India and Economic liberalization - Assignment Example

India & Economic liberalization By the end of 20th century, the world had realized that the next century is going to be an Asian century on economicground. The reason behind this view was neither Japan nor the South East Asian tigers comprising ASEAN; it's the world's two most populated nations namely China and India. Many economists called this advent of the two nations as the arrival of Chindia. The China has now become the factory of the world while India is a service sector giant while leading in the sectors like software development and BPO industry (Perkovich, 2003). Though both have now become a very successful case of FDI channeled development model but the structure of economy of these two nations are at the two ends of any of the economic theory. In China, being a one party communist state and very strong central government economic decisions are taken irrespective of what is actually the people at ground wish while in India, being a secular democratic nation with multi-party political system decisions related to economy are often taken while considering the compulsions like electoral promises and is very much populist in nature. The governments which includes both central and states are always under pressure from both opposition parties and popular public demand and many a times the decisions get affected due to this factor. At the same time, India's economic stand for more than forty years of its independence had been protective and least connected with the world (Bromley, Mackintosh, Brown & Wuyts, 2004, p. 196). Its neutral stand during the cold war and strategic military relationship with USSR caused very less interation with western world led by USA. The country continued to pursue its independent political stand and entered 21st century, its economic structure saw extreme changes and the country now boasts of having the USA as its largest trading partner and at the same time, US has also found great interest in world's largest democracy and the recently signed nuclear treaty between the US president George Bush and Indian Prime Minister Dr. Manmohan Singh clearly underlines the growing interest between the two. So the new India or better to say the liberalized India post reforms presents a beautiful case where Kenneth Waltz's theory of International Relations which states that the action of a state can often get affected due to pressures being exerted by international forces and thereby limiting the options available to them(1979). The neorealist or structured model has been developed with the aim to explain the repeating patterns of state behavior and power and its extent which is the combination of its capacity to resist external influence while influencing others to behave according to its wishes (Extra Material, p. 6). The liberalization process in India began in early 1990s in the tenure of the Prime Minister P. V. Narashimha Rao under the leadership of then Finance Minister Dr. Manamohan Singh. The reform process and India's integration into world economy was widely appreciated with International Monetary Fund or the IMF calling it a long term corrective measure. The reform process which began with India signing GATT and becoming a part of WTO was widely appreciated by almost all economic quarters (Bromley et. al, 2004, p. 173). But still the opposition led by communists and the BJP were dead against the proposal. The Narashimha Rao govt. continued with his reforms though slowly while destroying the opposition unity by making non BJP opposition parties believe that the fall of the government will make way for BJP to grab power at centre. BJP at that time was regarded as a communal political party and there was a widespread fear that once coming into power this party will make solid changes to the current political structure of India and might convert India into a single party ruled state. This fear helped the Narashimha Rao govt. to complete its full term and during this period, the Indian economy became irreversibility liberal (Bromley et. al, 2004, p. 167). After entering into a new economic fold, the Indian State's decision showed the signs of getting influenced through external international forces which includes IMF, World Bank and other trade partners including US and EU. On economic issues, the Indian government for obtaining loans from IMF and World Bank had to observe their demands. Some of the demands that IMF made were import liberalization, tariff reduction, decontrolling the food grains market, decreasing subsidies in food and agricultural sector, PSU privatizations, enabling law for attracting FDI in manufacturing and infrastructure projects and opening the domestic banking and insurance sector i.e., financial liberalization (Bromley et. al, 2004, p. 199).. The Indian government reacted cautiously but in a considerably long period, opened some of the sectors with foreign players holding majority stakes while in most of the sectors FDI was promoted to some percentage that may be 26 percent or up to 49 percent (Govt. of India, 2005). The economic reforms of Indian economy went into super fast mode during the regime of BJP. The BJP government was found to be pro-reformist with measures taken by continued to follow the path initiated by the Narashimha Rao Government. This stand of BJP was in sharp contrast to what it had observed during the beginning of the reform movement (Bromley et. al., 2004, p. 168). Under the BJP government, India tested five nuclear weapons and was widely criticized by most of the countries (Perkovich, 2003). The US government imposed a series of economic sanctions and the relationship between the two nations started showing down turn. But the Indian economy showed resilience and even the US congress and other western nations realized this fact and the sanctions were removed in a number of phases. The terrorist attack of September 11 2001 changed the scenario and the world under US leadership started considering terrorism as an international threat and India being a victim of Pakistan sponsored terrorism gave unequivocal support to US led war against terror (Perkovich, 2003). But the real success of India has been observed in form of the success of software giants like Infosys, TCS, Wipro and many smaller ones (Bromley et. al., 2004, p. 209). These companies opened new era of business through outsourcing of jobs from US and this led to the advent of many of the US based MNCs like Accenture, IBM, GE and others investing a lot in India. The condition has become so different that the growth of Indian firms is dependent on US. Now the other sectors like retail, automobile, telecommunication etc. are getting large input through FDI channel (Perkovich, 2003). Now this US supported growth of economy has made the government to follow foreign policies with extra care so that the interests of US must be taken into account and the mutually beneficial relationship between the two countries should remain intact. These things are clearly showing that the country's stand on different international issues have started getting affected by economic policies of developed nations especially USA and sometimes the country had to take stands different than that of cold war era on international issues like US invasion on Iraq or the Iran's defiance of US and IAEA (Kapila, 2006). References Extra Material. P. 6 Govt. of India (2005). Investing in India Foreign Direct Investment -Policy & Procedures Department of Industrial Policy & Promotion, Ministry of Commerce & Industry, Government of India, New Delhi [Online] Available from: http://dipp.nic.in/manual/manual_03_05.pdf [Accessed 25 March, 2007] Kapila, S. (2006). Iran's nuclear issue: India well advised to be objective. South Asia Analysis Group[Online] Available from:http://www.saag.org/%5Cpapers17%5Cpaper1694.html [Accessed 25 March, 2007] Perkovich, G. (2003).The measure of India: what makes greatness 2003 Annual Fellows' Lecture, University of Pennsylvania. [Online] Available from: www.sas.upenn.edu/casi/publications/Papers/Perkovich_2003.pdf [Accessed 25 March, 2007] S. Bromley, M. Mackintosh, W. Brown & M. Wuyts (2004).Making the International: Economic Interdependence and political Order. Pluto Press Waltz, K. N. (1979).Realist Thought and Neorealist Thesis 1979. Journal of International Affairs [Online] Available from: http://classes.maxwell.syr.edu/PSC783/Waltz44.pdf [Accessed 25 March, 2007] Mexico & Economic Liberalization after NAFTA The year 1994 saw the beginning of a new era in trade relations among three major countries of North America. With the launch of North America Free Trade Agreement i.e., NAFTA, comprising of world's two most powerful economies USA and Canada and Mexico, the whole economic situation of the region has become a matter of close observation. If the case of Canada and USA is looked upon, there already exist a number of bilateral agreements on issues from defense, border security to trade and commerce. But from Mexican point of view, NAFTA has been much more than a simple regional trade agreement. Despite being a platform for boosting trade, participation of Mexico in NAFTA has been seen as the most effective tool to achieve two important missions. The first one has been for the purpose of directing the Mexican economy to an export-led growth path on a non-inflationary note. With USA as the major economic partner, NAFTA has been seen by the Mexican government as a platform to initiate large scale export to its much superior economic partner. Internal structure of the Mexican economy has also been made available on a platter to get a change with new set policies ensuring free trade initiative and drastic reduction in terms of tariff and quota issues to promote intra-regional trade (Moreno-Brid, Validiva & Santamaria, 2005). The second objective of the above mentioned reform process was to make the nature of this process very much irreversible. Though NAFTA accord has made sufficient provision so that any attempt to be made by the governments of future would cause the imposition of international legal and extra-legal constraints thereby deterring any attempt of returning back to the days of trade protectionism but the Salinas administration along with other supporters blunted all attack by its opponents to ensure the path of reform unruffled. The whole purpose of this treaty for Mexico was to make the nation a very lucrative region for the manufacture of products that can easily be exported to USA (Moreno-Brid et. al., 2005). Now it's been more than a decade that NAFTA came into existence and if the economic condition of Mexico is viewed then the expectations that was raised by the Salinas govt. has actually been partially satisfied. The country has made considerable economic advancements and these things are visible through the era of small budget deficit, low inflation that followed the treaty. Also the export of non-oil products has reached a very high level with surge in Foreign Direct Investment (FDI). But euphoria associated with the treaty loses its charm when the number of jobs being created in the liberated economy is taken into account. The rate of growth of the GDP is still below the level which the economy had attained in days much prior to liberalization (Moreno-Brid et. al., 2005). So, for Mexico, the outcome of being a part of NAFTA has been very limited. If the limited gains are compared with what had been expected before, the NAFTA will appear more as a failure than a success. In 1994 only, the possibility of this sort of result was predicted by eminent US political scientist Stephan Krasner. While depending on realist model Krasnar had clearly stated that though NAFTA is an excellent attempt to have a very beneficial regional agreement but from Mexico point of view it's not going to yield any golden egg (Bromley, Mackintosh, Brown & Wuyts, 2004, p. 264). The extreme differences in the business culture and size of the economies of US and Mexico will be a very important reason behind the limited success of the agreement and expecting a broad result of something like the one between US and Canada can never be achieved (Extra Material, p. 10). The economic policy of US has been more of imperialistic in nature. This very US policy gives rise to anti-Americanism. The actually reduces the extent up to which both US and Mexico could have cooperated. This is very much in agreement to Waltz theory, which has clearly mentioned that the international condition is very much anarchic due to the lack of any common controlling authority giving rise to the issues like national threat and rise of conflicts of both military and economic nature (1979). As a result the apprehensions with rich nations fearing the rise of issues of illegal migration and human trafficking, the extent of cooperation between the two states will be very limited (Hollifield, 2006). The states would be found more concerned towards maintaining their relative power in relation one another and at the same time will avoid any permanent loss to existing relationship (Bromley et. al, 2004, p. 278). The much analyzed theory of Waltz on International Relations valid in almost every case can be successfully used in understanding the case of NAFTA and Mexico. The history is full of differences and conflicts between the US and Mexico with Mexico in constant fear of losing its sovereignty. This fear and the bitterness of past has always been a very important reason the success of any pact between Mexico and US. Even the economic policy of US has widely been considered as imperialistic and Mexico had become a part of NAFTA for increasing its exports especially to US, hence the Mexican establishment will always be under the influence of US economic policies and decisions and may have to modify its international economic and business policies to suit US and the economic benefits Mexico is having with the trade with such a large neighbor (Bromley et. al, 2004, p 264). So the fear of the past was the invasion over geographical boundary with Mexico preferring Latin culture rather the pro-US North American trend. Now becoming a very important part of North American economic group, Mexico is under continuous fear of losing is control over its economy and currency and might have to face economic colonialism. References Extra Material. P. 6 Hollifield, J. F. (2006). Trade, Migration and Economic Development: The Risks and Rewards of Openness [Online] Available from: http://www.dallasfed.org/news/research/2006/06migr/hollifield.pdf [Accessed 25 March, 2007] Moreno-Brid, J. Validiva, J. C. R. & Santamaria, J. (2005). Mexico: Economic growth exports and industrial performance after NAFTA, Economic Development Unit [Online] Available from: http://www.wilsoncenter.org/news/docs/Mexico_after_NAFTA_ECLAC.pdf [Accessed 25 March, 2007] S. Bromley, M. Mackintosh, W. Brown & M. Wuyts (2004).Making the International: Economic Interdependence and political Order. Pluto Press Waltz, K. N. (1979).Realist Thought and Neorealist Thesis 1979. Journal of International Affairs [Online] Available from: http://classes.maxwell.syr.edu/PSC783/Waltz44.pdf [Accessed 25 March, 2007] Read More