India on the Move Essays

India on the Move Essays India on the Move Essay India on the Move Essay Why did India experience relatively slow economic growth from independence until 1991? India became an independent country in 1947 and from that moment until the first years of the 1990’s, the government adopted the Import Substitution Industrialization model (ISI) in order to protect the economy against foreign competition. The model was based on regulations in the private and public sector, trade and foreign direct investment that made the economy very closed compared to other economies in the world. The system was not sustainable in the long term because it encouraged inefficiency in the industry performance. For instance, the average GNP per capita at that period of time was as low as $2301. Moreover, India’s growth performance plan has been written in a five year scope in which the actual growth from the periods of 1956-1961, 1961-1966, and 1969-1974 did not surpass the target (see Exhibit 1). The â€Å"Hindu rate of growth† around 3. 5% prevailed in the period of 1950-1980 and then with oriented market reforms the growth rate change to approximately 6-8%2. Why did Rao adopt the post crisis, â€Å"Washington Consensus† strategy? How is it working? The Prime Minister Narasimha Rao, elected in 1991, had to ask for urgent help to the International Monetary Fund (IMF) as a result of a balance of payment crisis due to high interest rates, inflation driven by the fall of its principal trading partner: the Soviet Union. The IMF authorized the loan under the condition of adopting ten prescribed reforms. These policies were focused to stimulate growth and reach a stable macroeconomic environment; but most important, to minimize the role of the government in economic decisions. One of the most important results from these market reforms was the reduction of India’s fiscal deficit from 9. 4% of GDP in 1990-19913 to 6. 5% of GDP in 1998 (Vietor and Thomson, 2008). On the other hand, the average inflation rate dropped from 7. 5% in the 1980’s, to 6. 3% in the 1990s, and from 4. 7% in the period of 1996-1997 to 2002-20034. Foreign Direct Investment is another main variable in the process of adjustment that shows positive highlights, since the opening of capital inflows in 1991, the investment rose from $74 millions to $5,626 millions in 2002, a 75% increase (Vietor and Thomson, 2008). Nevertheless, there are still challenges that must be overcome beyond macroeconomic indicators, for example a reduction of bureaucracy, lower entry barriers, good leadership to eradicate corruption, investment in infrastructure, and most important, the investment on the people through health programs and education especially in the highest illiterate states. How big a deal are Hindu-Muslim frictions? Demographic fragmentation? Deficits The Hindu-Muslim conflict is affecting in many ways to India. First, the friction promotes a bad climate of business to foreign investors. For instance, Thomas Friedman in his book â€Å"The World is Flat† describes how a state of emergency in 2002 worried American companies due to rumors of a nuclear exchange attack against Pakistan. The book also quote N. Krishnakumar, President of MindTree a leading Indian knowledge firm who stated: â€Å"What we explained to our government, through the Confederation of Indian Industry, is that providing a stable, predictable operating environment is now the key to India’s development†. Secondly, the conflict affects the country through a high fiscal deficit. Only in 2002, the military spending rose around 10% of the government expenditures (Vietor and Thomson, 2008). The mayor concern is that inefficient expenditure raises the budget and makes the economy more vulnerable. Lastly, the trade off between allocating money to the military defense is affecting the people urgent needs in social issues. In fact, In 2002 India ranked # 124 in the Human Development Indicator (Vietor and Thompson, 2008). That is the reason why health, education, and literacy have to be priorities to the government in order to maintain a sustainable growth. Is India an attractive site for foreign direct investment? India is an emerging country which is getting worldwide attention for its quickly growing economy. It has been growing in an average of 6%-8% in the last years. Many large companies are taking advantage of the skilled labor force at low cost, the vast number of people who speak English as a heritage from the British colony, as well as the cheaper costs in telecommunication. In fact, India is considered by many as the back-office of world servicesa. There are approximately 40% of the 500 Fortune companies that have outsourced part of its services to India5. According to the FDI Confidence Index 2005, India top as one of the best countries to invest in manufacturing, telecommunication, financial and non-financial services, and wholesale and retail (see Exhibit 2). However, even though there are positive outcome from the implemented reforms, there are still important activities to improve Foreign Direct Investment. The government has to emphasize more in infrastructure and simplify the procedures to make easier the establishment of a company in the country.