Liberalisation of the Indian economy

Gunti, Ajaat

Liberalisation of the Indian economy

Issues involving scope of foreign direct investment and its impact on the Indian economy

von Ajaat Gunti (Autor:in)

BWL - Unternehmensführung, Management, Organisation

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 […]

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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

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

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

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

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

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 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.

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.

Ref. Kanungo, S. (1999), pp. 51-53.

Ref. Behari, B. (1991), pp. 188-194.

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

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

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.

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.

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

Therefore this strategy would have had the following implications:

- 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.

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.

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.

In order to compensate for the limited absorption of labour and the limited supply of

consumer goods (in the short and medium term)

, a plan was laid to develop the labour-

intensive cottage and small-scale sector.

Ref. Gupta, M. L. (1999), pp. 3-6.

Ref. Beck, C. H. (1995), pp. 489-490.

Ref. Sengupta, A. (2001), pp. 14-15.

Ref. Byres, T.J. (1998), pp. 256.

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

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.

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.

(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.

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.

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.

(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

Ref. Michael, V.P. (1999), p.130.

Ref. Byres, T.J. (1998), pp. 261-262.

Ref. Byres, T.J. (1998), pp. 256-257.

Ref. Kelkar, L.V./Rao, B.V.V. (1996), p. 7.

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

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.

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.

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,

Ref. Sengupta, A. (2001), p. 21.

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

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.

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.

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.

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.

(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

Ref. Cherunilam, F. (1999), p. 355.

Ref. Chadha, R., et al. (1998), p. 14.

Ref. Kelkar, L.V. and Rao, B.V.V. (1996), p. 8.

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

form of the nationalisation of commercial banks.

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.

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.

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:

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.

Ref. Choudhry, N.K./Mansur, S. (1994), p. 15.

Ref. Kelkar, V.L./Rao, V.V.B. (1996), p. 8.

Ref. Joshi, V./Little, I.M.D. (1999), p. 111.

Ref. Chadha, R., et al. (1998), pp. 14-15.

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

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.

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.

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.

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.

In the other areas, it was not allowed so as to protect the domestic base of created assets.

Ref. Palande, P.S. (2000), pp. 26-27.

Ref. Rao, M.B. (1999), pp. 279-280.

Ref. Bhaduri, A./Nayyar, D. ( 1996), p. 34.

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

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.

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.

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.

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

Ref. Byres, T.J. (1998), pp. 271-272.

Ref. United Nations Industrial Development Organisation (1995), p. 17.

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

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.

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.

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.

Also, as these price and distribution controls

did not exclude the agricultural sector, its effects upon it were equally damaging.

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:

Ref. Sengupta, A. (2001), p. 18.

Ref. Gowda, D.T.N. (2000), p. 36.

Ref. Chadha, R., et al. (1998), Pg. 16.

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

(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.

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.

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.

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.

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).

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

Ref. Bhagwati, J. (1993), p. 22.

Ref. Ramu, S.S. (1994), p. 340.

Ref. Beck, C.H. (1995), p. 62.

Ref. Jalan, B. (1992), p. 24.

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

decade. Therefore, the overall average GDP growth from 1951-90 climbed to 4 per

cent.

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

, 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.

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.

(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,

Ref. Kapila, R./Kapila, U. (2001), p. 32.

Ref. Bhalla, S.S. (2000), p. 17.

Ref. Kelkar, L.V./Rao, V.V.B. (1996), p. 10.

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

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.

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.

A review of India's foreign trade since the commencement of planning reveals the

following important points:

- 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:

- 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

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.

Ref. Rao, K. (1996), p. 11.

Ref. Fasbender, K./Mayer, O.G./Chatterjee, D.K. (1992), p. 75.

Ref. Majumdar, T. (1993), pp. 374-375.

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

(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.

Though the percentage of the total population living under the poverty line had

decreased, in quantity terms, it had actually increased.

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

, 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.

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.

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

Ref. Kapila. R./Kapila. U. (2001), p. 33.

Ref. Behari, B. (1991), p. 240.

Ref. Behari, B. (1991), pp. 240-241.

Ref. Beck, C.H. (1995), p. 62.

Ref. Kapila. R./Kapila. U. (2001), pp. 33-34.

Details

Seiten
Erscheinungsform: Originalausgabe
Jahr: 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

Autor

Ajaat Gunti (Autor:in)