Liberalisation of the Indian economy
Issues involving scope of foreign direct investment and its impact on the Indian economy
©2001
Diplomarbeit
105 Seiten
Zusammenfassung
Inhaltsangabe:Abstract:
With the onset of reforms to liberalise the Indian economy in July of 1991, a new chapter has dawned for India and her billion plus population. This period of economic transition has had a tremendous impact on the overall economic development of almost all major sectors of the economy, and its effects over the last decade can hardly be overlooked. Besides, it also marks the advent of the real integration of the Indian economy into the global economy.
This era of reforms has also ushered in a remarkable change in the Indian mindset, as it deviates from the traditional values held since Independence in 1947, such as self reliance and socialistic policies of economic development, which mainly due to the inward looking restrictive form of governance, resulted in the isolation, overall backwardness and inefficiency of the economy, amongst a host of other problems. This, despite the fact that India has always had the potential to be on the fast track to prosperity.
Now that India is in the process of restructuring her economy, with aspirations of elevating herself from her present desolate position in the world, the need to speed up her economic development is even more imperative. And having witnessed the positive role that Foreign Direct Investment (FDI) has played in the rapid economic growth of most of the Southeast Asian countries and most notably China, India has embarked on an ambitious plan to emulate the successes of her neighbours to the east and is trying to sell herself as a safe and profitable destination for FDI.
The main objective of this thesis is to show whether India is really that attractive as a host to FDI and whether she is likely to succeed in her endeavour to be able to use FDI as a tool to accelerate her economic growth.
In order to achieve this task, starting with the liberalisation process, there will be a brief description of the economic development of India since Independence and its role in leading to the dire economic situation, which ultimately culminated in the initiation of reforms to open up the economy to foreign investors and competition, whereby the reforms relating, directly and indirectly, to FDI will be closely described.
Then there will be a brief explanation of the theoretical background of FDI, i.e. what it exactly means and the driving forces behind it, whereby concentrating mainly on the eclectic theory and then applying it to the prevailing situation in India by concentrating […]
With the onset of reforms to liberalise the Indian economy in July of 1991, a new chapter has dawned for India and her billion plus population. This period of economic transition has had a tremendous impact on the overall economic development of almost all major sectors of the economy, and its effects over the last decade can hardly be overlooked. Besides, it also marks the advent of the real integration of the Indian economy into the global economy.
This era of reforms has also ushered in a remarkable change in the Indian mindset, as it deviates from the traditional values held since Independence in 1947, such as self reliance and socialistic policies of economic development, which mainly due to the inward looking restrictive form of governance, resulted in the isolation, overall backwardness and inefficiency of the economy, amongst a host of other problems. This, despite the fact that India has always had the potential to be on the fast track to prosperity.
Now that India is in the process of restructuring her economy, with aspirations of elevating herself from her present desolate position in the world, the need to speed up her economic development is even more imperative. And having witnessed the positive role that Foreign Direct Investment (FDI) has played in the rapid economic growth of most of the Southeast Asian countries and most notably China, India has embarked on an ambitious plan to emulate the successes of her neighbours to the east and is trying to sell herself as a safe and profitable destination for FDI.
The main objective of this thesis is to show whether India is really that attractive as a host to FDI and whether she is likely to succeed in her endeavour to be able to use FDI as a tool to accelerate her economic growth.
In order to achieve this task, starting with the liberalisation process, there will be a brief description of the economic development of India since Independence and its role in leading to the dire economic situation, which ultimately culminated in the initiation of reforms to open up the economy to foreign investors and competition, whereby the reforms relating, directly and indirectly, to FDI will be closely described.
Then there will be a brief explanation of the theoretical background of FDI, i.e. what it exactly means and the driving forces behind it, whereby concentrating mainly on the eclectic theory and then applying it to the prevailing situation in India by concentrating […]
Leseprobe
Inhaltsverzeichnis
ID 5306
Gunti, Ajaat: Liberalisation of the Indian economy: Issues involving scope of foreign direct
investment and its impact on the Indian economy / Ajaat Gunti - Hamburg: Diplomica GmbH,
2002
Zugl.: Bamberg, Universität, Diplom, 2001
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Contents
I
Contents
List of abbreviations...III
List of figures and tables...VI
1 Systematic outline and intent of the presented work...1
2 India's economic development: The road taken from Independence to
liberalisation, and its significance for FDI...3
2.1 Nature of economic development in India...3
2.2 Major features of the economy by the end of the 1980s: Indirect reasons
for liberalisation...6
2.3 A summary of the overall negative impact of the past policies: Reasons
for liberalisation...11
2.4 Salient features of the liberalisation process; New guidelines for FDI...20
3 Comprehensive analysis of the constituents and determinants of FDI
with special emphasis on the Indian economy; Review of the effectiveness
of the liberalisation process on FDI-inflows...31
3.1 Basic characteristics of FDI...31
3.2 Explanation of the FDI process into India with help of the eclectic theory...32
3.3 An in-depth look at the main location advantages of India...36
3.3.1 Macroeconomic stability...36
3.3.2 Political stability...40
3.3.3 Enormous consumer market...42
3.3.4 Natural resources and manpower...45
3.3.5 Industrial base and future trends...50
3.3.6 Structural transition of the economy...54
3.4 Indicators and statistics of FDI-inflows since liberalisation...60
Contents
II
4 Main reasons for India not living up to her true potential in attracting
FDI...64
4.1 Uncertainty over fiscal management...64
4.2 Inadequate infrastructure...68
4.3 Excessive labour market controls, resulting in low labour productivity and
high exit barriers...70
4.4 Bureaucracy and corruption...72
4.5 Cultural barriers...77
5 The big question: Is carrying out a FDI in India a viable proposition ?...81
References and select readings...83
Eidesstattliche Erklärung...96
Liberalisation of the Indian economy; issues involving scope of foreign direct
investment and its impact on the Indian economy
III
List of abbreviations
C.A.G.R. Compounded Annual Growth Rate
CENVAT Central Value Added Tax
CEO Chief Executive Officer
CRR Cash Reserve Ratio
BIFR Board of Industrial and Financial Reconstruction
BJP Bharatiya Janata Party
BOP Balance of Payments
DPC Dabhol Power Project
e.g. Exempli gratia (For example)
et al Et alia (And other people)
EOU Export Oriented Unit
EPZ Export Processing Zone
EXIM Export-Import Policy
FDI Foreign Direct Investment
FERA Foreign Exchange Regulation Act
FIPB Foreign Investment Promotion Board
FTC First Credit Tranche
GB Gigabytes
GDCF Gross Domestic Capital Formation
GDP Gross Domestic Product
i.e. Id est (That is)
IMF International Monetary Fund
IPPs Independent Power Producers
IPR Industrial Policy Resolution
Liberalisation of the Indian economy; issues involving scope of foreign direct
investment and its impact on the Indian economy
IV
ISI Import Substitution Industrial strategy
km kilometres
Mbps Megabits per second
MNCs Multinational Companies
MODVAT Modified Value Added Tax
MoU Memorandum of Understanding
MRTP Monopolies and Restrictive Trade Practises
MSEB Maharashtra State Electricity Board
NASSCOM National Association of Software and Service Companies
NMM Nehru-Mahalanobis Model
NRI Non Resident Indian
OECD Organisation for Economic Co-operation and Development
Page
p.a. Per Annum
Pages
Ref. Reference
R&D Research and Development
SEBs State Electricity Boards
Sept. September
SLR Statutory Liquidity Ratio
TEUs Twenty feet equivalent units
U.S. United States (of America)
Liberalisation of the Indian economy; issues involving scope of foreign direct
investment and its impact on the Indian economy
V
VBM Vikal-Brahmananda Model
vs. Versus
WPI Wholesale Price Index
Liberalisation of the Indian economy; Issues involving scope of foreign direct
investment and its impact on the Indian economy
VI
List of figures and tables
Figure 1: Recovery from 1991 crisis...40
Figure 2: Income distribution in India...44
Figure 3: Structural transition of the Indian economy...55
Figure 4: Growth in domestic and export software revenues...57
Figure 5: Foreign Direct Investment in India, 1991-2000: Approvals and Actuals...61
Table 1: Income distribution in India...44
Table 2: Approved FDI vs. actual FDI-inflows...61
Table 3: Labour productivity levels in manufacturing (1995-99)...71
Liberalisation of the Indian economy; Issues involving scope of foreign direct
investment and its impact on the Indian economy
1
1 Systematic outline and intent of the presented work
With the onset of reforms to liberalise the Indian economy in July of 1991, a new
chapter has dawned for India and her billion plus population. This period of economic
transition has had a tremendous impact on the overall economic development of almost
all major sectors of the economy, and its effects over the last decade can hardly be
overlooked. Besides, it also marks the advent of the real integration of the Indian
economy into the global economy.
1
This era of reforms has also ushered in a remarkable change in the Indian mindset, as it
deviates from the traditional values held since Independence in 1947, such as "self
reliance" and socialistic policies of economic development, which mainly due to the
inward looking restrictive form of governance, resulted in the isolation, overall
backwardness and inefficiency of the economy, amongst a host of other problems.
2
This, despite the fact that India has always had the potential to be on the fast track to
prosperity.
Now that India is in the process of restructuring her economy, with aspirations of
elevating herself from her present desolate position in the world, the need to speed up
her economic development is even more imperative. And having witnessed the positive
role that Foreign Direct Investment (FDI) has played in the rapid economic growth of
most of the Southeast Asian countries and most notably China, India has embarked on
an ambitious plan to emulate the successes of her neighbours to the east and is trying to
sell herself as a safe and profitable destination for FDI.
3
The main objective of this thesis is to show whether India is really that attractive as a
host to FDI and whether she is likely to succeed in her endeavour to be able to use FDI
as a tool to accelerate her economic growth.
1
Ref. Kanungo, S. (1999), pp. 51-53.
2
Ref. Behari, B. (1991), pp. 188-194.
3
Ref. United Nations Publications (1992), p. 27.
Liberalisation of the Indian economy; Issues involving scope of foreign direct
investment and its impact on the Indian economy
2
In order to achieve this task, starting with the liberalisation process, there will be a brief
description of the economic development of India since Independence and its role in
leading to the dire economic situation, which ultimately culminated in the initiation of
reforms to open up the economy to foreign investors and competition, whereby the
reforms relating, directly and indirectly, to FDI will be closely described.
Then there will be a brief explanation of the theoretical background of FDI, i.e. what it
exactly means and the driving forces behind it, whereby concentrating mainly on the
eclectic theory and then applying it to the prevailing situation in India by concentrating
mostly on the "location factor", thus, analysing the various advantages which India has,
to present herself as a host to FDI.
Subsequently, there will be a presentation of the vital statistics and trends of FDI-
inflows into the economy to highlight the effectiveness of the measures undertaken by
the Indian government to promote FDI-inflows.
After that, comes a critical analysis of the drawbacks and bottlenecks in the Indian
economy, including the hurdles and risks that foreign firms have to face while investing
in India, which act as an impeding factor for the realisation of India's goal to be
perceived as a favourable destination of FDI. In addition to that, a recent case of a U.S.
multinational firms that has already entered the Indian market and is facing enormous
problems will be cited.
Finally, after considering all the relevant issues, it will be determined whether India can
be trusted as a safe and promising haven for FDI, and also whether the present and
expected future growth in FDI-inflows will have the desired effects on the Indian
economy.
Liberalisation of the Indian economy; Issues involving scope of foreign direct
investment and its impact on the Indian economy
3
2
India's economic development: The road taken from
Independence to liberalisation, and its significance for FDI
2.1 Nature of economic development in India
The liberalisation process was hardly the result of a planned endeavour, but rather the
result of the mismanagement of the past that had accumulated over time to such
enormous and threatening dimensions, that the government of India had no other
alternative than to proceed with its programme of liberalising the economy.
In order to really understand these compulsions, there is a need to outline the main
features and directions of the development of the Indian economy since Independence.
At the onset of Independence, the leaders of the nation had to choose between two
different models for economic development:
- Nehru-Mahalanobis Model (NMM)
- Vikal-Brahmananda Model (VBM)
Accelerating economic growth through industrialisation was the central agenda of the
NMM-model. The belief was that rapid industrialisation accompanied by import
substitution and spurred by high investment would yield greater income and a higher
standard of living, thus, being the most effective instrument to tackle poverty. It meant
that public and private sector production and consumption would be centrally planned
with state intervention.
4
On the other hand, the VBM-model held the belief that unemployment was not due to a
scarcity of capital, in the form of machine goods, but due to shortage of wage goods.
This model envisaged the accumulative bottom up expansion of output and employment
through high yield projects with a low capital intensity.
4
Ref. Chadha, R., et al. (1998), pp. 1-2.
Liberalisation of the Indian economy; Issues involving scope of foreign direct
investment and its impact on the Indian economy
4
Therefore this strategy would have had the following implications:
5
- Agriculture would get greater investments to increase the supply of food grains
rather than rely on forced savings.
- Under-employed labour would be absorbed in rural infrastructure schemes and agro-
industrial enterprises.
- Priority would be given to the consumer goods sector, for both exports and domestic
consumption, instead of the machine goods industry.
Finally, a modified version of the NMM-model, called the Bombay Plan advocating an
indicative planning, where the state and the market would be partners in development,
instead of the state being solely conferred with absolute power, was given the green
signal in 1950 to determine the course of India's future economic development.
6
The fundamental objectives of this chosen path to economic development were:
(1) Emphasis on heavy industry
The primary aim was to create a basic and heavy industrial base, in anticipation of
future demand in the capital goods sector, i.e. making machines to make machines for
further development. This was brought about through the containment of current
consumption level, increase of the marginal saving rate and channelling it into heavy
industries, so as to accelerate industrial growth and also the national income.
7
This model, with its pro-heavy industry bias, was similar to the main features of a
model independently developed by Feldman in the former Soviet Union during the
1920s.
8
In order to compensate for the limited absorption of labour and the limited supply of
consumer goods (in the short and medium term)
9
, a plan was laid to develop the labour-
intensive cottage and small-scale sector.
5
Ref. Gupta, M. L. (1999), pp. 3-6.
6
Ref. Beck, C. H. (1995), pp. 489-490.
7
Ref. Sengupta, A. (2001), pp. 14-15.
8
Ref. Byres, T.J. (1998), pp. 256.
9
Due to the strong emphasis on heavy industry.
Liberalisation of the Indian economy; Issues involving scope of foreign direct
investment and its impact on the Indian economy
5
This, it was thought would lead to more equitable distribution of incomes, besides,
exploiting the possibilities of rural industrialisation, capitalising on traditional skills and
providing employment in rural areas as agricultural productivity increased and labour
was released from the agricultural sector.
10
At the same time, in order to check the concentration of economic power, it was
stressed that the small-scale sector would be promoted and protected, whereby the large,
i.e. basic and heavy industries would be checked and kept under control.
11
(2) Leadership role of the public sector
A second major feature of the Indian industrial strategy was to carve out an ever greater
role for the public sector in the planning for industrialisation. It was believed that
considering the degree of under-employment, rapid industrial growth could not be
brought about by the private sector, as it was thought that the private sector was not in
any position or reluctant to take up large and risky investment projects.
12
Therefore, the notion that the public sector was supposed to strategically control key
sectors of the economy, formed the basis for the reservation of certain areas of industrial
production, e.g. iron and steel, coal, transport, power, mineral oils, atomic energy,
defence equipment and infrastructure, amongst others.
13
In areas that were left to the private sector, a clear role was seen for state intervention,
so as to promote and to facilitate the realisation of proposed targets. This was brought
about by influencing private decisions through fiscal measures, through licensing and
through direct physical allocation.
14
(3) Self reliance
Self-reliance, termed as "Swadeshi" in India, has been a principal objective of Indian
industrial planing and mooted the idea of making the Indian economy independent from
foreign capital and at the same time stressing on import-substitution, thus, reducing the
10
Ref. Michael, V.P. (1999), p.130.
11
Ref. Byres, T.J. (1998), pp. 261-262.
12
Ref. Byres, T.J. (1998), pp. 256-257.
13
Ref. Kelkar, L.V./Rao, B.V.V. (1996), p. 7.
14
Ref. Majumdar, T. (1993), p. 203.
Liberalisation of the Indian economy; Issues involving scope of foreign direct
investment and its impact on the Indian economy
6
role of foreign trade to a secondary or residual element in the development process.
This led to the adoption of the Import Substitution Industrialisation strategy (ISI). This
ISI concept, however did not necessarily mean non-acceptance of foreign aid, as it was
generally acknowledged that the development of a poor country with a low rate of
saving like India's would substantially benefit from the inflow of foreign savings in the
form of foreign capital. What was emphasised, rather, was that the structure of the
economy should develop in such a way that the dependence on external assistance
would no longer exist.
15
The critical link between the objective of self-reliance and import-substitution
orientation in the Indian strategy of industrialisation stemmed from the assumption of
export pessimism, which was influenced by the Japanese experience during the second
world war.
16
Though, there were various new policies and modifications made to the Indian economy
till the advent of liberalisation, the overall grounding principles that were laid down in
the beginning were never really set aside, rather, what ever modifications were made,
had to be in accordance with these principles.
2.2 Major features of the economy by the end of the 1980s: Indirect
reasons for liberalisation
As a result of the development policy framework, with its basis being laid in the mid-
1950s, the Indian economy evolved a highly regulated structure by the end of the
1980s, with the government playing a pivotal and at the same time, an ever increasing
role in establishing different regulations and controls on trade, production, pricing and
distribution.
This development strategy with all its drawbacks, served the nation in a very peculiar
manner, as with it, many of the major goals set out to be achieved were accomplished,
15
Ref. Sengupta, A. (2001), p. 21.
16
Ref. Byres, T.J.(1998), p. 258.
Liberalisation of the Indian economy; Issues involving scope of foreign direct
investment and its impact on the Indian economy
7
but then, there were also other consequences, which one could even term as horrendous
for the fate of India and her people.
The structural fallout and the resulting main consequences of this development strategy
are underlined below:
(1) Highly regulated trade
The trade policy regime was highly protectionist and regulated through exceptionally
high tariff rates, quantitative controls on imports as well as exports. In addition,
regulations like local content requirements, phased manufacturing programme (PMPs),
export obligation and restrictions on domestic sales, etc., were also prevalent.
17
Domestic industry, too, was under strict regulation and was heavily insulated from
international competition. The two underlying assumptions were that the country would
face a more or less permanent shortage of foreign exchange, and that the domestic
industry could only be promoted by having a protective foreign trade regime in place.
18
The late 1970s saw the first moves towards easing of imports, primarily to encourage
exports that needed capital and intermediate goods, however during most of the 1980s,
the regime of import control continued in one form or the other.
19
The need to boost exports in the 1970s, which deviated from the earlier assumption of
export pessimism, was brought about by the compulsion of sustaining domestic
production, which due to its faulty planning led to an under-utilisation of production
capacities in the country.
20
(2) State Controlled financial institutions
In 1969, the Congress government of India under the leadership of Indira Gandhi added
another feature of state intervention to India's already over controlled economy, in the
17
Ref. Cherunilam, F. (1999), p. 355.
18
Ref. Chadha, R., et al. (1998), p. 14.
19
Ref. Kelkar, L.V. and Rao, B.V.V. (1996), p. 8.
20
Ref. Choudhry, N.K./Mansur, S. (1994), pp. 25-26.
Liberalisation of the Indian economy; Issues involving scope of foreign direct
investment and its impact on the Indian economy
8
form of the nationalisation of commercial banks.
21
By the end of the 1980s, a large part of the financial sector was state-owned. The
commercial banks, after nationalisation, were compelled to direct most of their lending
towards government specified priority sectors like agriculture, rural development,
cottage and small-scale industries and housing. As such, lending towards industry as a
share of commercial bank credit steadily decreased. Thus, large and medium scale
industry had to pay higher interest rates, which were naturally set by the government
itself, compared to the specified priority areas.
22
Over time, these nationalised banks became a major source of lending to the
government and as a result were more or less financing fiscal deficits.
23
This measure, therefore, stifled the future growth prospects of the private sector.
(3) Production controls
The controls over production were first introduced through the Industrial Policy
Resolution (IPR) in 1956, and later through the Monopolies and Restrictive Trade
Practises (MRTP) Act in 1969. The entry and growth of firms, whether domestic or
foreign, were subjected to the following sets of licensing policies:
24
-
Capacity licensing.
- Monopoly
control.
-
Small-scale industry reservation.
-
Activities reserved for the public sector.
The MRTP Act was introduced to prevent the concentration of economic power and to
curb restrictive trade practises. Companies from the private sector being found to have a
dominant market share or having accumulated assets above a certain threshold limit
were required to receive clearances from the government, in the form of licenses, before
they could expand their production.
25
21
Ref. Choudhry, N.K./Mansur, S. (1994), p. 15.
22
Ref. Kelkar, V.L./Rao, V.V.B. (1996), p. 8.
23
Ref. Joshi, V./Little, I.M.D. (1999), p. 111.
24
Ref. Chadha, R., et al. (1998), pp. 14-15.
25
Ref. Berberoglu, B. (1992), pp. 158-159.
Liberalisation of the Indian economy; Issues involving scope of foreign direct
investment and its impact on the Indian economy
9
The basis for the passing of the MRTP Act were the results of the Subimal Dutt
Committee Report (1969). It was found that many large and influential industrial firms
had been exploiting loopholes in the existing rules and regulations, leading to the pre-
emption of capacities and cornering of licenses that were not actually implemented. It
was also discovered that the private sector was encroaching on areas reserved for the
public sector, besides, receiving a large proportion of assistance from financial
institutions. This according to the prevailing thought at that time, made these firms too
large and powerful. It was also evident that not enough regional spread was achieved,
leading to uneven economic growth in the country.
26
These regulations had a very important drawback for large firms, as they could not
benefit from economies of scale and were now mostly restricted, barring those reserved
for the public sector, to core industries that required lumpy investments.
27
Therefore, these MRTP firms could not explore and diversify into newer and more
promising areas without prior government permission, which was now costlier and
more cumbersome in coming.
This also laid the basis for the flourishing of the so called "License-permit Raj", i.e. a
complex regime of controls, particularly in the area of investment decisions.
28
With this, to a larger extent, the private sector also came into the grasps of an ever
larger expanding regulatory framework.
(4) FDI regulations
In regard to FDI, the attitude of the government has generally remained one of fear and
suspicion until the end of the 1980s. Foreign collaborations were allowed only in areas
in which India had not developed its capabilities, such as in areas involving
sophisticated technologies, in the so called "Appendix I industries", i.e. industries of
national priority and also in export oriented industries.
29
In the other areas, it was not allowed so as to protect the domestic base of created assets.
26
Ref. Palande, P.S. (2000), pp. 26-27.
27
Ref. Rao, M.B. (1999), pp. 279-280.
28
Ref. Bhaduri, A./Nayyar, D. ( 1996), p. 34.
29
Ref. Kapila, R./Kapila, U. (2001), p. 236.
Liberalisation of the Indian economy; Issues involving scope of foreign direct
investment and its impact on the Indian economy
10
Up to the early 1970s, there were no general restrictions on the equity holdings of
foreign nationals or companies investing in the above mentioned government specified
areas of the economy. But then, in 1973 the Foreign Exchange Regulation Act (FERA)
was passed which laid down certain guidelines regarding investments, exports and
imports of these companies. It diluted the foreign equity holdings in companies that did
not come under the "Appendix I industries", i.e. industries which operating in "high-
tech" and strategic areas, to a maximum of 40 per cent. These companies were then to
be treated on par with their Indian counterparts. As for the rest, different ceilings were
imposed on the percentage of foreign equity holdings depending on the types of
industrial undertakings, the maximum of foreign ownership permissible being 74 per
cent. Companies with foreign equity exceeding 40 per cent were referred to as FERA
companies.
30
These restrictions forced many foreign companies like Coca-Cola and IBM to leave the
country and at the same time discouraged new potential entrants. Some foreign
companies like the Unilever group diversified into areas of like heavy chemicals and
fertilisers, which came under the "Appendix I industries" list. Thus, the average level
of equity investment during the period 1973-1983 was as low as US$ 10 million per
year.
31
Though, there was a significant shift in the governments stand during the mid 1980s, i.e.
policy relaxation in regard to FDI from Oil Exporting Developing countries, the overall
FDI policy still remained in place.
32
Therefore, India's policy towards FDI was quite restrictive and selective, and those
foreign firms that were already operating in the Indian market faced the same hardship
as their Indian counterparts.
(5) Regulation of Prices and Distribution
In order to provide the weaker and poorer sections of society with necessary consumer
goods at low prices, besides, making certain crucial inputs required for the development
30
Ref. Byres, T.J. (1998), pp. 271-272.
31
Ref. United Nations Industrial Development Organisation (1995), p. 17.
32
Ref. Chadha, R., et al. (1998), p. 15.
Liberalisation of the Indian economy; Issues involving scope of foreign direct
investment and its impact on the Indian economy
11
process available at "right" prices and in order to control inflation, the government of
India attempted to control the prices and distribution of many commodities.
33
By 1986, the Ministry of Finance noted in a discussion paper on Administered Price
Policy that out of the 360 commodities in the Wholesale Price Index (WPI), 55 major
items had their prices either fully administered, partially administered or subjected to
different forms of voluntary and other mechanisms of control.
34
This policy had a negative impact on various sections of the industry such as steel,
fertilisers, cement, amongst others. Therefore, in order to keep these industrial units
from perishing, they were injected with huge doses of subsidies, the bill of which was
naturally to be footed by the government.
35
Also, as these price and distribution controls
did not exclude the agricultural sector, its effects upon it were equally damaging.
36
In addition to that, these subsidies added to the already burgeoning fiscal deficit.
2.3 A summary of the overall negative impact of the past policies:
Reasons for liberalisation
As a result of the legacies of the past, in regard to the chosen model of economic
development, the inadequacies of the structural nature of economic development since
Independence and its resulting to the overall ill-effects on the economy by the late
1980s, there was a realisation beginning to dawn on the policy makers of India, that
there needed to be a shift in policy from the treaded path, if India were ever to keep
pace with the rapidly changing dynamics of the outside world and to come out of the
caldron of mess that she happened to find herself in.
Described below, are the main accumulative limitations in the post-Independence
development policy of India, prior to liberalisation:
33
Ref. Sengupta, A. (2001), p. 18.
34
Ref. Gowda, D.T.N. (2000), p. 36.
35
Ref. Chadha, R., et al. (1998), Pg. 16.
36
Ref. Agarwal, R./Diwan, P. (2000), p. 571.
Liberalisation of the Indian economy; Issues involving scope of foreign direct
investment and its impact on the Indian economy
12
(1) Inadequate economic growth
India's failings can be seen in her slow rates of growth of national income and per
capita income. Though setting upon herself the task in 1950 of doubling the per capita
income by 1967, this was only achieved in the year of 1973. This even though the
growth in national income was above the expected level during the first 5 years that
accompanied the planning process.
37
In 1989, India's per capita was one of the lowest in the world and stood at an
unenviable US$ 340, compared to the United States and West Germany which enjoyed
a per capita income of US$ 6,890 and US$ 10,940 respectively.
38
Even compared to
many of the developing countries, her per capita income was rather dismally low.
A major factor that led to the poor per capita income, was the steady, but almost
continuous rise in the population that by 1991 stood at 844 million from a figure of 361
million in 1951. Thus, one can see that the immense growth, that was achieved in the
industrial sector, (to an large extent, at the expense of the agricultural sector) was
dampened with the high population growth rate, that averaged 2.11 per cent in 1991, up
from 1.25 per cent in 1951.
39
Besides, there was also an unequal distribution of the national income.
The growth in Gross Domestic Product (GDP) has also been far from spectacular,
averaging only about 3.8 per cent annually from 1951-84.
40
The weak growth
performance of the GDP resulted not because of a disappointing savings performance,
but rather due to a disappointing productivity performance. This, even though the
savings rate more than doubled from 1950-84, from roughly 10 per cent to 22 per cent,
which supported a somewhat higher investment rate (higher due to relatively modest
influx of foreign savings in the form of assistance, rather than FDI).
41
Then, as a result of deficit financing and a half hearted attempt during the mid 1980s on
the part of the government to address some of the structural flaws in its past policies, the
GDP growth registered an upward trend and averaged 5.9 per cent per annum for that
37
Ref. Bhagwati, J. (1993), p. 22.
38
Ref. Ramu, S.S. (1994), p. 340.
39
Ref. Beck, C.H. (1995), p. 62.
40
Ref. Jalan, B. (1992), p. 24.
41
Ref. Bhagwati, J. (1993), p. 40.
Liberalisation of the Indian economy; Issues involving scope of foreign direct
investment and its impact on the Indian economy
13
decade. Therefore, the overall average GDP growth from 1951-90 climbed to 4 per
cent.
42
However significant this GDP growth rate of 4 per cent might have been compared to
the average GDP growth rate of the pre-Independence era of 0.9 per cent
43
, it still
lagged far behind those rates achieved by many East and Southeast Asian economies,
which benefited from generous inflows of FDI.
(2) Burgeoning budget and fiscal deficit
At the end of the 1980s, the central government's budget deficit fluctuated at around 2
per cent of GDP, which was seen as normal. However, during this period the revenue
deficit which stood at 1.1 per cent of GDP during the period of 1980-85, had increased
sharply and amounted to almost 3 per cent of GDP in 1988-99. Also, the gross fiscal
deficit rose from 6.3 per cent of GDP during the period of 1980-85 to 8.2 per cent of
GDP during 1985-90.
44
As according to the prevailing thought at the time, these deficits, though disturbing,
were still to a large extent manageable. But, due to these deficits, there was a constraint
on the economy, as the impressive GDP growth during the 1980s of 5.9 per cent, that
was mostly fuelled by deficit financing, was to a large extent negated. This also led to
an increase in the money supply and the resulting excess demand fuelled inflationary
pressures.
45
(3) Balance of Payment deficits and decline of share in world trade
Even though India set out to achieve self-reliance in the external sector, she continued
to face considerable pressures on the balance of payments (BOP) front, that was
intensified by the increase in external commercial borrowings by the government, in
addition to borrowing from the International Monetary Fund (IMF) and the World
Bank. Plus a significant decline of her share in world trade, especially her exports,
42
Ref. Kapila, R./Kapila, U. (2001), p. 32.
43
Ref. Bhalla, S.S. (2000), p. 17.
44
Ref. Kelkar, L.V./Rao, V.V.B. (1996), p. 10.
45
Ref. Joshi, V./Little, I.M.D. (1999), p. 14.
Liberalisation of the Indian economy; Issues involving scope of foreign direct
investment and its impact on the Indian economy
14
exasperated this problem further. This precarious BOP situation rendered the economy
to be very susceptible to external and internal shocks.
For example, mainly due to her declining export to import ratio, there was an increase in
the current account deficit from an average of 1.3 per cent of GDP during 1980-85 to
2.2 per cent of GDP during 1985-90.
46
On the export front, Indian firms performed dismally, due to the highly regulated trade.
This led to exports of poor quality, with the necessary inputs being too costly at the
same time. Obtaining imported inputs was also very difficult, as they were sometime
not allowed at all, and sometimes because of the complex procedures of advance
licensing. To add to that, custom procedures were extremely slow, with huge volumes
of paperwork and documentation required, specially in importing.
47
A review of India's foreign trade since the commencement of planning reveals the
following important points:
48
- Both exports and imports have grown considerably.
- Imports were larger than exports, except for 2 years, in all the years since 1951.
- Until about the mid-1980s, India's overall export performance had been very poor,
even in comparison with several other developing countries.
The above statements can be better illustrated by considering the following statistics:
49
- India's share in the total world exports fell from around 2 per cent in 1950 to 0.4 per
cent in 1980, with a slight improvement since the mid-1980s.
- India was the world's 13
th
largest exporter in 1950, but was now surpassed by more
then 30 countries.
- India's export-GDP ratio had also remained largely stagnant at about 6 per cent until
the end of the 1980s and it compared very poorly with several other developing
countries.
46
Ref. Rao, K. (1996), p. 11.
47
Ref. Fasbender, K./Mayer, O.G./Chatterjee, D.K. (1992), p. 75.
48
Ref. Majumdar, T. (1993), pp. 374-375.
49
Ref. Cherunilam, F. (1999). p. 391.
Liberalisation of the Indian economy; Issues involving scope of foreign direct
investment and its impact on the Indian economy
15
(4) Social underdevelopment
Despite all the efforts of planning and the resulting economic development for more
than 40 years, India had not been able bring up the living standards of a large section of
her population. The continuation of poverty, accompanied with unemployment can also
be summed up as an indirect result of the failure on the part of the government in its
endeavour to put the economy on a high growth track.
In India, poverty is defined as the inability of a person to incur expenditure to meet the
minimum calorie intake per day of 2400 in rural areas and 2100 in urban areas.
50
Though the percentage of the total population living under the poverty line had
decreased, in quantity terms, it had actually increased.
51
Around one third to a fifth of the total population in India still lived under the "official"
poverty line, which meant that at least 315 million Indians were not even able to afford
the bare minimum requirements to suffice
52
, such as access to safe drinking water,
sanitation facilities, healthy food, etc.
Even states that were relatively heavily industrialised, were not able to bring down the
level of poverty. Thus, this added weight to the already growing assumption of the
policy makers in India that there were real structural flaws in the development
programme of the past, that needed to be addressed.
Apart from the high instance of poverty, India had not been able to educate almost half
of her population. The percentage of the population being illiterate stood at 48 per cent
in 1991, and there was only one primary school teacher available for every 46 pupils in
1989-90.
53
Then, the availability of health care was also dismal, where as recent as the second half
of the 1980s, for every 2,250 Indians only one medical doctor was available, while only
one nurse was available to 1,700 Indians.
54
In addition to that, the large instance of rural poverty drove millions from their land to
the cities in search of work, as most of the industrial development took place in and
50
Ref. Kapila. R./Kapila. U. (2001), p. 33.
51
Ref. Behari, B. (1991), p. 240.
52
Ref. Behari, B. (1991), pp. 240-241.
53
Ref. Beck, C.H. (1995), p. 62.
54
Ref. Kapila. R./Kapila. U. (2001), pp. 33-34.
Details
- Seiten
- Erscheinungsform
- Originalausgabe
- Erscheinungsjahr
- 2001
- ISBN (eBook)
- 9783832453060
- ISBN (Paperback)
- 9783838653068
- DOI
- 10.3239/9783832453060
- Dateigröße
- 1 MB
- Sprache
- Englisch
- Institution / Hochschule
- Otto-Friedrich-Universität Bamberg – Betriebswirtschaft, Internationales Management
- Erscheinungsdatum
- 2002 (April)
- Note
- 2,3
- Schlagworte
- direkt investition indien liberalisierung wirtschaft