Condition Of Indian Economy Essay

India has come a long way in modernizing its economy, reducing poverty and improving living standards for a large segment of its population.

Its economy has been one of the largest contributors to global growth over the last decade, accounting for about 10% of the world’s increase in economic activity since 2005, while GDP per capita in PPP (purchasing power parity) terms is today three times as high as in 2000.

Yet, this period also witnessed a rise in inequality, which has been mainly driven by income gaps between India’s states, and a growing urban-rural divide. India continues to have the largest number of poor in the world (approximately 300 million are in extreme poverty), and nearly half of the poor are concentrated in five states.

Growth has slowed in recent years and several challenges remain unsolved. Bringing more people into the process of generating growth and sharing the gains more widely will make India more resilient for the future.

With one of the largest and youngest populations in the world, India needs to create millions of good-quality jobs in the near future to ensure decent living conditions for the vast majority of its citizens.

The country is often cited as an example of an economy that is modernizing by jumping directly into services without passing through manufacturing. The weight of manufacturing in India has been relatively stable over the past two decades, at much lower levels than China and ASEAN countries. Business services – a high value added sector – represent a larger share of economic activity in India than in Europe.

Will India be able to achieve shared prosperity without a growing manufacturing sector? Agriculture accounts today for only 16% of total value added (down from 44% in 1965), but still employs about half of the Indian population. Productivity in this sector did not increase significantly in the past decades, limiting improvements in living standards in rural areas.

The competitiveness landscape

After five years of decline, India’s competitiveness improved notably this year as measured by the Global Competitiveness Report 2015-2016, where the country improves 16 ranks to 55th of 140 economies.

 

This improvement can be largely attributed to two main factors.

Firstly, macroeconomic conditions improved significantly. Inflation eased to 6% in 2014, down from near double-digit levels the previous year. The government budget deficit has gradually dropped since its 2008 peak, although it still amounted to 7% of GDP in 2014, one of the world’s highest.

Secondly, the country benefits from the momentum initiated by the election of Narendra Modi, whose pro-business, pro-growth, and anti-corruption stance has improved the business community’s sentiment toward the government. Infrastructure has also improved, but remains a major growth bottleneck. The fact that the most notable improvements are in the basic drivers of competitiveness bodes well for the future, but other areas also deserve attention, including technological readiness.

How inclusive is growth?

Despite India’s relatively strong record in terms of economic growth over the last decade, its middle class remains small and getting a job is no guarantee of escaping poverty.

India must take further action to ensure that the growth process is broad-based in order to reduce the share of the population living on less than $2 a day—many of whom are employed in informal and low skilled jobs. Educational enrollment rates are relatively low across all levels, and quality varies greatly, leading to notable differences in educational performance among students from different socioeconomic backgrounds.

The gender gaps in labour force participation and wages are both high, showing that India’s women are not benefiting equally from economic opportunities. India scores well in terms of access to finance for business development and real economy investment (investment channelled towards productive uses), yet new business creation continues to be held back by administrative burdens. India also under-exploits the use of fiscal transfers compared to peer countries.

Modernizing India’s public institutions

Modernizing public institutions has been high on the agenda of reforms in India in recent years, and results are starting to show. In 2015, businesses perceived lower levels of corruption among public officials and showed more trust in government’s decisions. Improved public institutions are one of the main drivers of the increase in India’s competitiveness. Yet, there is still a lot of ground to cover.

Private investment, especially from foreign firms, requires a favourable business environment, which includes strong property rights protection and also fair and speedy trials in the case of disputes. To this end, ensuring the independence of the judicial system and increasing efficiency in settling disputes will be key. Business ethics should also improve in line with that of public institutions. Reporting and accounting standards are necessary to ensure transparency in the private sector, increase trust and facilitate long-term financing and investment.

Talent, education and social mobility

Educational enrolment rates are relatively low across all levels: barely above the median for its peer group on pre-primary and primary, and below the median for secondary, vocational and tertiary levels.

Only 1.4% of secondary students are enrolled in technical and vocational programs, limiting the talent pool for skilled labor. The average level of education is only 7.3 years and a gender gap continues to persist, with boys benefiting from two more years of schooling than girls. India ranks 31st out of 37 lower middle income countries in providing equal educational opportunities for men and women, which translates into low levels of female participation in the labor force.

The gap in educational attainment between children from the top and bottom quintiles in India is 8.7 years, with those in the bottom quintile receiving only 2.8 years of education on average and those in the top income quintile receiving 11.56 years. The disparities in educational attainment by income are greater in India than in most other countries with similar income levels, and can be important in transmitting inequality down the generations. The gap is much smaller in Vietnam, Thailand, Indonesia and the Philippines and larger only in Laos. Thailand stands out for having the best educational outcomes in this peer group on average (nearly 5 more years than India).

Unequal access to finance

India scores relatively well in terms of access to finance for developing businesses and investing in the economy. India’s entrepreneurs have better access to bank accounts, credit, venture capital, and equity markets than their counterparts in most peer countries. However, access to finance remains limited for low income individuals, especially women. 400 million people remain unbanked in India and disconnected from the financial system despite impressive gains in recent years. Most unbanked are poor and female: only 27% of individuals in bottom quintiles and 37% of women have access to a bank account. Finance can help poor households optimize severely constrained resources across their lifetime.

Barriers to Entrepreneurship

Yet, only 7% used their savings account to start a business (the proportion is even smaller for those in the bottom 40% of the income distribution). A last-placed ranking on small business ownership is evidently not for want of good ideas, as India scores fourth on a measure of patent applications. But budding entrepreneurs are held back by red tape and an inefficient justice system, with relatively low rankings for indicators such as the time and cost of starting a business, enforcing a contract and resolving insolvency.

Closing the infrastructure gap in India

Infrastructure development has not keep up with the increasing needs of the economy. Since 2007, the country slipped 14 ranks to 81st worldwide in terms of overall quality of infrastructure. In a recent report, the World Bank estimates that India might need up to 1.7 trillion dollars to close its gap in infrastructure development. Such a huge challenge cannot be borne by the government alone and will require more private investments and public-private partnerships. Private infrastructure financing totalled only 2.4 % of GDP per year on average from 2009-2013.

A quarter of Indians still do not have access to electricity and almost a third of the urban population live in slums. 65% of the population does not have access to improved sanitation and access remains unevenly distributed. This is also the case for clean drinking water.

Modernizing transport infrastructure will be particularly important to increasing India’s competitiveness. The airline sector is one of the weaknesses of India’s transport system. Operational airports are still out of reach for large parts of the country given that only half of Indian roads are paved, contributing to one of the highest accident rates in the world. On the flipside, the railway system performs relatively better than other modes of transport, traversing the country for approximately 65,000 kilometers (the fourth largest in the world). Nonetheless, investments are needed to improve the speed and efficiency of the system, especially within urban areas.

Connecting India

Despite many clusters of excellence in the IT industry and a vibrant service sector, India is not fully leveraging ICTs (information and communication technologies) for the benefits of its entire population. Regulation of the ICT sector is among the most competitive in the world and costs are low by international standards. Yet, the uptake of ICTs in India remains very low. Fewer than one in five Indians access the Internet on a regular basis, with only 1 percent of the population having fixed broadband (more worryingly, this figure has not gone up significantly in recent years). Smartphones are the privilege of the very few, with 5 mobile broadband subscriptions for every 100 population, while less than two in five Indians are estimated to own even a basic cell phone.

India has been slipping behind other countries in developing Asia over the last decade. Until 2007, internet usage was in line with the median performance of other economies in the region. Since then, countries such as Thailand and the Philippines have experienced a tremendous increase in the uptake of ICTs. Connecting India will mean investing in both physical and human capital to bridge the gap with other emerging markets. ICT could help fulfil India’s ambition to become a global manufacturing hub. Furthermore, ICT could do wonders in improving productivity in agriculture and the services sector, while boosting access to some basic services among the rural population.


India’s tax tystem and social safety net

Some countries effectively use redistribution to reduce inequality, but India is not among them. Its Gini coefficient (a measure of income distribution) is the second highest among lower middle income countries and is barely changed by fiscal transfers. Tax revenues are extremely low and India’s tax code is regressive, meaning that the poor bear a heavier burden than the rich, which is not offset by social spending. The country spends only 2.5% of GDP on social protection compared with over 6% in many peer countries.

India has a great deal of opportunity to enhance the generosity and progressivity of its social protection system so that it can give its citizens the safety net needed to take risks and participate fully in the economy and society.

Increasing its narrow tax base can also give India more fiscal space to make these much needed social expenditures, particularly in health. India’s public health system remains limited in coverage. Out-of-pocket expenses are high, limiting affordability. This translates into poor (and unequal) health outcomes. Inequality adjusted life expectancy is 25 years while in many peer countries like Thailand and Vietnam there is only around 10 years’ difference between high and low-income individuals.

The way ahead

To achieve both economic growth and social inclusion, India should focus on a number of areas of reform, including:

Authors: Gemma Corrigan, Economist, Economic Growth and Social Inclusion Initiative, Inclusive Growth, World Economic Forum. Attilio Di Batisto is a Quantitative Economist at the World Economic Forum.

Image: Passengers ride an overcrowded bus as they head towards their village to celebrate “Dashain”. REUTERS/Navesh Chitrakar

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Written by

Gemma Corrigan, Practice Lead, Inclusive Growth, Future of Economic Progress, World Economic Forum Geneva

Attilio Di Battista, Economist, World Economic Forum

The views expressed in this article are those of the author alone and not the World Economic Forum.

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1. Introduction

India is a country which had gained its independence more than 60 years ago (since 1947), also a country which is sited under the banner of "developing country". It is mentioned by Kulwant S Pawar, India is a country with approximately 450,000 new graduate engineers each year also with 20% of world's population which is under 25 years, which deals with the problem such as profession and good job opportunities.

Furthermore the democratic India is the worst for its government official's bribery, which also affects the structural and economic growth of the country, but for this growing country there is a crisis of unemployment for the people with high skills. Country's highly talented leaders try to attract more international and foreign multinational companies to open new fields related to additional employment chances for developing the people and results in making the country develop.

For this purpose as well as considering less cost in establishing a company partner in India and cheap labour, such matters is pulling big multinational companies to India; during this recession period. For in depth analysis in the various reasons for this international operations increasing in India, it will evident and helpful if we give a glance into the past of the country how it was run and various reasons for the international interest which will be done in section 2, further sections will be discussing on the current situations and growth from independence.


2. Indian Background

India must have had an estimated approximate 100 million population towards the end of sixteenth century (Moreland, 1920), with people of more religious beliefs, traditions and culture in focus than the economic development element. It was more of what we call now "Appropriate Technology" geared to small scale production in family units of peasants and artisans. During this period the country was parted and ruled by kings under different kingdoms.

Under these kingdoms or kings that ruled, there was prominent way of taxations from the people who heavily depended on the agricultural method, also there were strong trade relations in southern states with countries in the Indian Ocean by the kings to increase their income to build a powerful army. This obviously was the beginning of foreign trade and international operations juncture.

By around 1000AD there was a remarkable change in the structure of Asian maritime trade. The previous pattern of pre-emporia trade changed into the new pattern of emporia trade. Whereas in the phase of pre -emporia trade goods were shipped directly from the place of the origin to that of final consumption, the rise of emporia, particularly along the Indian coasts implied new practices of re-export (Rothermund, 1988).

Dutch took the initiative of improving the trade structure; they had well pirated ships in the Indian Ocean, which made them in transporting goods and products from India to the Dutch market. European's gathered to find and buy these products in the Amsterdam auctions. The Dutch method of selling the goods that they brought from Asia at a free auction in Amsterdam enabled them to diversify their trade very quickly (Rothermund, 1988).

This enabled British to shift focus from spices to textile, and also in the innovation and improvement of their ships to move faster, under the East India Company which began in 1600 in London (Rothermund, 1988). In this case Madras was the earliest colonial port city established by British in India. Like the other port cities of Asia which were the creation of European powers, Madras functioned primarily as a base for the overseas trade (lewandowski, 1975).

The company started their major fold in India, performing in trading development by various methods improving the British expansion in Indian Ocean, for illustration they took Indian raw cotton to China and paid their sales proceeds into the company's treasury in Canton in return for drafts on Calcutta or London, providing cash for buying tea (Rothermund, 1988). Furthermore there was no stop in the production of Indian goods in India as there was demand in Arabia and Persia which also was a major flow of returns which supported the trade.

While the East India Company started their influence in through Bengal, they provided people with work opportunities in factories, which lead to the percentage fall in agriculture dependent between 1911 and 1921by 14 and labourers by 37whereas factory based workers increased by 49 (Anesty, 1977) shown in A1, which also guided to the maximum export from India shown in A2. Also there arose family based industries in India like TATA and BIRLA which put a strong hold to Indian operations in the country, which was formed basically due to, mentioned earlier the strong Indian tradition and culture background.


3. Current India & Discussion

Although India gained political independence in 1947, but not until the unleashing of economic reforms in 1991 did the people of India gain their economic independence (Tikku, 1998). This set open doors in attracting the international community.

By virtue of its inadequate infrastructure, cheap labour and 950 million potential consumers (Financial Times, 1996), all indicate the potential tax investments and growth existing within India. Furthermore with the 2nd largest pool of scientific and technical workers in the world, strong economy and potential for high technology investments in India is reaching far (Tikku, 1998).

Basically, a country's infrastructure, its economic development path, market size, and consumer culture play a vital role in attracting the foreign investors (Sharma & Srinivasan, 2008). India is among the world's top ten largest economies in terms of absolute gross domestic product (Halepete & Seshadri Iyer, 2008), which is due to the growth in the manufacturing and service sector also the foreign investments.

These various advantages and development opportunities noticed by the companies, started to impact the developing countries as they could view the future success, moreover the investment and developments happening in the Indian market and society lead the populace to demand more of expansion and progress.

We will be discussing in this paper also on the various strategies and ideas that lead to the industrialisation and managing operations improvement in the Indian sub continent.

3.1 Entry Strategy: Foreign direct investment

The Indian economy has been actively involved in attracting FDI inflows since the introduction of economic reforms, beginning July 1991 (Srivastava, 2006). Even with an imperfect market condition, India opened up its economy and allowed multinational enterprises enter core sectors as a part of reform process of 1990's. Since then it has attracted a big share of FDI flows to the country and has become one of the lucrative investment locations for the foreign investors (Sahoo & Mathiyazhagan, 2003) shown in A3.

During this period (post liberalization), there was an increase in the FDI inflow in the service sector (tertiary) due to import substituting industrialisation, also an interesting fact that could be added, was around 39% of the FDI inflow was from Mauritius, followed by USA with 24%, with UK, Australia, Japan, Germany, South Korea constituted the rest 28%, These 7 countries gave almost 90% of the country's inflow (Sahoo & Mathiyazhagan, 2003) chart in A4.

At the present condition from 2001 till 2006, there was a steady increase till 2005 and a sudden boost in the FDI inflow to reach a maximum of $17 billion. It is also estimated by UNCTAD that India will top the list in the developing countries list with highest FDI inflows. To establish FDI in India, it is required to attain government approval and considered by Foreign Investment Promotion Board (FIPB), for automatic route you just need the company licence and need to inform the Reserve Bank of India within 30days.

3.2 Licensing

India from the beginning has been a country with weak infrastructure for research and new product development, which is a major reason for the use of foreign inventions. Which lead to the Patents Act, 1970 introduction for the protection of the patents, including the introduction of the law governing the licence of trademarks, The Trademark Act, 1999, the Act is mute on the matter of licensing of an unregistered trademark; however the courts have endorsed the identical as common law licensing.

A registered user has a right to use the registered trademark in relation to the goods for which it is registered, but it does not give any assignable or changeable right to use the mark. However, the registered user has the right to file suit for infringement in his own name, making the registered proprietor a defendant.[2]

3.3 Outsourcing & Supply chain

Indeed, technology enables globalization and globalization makes technology more profitable (Aggarwal, 1999), and every industry is creating a global presence, organisational, technical and operational factors for which global outsourcing is vital. An analysis of the business conditions in India predicts a continuation of the growing trend of outsourcing of various services to India; one can also expect a higher level of off shoring of higher skilled jobs (Dossani and Kenney, 2004). The availability of cheap labour also the less initial investment required is the basic reason for this increasing outsourcing.

Supply chain characteristics are also well established in India towards the beginning of 20th century when outsourcing increased country started giving equal importance for supply chain management for international companies who have established partnerships with India.

3.4 Entry Strategy: Joint Ventures

Joint ventures is also under foreign investment if it is an international company planning to setup a merged business with an Indian firm, where there are similar regulations and criteria's put forward by the Indian government as to the FDI. The document has to be prepared by the so wished company to be presented for the government which is more general and open ended. As the process in India is hierarchical so early negotiations are acceptable with the position holder or else which will lead to more wasting of time, as usual because Indian litigation is very slow foreign investors are also allowed to add the dispute resolution clause in the joint venture agreement.[3]

3.5 Multi National Co operations (MNC's)

From early colonial rule MNC's where familiar in India, but by the change of government by 1970 a few MNC's packed up and left due to anti MNC's public eagerness and socialistic views, but again from 1991 similar rise was seen in MNC culture, still there were a few companies which faced hurdles due to less public relationships and inadequate country research (Bardhan & Patwardhan, 2004).

Overall if a multinational company is planning to form its base in Indian soil it is very much required to have a very good knowledge about the divergent country and be more attached to as a protectionist and nationalist culture environment similar to the country character.

3.6 Political structure and culture

India has large numbers of distinct linguistic and ethnic groups; there is much poverty, and large regional variations in income and wealth in India (Budhwar, 2001). Even though of these differences, democracy is well-established in India, with various cultures languages and states, Indian democracy constitution seem robust having withstood many shocks over the last half century.

After independence most Indian leadership had been trained in England by socialists. These leaders were responsible for setting up the state machinery with an independent judiciary, the Supreme Court; there are also main head minister under the prime minister and president who make the main role decisions for the running of the country (Tikku, 1998).

The Hofstede's cultural dimensions give a brief idea also about Indian culture.

PDI: Power distance of maximum inequality of 77.

LTO: Long term oriented country with a value of 61.

MAS: Masculinity of 56 greater than world average of 51 shows difference in gender power.

IDV: Individualism of the country rating is poor.

UAI: Uncertainty avoidance of 40 shows a population with less rules and regulation.


4. Conclusion

This report is an assessment or analysis done on the structure of India, looking into the business aspect of various international operations that could be put into practice in this developing country, where we also viewed the past impacts and advantages brought through international trade and inflow into the country which could be told or seen as a support and a helping hand to lead into a better and growing future.

However, with this less developed or developing stage, India is now the centre point of attraction due to the facilities, culture, high skilled labour also the vital point of cheapest labour with a good robust government, rules and regulations which can always be beneficial for any sort of international operations, with excellent handling area for a FDI in future and more ventures with India can be a safe and secure site even during this time of recession.


5. Reference

1. Moreland, W. H. (1920) India at the death of Akbar, Macmillan and Co, Ltd London, Adamant media corporation.

2. Rothermund, D. (1988) An economic history of India from pre-colonial times to 1991, 2. Rothermund, D. (1988) An economic history of India from pre-colonial times to 1991, Croom Helm, Ltd.

3. Lewandowski, S.J. (1975) 'Urban growth and municipal development in the colonial city of Madras, 1860-1900' The Journal of Asian Studies, Vol. 34, no.2, February, pp. 341.

4. Anstey, V. (1977) The economic development of India, New York Times Company, ARNO presses.

5. Tikku, A. (1998) 'Indian Inflow: the interplay of foreign investment and intellectual property' Third World Quarterly, Vol. 19, no. 1, pp. 87-113.

6. M Nicholson, `Faltering steps on the upward path', Financial Times, 19 November 1996, Survey III.

7. Sharma, S. K. and Srinivasan, R. (2008) 'Perceptions of foreign players for effective positioning in India' , Management Decision, Vol. 46, no. 10, pp. 1465-1481.

8. Halepete, J. and Seshadri Iyer, K. V. (2008) 'Multidimensional investigation of apparel retailing India', International Journal of Retail& Distribution Management, Vol. 36, no. 9, pp. 676-688.

9. Srivastava, S. (2006) 'The role of foreign direct investment in India's services exports: An empirical Investigation', The Singapore economic review, Vol.51, No.2, pp. 175-194.

10. Sahoo, D. and Mathiyazhagan, K.M. (2003) 'Economic growth in India: Does foreign direct investment inflow matter?' The Singapore economic review, Vol.48, no.2, pp.151-171.

11. Aggarwal, R. (1999), 'Technology and globalization as mutually reinforcing forces', Management International Review, Vol. 39 No.2, pp.83-104.

12. Dossani, R., Kenney, M. (2004), 'Lift and shift: moving back office to India', Information Technologies and Development, Vol. 1 No.2, pp.21-37.

13. Bardhan, N. and Patwardhan, P. (2004) 'Multinational corporations and public relations in a historically resistant host culture', Journal of communication management, Vol.8, no.3, pp.246-263.

14. Budhwar, P. (2001), 'Doing business in India', Thunderbird International Business Review, Vol. 43 No.4, pp.549-68.


[1] http://www.fdi.net/country/sub_index.cfm?countrynum=93>

[2] http://www.indiavision.com/business_laws.html

[3] http://www.iptu.co.uk/content/pdfs/INDIA%20RELATED%20ARTICLE/Joint_Ventures.pdf

[4] http://www.geert-hofstede.com/hofstede_india.shtml

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