Week 9

SMU Classification: Restricted
ECON113: ECONOMICS OF GLOBALISATION

Week 9: India
Yuan MEI
2022 – 2023 Term 1
1
Recap from Last Week
• Economic history of modern China
• Some features of Chinese economy today
• Challenges and Plans
• Discussion question: How should Singapore respond to the

rise of China and its One Belt One Road Initiative? Will it
hurt the welfare of Singaporeans?
2
Contents
• Indian economy
▪ Pre-liberalization era
▪ 1991 economic crisis and reform
▪ Post-liberalization era
• Business process outsourcing
• US-India trade dispute
▪ Compare with China
• COVID-19 and international trade
3
India: Basic Facts

• Area: 3.28 M km2 (7th )
• Population: 1.38 B (2nd )
• Independence: 1947
• 15 official languages
▪ Hindi 41%, Bengali 8.1%, Telugu 7.2%, Marathi 7%,
Tamil 5.9%, Urdu 5%, Gujarati 4.5%, Kannada 3.7%,
Malayalam 3.2%, Oriya 3.2%, Punjabi 2.8%, Assamese
1.3%, Maithili 1.2%, other 5.9%
• English enjoys the status of subsidiary official language

▪ most important language for national, political, and
commercial communication
4
Map of India
Source: CIA 5
India GDP Per Capita (PPP)
Source: CIA 6
India GDP per Capita
Source: World Bank 7

India Openness Index
Source: World Bank

8
Let’s watch a video.
9
Pre-Liberalization Era (1947-1991)
• After independence, the Nehru government decided to

embrace a planned economy that was to a large extent copied
from the Soviet Union
▪ License Raj: the elaborate system of licenses
▪ Large and inefficient public sector
▪ Import substitution
▪ A closed economy with protectionist policies
10
License Raj
• Key characteristic: a planning commission that centrally

administers the economy of the country
• Extremely inefficient:
▪ It took more than 400 working days from the day a
person applies for license to the day he gets approval
▪ Up to 80 agencies had to be satisfied before a firm could

be granted a license to produce
▪ the state would decide what was produced, how much, at

what price and what sources of capital were used.
11
Large and Inefficient Public Sector

• Consequence of the License Raj: there would be only a
limited number of producers in each industry
▪ Only four or five licenses would be given for steel,
power and communications
▪ Those with licenses would be able to build up huge
powerful empires.
• Planning and the state, rather than markets, would determine

how much investment was needed in which sectors
• Between 1986 and 1991, state owned enterprises made 39%

of gross investment, but generated only 14% of GDP
• Rampant corruption 12
13
Source: transparency international
Closed Economy
• The government attempted to close the Indian economy to

the outside world
• A belief generated as a mixture of socialism and the

experience of colonial exploitation: India needed to rely on
internal markets for development, not international trade
• Implementation
▪ High tariffs
▪ Quota on imports
▪ Import licensing
▪ Foreign exchange control
14
Tariff Rate
15
Exports/Imports Before Liberalization
16
Source: Panagariya, IMF Working Paper
Economic Crisis in 1991
• India’s twin deficit problem: fiscal deficit and trade deficit
• Trade deficit problem started in mid-eighties
• Precipitated by the Gulf War

▪ Oil import bill skyrocketed
▪ Exports slumped
▪ Investors their took money out
• India’s foreign reserved halved from January 1991 to June

▪ Barely enough for three weeks of essential imports
▪ Weeks away from defaulting on its external debts
17
Immediate Response
• Secured a $2.2 B emergency loan from IMF by pledging 67

tons of India’s gold reserves as collateral security
• Airlifted gold to UK and Switzerland to raise additional

foreign reserve
▪ Public outcry
• The Shekhar government collapsed

▪ Narasimha Rao took over as Prime Minister and
Manmohan Singh as Finance Minister
18
India’s Foreign Reserve (Gold Excluded)

Gold Reserves
20
Source: World Gold Council
Economic Reform
• Industrial licensing abolished for almost all product

categories
• Limited public sector monopoly to eight sectors
• Abolished 40% threshold of foreign investment
• Trade liberalization
▪ Tariff reduction
▪ Removed import licensing on all intermediate inputs and
capital goods
▪ Liberalization in trade of services
21
Post-Liberalization Era
22
India Industry Composition

Let’s watch a video.
24
Business Process Outsourcing
• Business Process Outsourcing (BPO): contracting of the

operations and responsibilities of a specific business process
to a third-party service provider
• Examples
▪ Customer-related services
▪ Human resources
▪ Computer or Internet related work (IT outsourcing)
• BPO in India
▪ Accelerated around 2000 when numerous US firms hired
Indian IT services to re-write codes to deal with Y2K
▪ In 2017, IT services along contributed $126 B exports
25
US-India Trade Dispute
26
US-India Trade Dispute
• Even after the economic liberalization, India is a more closed

economy compared to USA
• Average MFN applied rate in 2018:

▪ 13.4% (India) versus 2% (USA)
• Not much tension observed before Trump

▪ USA has treated India as a potential counterweight to China
▪ USA has a small and declining trade deficit with India:
$24.2 billion in 2018 ($378.6 billion with China)
• Harley-Davidson: India only bought 3,413 in 2017

27
U.S. Trade and Investment with India
28
Escalation
• June 2019: Trump terminated India’s designation as a
beneficiary developing country for purposes of the Generalized
System of Preferences (GSP)
▪ A U.S. trade preference program that gives 120 developing
countries unilateral preferential treatment
▪ Eliminates tariffs on thousands of products
▪ Granted trade concessions on $5.7 billion of goods India
shipped to the U.S. as of 2017
• India was the largest beneficiary of GSP

▪ over one-tenth ($6.3 billion) of U.S. goods imports from
India entered duty-free under the program
• India retaliated with tariffs on 28 American products worth

more than $200 million 29
India versus China in the future
30
Population
31
Population Pyramid
India China
Source: https://www.populationpyramid.net
32
Share of Urban Population
33
Total GDP
34
Other Factors
• China is a one-party authoritarian regime while India is a

democracy
• Most Chinese are atheist while most Indians are religious
• Language: English versus Chinese
• Region: East Asia versus South Asia
• Relationship with the U.S.: friend (?) versus competitor
35
COVID-19 and World Trade
36
Timeline: Death
https://covid19.who.int/
37
2020 GDP Growth for Selected Countries

Impact on Merchandise and Service Trade
Source: WTO 39
Merchandise and Service Trade of Singapore
40
Trade on PPE
• Since the Jan 2020, personal protective equipment (PPE) now in

short supply globally
▪ Hand soap and sanitizer, face masks, protective spectacles…
• China is the major producer of PPE and especially masks

▪ In Jan 2020, China produced 20 million masks per day, but
total demand is 240 million
▪ Chinese production increased six-fold and reached 116 million
masks per day at the end of February and possibly 200 million
per day at the end of March (a ten-fold increase)
• Producers: carmaker BYD, DaddyBaby (a manufacturer of baby

goods), Foxconn (the company manufacturing iPhones for Apple),
and China Petroleum and Chemical
41
Buying Masks from China
Source: CGTN News
Source: https://www.aircargonews.net/
42
Rise in Trade Restrictions
43
Export Ban on Masks: An Example in April
44
Quiz Time
https://www.wooclap.com/ECON113L9
After Class Discussion
• Discussion question: Which country will become the largest

economy in Asia in 2050? India or China?
• Please read this week’s supplementary materials on Elearn
• Discussion at the beginning of Week 12’s class
46

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SMU Classification: Restricted

ECON113: ECONOMICS OF GLOBALISATION

2022 – 2023 Term 1

Recap from Last Week

• Economic history of modern China

• Some features of Chinese economy today

• Challenges and Plans

• Discussion question: How should Singapore respond to the

▪ 1991 economic crisis and reform

▪ Compare with China

• COVID-19 and international trade

India: Basic Facts

• Population: 1.38 B (2nd )

• English enjoys the status of subsidiary official language

India GDP Per Capita (PPP)

India GDP per Capita

Source: World Bank 7

India Openness Index

Source: World Bank

Let’s watch a video.

Pre-Liberalization Era (1947-1991)

• After independence, the Nehru government decided to

▪ Large and inefficient public sector

▪ A closed economy with protectionist policies

• Key characteristic: a planning commission that centrally

▪ Up to 80 agencies had to be satisfied before a firm could

▪ the state would decide what was produced, how much, at

Large and Inefficient Public Sector

• Planning and the state, rather than markets, would determine

• Between 1986 and 1991, state owned enterprises made 39%

• The government attempted to close the Indian economy to

• A belief generated as a mixture of socialism and the

Exports/Imports Before Liberalization

Economic Crisis in 1991

• India’s twin deficit problem: fiscal deficit and trade deficit

• Trade deficit problem started in mid-eighties

• Precipitated by the Gulf War

• India’s foreign reserved halved from January 1991 to June

• Secured a $2.2 B emergency loan from IMF by pledging 67

• Airlifted gold to UK and Switzerland to raise additional

• The Shekhar government collapsed

India’s Foreign Reserve (Gold Excluded)

Source: World Bank 19

• Industrial licensing abolished for almost all product

• Limited public sector monopoly to eight sectors

• Abolished 40% threshold of foreign investment

India Industry Composition

Source: World Bank 23

Let’s watch a video.

Business Process Outsourcing

• Business Process Outsourcing (BPO): contracting of the

US-India Trade Dispute

US-India Trade Dispute

• Even after the economic liberalization, India is a more closed

• Average MFN applied rate in 2018:

• Not much tension observed before Trump

• Harley-Davidson: India only bought 3,413 in 2017

U.S. Trade and Investment with India

• India was the largest beneficiary of GSP

• India retaliated with tariffs on 28 American products worth

India versus China in the future

Share of Urban Population