at a one-time settlement of duesto SEBs. In effect, a large amount of liquidity will be injected in the sector.

The ministry of power has also formulated a blue print to provide reliable, affordable and quality powerto all users in the country i.e. power on demand by 2012. this requires huge increase in generationcapacity, upgradation of existing generation facilities and also the transmission and distribution network.

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Telecommunications

India 's telecommunications network ranks among the top ten countries in the world. One of the world'slargest and fastest growing telecom markets, the country has an investment potential estimated at US$39 billion by 2005 and US$ 69 billion by 2010.

Despite a strong base of a billion people, the country has a low telephone density of approximately 5 percent, estimated to grow to 7 per cent by 2005 and 15 per cent by 2010. The government had allowedprivate participation in cellular services in 1992. The sector witnessed partial de-regulation between1994 and 1999. The government announced the New telecom policy (NTP) in 1999 to further de-regulate the sector with respect to services like basic, international long distance (ILD), national longdistance (NLD) and wireless in local loop (WILL) among others.

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Financial Sector

The Indian financial sector reforms aim at improving theproductivity and efficiency of the economy. It remained stable, evenwhen other markets in the Asian region were facing a crisis. Theopening of the Indian financial market to foreign and private Indianplayers, has resulted in increased competition and better productofferings to consumers.

The financial sector has kept pace with the growing needs ofcorporates and other borrowers. Banks, capial market participants

and insurers have developed a wide range of products and services to suit varied customerrequirements. A trend towards mergers and acquisitions is expected in the near future due to thecompulsion of size and limitations of growth of business on its own vis--vis growth through acquisitions.The recent favourable government policies for enhancing limits of foreign investments in the bankingsector have generated interest from global banking majors.

The reserve Bank of India (RBI) has ushered in a regime where interest rates are more in line withmarket forces. This has increased the credit disbursements in the economy which, in turn, will boostindustry. Banks and trade financiers have also played an important role in promoting foreign trade of thecountry.

The potential of the sector is evident from existing and projected estimates:


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Presently the total asset size of the Indian Banking sector is US$ 270 billion while the total depositsamount to US$ 220 billion in a banking network of over 66,000 branches across the country.

The size of the insurance market with only 20 per cent the insurable population currently insured,presents an immense opportunity to new players. Foreign insurance majors have entered the country ina big way and started joint ventures in both life and non-life areas.

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Disinvestment

The government over the past decade has been increasingly redefining its role from being a provider ofgoods and services to that of a policy maker and facilitator. Towards this objective, the government hasbeen consistently divesting its stake in various public sector undertakings (PSUs).

Between 1991 and 2002, the government divestment process had yielded US$ 6.3 billion to thenational exchequer.

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Policy Initiatives

There has been a paradigm shift in the government's approach to selling its stake since 31 March,2000 . From selling minority stakes, the government has started divesting majority holding andtransferring management control to strategic investors in profitable undertakings.

The government had set up a separate ministry in late 1999 to facilitate the divestment process. Ithas also set up a cabinet committee and an interministerial group to consider and facilitate specificdivestment proposals.

Some of the key highlights of the disinvestment policy are:

The 1991-92 Budget considered divestment of 20 per cent government equity in select PSUs in favourof public sector institutional investors, mutual funds and workers.

The Disinvestment Commission (1997-99) made specific recommendations on 58 specific PSUs withrespect to disinvestment feasibility and the methodology to be adopted.

The second phase of disinvestment started in 1998-98. Each year since 1999, the government ispushing ahead with reforms and disinvestments. The government has now declared its willingness toreduce its stake below 26 per cent in non-strategic PSUs.

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Opportunities

The successfully privatized projects during 2002-03 include the long - distance international telecomcarrier - Videsh Sanchar Nigam Limited (VSNL); petroleum marketing company - IBP; petrochemicalcompany - Indian petrochemicals limited (IPCL); metal manufacturing companies - Hindustan ZincLimited and Bharat Aluminium Company; hotels belonging to India Tourism Development Corporation(ITDC) and the country's largest small and medium car manufacturing company - Maruti.

The government is now considering disinvestments of the shipping corporation of India and two statetrading corporations (STC and MMTC) among others. One of the biggest privatization projects that thegovernment has initiated is the leasing of international airports at the four metropolitan cities of Delhi ,Mumbai, Chennai and Kolkata. The privatization mandates will provide a good opportunity to bothdomestic and foreign investors to pick up stakes in well- performing assets.

HOW INDIA SRVIVED THE FINANCIAL CRISES
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As the world economy begins to recover, Indians are looking back with particular satisfaction athow they coped with the recent crisis. Despite an unprecedented global recession, India remainedthe second fastest growing economy in the world. Whereas most countries suffered negativegrowth in at least one quarter over the last two years, Indias GDP grew by more than 6%throughout this period and by 7.9% in the last quarter of 2009.

Indias achievement is all the more striking given that the Pakistani terrorist attacks on Mumbai Indias financial nerve center and commercial capital in late November 2008 came in the midst ofthe crisis. The terrorists dented the worldwide image of India as an emerging economic giant, asuccess story of the era of globalization, and a magnet for investors and tourists.

Indeed, in late 2008, foreign investors did withdraw $12 billion from Indias stock markets. ButIndias resilience in the face of adversity, and its mature restraint in the face of violentprovocation, encouraged investors to return. Foreign direct investment totaled $27.3 billion in2008-2009, despite the global financial crisis, and reached $1 billion in just one week in May 2009.

Indias ability to stave off the economic gales was helped by the fact that it is much lessdependent than most countries on global flows of trade and capital. India relies on external tradefor about 20% of its GDP (the figure for China is roughly double). The countrys large and robustinternal market accounts for the rest. Indians continued producing goods and services for other

Indians, and that kept the economy humming.

Though Indias merchandise exports did register declines of about 30%, its exports of servicescontinued to do well throughout the crisis. Indians abroad stayed loyal to India: remittances fromoverseas Indians remained robust, reaching $46.4 billion in 2008-2009, the bulk of which camefrom the mainly blue-collar Indian expatriate community in the Gulf countries.

Indias generally conservative financial system played a vital role, too. Its banks and financialinstitutions were not tempted to buy the mortgage-supported securities and credit-default swapsthat ruined several Western financial institutions. Among the drivers of growth, domestic capitalformation retained much of its momentum from preceding years.

Moreover, Indias government adopted a pro-active fiscal policy, rolling out two rounds of stimuluspackages. The authorities pursued pro-growth policies, including lower interest rates, expandedcredit, and a reduction in excise duties.

There are still challenges ahead. Reform is pursued hesitantly by a coalition government constantlywary of voters reactions. A decision to de-regulate petrol and diesel prices has sparked massivestreet protests and stoked fears of rampant inflation. Privatization of Indias bloated public sector(from massive coal and steel enterprises to the loss-making national carrier Air India) has beenslow to get off the ground.

And, of course, the persistent complaints of corruption and bureaucratic red tape have not fadedwith liberalization. The countrys infrastructure remains woeful, as any visitor flying into an Indianairport notices. Power shortages are frequent. Some 40% of the population still lives below apoverty line drawn just this side of the funeral pyre.

Yet all these problems are being dealt with by a confident Prime Minister Manmohan Singh, whohas steered the ship of state through some particularly treacherous waters. India is simultaneouslytackling the hardware of development (ports, roads, airports) and its software (health care,education). Success will not occur overnight, but progress has been impressive and is continuing.

In the last 15 years, India has pulled more people out of poverty than in the previous 45 roughly10 million people per year on average in the last decade. The country has visibly prospered, and,despite population growth, per capita income has grown faster, and to a greater level, than everbefore.

The current financial crisis, far from prompting India to retreat, is an opportunity to safeguard andbuild on those gains. India can advance with the confidence that it can cope with the world from avery secure base. As the 2010 monsoon nourishes Indias plains, thats an encouraging place tobe.

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