Factors Affecting Indian Economic Growth
India is one of the fastest growing economies. Since introducing the concept of free market in 1991, the Asian country has experienced rapid growth and is predicted to grow even further. As at 2011, India was ranked 11th in terms of nominal GDP and fourth in terms of GDP purchasing power parity (PPP). India has one of the highest populations in the world and a bustling manufacturing sector. In addition to this the country has changed its economic policies since independence in order to propel economic growth further. It is also known to save a lot and this has helped it to stabilize and grow.
All in all there are several factors that currently affect the Indian economic growth and these include:
- Capital flows and Stock Exchange Market. India has had a very steady flow of capital from both foreign and local investors. In addition to this, the country also has a thriving stock market and this has helped it gain capital. With this amount of capital, India has less to worry about in case the GDP rates fall. This is because its currency can still get overvalued given its steady flow of capital.
- The RBI ranks. The currency of India largely depends on the rankings by RBI. The RBI is in charge of managing the balance of payments for India. Slight changes in the RBI assessments can have a huge impact on the currency of India and lead to either over assessment or under rankings of the country’s economy.
- Global currency trends of economically powerful countries. India like many other countries has economic and currency links with powerful countries such as US, UK, Japan, Canada and others. When the currencies of these countries are undervalued, India’s currency is also likely to depreciate. On the other hand an appreciation of these currencies has similar effects on India’s currency. These global currency trends therefore influence India’s economic growth.
- Political changes. Political setup in India also influences its economic growth. A change in the country governance often leads to changes in economic policies especially with regard to importation and exportation of goods and services. Political changes also impact on the tax rates and may affect the investment climate which ultimately influences the economic growth rate of the country.
- Energy and oil. India imports oil in large quantities. This is an essential commodity and it affects India’s economic growth rate. When crude oil prices in the world market fluctuate, India’s currency cannot remain stable. High oil prices result in high inflation rates hence overvaluing of India’s currency.
- Demographics and poverty rates. India is one of the most populous countries in the world and economists predict that its population will rise by over 300 million by 2030. In as much as this population growth may be good in terms of larger markets, it is costly to maintain and can only be fruitful if India puts in place measures to provide its citizens with social, educational and economic needs. Otherwise poverty rates which are already high will increase with this population and drag the economic growth rate of the country.
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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.
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.
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.
3.5 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.
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.
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