The emerging role of India in international business - includes related article on India's cultural orientation

Business Horizons, Sept-Oct, 1996 by Raj. G Javalagi, Vijay S. Talluri

In the first two days of a 1995 visit to India by a business delegation led by the late Commerce Secretary Ron Brown, proposals worth $4 billion were signed. These included a $25 million financing agreement by the SorosChatterjee Group of New York for a $1.25 billion petrochemical complex at Haldia near Calcutta. Texas-based Petrodyne Inc. signed a Memorandum of Understanding with its Madras-based subsidiary Petro Energy Products India Limited and the state-owned Indian Oil Corporation to move an existing U.S.-built oil refinery from Naples, Italy to Karaikal, south of Madras. Similar successes were chalked up by the delegation led by Energy Secretary Hazel O'Leary., which signed 23 deals involving investments that total more than $1.4 billion.

Why are firms from the U.S. and other countries showing such a sudden interest in India? The world's largest democracy, India has emerged as a new player on the international arena. Long closed to foreign competition, it has now opened up its market to foreign companies. But what are the characteristics of the Indian market in the context of reforms initiated since 19917 And what types of problems does it pose for foreign firms that plan to do business there? This article is an attempt to catalogue the recent changes in the Indian economy and consider their impact on international business.

Why Should The World Community Believe In India Now?

It is undeniably true that for many years India's role in international affairs was marginal. Its image was poor; the economy was plodding along at the "Hindu growth rate" of 3.5 percent for much of the time after the country gained its independence in 1947. Matters reached a crisis point in mid-1991, when for the first time ever India seemed on the verge of defaulting on its international loans. The credit rating agencies had drastically lowered the country's ratings. The Gulf War had reduced foreign exchange remittances to a trickle. Profligate spending during the 1980s resulted in huge budget deficits and runaway inflation.

On the political front, the nation was rocked by sectarian violence, witnessed the collapse of two unstable coalition governments, and was traumatized by the tragic assassination of the former prime minister, Rajiv Gandhi.

By this time India was at a crossroads. She either could be blind to economic realities and face disaster in the long run, or act swiftly to put her house in order. Fortunately India chose the second option, even though it entailed pain in the short term. The outlook of the Indian establishment underwent a sea change. The socialist shibboleths of the failed past were discarded; capitalism, profits, privatization, and consumption were no longer considered dirty words. The disintegration of the Soviet Union meant that India could no longer rely on subsidized handouts from its former ally; socialism as an ideology was in serious disrepute. It finally dawned on Indian politicians that in a rapidly globalizing world economy, India would lag far behind other developing countries unless it took drastic steps. To quote Landau (1994), "India only needed to look at its neighbor, China, to realize that its isolationist policies were misguided."

After decades of disappointment, frustration, and disturbed conditions, India is beginning to turn the comer. Under the government of P.V. Narasimha Rao, which took over in June 1991, the technocrat finance minister Dr. Manmohan Singh began the onerous task of reforming an economy emasculated by decades of socialism, state planning, red tape, and protectionism. It now appears that India is serious about this task. Despite efforts by vested interests to scuttle them, the Indian government has largely pressed on with its reforms. And despite defeats suffered by his Congress party in state elections that were blamed in part on hardships caused by the reforms, the then Indian Prime Minister insisted that the program would continue.

THE ROAD TO ECONOMIC TRANSFORMATION

The major changes initiated by the Indian government sweep away many archaic and burdensome regulations and create a business-friendly environment for domestic and international business. Here we consider many of the developments that have occurred and the changes that are still evolving. Developments are discussed under broad classifications: macroeconomic reforms, tax reforms, finance reforms and freeing of capital markets, reforms in the regulation of business firms, revitalization of the Indian private sector, removal of exchange controls and convertibility, trade reforms, and foreign direct investment. The Figure shows the major dimensions of economic reform.

Macroeconomic Reforms

Since taking office in mid-1991, the Indian government has managed to transform the nation's desperate economic situation by initiating a package of measures to stabilize the economy in the short term combined with structural reforms to accelerate growth in the medium term. Inflation was reduced from 17 percent in August 1991 to 8 percent in late 1993. The fiscal deficit slipped from 8.4 percent of the GDP in 1990-91 to about 6.5 percent in 1991-92 and 5.6 percent in 1992-93. The current account deficit in the balance of payments fell sharply from $5 billion in 1992-93 to less than $800 million in 1993-94, although this had risen to more than $2 billion by 1995. GDP growth has picked up from 1.2 percent in 1991-92 to 5 percent. Exports have surged from $12.5 billion in 1991 to $30 billion by 1995.