A Project on

IMPACT OF MULTINATIONAL
CORPORATION ON INDIAN ECONOMY
In the subject of Economics of Global Trade & Finance
Submitted to
University of Mumbai
For Semester II of
Master of Commerce
By
Shruti Vikram
(Management 166)
Under the Guidance of
Prof Rajlakshmy

Year 2012 - 2013

SR NO

TABLE OF CONTENTS

PAGE NO

HISTORY
1

3
a) MULTINATIONAL CORPORATION
b) MULTINATIONAL CORPORATION
STRUCTURE

FEATURES
A)
B)
C)
D)
E)
F)
G)
H)

5
INTERNATIONAL POWER
TAX COMPETITION
LARGEST ECONOMY
MARKET WITHDRAWAL
LOBBYING
GOVERNMENT POWER
MICRO MULTINATIONAL
MULTINATIONALS FROM EMERGING
MARKETS

3
MNC IN INDIA

ADVANTAGES AND DISADVANTAGES OF MNC

11

MNC MAKING PROFITS

INDIAN ECONOMY

12

13
a)
b)
c)
d)

PRE COLONIAL
COLONIAL
INDEPENDENCE TO 1991
AFTER 1991

GLOBAL TRADE RELATIONS AND INVESTMENTS

29

RISE OF INDIA AND IIM

8

32
a)
b)
c)
d)

RISE OF INDIA
TURNAROUND
ARRIVAL OF THE GIANTS
PATH AHEAD

BIBLIOGRAPHY
9

37

History
There is a dispute as to which was the first MNC. Some have argued that the
Knights Templar, founded in 1117, became a multinational when it stumbled into
banking in 1135. However, others claim that the Dutch East India Company was
the first proper multinational.
Multinational Corporation
A multinational corporation (or transnational corporation) (MNC/TNC) is a
corporation or enterprise that manages production establishments or delivers
services in at least two countries. Very large multinationals have budgets that
exceed those of many countries. Multinational corporations can have a powerful
influence in international relations and local economies. Multinational corporations
play an important role in globalization; some argue that a new form of MNC is
evolving in response to globalization: the 'globally integrated enterprise'.

What is the difference between Multi National Corporation and Trans

National Corporation? The difference is more semantics than anything else.
Multinationals operate in several different countries while trans national
implies "just across the border" as in the USA and Canada. Obviously, both
operate internationally

Multinational Corporation Structure

Multinational corporations can be divided into three broad groups according to the
configuration of their production facilities:
Horizontally

integrated

multinational

corporations

manage

production

establishments located in different countries to produce the same or similar

products. (example: McDonalds)
Vertically

integrated

multinational

corporations

manage

production

establishment in certain country/countries to produce products that serve as input to

its production establishments in other country/countries. (example: Adidas)
Diversified multinational corporations manage production establishments located
in different countries that are neither horizontally nor vertically nor straight, nor
non-straight integrated. (example: Microsoft)
Others argue that a key feature of the multinational is the inclusion of back office
functions in each of the countries in which they operate. The globally integrated
enterprise, which some see as the next development in the evolution of the
multinational, does away with this requirement.

Features of MNC
International Power
Large multinational corporations can have a powerful influence in international
relations, given their large economic influence in politicians' representative
districts, as well as their extensive financial resources available for public relations
and political lobbying.
Tax Competition
Multinationals have played an important role in globalization. Countries and
sometimes sub national regions must compete against one another for the
establishment of MNC facilities, and the subsequent tax revenue, employment, and
economic activity. To compete, countries and regional political districts offer
incentives to MNCs such as tax breaks, pledges of governmental assistance or
improved infrastructure, or lax environmental and labour standards. This process of
becoming more attractive to foreign investment can be characterized as a race to
the bottom, a push towards greater freedom for corporate bodies, or both.
Largest Economies
An inaccurate claim is that out of the 100 largest economies in the world, 51 are
multinational corporations.[2] This claim is based on a miscalculation, where two
numbers describing totally different things are compared: the GDP of nations to
gross sales of corporations. The problem with the comparison is that GDP takes

into account only the final value, whereas gross sales don't measure how much was
produced outside the company. According to Swedish economist Johan Norberg, if
one were to compare nations and corporations, then one should be comparing GDP
to goods only produced within the particular company (gross sales do not take into
account goods purchased from 3rd party vendors and resold, just as GDP does not
take into account imported goods). That correction would make only 37 of 100
largest economies corporations and all of them would be in bottom box: only 5
corporations would be in top 50.
Market Withdrawal
Because of their size, multinationals can have a significant impact on government
policy, primarily through the threat of market withdrawal. For example, in an effort
to reduce health care costs, some countries have tried to force pharmaceutical
companies to license their patented drugs to local competitors for a very low fee,
thereby artificially lowering the price. When faced with that threat, multinational
pharmaceutical firms have simply withdrawn from the market, which often leads to
limited availability of advanced drugs. In these cases, governments have been
forced to back down from their efforts. Similar corporate and government
confrontations have occurred when governments tried to force companies to make
their intellectual property public in an effort to gain technology for local
entrepreneurs. When companies are faced with the option of losing a core
competitive technological advantage and withdrawing from a national market, they
may choose the latter. This withdrawal often causes governments to change policy.
Countries that have been most successful in this type of confrontation with

multinational corporations are large countries such as India and Brazil, which have
viable indigenous market competitors.

Lobbying
Multinational corporate lobbying is directed at a range of business concerns, from
tariff structures to environmental regulations. There is no unified multinational
perspective on any of these issues. Companies that have invested heavily in
pollution control mechanisms may lobby for very tough environmental standards in
an effort to force non-compliant competitors into a weaker position. For every tariff
category that one multinational wants to have reduced, there is another
multinational that wants the tariff raised. Even within the U.S. auto industry, the
fraction of a company's imported components will vary, so some firms favor tighter
import restrictions, while others favor looser ones.
Government Power
In addition to efforts by multinational corporations to affect governments, there is
much government action intended to affect corporate behavior. The threat of
nationalization (forcing a company to sell its local assets to the government or to
other local nationals) or changes in local business laws and regulations can limit a
multinational's power.
Micro Multinationals

Enabled by Internet based communication tools, a new breed of multinational

companies is growing in numbers. These multinationals start operating in different
countries from the very early stages. These companies are being called micromultinationals. What differentiates micro-multinationals from the large MNCs is
the fact that they are small businesses. Some of these micro-multinationals,
particularly software development companies, have been hiring employees in
multiple countries from the beginning of the Internet era. But more and more
micro-multinationals are actively starting to market their products and services in
various countries. Internet tools like Google, Yahoo, MSN, EBay and Amazon
make it easier for the micro-multinationals to reach potential customers in other
countries. Contrary to the traditional powerful image of the large MNCs, the micromultinationals face the limitations and the typical challenges of a small business. In
most cases, the micro-multinational companies are being run by technically savvy
people who can use various Internet tools to overcome the challenges of remote
collaboration, customer service and sales infrastructures.
Multinationals from Emerging Markets
Large number of multinationals is operating into emerging markets and at the same
time a number of multinationals are coming from emerging markets. Professor
Rajesh K Pillania is bringing out a special issue on Multinationals from
Emerging Markets in 2008.

10

Multinational Companies in India

The post financial liberation era in India has experienced huge influx of
'Multinational Companies in India' and propelled India's economy to greater
heights.
Although, majority of these companies are of American origin but it did not take
too long for other nations to realize the huge potential that India Inc offers.
'Multinational Companies in India' represents a diversified portfolio of
companies representing different nations. It is well documented that American
companies accounts for around 37% of the turnover of the top 20 firms operating in
India. But, the scenario for 'MNC in India' has changed a lot in recent years, since
more and more firms from European Union like Britain, Italy, France, Germany,
Netherlands, Finland, Belgium etc have outsourced their work to India. Finnish
mobile handset manufacturing giant Nokia has the second largest base in India.
British Petroleum and Vodafone (to start operation soon) represent the British. A
host of automobile companies like Fiat, Ford Motors, and Piaggio etc from Italy
have opened shop in India with R&D wing attached. French Heavy Engineering
major Alstom and Pharma major Sanofi Aventis is one of the earliest entrants in the

11

scene and is expanding very fast. Oil companies, Infrastructure builders from
Middle East are also flocking in India to catch the boom. South Korean electronics
giants Samsung and LG Electronics and small and mid-segment car major Hyundai
Motors are doing excellent business and using India as a hub for global delivery.
Japan is also not far behind with host of electronics and automobiles shops.
Companies like SingTel of Singapore and Malaysian giant Salem Group are
showing huge interest for investment.
In spite of the huge growth India Inc have some bottlenecks, like Irrational policies (tax structure and trade barriers).
Low invest in infrastructure - physical and information technology.
Slow reforms (political reforms to improve stability, privatization and
deregulation, labor reforms).
Reports say, performance of 3 out of every 4 'Multinational Companies' has met
or exceeded internal targets and expectations. India is perceived to be at par with
China in terms of FDI attractiveness by 'Multinational Companies in India'. In view
of 'Multinational Companies' community, it ranks higher than China, Malaysia,
Thailand, and Philippines in terms of MNC performance. Multinational
Companies Operating in India cite India's highly educated workforce, management
talent, rule of law, transparency, cultural affinity, and regulatory environment as
more favorable than others. Moreover, they acknowledged, India's leadership in IT,
business processing, and R&D investments.
'Multinational Companies in India' are optimistic on -

12

India's market potential.

Labor competitiveness.
Macro-economic stability.
FDI attractiveness.

Advantages and Disadvantages of MNCs

For a individuals

Advantage: MNCs are globally recognized businesses so you have great potential
for your Career growth in a Global level
Disadvantage: Career path in MNC will take time to establish.

For society

Advantage: MNCs remove established legacy businesses and promote local

employment opportunities. They also provide various charitable services to the
society.
Disadvantage: MNCs induces competition, and their profit minded operations may
impact local market/produce.

13

For Government

Advantage: Tax Source Economic Benefit

Disadvantage: MNCs Strategy will influence various government policies making
which may not always be good for the economy

MNC's in India making profits

A majority of foreign companies operating in India are making profits but the
multinationals felt the need to build brand India so as to attract more investors, a
study by FICCI has said.

According to FICCI's annual FDI survey, 70 per cent of the foreign companies here
are earning profits from their Indian operations.

The survey said 84 per cent of the respondents gave a positive assessment of India,
although they highlighted the need for building brand India and showcase India's
potential as an investment destination.

14

Despite an overwhelming majority, 91 per cent, were upbeat about the market
conditions and the potential for further FDI inflows, they expressed concerns about
the quality of infrastructure in India, it said.

Indian Economy

The economy of India, when measured in USD exchange-rate terms, is the twelfth
largest in the world, with a GDP of US $1.25 trillion (2008). It is the third largest in
terms of purchasing power parity. India is the second fastest growing major
economy in the world, with a GDP growth rate of 9.4% for the fiscal year 2006
2007. However, India's huge population results in a per capita income of $4,542 at
PPP and $1,089 at nominal (revised 2007 estimate). The World Bank classifies
India as a low-income economy. India's economy is diverse, encompassing
agriculture, handicrafts, textile, manufacturing, and a multitude of services.
Although two-thirds of the Indian workforces still earn their livelihood directly or
indirectly through agriculture, services are a growing sector and play an

15

increasingly important role of India's economy. The advent of the digital age, and
the large number of young and educated populace fluent in English, is gradually
transforming India as an important 'back office' destination for global outsourcing
of customer services and technical support. India is a major exporter of highlyskilled workers in software and financial services, and software engineering. Other
sectors like manufacturing, pharmaceuticals, biotechnology, nanotechnology,
telecommunication, shipbuilding, aviation and tourism are showing strong
potentials with higher growth rates. India followed a socialist-inspired approach for
most of its independent history, with strict government control over private sector
participation, foreign trade, and foreign direct investment.
However, since the early 1990s, India has gradually opened up its markets through
economic reforms by reducing government controls on foreign trade and
investment. The privatisation of publicly owned industries and the opening up of
certain sectors to private and foreign interests has proceeded slowly amid political
debate. India faces a fastly growing population and the challenge of reducing
economic and social inequality. Poverty remains a serious problem, although it has
declined significantly since independence. Official surveys estimated that in the
year 2004-2005, 27% of Indians were poor.

Pre-colonial
The citizens of the Indus Valley civilisation, a permanent and predominantly urban
settlement that flourished between 2800 BC and 1800 BC, practiced agriculture,
domesticated animals, used uniform weights and measures, made tools and
weapons, and traded with other cities. Evidence of well planned streets, a drainage

16

system and water supply reveals their knowledge of urban planning, which
included the world's first urban sanitation systems and the existence of a form of
municipal government. Religion, especially Hinduism, and the caste and the joint
family systems, played an influential role in shaping economic activities. The caste
system functioned much like medieval European guilds, ensuring the division of
labour, providing for the training of apprentices and, in some cases, allowing
manufacturers to achieve narrow specialization.
For instance, in certain regions, producing each variety of cloth was the speciality
of a particular sub-caste.
Estimates of the per capita income of India (18571900) as per 194849 prices.
Textiles such as muslin, Calicos, shawls, and agricultural products such as pepper,
cinnamon, opium and indigo were exported to Europe, the Middle East and South
East Asia in return for gold and silver. Assessment of India's pre-colonial economy
is mostly qualitative, owing to the lack of quantitative information. One estimate
puts the revenue of Akbar's Mughal Empire in 1600 at 17.5 million, in contrast
with the total revenue of Great Britain in 1800, which totalled 16 million. India, by
the time of the arrival of the British, was a largely traditional agrarian economy
with a dominant subsistence sector dependent on primitive technology. It existed
alongside a competitively developed network of commerce, manufacturing and
credit. After the fall of the Mughals,India was administered by Maratha Empire.
The Maratha empire's budget in 1740s, at its peak, was Rs. 100 million.

17

Colonial
Colonial rule brought a major change in the taxation environment from revenue
taxes to property taxes resulting in mass impoverishment and destitution of the
great majority of farmers. It also created an institutional environment that, on
paper, guaranteed property rights among the colonizers, encouraged free trade, and
created a single currency with fixed exchange rates, standardized weights and
measures, capital markets, a well developed system of railways and telegraphs, a
civil service that aimed to be free from political interference, and a common-law,
adversarial legal system. India's colonization by the British coincided with major
changes in the world economyindustrialization, and significant growth in
production and trade. However, at the end of colonial rule, India inherited an
economy that was one of the poorest in the developing world, with industrial

18

development stalled, agriculture unable to feed a rapidly growing population, one

of the world's lowest life expectancies, and low rates of literacy. An estimate by
Cambridge University historian Angus Madison reveals that India's share of the
world income fell from 22.6% in 1700, comparable to Europe's share of 23.3%, to a
low of 3.8% in 1952. While Indian leaders during the Independence struggle, and
left-nationalist economic historians have blamed colonial rule for the dismal state
of India's economy in its aftermath, a broader macroeconomic view of India during
this period reveals that there were sectors of growth and decline, resulting from
changes brought about by colonialism and a world that was moving towards
industrialization and economic integration.

Independence to 1991
Indian economic policy after independence was influenced by the colonial
experience (which was seen by Indian leaders as exploitative in nature) and by
those leaders' exposure to Fabian socialism. Policy tended towards protectionism,
with a strong emphasis on import substitution, industrialization, state intervention
in labour and financial markets, a large public sector, business regulation, and
central planning. Jawaharlal Nehru, the first prime minister, along with the
statistician Prasanta Chandra Mahalanobis, carried on by Indira Gandhi formulated
and oversaw economic policy. They expected favorable outcomes from this
strategy, because it involved both public and private sectors and was based on
direct and indirect state intervention, rather than the more extreme Soviet-style
central command system. The policy of concentrating simultaneously on capitaland technology-intensive heavy industry and subsidizing manual, low-skill cottage

19

industries was criticized by economist Milton Friedman, who thought it would

waste capital and labour, and retard the development of small manufacturers.
India's low average growth rate from 194780 was derisively referred to as the
Hindu rate of growth, because of the unfavorable comparison with growth rates in
other Asian countries, especially the "East Asian Tigers".

After 1991

Goldman Sachs has predicted that India will become 3rd largest economy of the
world by 2035 based on predicted growth rate of 5.3 to 6.1%. Currently it is
cruising at 9.4% growth rate.

20

In the late 80s, the government led by Rajiv Gandhi eased restrictions on capacity
expansion for incumbents, removed price controls and reduced corporate taxes.
While this increased the rate of growth, it also led to high fiscal deficits and a
worsening current account.

I.

Government Intervention

A. State planning and the mixed economy

After independence, India opted for a centrally planned economy to try to achieve
an effective and equitable allocation of national resources and balanced economic
development. The process of formulation and direction of the Five-Year Plans is
carried out by the Planning Commission, headed by the Prime Minister of India as
its chairperson. Indias mixed economy combines features of both capitalist market
economy and the socialist command economy, but has shifted more towards the
former over the past decade. The public sector generally covers areas which are
deemed too important or not profitable enough to leave to the market, including
such services as the railways and postal system. Since independence, there have
been phases of nationalizing such areas as banking and, more recently, of
privatization.

B. Public expenditure

India's public expenditure is classified as development expenditure, comprising

central plan expenditure and central assistance and non-development expenditures;

21

these categories can each be divided into capital expenditure and revenue
expenditure. Central plan expenditure is allocated to development schemes outlined
in the plans of the central government and public sector undertakings; central
assistance refers to financial assistance and developmental loans given for plans of
the state governments and union territories. Non-development capital expenditure
comprises capital defense expenditure, loans to public enterprises, states and union
territories and foreign governments, while non-development revenue expenditure
comprises revenue defence expenditure, administrative expenditure, subsidies, debt
relief to farmers, postal deficit, pensions, social and economic services (education,
health, agriculture, science and technology),grants to states and union territories
and foreign governments. Indias non-development revenue expenditure has
increased nearly fivefold in 200304 since 199091 and more than tenfold since
19851986. Interest payments are the single largest item of expenditure and
accounted for more than 40% of the total non development expenditure in the
200304 budgets. Defence expenditure increased fourfold during the same period
and has been increasing due to growing tensions in the region, the expensive
dispute with Pakistan over Jammu and Kashmir and an effort to modernize the
military. Administrative expenses are compounded by a large salary and pension
bill, which rises periodically due to revisions in wages, dearness allowance etc.
subsidies on food, fertilizers, education and petroleum and other merit and nonmerit subsidies account are not only continuously rising, especially because of
rising crude oil and food prices, but are also harder to rein in, because of political
compulsions.
C. Public receipts

22

India has a three-tier tax structure, wherein the constitution empowers the union
government to levy Income tax, tax on capital transactions (wealth tax, inheritance
tax), sales tax, service tax, customs and excise duties and the state governments to
levy sales tax on intra-state sale of goods, tax on entertainment and professions,
excise duties on manufacture of alcohol, stamp duties on transfer of property and
collect land revenue (levy on land owned). The local governments are empowered
by the state government to levy property tax, Octroi and charge users for public
utilities like water supply, sewage etc.More than half of the revenues of the union
and state governments come from taxes, of which half come from Indirect taxes.
More than a quarter of the union government's tax revenues are shared with the
state governments. The tax reforms, initiated in 1991, have sought to rationalize the
tax structure and increase compliance by taking steps in the following directions:
Reducing the rates of individual and corporate income taxes, excises,
customs and making it more progressive
Reducing exemptions and concessions
Simplification of laws and procedures
Introduction of Permanent account number to track monetary transactions

21 of the 29 states introduced Value added tax (VAT) on April 1, 2005 to

replace the complex and multiple sales tax system
The non-tax revenues of the central government come from fiscal services, interest
receipts, public sector dividends, etc., while the non-tax revenues of the States are
grants from the central government, interest receipts, dividends and income from

23

general, economic and social services.Inter-State share in the federal tax pool is
decided by the recommendations of the Finance Commission to the President.
D. General budget

The Finance minister of India presents the annual union budget in the Parliament
on the last working day of February. The budget has to be passed by the Lok Sabha
before it can come into effect on April 1, the start of India's fiscal year. The Union
budget is preceded by an economic survey which outlines the broad direction of the
budget and the economic performance of the country for the outgoing financial
year. This economic survey involves all the various NGOs, women organizations,
business people, old people associations etc.
India's union budget for 200506, had an estimated outlay of Rs.5, 14,344 crores
($118 billion).
Earnings from taxes amount to Rs. 2, 73,466 crore ($63b). India's fiscal deficit
amounts to 4.5% or 1, 39,231 crore ($32b).The fiscal deficit is expected to be 3.8%
of GDP, by March 2007.

24

II.

Sectors

Agriculture

India ranks second worldwide in farm output. Agriculture and allied sectors like
forestry, logging and fishing accounted for 18.6% of the GDP in 2005, employed
60% of the total workforce and despite a steady decline of its share in the GDP, is
still the largest economic sector and plays a significant role in the overall socioeconomic development of India. Yields per unit area of all crops have grown since
1950, due to the special emphasis placed on agriculture in the five-year plans and
steady improvements in irrigation, technology, application of modern agricultural
practices and provision of agricultural credit and subsidies since Green revolution

25

in India. However, international comparisons reveal that the average yield in India
is generally 30% to 50% of the highest average yield in the world.
The low productivity in India is a result of the following factors:
Illiteracy, general socio-economic backwardness, slow progress in
implementing land reforms and inadequate or inefficient finance and
marketing services for farm produce.
The average size of land holdings is very small (less than 20,000 m) and is
subject to fragmentation, due to land ceiling acts and in some cases, family
disputes. Such small holdings are often over-manned, resulting in disguised
unemployment and low productivity of labour.
Adoption of modern agricultural practices and use of technology is

inadequate, hampered by ignorance of such practices, high costs and

impracticality in the case of small land holdings.
Irrigation facilities are inadequate, as revealed by the fact that only 53.6%
of the land was irrigated in 200001, which result in farmers still being
dependent on rainfall, specifically the Monsoon season. A good monsoon
results in a robust growth for the economy as a whole, while a poor
monsoon leads to a sluggish growth. Farm credit is regulated by NABARD,
which is the statutory apex agent for rural development in the subcontinent.

26

Industry
India is fourteenth in the world in factory output. They together account for 27.6%
of the GDP and employ 17% of the total workforce. However, about one-third of
the industrial labour force is engaged in simple household manufacturing only.
Economic reforms brought foreign competition, led to privatisation of certain
public sector industries, opened up sectors hitherto reserved for the public sector
and led to an expansion in the production of fast-moving consumer goods. Postliberalization, the Indian private sector, which was usually run by oligopolies of old
family firms and required political connections to prosper was faced with foreign
competition, including the threat of cheaper Chinese imports. It has since handled
the change by squeezing costs, revamping management, focusing on designing new
products and relying on low labour costs and technology.

27

Indian companies that have been listed in the Forbes Global 2000 ranking for 2007.
[57]

The 10 leading companies are:

28

World

Company

Logo

Industry

Revenue

Profits

Market

(billion

(billion

(billion $)

$)
Gas 15.64

$)
3.46

38.19

Rank
239

Oil and Natural

Oil

258

Gas Corporation
Reliance

Operations
Oil & Gas 18.05

2.11

42.62

326

Industries
State Bank of

Operations
Banking

13.66

1.24

12.35

399

India
Indian Oil

Oil

Gas 34.22

1.11

10.92

494
536
800

Corporation
NTPC
ICICI Bank
Steel Authority

Operations
Utilities
Banking
Materials

6.06
5.79
6.30

1.31
0.54
0.91

26.06
16.72
10.16

1047

of India Limited
Tata

Software

& 2.98

0.67

26.27

Consultancy

Services

Svcs
Infosys

Software

& 2.14

0.55

26.19

Technologies

Services

1130

&

&

Services
India is fifteenth in services output. It provides employment to 23% of work force,
and it is growing fast, growth rate 7.5% in 19912000 up from 4.5% in 195180. It
has the largest share in the GDP, accounting for 53.8% in 2005 up from 15% in
1950. Business services (information technology, information technology enabled
services, business process outsourcing) are among the fastest growing sectors
contributing to one third of the total output of services in 2000. The growth in the
IT sector is attributed to increased specialization, availability of a large pool of low

Value

29

cost, but highly skilled, educated and fluent English-speaking workers (a legacy of
British Colonialism) on the supply side and on the demand side, increased demand
from foreign consumers interested in India's service exports or those looking to
outsource their operations. India's IT industry, despite contributing significantly to
its balance of payments, accounted for only about 1% of the total GDP or 1/50th of
the total services. Since liberalization, the government has approved significant
banking reforms. While some of these relate to nationalized banks (like
encouraging mergers, reducing government interference and increasing profitability
and competitiveness), other reforms have opened up the banking and insurance
sectors to private and foreign players.

III.

Socio-economic characteristics

Poverty
Large numbers of India's people live in abject poverty. Wealth distribution in India
is improving since the liberalization and with the end of the socialist rule termed as
the license raj. While poverty in India has reduced significantly, official figures
estimate that 27.5% of Indians still lived below the national poverty line in 2004-

30

2005.A 2007 report by the state-run National Commission for Enterprises in the
Unorganized Sector (NCEUS) found that 70% of Indians, or 800 million people,
lived on less than 20 rupees per day with most working in "informal labour sector
with no job or social security, living in abject poverty."Since the early 1950s,
successive governments have implemented various schemes, under planning, to
alleviate poverty that have met with partial success. All these programmes have
relied upon the strategies of the Food for work programme and National Rural
Employment Programme of the 1980s, which attempted to use the unemployed to
generate productive assets and build rural infrastructure. In August 2005, the Indian
parliament passed the Rural Employment Guarantee Bill, the largest programme of
this type in terms of cost and coverage, which promises 100 days of minimum
wage employment to every rural household in 200 of India's 600 districts. The
question of whether economic reforms have reduced poverty or not has fuelled
debates without generating any clear cut answers and has also put political pressure
on further economic reforms, especially those involving the downsizing of labour
and cutting agricultural subsidies.

Global Trade Relations and Investments

Until the liberalization of 1991, India was largely and intentionally isolated from
the world markets, to protect its fledging economy and to achieve self-reliance.
Foreign trade was subject to import tariffs, export taxes and quantitative
restrictions, while foreign direct investment was restricted by upper-limit equity
participation, restrictions on technology transfer, export obligations and

31

government approvals; these approvals were needed for nearly 60% of new FDI in
the industrial sector. The restrictions ensured that FDI averaged only around
$200M annually between 1985 and 1991; a large percentage of the capital flows
consisted of foreign aid, commercial borrowing and deposits of non-resident
Indians.
Share of top five investing countries in FDI inflows. (19912004)[81]
Inflows
Rank Country

Inflows (%)
(Million USD)

Mauritius

8,898

34.49%[82]

United States

4,389

17.08%

Japan

1,891

7.33%

Netherlands

1,847

7.16%

United Kingdom

1,692

6.56%

32

India's exports were stagnant for the first 15 years after independence, due to the
predominance of tea, jute and cotton manufactures, demand for which was
generally inelastic. Imports in the same period consisted predominantly of
machinery, equipment and raw materials, due to nascent industrialization. Since
liberalization, the value of India's international trade has become more broad-based
and has risen to Rs. 63,080,109 crores in 200304 from Rs.1, 250 crores in 1950
51. India's major trading partners are China, the US, the UAE, the UK, Japan and
the EU.
The exports during August 2006 were $10.3 billion up by 41.14% and import were
$13.87 billion with an increase of 32.16% over the previous year. India is a
founding-member of General Agreement on Tariffs and Trade (GATT) since 1947
and its successor, the World Trade Organization. While participating actively in its
general council meetings, India has been crucial in voicing the concerns of the
developing world. For instance, India has continued its opposition to the inclusion
of such matters as labour and environment issues and other non-tariff barriers into
the WTO policies. Requirements removed restrictions on expansion and facilitated
easy access to foreign technology and foreign direct investment FDI. The upward
moving growth curve of the real-estate sector owes some credit to a booming
economy and liberalized FDI regime. In March 2005, the government amended the
rules to allow 100 per cent FDI in the construction business. This automatic route
has been permitted in townships, housing, built-up infrastructure and construction
development projects including housing, commercial premises, hotels, resorts,
hospitals, educational institutions, recreational facilities, and city- and regionallevel infrastructure. A number of changes were approved on the FDI policy to

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remove the caps in most sectors. Restrictions will be relaxed in sectors as diverse as
civil aviation, construction development, industrial parks, petroleum and natural
gas, commodity exchanges, credit-information services and mining. But this still
leaves an unfinished agenda of permitting greater foreign investment in politically
sensitive areas such as insurance and retailing.

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The Rise of India & the IIM

The Rise of India

In last couple of years, The Rise of India & China is a story being watched with
much awe, fascination & even fear in the global media. Most of these stories are
inspired by the huge strides made by Indian & Chinese companies in Service &
Manufacturing sectors. Many of the key drivers of their success has been their
prowess at creating high quality but low cost Software & Outsourcing services in
case of India and manufacturing in case of China. Some analysts have also
highlighted the Research & Development investments being made in India by
corporations as diverse as GE to Google leading to possible emergence of Asia as
the R&D hub for world. However what seems to have missed the attention of
media is emergence of Indian Managers in the top ladders of US Corporate arena.
There have been isolated stories like rise of Rajat Gupta (ex-Chief Mckinsey),
Victor Menzes of Citibank, but one big emerging trend has been the rise of Indian
Managers or MBA. This is a story, which is still to unfold in a big way but already
has started making waves in recent years. It will be interesting to trace the rise of
IIMs

along

with

India's

rise

in

the

world

economy.

35

The Turnaround

In late 90s when the current Indian PM, Manmohan Singh, began the liberalization
of Indian economy, as the Finance Minister, it opened up a wealth of opportunities
for private sector enterprises and also drew a horde of MNCs to India. The size of
Indian middle class by then estimates of 200-300MM was one of the fastest
growing markets in the world. To cater to this market corporate needed a horde of
management professionals to run & grow the new markets. This brought in a tonne
of opportunities to Indias thousands of MBA grads and more so for the students of
IIMs who were the crme-la-crme of India. Slowly but surely, the middle class
dream career was not to get into the Civil Service but rather to earn an MBA degree
as a route of entry to the corporate world. Also many of Indias top brains like IIT
engineers, Chartered Accountants were allured into seeking an MBA degree to their
portfolio especially so from an IIM. The competition for gaining a seat into these bschools was hyper competitive even after discounting the huge population of India.
Imagine an admission rate of .6% vs. 10% for the top ivy-league schools of US.
Only recently, The Economist in its recent ratings of B-Schools rated IIM-A
(Ahmedabad) as the toughest B-school in world to get into. Also being able to
attract many Indian profs who had acquired their doctorates at top US Universities
added to their reputation as hubs for excellence. Thus best of breed students

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combined with best of breed professors and availability of rewarding placement

opportunities, all at a fraction of Ivy League rates created a unique selling
proposition

in

the

hyper

competitive

MBA

school-world

Arrival of the Giants

In corporate world especially US, Consulting & Investment Banks are among the
most demanding careers and also most competitive in the war for talent globally.
The likes of Mckinsey & BCG in consulting & Lehman Brothers, JP Morgan in IBanks thus were quick to use the IIMs as a recruiting ground mainly for their
Indian Operations to start with. However impressed by the performance of the
initial recruits they started recruiting for their global practices. In fact the war for
heads has become so hot these days that many of these try to pick the cream via the
summer trainee route and offer Pre-Placement Offers. Year 2000 was a ground
breaking year in the sense, more than 10% of IIM-A grads was recruited purely for
placements in Manhattan, NYC and it also was the inaugural year for Goldman
Sachs. Also given the profile of IIM students, 70% of who boast of an engineering
degree from Indias top Colleges and mostly IITs, it became even more tempting
for the leading recruiters to shun many 2nd rung b-schools elsewhere to get these
talent.

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The Path Ahead

More recently, the success of many Indian corporate in IT & BPO arena people,
made people note of the management behind these companies. One key competitive
advantage Indian companies had vis--vis Chinese ones was the breadth & depth of
management talent. While China had a huge success in managing and running
cheap assembly line production of goods at lowest price, Indias success were more
in the higher end of value chain. This is where Indian Managers were miles ahead
and much of this success is credited to the IIMs & the second line of b-schools,
which are no less competitive. One of the key facets of market economy is
changing skill sets requirements and being able to deal with complexity and
uncertainty. This is one area where Indian students come with a unique advantage.
Life in India or any developing world can be full of chaos, uncertainty, scarcity and
grays. This meant that most of these young MBA aspirants get the experience of
many life times even in families and a 2 year structured thinking process and
arming with tools & techniques of a typical b-school curriculum would prepare
them to take on the corporate world by thorns. A random inventory of India's nonfamily, non-govt sector WHO IS WHO would read like the alumni list of
IIMs.Below are some examples from tradition sectorsVindi Banga (IIM-A) - HLL's
top gun ( HLL is India's largest consumer goods company, part of Unilevers) K V
Kamath (IIM-A), ICICI's top gun ( ICICI is India's largest private sector bank),

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Even in the new brave world of dot com, software & BPO we have many IIM alum
leading the charge, Rediff.com (Ajit Balakrishnan) , Genpact (Tiger Tyagrajan),
mphasis (Jerry Rao) .However what is new or changing is that unlike in past, we
have relatively younger alums are taking the risk to start their own firms. This is
what was needed. No more you needed to have spent a stable / secure career at Citi
or GE or P&G but rather you can start with your own thing. If things don't work
well then you can always go back to the big corporate world. As Indian economy
becomes a bigger % of global economy not in terms of GDP alone but also as a
bigger % of global innovation then many of these IIM grads to have step up and be
counted. Just like technology innovation was the source of competitive advantage
in past and IITians were a key enabler to that, now Business Process &
Management related innovations will be key to success in this hyper-competitive
economy.

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BIBLIOGRAPHY

The source for gathering information for my project.

WEBSITES:
www.economictimes.com.
www.yahoosearch.co.in
www.googlesearch.com

www.managementparadise.com
www.businessstandard.com

NEWSPAPERS:
The Economic Times

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Business Standard