BE

PROJEC
T
HAS INDIA LOST ITS GROUND IN THE
GLOBAL SETTING
ACKNOWLEDGEMENT
TABLE OF CONTENTS
EXECUTIVE SUMMARY

Globalisation is the new buzzword that has come to dominate the world since the nineties of the last
century with the end of the cold war and the break-up of the former Soviet Union and the global trend
towards the rolling ball. The frontiers of the state with increased reliance on the market economy and
renewed faith in the private capital and resources, a process of structural adjustment spurred by the
studies and influences of the World Bank and other International organisations have started in many
of the developing countries. Also Globalisation has brought in new opportunities to developing
countries. Greater access to developed country markets and technology transfer hold out promise
improved productivity and higher living standard. But globalisation has also thrown up new
challenges like growing inequality across and within nations, volatility in financial market and
environmental deteriorations. Another negative aspect of globalisation is that a great majority of
developing countries remain removed from the process. Till the nineties the process of globalisation
of the Indian economy was constrained by the barriers to trade and investment liberalisation of trade,
investment and financial flows initiated in the nineties has progressively lowered the barriers to
competition and hastened the pace of globalisation. Though in the recent decade, India along with
China has emerged as the engine of global growth. This period has also been one when India
initiated structural reforms which encompassed, inter alia, a phased opening up of the Indian
economy to the external sector. These structural reforms have strengthened India’s external
sector and have also imparted a degree of dynamism to the Indian economy. The opening up of
the Indian economy has not only allowed it to reap benefits of globalisation but India is also
contributing to global growth. Against this backdrop, we will discuss India’s recent economic
growth record in order to draw lessons for it to realize its potential in a globalised world.

Where do we stand? Have we improved our performance? These are some of the issues that will
be dealt with in the following project .
India at a glance (Source : india stat)

The rate of growth of the Gross Domestic Product of India has been on the increase from 5.6 per
cent during 1980-90 to seven per cent in the 1993-2001 period. In the last four years, the annual
growth rate of the GDP was impressive at 7.5 per cent (2003-04), 8.5 per cent (2004-05), nine
per cent (2005-06) and 9.2 per cent (2006-07) and 6.5 in (2008-09). Prime Minister Manmohan
Singh is confident of having a 10 per cent growth in the GDP by the Eleventh Five Year Plan
period.

The foreign exchange reserves (as at the end of the financial year) were $ 39 billion (2000-01), $
107 billion (2003-04), $ 676387(2005-06) and $ 1237965 crores (in February 2007) and 1283865
crores (2008-09).

The cumulative FDI inflows from 1991 to September 2006 were Rs.1, 81,566 crores (US $ 43.29
billion). The sectors attracting highest FDI inflows are electrical equipments including computer
software and electronics (18 per cent), service sector (13 per cent), telecommunications (10 per cent),
transportation industry (nine per cent), etc. In the inflow of FDI, India has surpassed South Korea to
become the fourth largest recipient whereas in hhe

India controls at the present 45 per cent of the global outsourcing market with an estimated
income of $ 50 billion.

In respect of market capitalization (which takes into account the market value of a quoted company
by multiplying its current share price by the number of shares in issue), India is in the fourth
position with $ 894 billion after the US ($ 17,000 billion), Japan ($ 4800 billion) and China ($ 1000).
Market Cap as on Oct’09 was Rs. 5374559 Cr.

As per the Forbes list for 2007, the number of billionaires of India has risen to 40 (from 36 last
year)more than those of Japan (24), China (17), France (14) and Italy (14) this year. A press report
was jubilant: This is the richest year for India. The combined wealth of the Indian billionaires
marked an increase of 60 per cent from $ 106 billion in 2006 to $ 170 billion in 2007. The 40 Indian
billionaires have assets worth about Rs. 7.50 lakh crores whereas the cumulative investment in
the 91 Public Sector Undertakings by the Central Government of India is Rs. 3.93 lakh crores
only.

The above figures are solely a representative of the Economic policy which was initiated in 1991 that
led to liberalization , globalisation and privatization of the Indian economy . this policy brought about
structural changes in the system that led to the present economic status , Globalization has become an
expression of common usage. While to some, it represents a brave new world with no barriers, for
some others, it spells doom and destruction. Hence before analysing the impact of globalization let us
first understand what globalization means

The human society around the world, over a period of time, has established greater contact, but the
pace has increased rapidly since the mid 1980’s.
The term ‘globalization’ means integration of economies and societies through cross country flows of
information, ideas, technologies, goods, services, capital, finance and people. Cross border
integration can have several dimensions – cultural, social, political and economic. In fact, some
people fear cultural and social integration even more than economic integration. The fear of “cultural
hegemony” haunts many. Limiting ourselves to economic integration, one can see this happen
through the three channels of (a) trade in goods and services, (b) movement of capital and (c) flow of
finance. Besides, there is also the channel through movement of people.

It includes an array of social, political and economic changes. Unimaginable progress in modes of
communications, transportation and computer technology have given the process a new lease of life.

The world is more interdependent now than ever before .Multinational companies manufacture
products across many countries and sell to consumers across the globe. Money, technology and raw
materials have broken the International barriers. Not only products and finances, but also ideas and
cultures have breached the national boundaries.

Laws, economies and social movements have become international in nature and not only the
Globalization of the Economy but also the Globalization of Politics, Culture and Law is the order of
the day. The formation of General Agreement on Tariffs and Trade (GATT), International Monetary
Fund and the concept of free trade has boosted globalization.

GLOBALIZATION OF INDIA
Indian economy was in deep crisis in July 1991, when foreign currency reserves had plummeted to
almost $1 billion; Inflation had roared to an annual rate of 17 percent; fiscal deficit was very high and
had become unsustainable; foreign investors and NRIs had lost confidence in Indian Economy.
Capital was flying out of the country and we were close to defaulting on loans. Along with these
bottlenecks at home, many unforeseeable changes swept the economies of nations in Western and
Eastern Europe, South East Asia, Latin America and elsewhere, around the same time. These were the
economic compulsions at home and abroad that called for a complete overhauling of our economic
policies and programs. Major measures initiated as a part of the liberalization and globalization
strategy in the early nineties included the following:

Devaluation: The first step towards globalization was taken with the announcement of the
devaluation of Indian currency by 18-19 percent against major currencies in the international foreign
exchange market. In fact, this measure was taken in order to resolve the BOP crisis

Disinvestment-In order to make the process of globalization smooth, privatization and liberalization
policies are moving along as well. Under the privatization scheme, most of the public sector
undertakings have been/ are being sold to private sector

Dismantling of The Industrial Licensing Regime At present, only six industries are under
compulsory licensing mainly on accounting of environmental safety and strategic considerations. A
significantly amended locational policy in tune with the liberalized licensing policy is in place. No
industrial approval is required from the government for locations not falling within 25 kms of the
periphery of cities having a population of more than one million.
Allowing Foreign Direct Investment (FDI) across a wide spectrum of industries and encouraging
non-debt flows. The Department has put in place a liberal and transparent foreign investment regime
where most activities are opened to foreign investment on automatic route without any limit on the
extent of foreign ownership. Some of the recent initiatives taken to further liberalize the FDI regime,
inter alias, include opening up of sectors such as Insurance (upto 26%); development of integrated
townships (upto 100%); defense industry (upto 26%); tea plantation (upto 100% subject to divestment
of 26% within five years to FDI); enhancement of FDI limits in private sector banking, allowing FDI
up to 100% under the automatic route for most manufacturing activities in SEZs; opening up B2B e-
commerce; Internet Service Providers (ISPs) without Gateways; electronic mail and voice mail to
100% foreign investment subject to 26% divestment condition; etc. The Department has also
strengthened investment facilitation measures through Foreign Investment Implementation Authority
(FIIA).

Non Resident Indian Scheme the general policy and facilities for foreign direct investment as
available to foreign investors/ Companies are fully applicable to NRIs as well. In addition,
Government has extended some concessions especially for NRIs and overseas corporate bodies
having more than 60% stake by NRIs

Throwing Open Industries Reserved For The Public Sector to Private Participation. Now there
are only three industries reserved for the public sector

Abolition of the (MRTP) Act, which necessitated prior approval for capacity expansion

The removal of quantitative restrictions on imports.

The reduction of the peak customs tariff from over 300 per cent prior to the 30 per cent rate that
applies now.

Wide-ranging financial sector reforms in the banking, capital markets, and insurance sectors,
including the deregulation of interest rates, strong regulation and supervisory systems, and the
introduction of foreign/private sector competition.

Effects of globalization:

This new system of gloabalization opened up new domains of development but at the same time
changed social values of the existing system , the following examines the positive and the negative
aspect of gloabalisation .

In the 80s when the Indian government undertook major reforms to relax restrictions on foreign trade
and investment it suffered from a very low GNP growth rate of below 3.5%, but as a result of opening
up to the global market GNP growth is averaged at 5-6% per year.

Indian Businesses are able to find new markets overseas to sell their products to, they will have the
advantage of cheap resources such as labor.
Entrepreneurs from foreign nations are also able to make efficient use of these resources when they
set up business in India. This of course leading to greater employment levels, greater output and
overall economic development and growth. Average real wages of unskilled labour has increased,
which will lead to an increase in the standard of living.

There have been signs of improvements in living standards in the general population a s a result of
economic growth and globalization. Poverty ratio has declined dramatically from 56.4% of the rural
population in 1973-74 to 37.3% in 1994. The urban poverty ratio has also fallen significantly form
49% in 73-74 to 32.4 in 1993-94. These are all results of job creation and developments undertaken
by the government and private institutions.

Due to the reduction in barrier import competing businesses have become more competitive leading to
greater efficiency and better-priced and quality goods.

Due to Globalization developing nations such as India become more ‘modernized- as new technology
and industries can quickly be adopted. Due to Globalization exports have risen dramatically leading to
economic growth. An indirect result of Globalization is the improvement in infrastructure. Additional
employment pportunities of 29.74 million jobs were created between Jan 94 to March 97.

The various beneficial effects of globalization in Indian Industry are that it brought in huge amounts
of foreign investments into the industry especially in the BPO, pharmaceutical, petroleum, and
manufacturing industries. As huge amounts of foreign direct investments were coming to the Indian
Industry, they boosted the Indian economy quite significantly. The benefits of the effects of
globalization in the Indian Industry are that many foreign comnpanies set up industries in India,
especially in the pharmaceutical, BPO, petroleum, manufacturing, and chemical sectors and this
helped to provide employment to many people in the country. This helped reduce the level of
unemployment and poverty in the country. Also the benefit of the Effects of Globalization on Indian
Industry are that the foreign companies brought in highly advanced technology with them and this
helped to make the Indian Industry more technologically advanced.

FINANCIAL SECTOR

Reforms of the financial sedctor constitutes the most important component of India’s programme
towards economic liberalization. The recent economic liberalization measures have opened the door
to foreign competitors to enter into our domestic market. Deregulation in the form of elimination of
exchange controls and interest rate ceilings have made the market more competitive. Innovation has
become a must for survival.Reforms in the financial sector introduced since the early 1990s have had
a major impact on the overall efficiency and stability of the banking system, reflected in
improvements in capital adequacy ratios and strengthening of the balance sheets.

Furthermore, Indian banks have done a remarkable job in containment of NPLs considering the
overhang issues and overall difficult environment. Net NPAs have now fallen to just two per cent of
net advances. The external sector continues to be robust. Despite sharp increase in oil as well as non-
oil imports, India’s balance of payments has recorded large and persistent surpluses, with foreign
exchange reserves at around US $ 144 billion. Increased earnings from exports of services and
remittances coupled with enhanced foreign investment inflows have provided strength to the external
sector.
In brief, the Indian economy has exhibited a strong performance since the early 1990s in an
environment of macroeconomic and financial stability – higher GDP growth, lower inflation, a
resilient external sector and a strong financial sector. All these happened during the 1990s,
which was otherwise a turbulent decade in terms of financial instability in many other
countries. Nonetheless, it is widely agreed that the growth of the Indian conomy remains well-
below its potential.

Many of the providers and users of capital have changed their roles all over the world. Financial
intermediaries have come out of their traditional approach and they are ready to assume more credit
risks. As a consequence, many innovations have taken place in the global financial sector. Which
have its own impact on the domestic sector also. The emergence of various financial institutions and
regulatory bodies have transformed the financial services sector from being a conservative industry
to a very dynamic one. In this process this sector is facing a number of challenges.

Growth in financial services (comprising banking, insurance, real estate and business services), after
dipping to 5.6% in 2003-04 bounced back to 8.7% in 2004-05 and 10.9% in 2005-06. The momentum
has been maintained with a growth of 13% in 2008-09.

Impressive progress in information technology (IT) and IT-enabled services, both rail and road traffic,
and fast addition to existing stock of telephone connections, particularly mobiles, played a key role in
such growth.

Because of Globalization, the financial services industry is in a period of transition. Market shifts,
competition, and technological developments are ushering in unprecedented changes in the global
financial services industry. Organizations in this highly competitive and increasingly regulated
industry will especially need to focus on making themselves more:

Ø Adept to face increasing transaction volumes, regulation and the integration of previously
disparate global markets

Ø Agile at identifying and managing risk

Ø Operationally efficient

Ø Customer – centric

Ø Optimized in both business & technology

INDIA’S SKILLED WORKFORCE

India’s booming knowledge-based sectors demonstrate the power of globalization to transform

developing economies. For India, however, these industries are just part of its contribution to the
global economy. For a more nuanced picture of India’s international economic position, this paper
places India in international and historical context, examines its links to the world through trade,
labor, and capital, and outlines some critical challenges facing the country. What emerges is a more
complex picture of India -- a nation with far more to offer than skilled programmers but which must
address problems of poverty, infrastructure, and governance to achieve its potential.
India is home to a vast pool of human resources consisting of educated, English speaking, tech-savvy
personnel. Every year, approximately 19 million students are enrolled in high schools and 10 million
students in pre-graduate degree courses across India. Moreover, 2.1 million graduates and 0.3 million
post-graduates pass out of India's non-engineering colleges. These figures very well give the idea of
human resources availability in India.

India is the hub of the global offshore software outsourcing business. India has a competitive edge
and clear-cut advantages over other contending players (destinations) in the Offshore IT Outsourcing
business with the availability of a huge pool of skilled human resource and encouraging government
policies for the IT sector.

As regards social sector indicators, notwithstanding some progress

in regard to education and health, India is still far behind its East Asian
neighbours. Our social indicators are lower even in comparison with the
levels achieved by these countries twenty five years ago, when they first
began to grow rapidly. The social indicators also show disturbing gender
gaps, large rural-urban differences and wide variation across states.
Although the literacy rate has improved encouragingly from 52.2 per cent in
1991 to 64.8 per cent in 2001 and the overall number of illiterates in the
country declined from 329 million in 1991 to 306 million in 2001, there are at
least seven major States with more than 15 million illiterates each,
accounting for nearly two-third of total illiterates in the country.
Concomitantly, given India’s comparative advantage in services, it is
important that the quality of secondary and higher education in the country
is improved so that adequate skills are developed to realize the benefits of
the knowledge economy. As regards health, the combined government
(Centre plus States) expenditure on health as a percentage of GDP has
stagnated at around one per cent of GDP over the last decade and a half.

Total public expenditure on health in India remains even lower than many
other developing countries such as Brazil (3.4 per cent), Thailand (2.1 per
cent), Sri Lanka (1.8 per cent), China (1.9 per cent) and Malaysia (1.5 per
cent). Low public expenditure in India is to some extent compensated by
private expenditure which at 4.0 per cent of GDP is comparatively higher
than all of these countries except Brazil (4.9 per cent). However, low public
expenditure is a cause for concern for the vast majority of the population
and primary health care remains of poor quality, unavailable and
inaccessible. The infant mortality rate in India is almost double that of China
(63 in India versus 37 in China) while the maternal mortality rate at 407 is
manifold as compared to China’s 56. Hospital beds (per 1000 population) at
0.7 for India are less than one-half of other developing economies such as
China (2.4), Thailand (2.0) and Malaysia (2.0). A significant improvement in
social indicators is necessary if we want to create the pre-condition for a
general improvement in welfare of our population and for genuine equality of
opportunity.
Some of the factors that make India a potential offshore software outsourcing destination are:

• Skilled Workforce: India has the largest pool of talented and trained knowledge
professionals
• Cost Efficiency: Companies can make a killing of the competitive cost, as the labor cost in
India is considerably cheap
• Government Policy: Government policies give huge concessions to the IT sector
• Quality: the software service sector has been maintaining the highest international standards
of quality
• Infrastructure: Software and technology parks in India have world class infrastructure
• Location & Time-Difference: The time difference due to India 's location ensures seamless
work flow

Advantage India:
Highest Quality Software Solutions at Minimum Cost
Largest English Speaking Population, after the US
Effective & Seamless Communication Processes & Network
Highly Trained Technical Workforce – Quality over Quantity
Educated, Industry Certified, Technical & Domain Expertise
Stable Initiatives by Indian Government to Promote IT/BPO Services
High Tax Incentives with Removal of Tax Barriers
World Class State-of-the-Art Infrastructure & Research Labs

The Indian Education System

The Indian education system places strong emphasis on mathematics and science, resulting in a large
number of science and engineering graduates. Mastery over quantitative concepts coupled with
English proficiency has resulted in a skill set that has enabled the country to take advantage of the
current international demand for IT.

Quality Manpower
Indian programmers are known for their strong technical skills and their eagerness to accommodate
clients. In some cases, clients outsource work to get access to more specialized engineering talent,
particularly in the area of telecommunications. India also has one of the largest pools of English-
speaking professionals.
RESEARCH AND DEVELOPMENT IN INDIA

The country is fast emerging as a major center for cutting-edge research and development (R&D)
projects for global multinationals as well as Indian firms. More and more companies in industries
ranging from IT and telecommunications through pharmaceuticals and biotech are setting up
ambitious R&D projects, in part to serve the Indian market, but also with an eye to delivering new
generations of products faster to the global market.
While India might seem like a natural location to expand offshoring into R&D, it is hampered by
some serious structural problems that range from not enough home grown researchers to a lack of
government support.
India produces about 300,000 computer science graduates a year. Yet it produces only about 100
computer science PhDs, a small fraction of the 1,500-2,000 that get awarded in the United States, or
China, every year.
Rival China has already pulled ahead with more than 1,100 R&D centers compared to less than 800 in
India, despite lingering concerns about rule of law and intellectual property rights.
Aside from providing funding to encourage students to complete their PhDs, China also offers fiscal
incentives such as tax breaks for R&D centers and special economic zones provide infrastructure for
hi-tech and R&D industries.
India is also losing out in the patent stakes. In 2006-2007, just 7,000 patents were granted in this
country of 1.1 billion people, compared to nearly 160,000 in the United States.
Our costs are low and our talent pool is ahead of China, Russia and Ukraine, but China gives specific
incentives, and produces way more PhDs than we do."
India is cheaper than China for R&D, but salaries in India have been rising by about 15 percent every
year and may soon reach parity with China. R&D center costs in Shanghai are currently just 10-15
percent higher than in India.
Early efforts by multinational companies to set up R&D operations in India were prompted by the
need to "localize" products. Now, however, encouraged by India's success at business process
outsourcing, or BPO, some companies are starting to explore research process outsourcing, or RPO.
The opening of the economy in the early 90's and the establishment of the software services industry
drew more foreign firms looking to cut costs and tap emerging markets.
When the going gets tough, the tough get creative. Dr. Reddy's Laboratories, a leading pharmaceutical
company that has faced rough weather since mid-2004, earlier this year struck a $56 million deal with
ICICI Venture Funds to fund some of its R&D efforts.
For now, the arrangement with the venture fund will make it possible for the pharma firm to file
abbreviated new drug applications, or ANDAs, and serve the lucrative U.S. generics market.
Half of Cisco's core R&D work, including innovations in WiMAX and optical networks, and about 40
percent of SAP's ideas for processes and product development come from India.

Both the Palm Pre smart phone and the Amazon Kindle, two of the hottest consumer electronics
devices on the market, have key components designed in India. Intel designed its six-core
Xeon processor in India . IBM has over 100,000 employees in India. A large number of these are
building Big Blue’s most sophisticated software products. Cisco is developing cutting edge
networking technologies for futuristic “intelligent cities” in Bangalore. Adobe, Cadence, Oracle,
Microsoft and most of the large software companies are developing mainstream products in India.

Equally important are the arrival of Indian multi-nationals who are tackling global markets, such as
Tata with its dirt cheap Nano car that the company is now positioning for a European market entry
and Reva, which recently announced it was planning to build an electric car factory in New York state
to address the U.S. market for electric vehicles.

What has been missing to date in India, however, is early stage venture activity and the type of grass-
roots entrepreneurism that is the hallmark of American capitalism and Silicon Valley. In that respect
China is way ahead of India with many startups taking advantage of huge government incentives and
reeling in talented native Chinese returnees to serve as CEOs and CTOs. Kaifu Lee, formerly
Google’s top guy in China, was able to launch a $100 million startup incubator focusing entirely on
the mobile sector — and he was flooded with business plans within days of opening his doors in the
Middle Kingdom.

But India lags in home-grown venture capital activity. So the lack of native VC in India is notable in
that it implies a critical mass of activity remains lacking, as well.

In the first nine months of 2008, total early stage VC investments in India totaled $678 million,
according to the Global India Venture Capital Association. In the U.S. over that same period early
stage investments tallied $5.2 billion according to the U.S. National Venture Capital Association

There are several factors driving the scramble among global firms to set up R&D centres in India:

Low costs: The primary factor favouring India is low costs. The cost of a researcher in India is one-
fifth that in the US or Europe. Companies which have shifted research work to India have reported
substantial cost savings.

Access to qualified manpower: The second factor is the easy access to talent. India has a vast pool of
high-quality, technically-qualified and English-speaking manpower. India's more than 250
universities and engineering colleges churn out over 2,00,000 engineering graduates and 5,000 PhDs
every year.

World-class standards: The base for software development can be gauged from the fact that India
ranks second in the worldwide ranking of the number of assessment and maturity levels reported to
the Software Engineering Institute (SEI) by countries with 187 assessments, second only to the US
with 1,563 assessments. Forty two software organisations in India have attained CMM level-5 ranking
out of 76 R&D organisations worldwide.

Infrastructure: India has a vast network of state-owned national research laboratories which have
excellent facilities. In addition, the facilities available at the six Indian Institute of Technologies and
premier institutes such as the Indian Institute of Science can be tapped by a foreign company.

Easy approvals: The government welcomes foreign companies setting up R&D centres. Approvals
are easily given for wholly-owned foreign subsidiaries or joint ventures. Several development centres
enjoy concessions. Most software development centres operate under the Software Technology Park
(STP) and are entitled to a plethora of concessions such as duty free imports. The company that is
truly leveraging India's strength in R&D is GE.

Telecom: A host of telecom service providers and equipment manufacturers carry out significant
research and development. They use all three models for carrying out R&D — wholly-owned
subsidiary, joint venture with an Indian partner and R&D contracted to an Indian company. Motorola
was one of the first telecom companies to realise India's potential for software development. It set up
Motorola India Electronics, a wholly-owned subsidiary, for R&D.
Nortel also has its own R&D lab in New Delhi to develop remote access products for data
communications. Ericsson has identified India as an important outsourcing location for R&D. Last
year, Wipro purchased the Ericsson software development centres in Bangalore, Hyderabad and New
Delhi. Wipro will continue Ericsson's development work in India through outsourcing. Ericsson chose
Wipro for its technical depth, technical leadership and telecom domain expertise.

Chip designers: India has become the centre for chip design for almost all the major chip design
companies of the world. Texas Instruments, Motorola, Intel, ST Microsystems and Cadence Design
are all expanding their chip design facilities. Intel, which set up its India development centre in
Bangalore in 1998, now plans to invest $41 million in building a new campus in Bangalore. Intel
hopes to double the number of engineers employed to 2000 by end-2004. The centre is the largest
non-manufacturing site for Intel. .

Cadence Design Systems is planning to expand its state-of-the-art facility R&D facility at Noida, set
up as early as 1987, by adding 300 engineers. Adobe's new state-of-the-art facility at NOIDA, built
with an investment of $10 million, has filed for 10 worldwide patents. The Adobe Indian team
conceptualised and developed the Acrobat Reader for Palm and Pocket PC.

Chemicals: Since 1994, DuPont has had a profitable alliance with a national research laboratory
under the CSIR. DuPont Textiles and Interiors and the Pune-based National Chemical Laboratory
have extended their research alliance for another five years. Dupont Polyester has entered into a
strategic alliance with Reliance Industries to jointly develop advanced polyester process and product
technologies in India. The Netherlands-based Akzo Nobel Car Finishes has established an
international research centre at Hoskote, near Bangalore.

Consumer durables: Samsung India Electronics is working with IIT Delhi for new designs of colour
televisions, washing machines and air-conditioners to suit the Indian market. The company also plans
to set up a consumer laboratory at IIT, where industrial designs students will work on projects
sponsored by Samsung.

INFLATION

Inflation is a rise in the general level of prices of goods and services in an economy over a period of
time. When the price level rises, each unit of currency buys fewer goods and services; consequently,
inflation is also an erosion in the purchasing power of money – a loss of real value in the internal
medium of exchange and unit of account in the economy. A chief measure of price inflation is
the inflation rate, the annualized percentage change in a general price index(normally the Consumer
Price Index) over time.

India’s soaring prices are a product of both international and domestic factors. According to the
World Bank, international prices of agricultural commodities rose 73 percent between August 2007
and March 2008. Global wheat prices, for example, have shot up by more than 100 percent over the
past year, due to poor weather conditions in some wheat-producing areas, a shift to growing crops
used in making bio-fuels, and increased demand from an expanding middle class in China and India.
Prices have also been driven up by speculation, as international traders look for new sources of profit
under conditions where money markets have been rocked by the fallout from the US subprime
housing mortgage crisis.

India’s rapid economic growth and accompanying shortages have also fueled rising prices.
Global Forces Fueling Inflation
Indian inflation has much to do with global developments. It’s due to soaring oil and commodity
prices. It has its root in the Gulf and Western countries. In a span of 5-6 months the rate of crude oil
almost doubled to 145 dollar per barrel. Budgetary estimates made at 100-110 dollar per barrel went
haywire.

The Government was compelled to take unpopular measure of hiking petro prices. Consequently
wholesale price based inflation jumped from 8 percent to 11 percent alarming consumers as well as
market participants. The fact remains that Indian inflation is very much a result of growing demand
led by increase in per capita income. It is, therefore, that stiff monetary tightening by RBI is taking
time in delivering desired result.

INFRASTRUCTURE

Turning to the industrial sector, reforms which encompassed removal of industrial licensing, de-
reservation, substantial opening of foreign direct investment and trade liberalisation have imparted a
competitive edge to Indian industry. This is reflected in a resurgence of activity in the manufacturing
sector in the past two years, and the present phase appears to be sustainable, in contrast to the
exuberance – which turned out to be temporary - reflected in high growth in investment and
production in industry during 1993-94 to 1996-97. For industrial activity to get entrenched and
gather momentum, efficiency in supply of infrastructural inputs will need a large impetus. The
subdued performance of the infrastructure sector in the recent months is an issue of concern, given the
sector’s strong forward and backward linkages in the economy. The increasing demand-supply gap in
the availability of power is becoming the most critical issue in the future of India’s economic
development. In the recent period, shortage of coal and gas has emerged as a serious constraint on
power generation with the supply of both fuels falling far short of demand. In this context, given the
fact that the Indian economy is among the more inefficient users of energy, highest and urgent priority
needs to be given for energy-saving measures, which could include appropriate pricing policies and
incentives to invest. With growing urbanisation, issues related to urban infrastructure have come to
the forefront. At present, investment in urban infrastructure is hampered by the fact that local
governments are not yet creditworthy and urban infrastructure projects are, therefore, not found to be
commercially viable. Strengthened planning and better coordination between various agencies
entrusted with maintenance of urban infrastructure would have a positive impact on the overall
productivity of economic activity in cities.
Given the fact that there is a heavy concentration of economic activity in large cities, weak
infrastructural facilities impede the growth of large cities and of overall economic productivity. It is,
therefore, of the utmost importance that the quality of urban infrastructure in the large cities is
improved significantly so as to maintain and accelerate the momentum of economic growth and
productivity enhancement.

URBANISATION:
For urbanising economies like India to replicate the experience of developed countries in the
provision of urban infrastructure, it is essential that all aspects of city management, including the
fostering of a professional workforce, are strengthened.
The maintenance of vibrant growth in the manufacturing sector will depend crucially on the xpansion
of small and medium enterprises that then become significant players in the future. For this potential
to be realized, there is a need to increase credit availability to this sector at reasonable costs. Banking
institutions need to improve their credit assessment capabilities with regard to small-scale enterprises
and smallscale must not be equated with high risk. Recent initiatives of the government and the
Reserve Bank, such as the new legislation aimed at developing credit information bureaus will help to
reduce information and transaction costs that should then lead to lower cost of credit to the SSI
sector. Empirical evidence shows that wider availability of credit histories greatly expands the flow of
credit as potential borrowers are no longer tied to their local lenders.
The services sector has emerged as the largest contributor to growth in the country. Advances in
information technology, liberalisation of the telecommunications sector and availability of skilled
labour have permitted India to reap advantages through the globalisation of some services. The
initial impetus provided by exports of software and services has now got additional support from the
exponential growth of the IT-enabled sector (ITES). According to the National Association of
Software and Service Companies (NASSCOM), India’s software and service exports recorded a
strong growth of 34 per cent in 2004-05.
The software sector [including ITES-Business Process Outsourcing (BPO)] now employs more than
one million people, having recorded a compounded annual growth of nearly 30 er cent in employment
during the period 1999-2005. The software sector also provides indirect employment to 2.5 million
people. These data bring forth the growing role of the software sector, but at the same time, they
suggest that for this order of growth rates to be maintained in the future, investment in social
infrastructure – especially, education - needs to stepped-up. In this context, it is necessary that public
expenditure on education should reverse its declining trend: total expenditure by the State
Governments on education is budgeted to decline from 2.5 per cent of GDP in 2003-04 to 2.0 per cent
in 2009-10. Moreover, given the demographic profile, the demand for education is slated to increase
further.
Accordingly, the improvement in State finances will enable the States to increase their expenditure on
education and other social services and thereby improve the quality of overall social infrastructure so
that India can realise its potential.
It is now well-recognised that monetary policy can contribute to longrun growth by maintaining low
and stable inflation. International experience indicates that a prudent fiscal policy remains the single
largest prerequisite for monetary stability. In India, reforms in the monetary-fiscal interface during the
1990s have been a key factor that imparted greater flexibility to monetary policy. These reforms have
taken a significant step forward with the enactment of the Fiscal Responsibility and Budget
Management (FRBM) Act, 2003 by the Centre. With the Centre’s GFD/GDP ratio at 4.1 per cent in
2004-05 (provisional accounts), the FRBM target of 2.0 per cent by 2010-11 appears to be within
striking distance.
Achieving this target requires continued focused action on containing expenditures, increase in tax
revenues and reduction in tax exemptions. Revenue augmentation would critically depend upon
improvement in tax/GDP ratio as non-tax revenue is set to decline in the coming years. With the
acceleration in overall economic growth that is being observed currently, renewed efforts on tax
compliance should yield beneficial results. Achievement of the FRBM target of revenue deficit at
zero
per cent of GDP will free up resources for public investment which will also crowd-in private
investment. Overall, despite the recent improvements in the fiscal position of the Central Government
the effort in achieving fiscal consolidation will have to continue.

Urbanization in India will grow only when responsibility for specific urban infrastructure services
differs widely across the states and municipalities.
• Central Government provides specific grants for select infrastructure investments- Mega City
scheme, Integrated Development of Small and Medium Towns (IDSMT) scheme, Urban Water
Supply scheme and a few other minor schemes
• State Governments departments make investments in specific sectors where they are charged with
the responsibility to provide service
• Specialized agencies like water and sewerage boards, BEST undertake projects financed on their
strength.
Even though the growth rate of population decreased in the previous decade the population of India is
expected to reach a whooping figure of 1’245’827’000 by 2015. India is urbanizing and needs to
urbanize faster; Strong cities government would be primary vehicles for meeting growing aspirations
of urban population. Citizen’s participation would need to be scaled up, including handing over
several types of responsibilities to their associations. The sex ratio is supposed to improve in the near
future.

Poverty and unequality

Globalisation in the form of increased integration though trade and investment is an important reason
why much progress has been made in reducing poverty and global inequality over recent decades. But
it is not the only reason for this often unrecognised progress, good national polices , sound institutions
and domestic political stability also matter.

Despite this progress, poverty remains one of the most serious international challenges we face up to
1.2 billion of the developing world 4.8 billion people still live in extreme poverty.

But the proportion of the world population living in poverty has been steadily declining and since
1980 the absolute number of poor people has stopped rising and appears to have fallen in recent years
despite strong population growth in poor countries. If the proportion living in poverty had not fallen
since 1987 alone a further 215million people would be living in extreme poverty today.

India has to concentrate on five important areas or things to follow to achieve this goal. The areas like
technological entrepreneurship, new business openings for small and medium enterprises, importance
of quality management, new prospects in rural areas and privatisation of financial institutions. The
manufacturing of technology and management of technology are two different significant areas in the
country.

There will be new prospects in rural India. The growth of Indian economy very much depends upon
rural participation in the global race. After implementing the new economic policy the role of villages
got its own significance because of its unique outlook and branding methods. For example food
processing and packaging are the one of the area where new entrepreneurs can enter into a big way. It
may be organised in a collective way with the help of co-operatives to meet the global demand.

Understanding the current status of globalisation is necessary for setting course for future. For all
nations to reap the full benefits of globalisation it is essential to create a level playing field. President
Bush's recent proposal to eliminate all tariffs on all manufactured goods by 2015 will do it. In fact it
may exacerbate the prevalent inequalities. According to this proposal, tariffs of 5% or less on all
manufactured goods will be eliminated by 2005 and higher than 5% will be lowered to 8%. Starting
2010 the 8% tariffs will be lowered each year until they are eliminated by 2015.

DIASPORA MAKES INDIA PROUD

To-day the overseas Indians particularly from developed countries are seen as potential resources of
the country owing to their success and achievements in the countries of their adoption. With 20
million persons of Indian Origin in 110 countries, India is no longer restricted to the sub-continent, it
straddles the world. They may be just over 2 per cent of India’s population but their estimated
collective income is at about $160 billion, almost one third of India’s gross domestic product.

India receives almost $14 billion a year in official remittances and this money has played a significant
role in-India’s $80 billion foreign reserve. According to the latest Balance of Payments data of the
Reserve Bank of India, remittances during April-December 2002 alone were $10.8 billion.

Seven Indians made it to the global billionaires list while India emerged third among the Asian
countries, whose people found a place in the elite club. Most of them have made their fortunes
through India's booming information technology sector. Increasing number of Indian companies is
being listed in the New York Stock Exchange.

There are 200,000 Indian millionaires in the US (Merrill Lynch figures). The world is aware of
India’s telecom revolution and its ongoing world’s largest highway project. India’s image has
changed because of success of Indians. India has a distinct advantage over technology and more
particularly in the information technology field. Today, India is one of the most exciting emerging
markets in the world. Skilled managerial and technical manpower that match the best available in the
world and a middle class whose size exceeds the population of the USA or the European Union,
provide India with a distinct cutting edge in global competition.

FACTS ABOUT INDIANS IN US

• Based on median income, Indian-born residents in the United States comprise the
highest-paid group in the country. They are represented in virtually all professions
including agriculture, biotechnology, business, economics, finance, information
technology, journalism, management, medicine and various sciences.
• As a visit to the websites of the leading universities will confirm, Indians enjoy a very
substantial presence in the U.S. academia. According to American Universities
Admission Program, a global consulting firm, in 1997-98, a staggering 4,092 Indian
professors were teaching in U.S. universities. In the same year, 33,818 students born
in India were registered in 2,579 universities.
• In the medical field, the American Association of Physicians of Indian Origin boasts
a membership of 35,000. Fourteen out of every 100 researchers in the U.S.
pharmaceutical labs are of Indian origin. And a very large proportion of scientists at
the prestigious Bell Labs, including its president and several vice presidents, come
from India.
• Above all, Indians have come to enjoy a dominant position in the information
technology (IT) industry. In an issue devoted to in-depth coverage of Indian
immigrants in this industry, the Fortune Magazine (May 15, 2000) recently noted that
without the Indian entrepreneurs, Silicon Valley would not be what it is today. It
placed the wealth generated by them at $250 billion, more than half of India’s current
GDP!
• Political contribution:
 1. Amongst prominent indo- Americans are Satveer Chaudhry, state senator
from Minnesota, Nimi McConigley, state legislator from Wyoming.
2. Atleast 3 Indian Americans have held the position of mayors in various cities
of USA.
3. Two NRIs named on Obama’s team : President Barack Obama has formed a
three-man team, including two Indian Americans, to help break Washington's
"bad habits" of wasteful spending and move recession-hit America from
recovery to prosperity. Indian American Aneesh Chopra was recently
appointed, currently Virginia's secretary of technology, to serve as the chief
technology officer.

SOME OF THE FAMOUS INDIANS

• L.N MITTAL

The steel tycoon, Laxmi Narayan Mitttal is a London based industrialist and a Forbes 100
billionaire. He is the richest Indian in the world and one of the richest persons in Britain. Such
is the charisma of Mittal that his company is all set to become the world's largest producer of
steel. Mittal holds steel assets in South Africa, Poland, Indonesia, and Kazakhstan.

• SHASHI THAROOR

Shashi Tharoor is prolific writer and UN Diplomat. Shashi has been with the UN since 1978
when he joined the UN High Commission for Refugees (UNHCR) in Geneva. Shashi Tharoor
served the UN in various capacities before assuming the office of the Under-Secretary-
General for Communications and Public Information of the United Nations in 2001. In this
capacity, he is responsible for the communication strategy, enhancing the image and
effectiveness of the UN. In 2003, the Secretary-General appointed him United Nations
Coordinator for Multilingualism.

• M ARUNACHALAM

He is a Hong Kong-based businessman. M. Arunachalam has played an important role in

promoting trade and investment between Hong Kong and India as also between China and
India. M. Arunachalam has held the post of chairman, Indian Chambers of Commerce and
president of the Asia Pacific Indian Chambers of Commerce and Industry. He has also hosted
several delegations from India.

NUCLEAR DEAL WITH USA

India’s strong stand for the nuclear deal

Thanks to diplomatic and political skills of President Bush and Prime Minister Manmohan Singh, we
have a deal which could lift India into the Trillion-dollar club, faster. Ten years from now when
electricity supply situation in India’s households, industry and farms is significantly better, we have to
thank them both.

Despite the protests against this deal in India as well as US, the Indian government stood its ground
and ultimately the deal swung in India’s favour .

What does India get out of the Deal

Benefits to India are immense with this deal. First and foremost, is the de-facto recognition of India as
a nuclear power? It is not clearly stated in the deal, but it’s an implicit understanding. India missed
this opportunity in 1970-78. It is unlikely that this opportunity is to be missed again. Second, is future
recognition of India as a permanent UN Security Council member? India has tried this in last three
years. It has not succeeded. It is unlikely to succeed in next 10 years. But with a Trillion and a half
dollar economy (8% growth over ten years), India will make this grade. When UN reforming
movement gains strength in the future, India will be right there and waiting for this opportunity.

Economic benefits to India

There is an urgent need in India for capital to build its infrastructure and manufacturing base. And
there is only one source to get it i.e. US & Europe. US and Europe at this moment are content with
sending capital to China to supply them with consumer goods. The former very cleverly had avoided
exporting manufacturing technology to supply high priced, high technology capital goods to China.
This component together with auto-parts, pharmaceuticals and computer hardware could herald India
into big leagues in ten years and beyond. Commercial Aircraft manufacture, ship building, factories to
make giant power plants, steel making plants, mining & drilling hardware, petroleum &
petrochemical plant building facilities could be ultimately shared with India. The latter within ten
years will have a workforce sufficiently skilled to undertake all the foregoing. It will be beneficial to
US. Labor costs in India, will always stay a third of US, and European costs. That will make India an
ideal candidate for this technology transfer.

Opportunity of the KPO (Knowledge Process Off-shoring) is knocking at India’s door. Indian
graduates of Science and Engineering will play a major role in this expansion. In about 5 years KPO
Off-shoring will grow immensely. India stands to benefit most from it. Thanks to the edge, Indian
science & technology graduates have established.

Political Benefits to India

After 50 years of isolation, India will have the opportunity to say something, in world forums like
UN, WTO and World monetary lending institutions, and be heard. This was not the case previously.
Reasons – India had no clout. With western economies in the future, tied more and more with India,
the latter’s clout will improve. There will be frequent inter-government exchanges on matters of
mutual interest. India could become a full member of the select group of G-8 members. Gone will be
the days that US politicians will heap scorn on India, the way they are doing it today. The Indo – US
Nuclear deal is in fact dumping the past and unlocking the hidden potential of the future. In addition
Pakistan may get the cue and begin a rethink of its policies towards India.

Military Benefits to India

Indian military is in need to diversify its sourcing of military hardware. Russia has been a very
reliable source for the past 40 years. This source has to be diversified. Ultimately all military
hardware will have to be produced in India. But development time in India is too long and success
factor is low. This has to be speeded up. The only way at India’s disposal is buy its immediate needs
and import technology to develop its own weapon system. It is a bit expensive up front but pays
dividend later as India joins the select group of countries as a source of military hardware.
Technological Leapfrog

The immediate benefit would be in getting the latest technology for nuclear power generation. Current
progress in India on building its own nuclear power plants at best has a failing grade. Most of nuclear
power plants in India are of other country’s design. The Indian Department of Atomic Energy falsely
clings to the view that Fast Breeder Reactors will allow India to bridge the nuclear gap in the future.
That future may be difficult to arrive. It may be too distant. This will hold economic development as
hostage. Moreover developing nuclear technology is one thing, implementing it is another. For even
homegrown technology, India will have to import critical components.

Why India -India at a glance- Attractive Destination

India has a population of 1.1 billion. More than 30% of the world’s youth live in India. More than
55% (550 million) of the India’s population is less than 25 years of age. This is nearly twice the total
population of the United States. India’s urban population constitutes around 30%. India is a nation
growing younger (population in working age group projected to increase) as the developed world
faces the problem of aging. India has a huge reservoir of English speaking, skilled and relatively
inexpensive manpower with over 2.6 million engineers (degree and diploma holders), 814,000
software professionals, growing every year. It also got a well developed banking system, with over
67,000 branches and banking practices conforming to international best standards with net non
performing assets ratio for all commercial banks 1.2%. It has a sophisticated, well regulated capital
market with 23 stock exchanges of which the two largest, the National Stock Exchange and Bombay
Stock Exchange ranked as no 3 and 5 in the globe by number of transactions. India has more
billionaires than China. This year there were 15 billionaires in China but last year in India, there were
20 billionaires, according to the Forbes magazine. Forty-four per cent of Top 100 Fortune 500
companies are present in India. Some of the fortune companies present in India are ABB, Accenture,
Alctel, AMD,ANZ, APC, Bosch, CSC, Citibank, Caterpillar, CA, Delphi, Dell, Dupont, Digital ,
Delloitte ,Ford,HSBC,Hyundai, Google,Intel,GE, Oracle ,Microsoft , Nokia, Siemens. India is the
fourth largest economy in terms of purchasing power parity, the tenth most industrialized country in
the world, the tenth largest economy in the world in terms of GDP and is one of the fastest growing
developing economies today in the world. The most remarkable feature of its impressive growth story,
especially over the last decade and a half, is that it has happened in a solid, democratic environment,
making the process sustainable. The present infrastructure in India is grossly inadequate for the 1.1
billion populations. To improve the infrastructure of India, large investments have been planned by
Indian government.

NEW INSTITUTIONAL MECHANISM FOR PPP

The creation of world class infrastructure would require large investments in addressing the deficit in
quality and quantity. , it is necessary to explore the scope for plugging this deficit through Public
Private Partnerships (PPPs) in all areas of infrastructure like roads, ports, energy, etc. Given the risks
involved in large projects the government has realized that only public sector involvement with
central government development assistance for infrastructure projects is not adequate to meet the
challenge. Recognizing the imponderable risks, which infrastructure projects entail, with long
gestation periods, high costs and budget constraints, the government has proposed a flexible funding
scheme, which will find support from budgetary allocation to fund public-private-partnerships (PPPs)
for infrastructure projects. The government has proposed India Infrastructure Finance Company
(IIFC) and formulated a scheme to support PPPs in infrastructure. As part of this scheme, PPP
opportunities are to be awarded through competitive bidding in a transparent manner and for each
project, performance is to be assessed against easily measurable standards, based on unambiguously
defined criteria, in order to inspire confidence among investors.
Recently, legal and regulatory changes have been made to enable PPPs in the infrastructure sector,
across power, transport, and urban infrastructure. For example, the Electricity Act allowed for private
sector participation in the Distribution of electricity in specified area(s) of the distribution licensees
under the role of a “franchisee”. The recognition of the franchisee role is a significant step towards
fostering PPP in the distribution of electricity. In some cases, the impact of private sector involvement
in terms of end-user benefits has been felt almost immediately. A case in point is the initial Build-
Operate-Transfer (BOT) experience at Jawaharlal Nehru Port, where the Minimum Guaranteed
Traffic requirement at the end of 15 years, identified as part of the concession agreement, was met in
just 2 years. The experiment is being replicated across other major ports as well.

EFFECT OF GLOBALISATION ON INDIAN INDUSTRIES

Effects of Globalization on Indian Industry started when the government opened the country's
markets to foreign investments in the early 1990s. Globalization of the Indian Industry took place in
its various sectors such as steel, pharmaceutical, petroleum, chemical, textile, cement, retail, and
BPO.

Globalization means the dismantling of trade barriers between nations and the integration of the
nations economies through financial flow, trade in goods and services, and corporate investments
between nations.

The various beneficial effects of globalization in Indian Industry are that it brought in huge amounts
of foreign investments into the industry especially in the BPO, pharmaceutical, petroleum, and
manufacturing industries. As huge amounts of foreign direct investments were coming to the Indian
Industry, they boosted the Indian economy quite significantly. The benefits of the effects of
globalization in the Indian Industry are that many foreign companies set up industries in India,
especially in the pharmaceutical, BPO, petroleum, manufacturing, and chemical sectors and this
helped to provide employment to many people in the country. This helped reduce the level of
unemployment and poverty in the country. Also the benefit of the Effects of Globalization on Indian
Industry are that the foreign companies brought in highly advanced technology with them and this
helped to make the Indian Industry more technologically advanced.
The various negative Effects of Globalization on Indian Industry are that it increased competition in
the Indian market between the foreign companies and domestic companies. With the foreign goods
being better than the Indian goods, the consumer preferred to buy the foreign goods. This reduced the
amount of profit of the Indian Industry companies. This happened mainly in the pharmaceutical,
manufacturing, chemical, and steel industries.

The effects of globalization on Indian Industry have proved to be positive as well as negative.

LOOK AT THE EFFECT OF GLOBALISATION ON VARIOUS INDUSTRIES

INDIAN PHARMACEUTICAL INDUSTRY

Advantages:

 It brought in huge amounts of foreign currency into the industry which in its turn
helped to boost the Indian economy.
 With many foreign pharmaceutical companies entering the Indian Pharmaceutical
Industry it increased the number of jobs that were available to the people of the
country.
 The foreign pharmaceutical companies also brought in highly advanced technology
into the industry and this improved the quality of medicines that were available to the
people.
 Many Indian pharmaceutical companies took over international pharmaceutical
companies such as Ranbaxy merged with Croslands, Wockhardt with Merind, and
Nicholas Piramal with Sumitra Pharma. This helped the Indian pharmaceutical
companies to grow and make even more profits.

Disadvantages:

 The competition increased in the Indian market between the foreign pharmaceutical
companies and domestic companies. This reduced the profit levels of the Indian
pharmaceutical companies as a result of which many had to close down such as
Hindustan Ciba Geigy, Park Davis, Boehringer Mannheim, and Abbot.
 This has resulted in many people losing their jobs and in Mumbai's Thane region which
is in Maharashtra more than 30,000 people lost their jobs between 1997- 1999.
 Further the disadvantages of Globalization of Indian Pharmaceutical Industry are that
many foreign pharmaceutical companies are taking over the Indian pharmaceutical
companies such as SKB merged with Sterling, Ciba Geigy merged with Sandoz, and
Rhone Poulenc merged with Fashions. This has led to the fear that foreign
pharmaceutical companies will take over the Indian Pharmaceutical Industry.

INDIAN PETROLEUM INDUSTRY

 The Indian Petroleum Industry was dependent from the very beginning on foreign capital,
expert personnel, and technology, which led to the industry's globalization.Globalization and
the Indian Petroleum Industry has been going together as has been seen for the past many
years. The government of India has taken several measures in order to ensure that the
Globalization of the Indian Petroleum Industry is successful for the industry. In the future, the
government is likely to ensure that Indian Petroleum Industry's Globalization is beneficial for
the industry and not harmful.

Measures taken by government to increase globalisation in this sector:

 converting the legal status of the Oil and Natural Gas Commission to a corporation.
 In order to encourage the involvement of the private sector in production and
exploration, the government set up the Directorate General of Hydrocarbon.
 The government has offered the contract of discovered fields to foreign and private
companies.
 The various companies that have helped in the Globalization of the Indian Petroleum
Industry are Enron Oil and Gas Company, Videocon Petroleum Ltd, Reliance
Industries Ltd., Ravva Oil Ltd., and Command Petroleum.
 formed the Exploration Licensing Policy by which it tried to attract the foreign and
Indian companies to production and exploration.
 The incentives that were declared by the government to encourage Globalization and
the Indian Petroleum Industry are that on imports that were required for petroleum
operations custom duty would not have to be paid, state participation is not
compulsory, no tax on the production of crude oil, provisions for liberal depreciation,
tax holidays for 7 years from the day that production starts, and the freedom to sell
natural gas and crude oil in the domestic market at prices that are related to the
market.

INDIAN MANUFACTURING SECTOR

The share of Indian manufacturing industry towards India GDP has grown from 25.38% in
1991 to 27% in 2004. Further, the contribution of the Indian manufacturing sector to the
Indian export sector has increased from 52% in 1970 to 59% in 1980 and 71% in 1990 and
77% in 2000-01. Furthermore, the Indian manufacturing exports accounted for a little over
5% (in 1990) of the value of output of the Indian manufacturing sector but today it is close to
10%.

India exports manufactured products worth about US$ 50 billion and a recent study on Indian
manufacturing industry has forecast an annual growth of 17% by the end of the year 2015. In
other words at this rate of increase the quantum of India's manufacturing exports will cross
the US$ 300 billion mark by the end of the financial year 2015.

The positive effect of the globalization of the Indian manufacturing sector can be corroborated from
the following facts -
 • The Indian industrial growth exceeded 10%
• Manufacturing growth rate exceeded 12 %
• Manufacturing of consumer durables and non-durables have also recorded upswings
• Telecommunication sector with inflows of US$ 405 million has registered the maximum
growth of 950%
• Merchandise exports recorded strong growth
• The automotive industry achieved a growth rate of over 20% in 2006-07
• The biotechnology industry witnessed another good year in 2006-07 and registering more
than 40% of growth
• The US$ 47 billion Indian textile industry is expected to grow to US$ 115 billion by the year
2012
• The US$6.4 billion Indian retail industry is expected to grow over 20% annually to US$ 23
billion by 2010
• The robust pharmaceutical market in India ranks 4th worldwide and is expected to cross
business worth Rs 1,00,000 crore in
• formulations and bulk drug production by 2010

Although, the process of globalization of the Indian manufacturing sector have contributed immensely
for the overall development of the Indian economy but it still suffers from some bottlenecks, like the
following -

• Use of primitive technology or under utilization of technology

• Poor infrastructure
• Over staffed operations
• Expensive financing and bureaucracy

FOREIGN DIRECT INVESTMENT IN INDIA

Share of top five investing countries in FDI inflows. (2000–2007)

Inflows
Rank Country Inflows (%)
(Million USD)

1 Mauritius 85,178 44.24%

2 United States 18,040 9.37%

3 United Kingdom 15,363 7.98%

4 Netherlands 11,177 5.81%

5 Singapore 9,742 5.06%

As the fourth-largest economy in the world in PPP terms, India is a preferred destination for
foreign direct investments (FDI); India has strengths in telecommunication, information technology
and other significant areas such as auto components, chemicals, apparels, pharmaceuticals, and
jewellery. Despite a surge in foreign investments, rigid FDI policies resulted in a significant
hindrance. However, due to some positive economic reforms aimed at deregulating the economy and
stimulating foreign investment, India has positioned itself as one of the front-runners of the rapidly
growing Asia Pacific Region. India has a large pool of skilled managerial and technical expertise. The
size of the middle-class population stands at 300 million and represents a growing consumer market.

The inordinately high investment from Mauritius is due to routing of international funds through the
country given significant capital gains tax advantages; double taxation is avoided due to a tax treaty
between India and Mauritius, and Mauriitus is a capital gains tax haven, effectively creating a zero-
taxation FDI channel.

India's recently liberalized FDI policy (2005) allows up to a 100% FDI stake in ventures. Industrial
policy reforms have substantially reduced industrial licensing 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 regional-level
infrastructure.

A number of changes were approved on the FDI policy to remove the caps in most sectors. Fields
which require relaxation in FDI restrictions include 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.

FDI inflows into India reached a record $19.5 billion in fiscal year 2006-07 (April-March),
according to the government's Secretariat for Industrial Assistance. This was more than double the
total of US$7.8bn in the previous fiscal year. The FDI inflow for 2007-08 has been reported as $24
billion and for 2008-09, it is expected to be above $35 billion. A critical factor in determining
India's continued economic growth and realizing the potential to be an economic superpower is going
to depend on how the government can create incentives for FDI flow across a large number of sectors
in India.

Why india is a preferred destination ?

 Liberal, largest democracy, Political Stability

 Second largest emerging market (US$ 2.4 trillion)

 Skilled and competitive labors force

 highest rates of return on investment

 one hundred of the Fortune 500 have R & D facilities in India

 Second largest group of software developers after the U.S.

 lists 6,500 companies on the Bombay Stock Exchange (only the NYSE has more)

 World's fourth largest economy & second largest pharmaceutical industry

  growth over the past few years averaging 8%

 has a middle class estimated at 300 million out of a total population of 1 billion

 Destination for business process outsourcing, Knowledge processing etc.

 Second largest English-speaking, scientific, technical and executive manpower

 Low costs & Tax exemptions in SEZ

 Tax incentives for IT , business process outsourcing and KPO companies

INDIA’S DIRECT INVESTMENT FLOWS

 • India attracted US$ 3.47 billion foreign direct investment (FDI) in July 2009, compared to
US$ 2.24 billion in July 2008, according to official data.
• The country's total FDI inflow during April-July 2009 stood at US$ 10.49 billion.
• The services sector invited a significant 20 per cent of the total FDI inflow during April-July
2009.
• The country received US$ 2.14 billion FDI in services during the period, the highest among
all sectors.
• The housing and real-estate attracted US$ 1.41 billion in investments while the
telecommunications sector attracted investments worth US$ 993 million.
• According to official data, the highest FDI contribution of US$ 4.55 billion came from
Mauritius, followed by the US and Singapore during the period.
• To facilitate foreign investment, the government has recently approved formation of an
investment promotion firm ‘Invest India’ that will partner with the states and the industry to
provide foreign investors a hassle-free entry.

Source: IBEF

FPI/FII
Foreign institutional investment is a short-term investment, mostly in the financial markets. FII, given
its short-term nature, can have bidirectional causation with the returns of other domestic financial
markets such as money markets, stock markets, and foreign exchange markets. Hence, understanding
the determinants of FII is very important for any emerging economy as FII exerts a larger impact on
the domestic financial markets in the short run and a real impact in the long run. India, being a capital
scarce country, has taken many measures to attract foreign investment since the beginning of reforms
in 1991. The Foreign direct investment (FDI) and foreign institutional investment (FII) flows are
usually preferred over the other form of external finance, because they are not debt creating,
nonvolatile in nature and their returns depend upon the projects financed by the investor. The Foreign
direct investment (FDI) and foreign institutional investment (FII) would also facilitate international
trade and transfer of knowledge, skills and technology.

In 1992, India opened up its economy and allowed foreign portfolio investment in its domestic stock
market

 Since then ,FPI has emerged as a major source of private capital inflow in this country

 India is more dependent upon FPI than FDI as a source of foreign investment.

 During 1992 -2005 more than 50 percent of foreign investment in India came from FPI.

Trends in Foreign investment :

Source : RBI annual report

Why is FDI preferred over FII:

While it is generally held that portfolio flows benefit the economies of recipient
countries2, policy-makers worldwide have been more than a little uneasy about such
investments. Portfolio flows – often referred to as “hot money” – are notoriously volatile
compared to other forms of capital flows. Investors are known to pull back portfolio
investments at the slightest hint of trouble in the host country often leading to disastrous
consequences to its economy. They have been blamed for exacerbating small economic
problems in a country by making large and concerted withdrawals at the first sign of
economic weakness. They have also been held responsible for spreading financial crises
– causing ‘contagion’ in international financial markets.

In 2007-08, net FII inflows into India amounted to $20.3 billion. As compared with this, they pulled
out $11.1 billion during the first nine and half months of calendar year 2008, of which $8.3 billion
occurred over the first six and a half months of financial year 2008-09 (April 1 to October 16). This
has had two effects: in the stock market and in the currency market.
Given the importance of FII investment in driving Indian stock markets and the fact that cumulative
investments by FIIS stood at $66.5 billion at the beginning of this calendar year, the pull-out triggered
a collapse in stock prices. As a result, the Sensex fell from its closing peak of 20,873 on January 8,
2008 to less than 10,000 by 17 October 2008

In addition, this withdrawal by the FIIs led to a sharp depreciation of the rupee. Between January 1
and October 16, 2008, the RBI reference rate for the rupee fell by nearly 25 per cent, even relative to a
weak currency like the dollar, from Rs. 39.20 to the dollar to Rs. 48.86 This was despite the sale of
dollars by the RBI, which was reflected in a decline of $25.8 billion in its foreign currency assets
between the end of March 2008 and October 3, 2008.
How to encourage Foreign investment

Though there is no doubt that FDIs help to improve the infrastructure of the economy which is a
strong driver for growth, still some serious issues need to be taken care in the future to maximize the
return from this perspective of economy.

• Firstly, the reforms further needs to be improved to invite more FDIs in those sectors in
which India is still lagging. No matter how much we say that growth in FDI has taken place,
we are still way behind China in this area.

• FDIs which promise long term investment, including infrastructural development, rather than
investment on paper, should be given more preference, so as to make sure that short term
disturbances in the market does not allow the investors to take their hand back.

• Finally, Income tax department and FIPB (Foreign Investors Promotion Board) should stop
pulling each other’s leg, and should bring in a solution which can solve the problem of both
tax theft and FDIs. New laws need to be incorporated such that FDI inflow in India is not
affected largely.

Corporate sector :

Indian corporate sector has been growing by leaps and bounds since globalization , Most of the
Americans may have never heard of these Indian companies: Reliance Gatewaynet, VSNL, Scandent
and GHCL – but these are growing number of Indian companies who have recently acquired US
firms. The news of Indian company acquiring a US firm may have been a surprising to most just a
few years back, but not now – It is become a common place in today’s world.

And these US acquisitions are a very small part of the bigger picture. Indian companies have been on
a buying spree in Continental Europe in the quest to become players in the global market. Very
recently, Tata Steel bought the English-Dutch steel maker Corus for a staggering deal of $12 billion.
These are the signs that global commercial and industrial leadership is beginning to pass from the
West to emerging economies like India.

The outsourcing phenomenon, especially in IT Industry has helped Indian companies in lot of direct
and indirect ways. First and foremost, it has ensured that Indian managers and executives are now far
more exposed to to Western business culture and practices. Over a period of time, the Indian offshore
companies have created an image of reliable low cost, yet high quality products and services.
Outsourcing/ Offshoring companies have increased their profits exponentially. There is a lot more
cash available with Indian companies than ever before. Their capacity to borrow large amount of cash
has also gone high.

Here are the top 10 acquisitions made by Indian companies worldwide:

Deal
Target Country
Acquirer value Industry
Company targeted
($ ml)
Corus
Tata Steel UK 12,000 Steel
Group plc
Hindalco Novelis Canada 5,982 Steel
Daewoo
Videocon Electronics Korea 729 Electronics
Corp.
Dr.
Reddy’s Betapharm Germany 597 Pharmaceutical
Labs
Suzlon Hansen
Belgium 565 Energy
Energy Group
Kenya
Petroleum
HPCL Kenya 500 Oil and Gas
Refinery
Ltd.
Ranbaxy
Terapia SA Romania 324 Pharmaceutical
Labs
Tata Steel Natsteel Singapore 293 Steel
Thomson
Videocon France 290 Electronics
SA
VSNL Teleglobe Canada 239 Telecom
If you calculate top 10 deals itself account for nearly US $ 21,500 million. This is more than double
the amount involved in US companies’ acquisition of Indian counterparts.Graphical representation
of Indian outbound deals since 2000.

(Source: ibef.org)

Indian outbound deals, which were valued at US$ 0.7 billion in 2000-01, increased to US$ 4.3 billion
in 2005, and further crossed US$ 15 billion-mark in 2006. In fact, 2006 will be remembered in India’s
corporate history as a year when Indian companies covered a lot of new ground. They went shopping
across the globe and acquired a number of strategically significant companies. This comprised 60 per
cent of the total mergers and acquisitions (M&A) activity in India in 2006. And almost 99 per cent of
acquisitions were made with cash payments.

INDIA AND WTO

POSITIVE ASPECTS

KEY POINTS:

• India’s emergence as a major player in the WTO is reflected in its participation in the
negotiation processes of the organization, its use of the Dispute Settlement Mechanism, and
above all its proven ability to block the negotiations.
• Theories of domestic interest groups and ideational change do not explain India’s rise in the
WTO. Economic size provides a necessary and minimal condition for acquiring veto-player
status, not a sufficient one.
• India’s effective use of the negotiation process, learnt after decades of participation within
the GATT and the WTO, provides the central explanation for India’s influence in this
multilateral forum.
• ‘Negotiation process’ has been operationalized using three variables: bargaining coalitions,
negotiation strategies, and framing.
India’s rise from a struggling developing country to an acclaimed ‘BRIC’, emerging economy
(Brazil, Russia, India, and China) has been meteoric. This is reflected partly in India’s soaring growth
rates: its growth rate of eight per cent makes it amongst the fastest-growing economies in the world.

A Goldman Sachs study on the BRICs has predicted that in thirty years’ time, the Indian economy
could be the largest in the world after the US and China.

In the World Trade Organization (WTO), India has proven its ability to block the negotiation process
until its demands are met; in meeting after meeting, negotiators from the developed world have
reiterated that no deal would be possible without the Indians on board.
India has emerged as a core player in the World Trade Organization. This is important for two
reasons:

• It illustrates that the foreign policy of India (or other emerging powers for that matter) cannot
be fully understood without a close analysis of the international institutional context within
which it plays out. India’s rise in the WTO is a product of decades of learning to negotiate
within the specific multilateral rules of the organization (as well as its predecessor, the
General Agreement on Tariffs and Trade, GATT).
• Secondly, even after certain structural conditions are met, such as large market size and rapid
economic growth, the rise of a country to a recognized great power is not automatic. Rather,
the process whereby a state’s rise is negotiated matters, both in terms of recognition by other
parties as well as the outcomes that the state is able to generate.

In its role in the World Trade Organization, India has adhered to and further developed its long-
established tactics of building coalitions with developing countries, standing up to the developed
world, and saying no even when it incurs costs as a result. India has continued to be a tough
negotiator in the WTO. It still acts as a leader of coalitions involving developing countries, makes
concessions to smaller members, tolerates free-riding, and fights for causes of global justice and
fairness. India, whilst rising in the WTO, retains at least some of its old ideals.
Far from pursue idealistic ThirdWorld-ist causes, the new nuclear India now seeks a freezing of the
regime which prevents acquisition of nuclear weapons by other countries, and which is actively
policed by ‘responsible’ nuclear powers including India.

Three sets of indicators point to India’s rising power in the WTO:

• participation in the negotiation processes
• effective use of the Dispute Settlement Mechanism (DSM),
• proven ability to block the negotiations until certain demands are met.

Thus, India has managed to acquire its current influence in the WTO. However, it has also been seen
that the power to say no does not necessarily transform into the power to achieve one’s preferred
outcomes. India now finds itself in a position where it has credibly established itself as a major player
in the WTO; even the most powerful members of the organization recognize that without India on
board, no agreement will be possible.
It is still, however, to use this power to more positive ends whereby it might achieve outcomes that
go in its favour.
NEGATIVE ASPECTS

The WTO has often been criticised for ignoring the plight of the developing world. It is argued the
benefits of free trade accrue mostly to the developed world. The disadvantages of free trade are:

1. Infant Industry Argument.

If developing countries have industries that are relatively new, then at the moment these industry’s
would struggle against international competition. However if they invested in the industry then in the
future they may be able to gain Comparative Advantage. Therefore protection would allow them to
progress and gain experience to enable them to be able to compete in the future.

2. The Senile industry argument.

If industries are declining and inefficient they may require large investment to make them efficient
again. Protection for these industries would act as an incentive to for firms to invest and reinvent
themselves. However protectionism could also be an excuse for protecting inefficient firms

3. To diversify the economy

Many developing countries rely on producing primary products in which

they currently have a comparative advantage. However relying on agricultural products has several
disadvantages

 Prices can fluctuate due to environmental factors

 Goods have a low income elasticity of demand. Therefore with economic
growth demand will only increase a little

4. Raise revenue for the govt.

Import taxes can be used to raise money for the govt however this will
only be a small amount of money

5. Help the Balance of Payments

Reducing imports can help the current account. However in the long term this is likely to lead to
retaliation

6. Cultural Identity

This is not really an economic argument but more political and cultural. Many countries wish to
protect their countries from what they see as an Americanisation or commercialisation of their
countries .

7. Protection against dumping

The EU sold a lot of its food surplus from the CAP at very low prices on the world market. This
caused problems for world farmers because they saw a big fall in their market prices
Problems facing India in WTO & its Implementation:

But there are several problems facing these Multilateral Trade agreements:

- Predominance of developed nations in negotiations extracting more benefits from developing and
least developed countries

- Resource and skill limitations of smaller countries to understand and negotiate under rules of various
agreements under WTO

- Incompatibility of developed and developing countries resource sizes thereby causing distortions in
implementing various decisions

- Questionable effectiveness in implementation of agreements reached in past and sincerity

- Non-tariff barriers being created by developed nations.

- Regional cooperation groups posing threat to utility of WTO agreement itself, which is multilateral
encompassing all member countries

- Poor implementation of Doha Development Agenda

- Agriculture seems to be bone of contention for all types of countries where France, Japan and some
countries are just not willing to budge downwards in matter of domestic support and export assistance
to farmers and exporters of agriculture produce.

- Dismantling of MFA (Multi Fiber Agreement) and its likely impact on countries like India

- Under TRIPS question of high cost of Technology transfer, Bio Diversity protection, protection of
Traditional Knowledge and Folk arts, protection of Bio Diversities and geographical Indications of
origin, for example Basmati, Mysore Dosa or Champagne. The protection has been given so far in
wines and spirits that suit US and European countries.

Implications for India

It appears that India does not stand to gain much by shouting for agriculture reforms in developed
countries because the overall tariff is lower in those countries. India will have to tart major reforms in
agriculture sector in India to make Agriculture globally competitive. Same way it is questionable if
India will be major beneficiary in dismantling of quotas, which were available under MFA for market
access in US and some EU countries. It is likely that China, Germany, North African countries,
Mexico and such others may reap benefit in textiles and Clothing areas unless India embarks upon
major reforms in modernization and up gradation of textile sector including apparels.
IMPACT OF WTO ON AGRICULTURE

The negative repercussion of the world trade organization (WTO) agreement on India farming
community is well published and has become a major concern of wide spectrum of people and
organizations in India. (Refer to February 2, 2001 cover story of FRONTLINE, a publication of The
Hindu news paper).

The drastic erosion of the price of farm produce and the dumping of cheap agriculture commodities
by other countries are allegedly undermining the welfare of Indian farmers who form over seventy
percent of the nation’s population.

Various theoretical solutions based on political leanings and financial considerations are offered by a
wide spectra of Indian media, public and national intelligentia. However, a solution based on a sound
and practical scientific approach has yet to be emerge.

Underlying all the problems is the inability of the country to compete with the other nations in pricing
and quality of Indian farm produce and agriculture commodities. Most other nations can produce at
lower cost than India, agriculture items traded in the international market.

An attempt is made here to evolve a scientific dimension for solving the WTO related negative
impacts on Indian agriculture in general and the economics of the farming community in particular.

India has one of the lowest agriculture productivity or crop productions per acre in the world. This is
responsible for most of the maladies associated with WTO considerations.

Adoption of modern agriculture production practices and putting tools of state-of- the-art production
technologies in the hands of Indian farmers would make them competitive with the farmers of the
other countries. This will open the way for Indian farmers to significantly reduce unit cost of
agriculture produce, which is fundamental to successful competition in the world market.

The first step to wards attaining this goal would be to evolve a systematic approach in understanding
the pros and cons of WTO agreement as it applies to the interest of India as a whole and the
economics its states and their cropping systems in particular.

In order to achieve this, the formation of a higher-level adhoc commission consisting of agricultural
professional experts with practical experience in the science of international production agriculture
involving economics of cropping system and farming communities and professional consultants
including international personnel capable of analyzing and providing remedial measures, is necessary.

This commission will conduct a time-bound in depth investigation of the problems of Indian
agriculture through discussions with a wide spectrum of farmers, farm leader, agriculture scientists
and economists to come up with a comprehensive report containing recommendations that will meet
the challenges and provide solutions to problems posed by the WTO agreements and their
repercussions on Indian agriculture. The recommendations of the adhoc committee will be studied by
an appropriate policy making team of the government of India. A goal oriented time bound action
plan will be developed in collaboration with the adhoc committee. The implementations of the plan
will we carried out under the guidance of the adhoc committee by nominated technocrats well versed
in cutting edge technologies in crop production, agriculture economics and international marketing.
Since the success of the plan depends on achieving the goal of each phase of the plan on a timely
basis, Provisions for close and periodic reviews will be built into the implementation schedule of the
plan.

COMPARISN OF INDIA WITH THE BRIC COUNTRIES

A). INDIA AND CHINA

China Economic Fact Sheet:

GDP – real growth rate:

9.8% (2008) country comparison to the world:

13% (2007)
11.6% (2006)

GDP-Per capita (PPP-Purchasing power parity):

$6,000 (2008)country comparison to the world:

$5,500 (2007)
$4,900 (2006)
note: data are in 2008 US dollars

GDP – composition by sector:

agriculture: 10.6%
industry: 49.2%
services: 40.2% (2008)

India Economic Fact Sheet:

 The growth rate in GDP India vs. GDP China has increased outstandingly in the recent period due
to several factors leading to an economic upsurge in both the countries. China and India jointly
account for 2.4 billion people, which is roughly 40 percent of the total population of the world. It has
been assumed that China is likely to excel Japan in terms of population by the year 2016. By the end
of the year 2045, China is expected to surpass United States in the population strength also.
According to a survey report on the growth rate of China and India GDP, it has been stated that the
institutional investors have made a notable contribution in the country's economy, which led to the
hike in the GDP of both the countries.

India GDP and China GDP are likely to grow in their own ways. To be precise, in 25 years from the
current period it has been assumed that China will have a more superior economy as it already leads
the total output in the world. On the other hand, soon in the coming years India will have superior
investor returns than China. This is because of the augmented institutional development in India
which is higher and more efficient than that of China. Considering the expected conflicts in China's
economic and political systems, it can be inferred that a wide diversification of the investors is an
essential factor that is required for a sustainable growth in the country's GDP.
It has been reported by a survey done on GDP India vs. GDP China that India's GDP (PPP) is four
trillion whereas China's GDP (PPP) is ten trillion. As per the post-war history of economics, China's
economy has undergone a drastic change with seven percent increase in its GDP. The growth in GDP
of China has resulted from the rapid rise in the manufacturing of high-tech goods in the country under
the large-scale high-tech manufacturing firms like Lenovo, Baidu.com and Huawei Technologies. The
infrastructural development in China has also been quite higher than that of India, which has added to
the growth of China GDP. In general, China spends much more in its infrastructural facilities than
India.
Former World Bank Chief James Wolfensohn declared in one of his speeches that soon GDP India
and GDP China will witness an overwhelming growth that will transcend the G7 countries, that
includes United States of America, Canada, France, Germany, Italy, Japan, and United Kingdom. It is
assumed that by the year 2050, both India GDP and China GDP will witness a gargantuan growth.
The current GDP of China is USD two trillion which is predicted to reach USD 48.6 trillion by 2050.
On the other hand, India's current GDP is USD one trillion, which will become USD 27 trillion by
that time.
INDIA AND CHINA’S GROWTH STORIES

Indicators India China

Political System Multi-party Democracy One-party authoritarian rule

Speed of Growth Economic reforms started Economic reforms started in 1978. Average 9.5%
in 1991. Average 6% growth rate in past two decades.
growth rate in past two
decades.

Areas of Rising power in software, Dominant in mass manufacturing, electronics and

Specialization design, services, and heavy industrial plants
precision industry.

Indicators India China

Gini index (standard 47.0 (up 10 points from 15 yrs ago)

measure of inequality)
36.8

Foreign Direct Investment 6.8% (up from 0.3% in 2004) 17.8%

Future Areas of growth R&D, bio-technology, high- IT business, services and continued
value IT enabled services manufacturing
(legal, medical, engineering
architecture), manufacturing,
agro-based industry

UNDP INDICES

The United Nations Development Program (UNDP) uses three important indices to chart the
effectiveness of development. These are the Human Development Index (HDI), the Gender Related
Development Index (GDI and the Human Poverty Index (HPI). Each of these is a number between 0
and 1, and the greater the number the better a nation is doing. The third is given as a %, and a higher
number indicates less poverty. China and India fare thus:
 HDI: China – 0.745 India- 0.595

GDI: China – 0.741 India- 0.572

HPI: China – 13.2% India- 31.4%

The first of these the HDI is the oldest going back to the 1970s and combines three categories in the
measure — long and healthy life; knowledge; and a decent standard of living, this last including GDP.
Clearly China leads India in the HDI and the gap was growing at least up to the time of the 2004
report from which these numbers are taken. But most interestingly the gap existed in 1975 when the
HDIs for China and India were 0.523 and 0.491, respectively.

B). INDIA AND BRAZIL

Both the nations are strikingly similar in many aspects. They had similar policies between 1950-1980
(Import Substitution, trade barriers, etc.), started their liberalization process at approximately
the same time (early 1990s) and both of them, for a very long time, have had a stable
democratic form of government.
So why has Brazil, historically, not been able to clock similar GDP growth rates as that of India?
Well, the political policies adopted in the 90s were similar yet different in the ways the two countries
went about implementing the guidelines.

What is the current state of economic well-being in the two countries? We take a look at some of the
macro-economic factors for both the giant economies and understand their respective
strengths and weaknesses. (Ex: Brazil’s GINI index is very high implying an economic
growth with large inequalities in the society)

A COMPARISON

Parameters Brazil India

Government Presidential Federal Federal Republic,
Republic Parliamentary Democracy
Population Rank 5th 2nd
GDP $1.984 trillion $3.298 trillion
GDP (per capita) $10,465 $2,780
Gini (Inequality Index) 46.3 36.8
HDI Rank 75th 134th
Exports (Rank) 21st 23rd
Imports 27th 16th
Received FDI (2008) 16th 29th
Foreign Exchange Reserves 7th 6th
(2008)
Public Debt 47th 29th
Cultivated Land 5th 2nd
Forest Area 2nd 10th
Rail Network 10th 4th
Road Network 4th 2nd
Electricity Consumption 10th 7th
Number of Mobile Phones 5th 2nd
Number of Internet Users 5th 4th
 BRAZIL INDIA

Liberalization of Financial System Again, steps taken were more prudent in this
accompanied by the opening of short-term regard.
capital Account - cited to be one of the most 2003:
controversial steps in exposing Brazilian FDI Flows/Gross Capital Formation = 4%
economy to the instability of the world FDI flows/GDP = 5.4%
economy and for rendering its fiscal and
monetary policies ineffective to sustaining
economic growth
2003:
FDI flows/Gross Capital Formation = 11.4%;
FDI flows/GDP = 25.8%

COMPARISON OF KEY MACRO-ECONOMIC INDICATORS

Economic Growth

Brazil grew rapidly to middle-income status with dramatically high rates of economic growth in the
late 1960s and early 1970s. However, it has experienced extreme macroeconomic volatility and, over
recent years, has recorded negligible rates of economic growth.

India, on the other hand, has a relatively low level of per capita income and due to the high level of
FDI’s and FII’s exiting the market, the Indian growth has reduced to around 6%.

Taxes

Between India and Brazil, the administrative and financial burden of taxation rates in Brazil are much
more serious .The burden of taxation on firms in India is in line with international norms and India
could work to lessen the number of tax payments made by firms.

The Brazilian tax system is complex and burdensome. The tax burden reached almost 40 % of GDP
last year hence a disproportionate proportion is raised through taxes.

In India recent reforms have attempted to simplify tax registration procedures, although the
administrative and financial burden of tax payments is still slightly on the higher side.

Ease of Finance

In Brazil, three-quarters of managers cited the cost of finance as a constraint on the growth of their
business. Over 50% of Brazilian firms which claim to need loans opt not to apply, citing reasons such
as complicated application procedures, high interest rates, and strict collateral requirements. Lending
rates in Brazil remain above 50 % even though they have come down in the recent past. 75 % of
small businesses have bank credit lines and overdraft facilities.

In India, the corresponding figures are just 16%. Access to external financing is a cause for concern
for small firm’s as only 54 % have bank credit lines and overdraft facilities. SMEs in India also lack
access to credit due to the absence of reliable credit information.

Infrastructure

In Brazil, while it seems clear that the quality of transport and electricity provision is negatively
affecting firm performance, firms do not cite infrastructure as an important obstacle to growth.

Firms in India, on the other hand, are very concerned about the effect of deficient infrastructure on
productivity. Power supply is identified as the most problematic element, with nearly a third of
businesses rating it as a major or severe bottleneck.

Rate of Population Growth

Both the countries have a large and varied labour force and consumer market. India’s population
stands at 1.2 billion and Brazil’s at 196.6 million.

India’s population grew by 1.4% annually in 2009, while Brazil’s population grew by 1.2%. Over the
2009-2020 periods India’s population will grow by 1.2% and Brazil by 1.0%.

Therefore both countries are striving towards lower growth rates, which may be construed as
necessary for India due to its already large population size, but for Brazil this might turn out to be
anti-productive, due to the relatively smaller size of its population, resulting in lesser number of
people in the labour force.

GDP per capita (purchasing price parity)

In 2008, GDP per capita in Brazil was $5,962 as compared to $2,829 for India. By 2020 this is
forecast to rise to $17,563 for Brazil and $7,129 for India. Here Brazil has a distinct advantage due to
a smaller population, putting less burden on the per capita income.

Consumer Spending

Private final consumption expenditure totaled 60.7% in Brazil compared to 55.7% in India.
Suggesting potential room for more growth. This points at greater consumption growth in India, due
to a larger savings rate than that of Brazil. MNC’s and local businesses alike would consider this as an
incentive to set up shop in India.

Conclusion

In Many area’s India and Brazil see eye to eye from a demographic stand point. Both countries have a
diverse population, with varied cultures and languages. But India has one particular USP, it’s
potential population dividend, which if reaped successfully by the Indian government, can allow the
country to race ahead Brazil.

A LOOK AT GDP GROWTH OF ALL BRIC NATIONS

Real GDP Growth (%)

2008 2009 2009(ACTUAL)
(FO RECAST)
BRAZIL 5.1 -1.3 -1.22
RUSSIA 5.6 -6 -8.99
INDIA 7.3 4.5 6.56
CHINA 9 6.5 8.9

Following charts show the movement of gdp , inflation in the BRIC nations , later years show has had
a effect on these countries .

The markets of BRIC countries are characterized by safe assets and higher liquidity, particularly
China and India were the very few countries having GDP above 5 % in 2008 -09. Due to this the
strong flow of foreign capital in these countries will trigger international reserves once again.

The following graphs will show the current trends of economic indicators in these economies:

( source : BRIC research report- Goldman Sachs)

The real GDP growth rate has been more or less constant for these economies except in Brazil which
is a newly developing economy and is facing many changes but still if we discount the predictions of
the recessionhit year the growth has been very sound .

The bric nations has wethered the recession crises way better than the other economies of the world
and doing even better than the predictions . India and China outpaced their predictions whereas Brazil
also suffered less fall . though Russia had more losses but his was due to the oil price fiasco .
 ( source : BRIC research report- Goldman Sachs)

Inflation was at very high level in all these economies in 200o but it has come to steady level in the
recent years , though some high-end were observed at the time of recession but apart from that all the
economies have been initiating policies to keep inflation at a steady growth level and reduce
widespread fluctuations .

( source : BRIC research report- Goldman Sachs)

Stock markets are said to be the barometer of any country’s economic performance as they reflect the
level of turbulence in the economy by their highs and lows , in the case of BRICcountries the indices
have touched new highs and shown consistent performances . though there have been slight
deviations but a bullish trend line has been observed except in the last year of recession .
 ( source : BRIC research report- Goldman Sachs)

The exchange rates in terms of US dollar has also been improving that means an appreciation in the
home country’s currency as compared to US Dollar , as we can see from the graph that the exchange
rate has been continuously falling indicating growth in the economy.

After studying the dynamics of the other BRIC countries India has a better chance at becoming the
next super power after China, but at that time Chinese population will be old enough so as to reap the
benefits of being rich and it will still not be as rich as US, hence India with its growing economy,
youth power and investment attractiveness can become the next superpower if it overcomes the
shortcomings like controlling inflation, balanced fiscal policy, market liberalization etc.

India and Global Slowdonwn 2008-09

No economic development in the recent history has been so talked about as the recent ‘economic
meltdown’. No one person or institution understands the economic network and functioning of the
world.

The United States of America is a dominant force in world economy. It represents around 21 percent
of the world economy. The changing economic statistics indicated a possible US recession which
further signified a global downtrend in the economic cycle due to the domineering impact of the US
economy. It is very rightly said that when the US sneezes, the entire world catches a cold. Many
countries, particularly developing ones are mostly dependent on USA due to which even the slightest
hint of a slowdown in the behemoth country spells doom for them. Due to the slowdown, the average
spending of American consumers would reduce significantly and thus result in a reduced demand for
imported items.

Hence, in the case of the US recession, the fault could not be detected until the symptoms proved
beyond repair. The sudden collapse of global financial giants like Lehman Brothers, AIG, and
thrashing of others like Citi Corp triggered the collapse of the stock capital, affecting all US financial
institutions. This effect spread across to European and Asian markets, which led to a worldwide lack
of capital for daily operations, loans and expansions across all sectors and all markets.

Oil is extremely important for any country and 2008 witnessed highest ever increase in oil prices. Due
to high oil prices which rose to $ 147 per barrel from $ 80 per barrel in a span of 6-7 months, food
prices also increased significantly. This rise in oil prices triggered global inflation to a dangerous
mark. The year 2008 also witnessed the closure of established investment banks due to an
unprecedented credit crisis across the world.

This situation of substantial loss of stock money, very low trading of shares across all stock
exchanges, high rates for borrowing money, and low productivity due to low demand, is termed as the
‘economic meltdown’

Impact of recession on india

The impact of the recession on the BRIC countries has varied in both magnitude and duration, as
shown in the figure below left. While Russia essentially collapsed, China and India barely slowed
down. Brazil, like Russia, went into a recession, but the contraction was much milder in comparison
with the latter. Even with these data it would be wrong to assume that India is like China, or that
Brazil is a milder version of Russia.

Russia is an export-oriented economy. Its health and growth depend on exports of oil, metals and
other commodities. Prior to the recession, the Russian economy had overheated as a result of high oil
prices.

To finance growth, large state firms and private companies chalked up nearly $500bn (€355bn) in
external debt - a phenomenon supported by the easy monetary conditions in North America and
Europe. With crude oil prices coming down and foreign credit drying up, the economy collapsed.

Over the past few decades, Brazil has developed from being an agricultural economy to an industrial
one. However, agriculture and natural resource exports are still an important driver for growth. Brazil
escaped the worst impact of the recession on account of two factors.

First, the banking sector in Brazil is largely government controlled and as a result more conservative.
It had limited exposure to the US sub-prime loan market. Second, China has replaced the US as
Brazil's largest export market. The Brazilian economy is recovering on the back of the Chinese
upturn. As indicated in The Economist, industrial production in Brazil tracks Chinese exports with a
three month lag.

India is a "Goldilocks" economy - neither too dependent on export-driven growth (as are China and
the East Asian tigers), nor too reliant on foreign money for investment-driven growth (such as Russia
and a few other countries in Eastern Europe). As a result, the impact of the recession on India has
been neither severe nor sustained. In the short term, India did suffer from a lack of business
confidence. Foreign investors exited the Indian stock market, leading to a drop in the share market.
However, business confidence has returned and along with it foreign money. In fact, the flow of
foreign money is creating excessive liquidity, leading to fears that a housing bubble might be created.

Quarterly Export Growth Percentage in 2008-09

Source: Economic Survey 2009, Government of India

The chart above shows that the exports have plummeted since October 2008 as a result of the
decline in global demand. Similarly, imports growth also experienced a slow down during
October-November 2008, before turning negative thereafter.
But in India, the impact of the crisis has been less severe than in other emerging market economies as
the Indian financial system is not directly exposed to the “toxic” or “distressed” assets of the
developed world. This is not surprising since Indian banks have very few branches abroad. The extent
of impact has been restricted due to several reasons such as:

• The Indian banking system was not directly exposed to the sub-prime mortgage assets or to
the failed institutions. The off-balance sheet activities or securitized assets were limited.
• The driving factor of the recent growth in Indian economy has been domestic consumption
and domestic investment. India’s dependence on foreign savings has remained around 1.5%
in recent period.
• Despite lower export demand and hampered capital flows, India has been able to manage
balance of payments comfortably due to ample foreign exchange reserves.
• A sharp decline has been observed in headline inflation, as measured by the wholesale price
index (WPI). Also, consumer price inflation has been moderate in recent times.
• Mandated agricultural lending and social safety-net programmes have resulted in a strong
rural demand.
• The exports of merchandise are somewhat modest and account for approximately15% of
India’s Gross Domestic Product.
The Chinese economy is export-driven, supported by an undervalued currency. With its chief export
markets contracting, Chinese growth slowed down. The economy has recovered thanks to monetary
and fiscal stimulus. However, it is at crossroads. With Western consumers cutting spending, at least in
the immediate future, the country will have to find another engine for growth. Investment-led growth
is unlikely to be the answer, as the country has significant excess capacity, resulting in a poor return
on capital. Growth in the long term will have to come from increasing domestic consumption - a
difficult proposition, given the Chinese predisposition to save. The government is following a loose
monetary policy to stimulate growth, but the fear is that this will lead to a new housing bubble in
China.

Hence In terms of comparison with other developing nations like BRIC tions , definitely china scores
the ground but it is also highly dependent and interlinked with the world economy , hence any major
world upheaveal has a huge impact on china , but at the same time India being more domestically
driven is non trifled by such dramatic changes , hence india has definitely not lost its ground in the
global setting

Conclusion

The structural reforms initiated in the early 1990s coupled with a cautious and calibrated approach to
external sector liberalization has led to a step-up in economic growth and India has emerged as one of
the fastest growing economies of the world. Notably, this growth has been achieved in an
environment of monetary and financial stability, even as there was a series of exogenous shocks, both
domestic and foreign, that hit the Indian economy in the period since the latter half of the 1990s.
Looking ahead, the evolving demographic profile in favour of younger population suggests that the
growth prospects of the Indian economy remain strong, provided their potential is effectively utilised.
At the same time, a lot needs to be done to improve the quality of life. While the proportion of the
poor in total population has come down, the absolute number of poor people remains high. India’s
rank in terms of human development index and gender development index continues to be low
compared to many developing countries. There is a need for linking growth with development and fill
the gap between macroeconomic performance and social sector development. In this regard,
globalisation throws both opportunities and challenges for benefit of societies. Opportunities offered
by forces of globalisation offer India scope to improve the quality of life of its people, provided
appropriate policies are put in place. While the economic integration of India with the global economy
will continue to take place, a successful integration, with due regard to the interests of a vast majority
particularly, the poor in our country would be possible only through sound public policies – evolved
and redesigned from time to time. Given India’s demographic advantages, the quality of labour force
(in terms of relevant skills which need to be sustained, reoriented and upgraded in a globally
competitive era) and the physical health of the workforce become crucial. Education and health,
therefore, provide the link between supply and demand for labour through increases in productivity.
In this context, there is universal recognition of the need to improve both productivity and output in
the agriculture and related activities to meet the objectives of growth and employment. There will
have to be a massive shift of the workforce from agriculture to non-agricultural avocations and we
should be prepared for a large-scale migration of the workforce to the tuneof 10 million per year, from
rural to semi-urban and urban areas. The quality of urban infrastructure even in the metropolitan
cities, as noted earlier, is not conducive to globally competitive economic activity. The inevitable
large scale redeployment of the migrating workforce would, therefore, need institutional
arrangements, be they in public or private sector, for skillimparting and skill up gradation. In these
two matters relating to the workforce, some supply-led approaches appear to be in order, rather than
waiting for the demand to be generated.
Enhanced investment activity, particularly in the infrastructure area, would necessitate higher
domestic savings, especially in the public sector coupled with efficient financial intermediation. In
addition, foreign savings need to be attracted and absorbed with a strong preference to Foreign Direct
Investment in all sectors though in some sectors like banking, a
calibrated approach may be warranted. At the same time, our enterprise should be enabled to attain a
strong global presence in all sectors. In brief, our global integration has to be a two way process,
encompassing movement of people with some caveats, trade in a free and equitable manner and
financial integration on a specially sequenced basis.
.
Still there is a lot of scope of improvement for the Indian economy , hence it can further grow in the
following direction:
Infrastructure improvement up to global standard
* Development of transportation facilities so that least time is required to move from one place to
another; it also reduces the carrying cost
* Government initiatives to advertise opportunities in different field to attract both Foreign Direct
Investment (FDI) and Foreign Portfolio Investment(FPI)
* Linkage effect-adaptation of backward integration for saving cost and time with a look to improve
supply chain
* Unbalanced growth strategy to facilitate growth
* Making direct link among educational institutes and business firms to provide direct industry
interference in large scale with practical approach to students
* Guild formation by the firms of specific industries to discuss, analyze about advantages,
disadvantages, opportunities etc. different dimensions of that particular sector standing on a common
platform
* Co operation among domestic and foreign companies to explore new opportunities in several fields
of operations
* Technological up gradation in industries
* Application of Just In Time(JIT) technique in business

Hence through these techniques india willnot only grow on the foreign cooperation end but will also
boost the domestic front as an internationally competitive economy .