Document Analysis of Indian Market - Term Paper Example

Indian Market Final Report Document Analysis For a long time, India had an extremely protected economy, but with pressure from the international financial lending institutions, the government was forced to embrace a free-market system. The country has a large population and covers a substantial geographic area. With the reforms, the India’s economic growth rate increased from 3% in 1980s to 8-9% in 2000s (Panagariya 67). The reforms also saw the India’s economy shift from agriculture to being service-based. Financial de-regulation encouraged capital inflows in major sectors of the economy and sparked high consumption rates especially by rich and middle classes. Despite the gains made, the country has registered a lower rate of export growth and continues to report wide trade and current account surpluses. This paper examines the impact of globalization in India and discusses why the country is a suitable investment destination. The paper also compares both the Indian and the Chinese economies. Is globalization good for India? Researcherscontend that globalizationimproves access to information and leads to efficient production of goods and services. Moreover, globalization leads to increased cooperation between countries and enhanced trade between member states. Through enhanced cooperation and integration, the Indian economy has benefited greatly in a number of ways. Firstly, farmers are adopting technology in growing crops while literacy levels have increased to 74% (Virmani 61). Foreign institutions are collaborating with the Indian universities to improve the quality of education. Some students from foreign countries have also enrolled in the Indian universities, bringing with them both direct and indirect benefits. At the same time, the domestic firms such as Tata and Winpro have expanded their operations in foreign countries, hence earning India additional revenue. India has benefitted immensely from the technological advancements, to fuel its service-oriented industries. International firms have established subsidiaries in India to take advantage of the cheap labour and available natural resources. To improve the current economic performance the government has committed to introduce investor friendly policies and incentive-based schemes. While globalization has created a huge market for consumer goods and facilitated efficient production of goods and services, it has increased the gap between the poor and the rich. In the rural areas, Indians are affected by the high prices of goods and currently the employment growth rate in rural areas is negative (Graph 1). Lack of government protection, also means that they have to sell their goods at lower prices.In addition, youths in the country are leaving school in search of employment opportunities in call centre and BPO industry. At the same time, the globalization is promoting ideals of consumerism and individualism, hence affecting the traditional culture. More over, globalization is creating social problems for the under-priviledged people likethe tribes and the lower castes. Graph 1: Growth of Usual Status Employment in % In essence, globalization has created new business opportunities in Indiaand increased the GDP growth rate to 9% (Dossani 56). The balance of trade is also favourable which means the country is benefitting from the increased demand for its products and services.Despite the social problems and rising levels of corruption in the country,it is right to conclude that India is doing better than it was, during the pre-reforms era. The situation is similar in China, whereglobalization has increased economic development. As a result of the increased economic development, its citizens are enjoying rising per capita income and improvements in quality of life. For instance, the Indians have a greater choice of products, and they can buy foreign goods of all sorts. According to the world bank estimates due to the improved economic environment in the country, poverty had reduced by 400 million people, while the population’s life expectancy, GDP per capita and ‘adult literacy levels have risenby 65%’(Cohen 78). The shift from being a planned economy to a market economy has attracted huge investment from the multinationals especially from the western countries. The investment obtained from the foreign firms is invested in secondary and tertiary sectors. The positive impact of the increased investment in the country is rather evident in the Special Economic Zones, where employment and income opportunities are great. However, on the downside, higherrates of economic growth have led to environmental degradation. The government will also be required to address a stable political system and reform the labour market. Moreover, there are those who feel that ‘opening up of the Indian economy is eroding Indian’s sovereignity and independence and subjecting the national economy to internal finance.’ But how true are these allegations? Well they are true since globalization is associated with negative consequences such as loss of cultural traditions and westernization of the non-developed economies. Why would you invest in India? For long, the Indian economy was highly controlled, but it has since been liberalized. The market system was greatly hindered by the heavy customs barriers and tariffs while the nationalist and socialist ideals discouraged investors from venturing into the market.As a result of the controlled economy, the Indians could not access quality products. To maintain dominance in the market, the India government introduced the ‘licence Raj’. However, the country was negatively affected by a financial crisis which almost pushed it into bankruptcy. In addition, the bureaucratic stance adopted the government led devaluation of the local currency while the central bank’s credit and foreign exchange reserves reduced considerably. Faced with these challenges, the Indian government initiated a number of reforms which are discussed below. In the financial sector, reforms targeted the insurance industry, the stock market and the banking sector. The reforms in the financial sector were initiated in 1992, and as a result of this initiative, the private and foreign banks have increased their presence in the Indian market. The government also de-regulated the deposit rates, and interest rates while banking institutions were accorded operational freedom to invest in government securities and lending. In the insurance sector, the number of the firms has increased considerably and the consumers can now enjoy better services at an affordable cost. To preserve the gains so far achieved, the government has established the Insurance Regulatory and Development Authority to regulate the activities of the insurance firms. The Indian government also established the Securities and Exchange Board to strengthen the capital markets and attract more foreign investment. Infrastructure A key tenet of the ongoing reforms is the improvement of the existing infrastructural framework. Since 1991, the Indian government has established private-public partnerships to improve roads and ports. In addition, the government developed the Electricity Act to encourage private participation in the production and distribution of electricity. Construction of the roads is no longer a state monopoly and foreign investors can now invest in the country (Graph 2). As a result of reforms in the telecommunication industry, the tele-density has improved from 1% in 1991 to 70% in 2010 (Tirthankar 51). In addition, the number of the cellular players in the industry has increased tremendously. Already some of the companies such as Orange mobile, have expanded their operations in the Indian market. Graph 2 Industrial sector A number of initiatives were developed to spur growth in the sector industry, including the abolition of licensing. In addition, the number of sectors reserved for the public sector were reduced and the government relaxed the Monopolies and Restrictive Practices. Coupled with the financial reforms, the industrial reforms have spurred growth and have given greater operational flexibility to the industry. Due to such changes, foreign companies have expanded their operations in the Indian market. Already companies such as CocaCola, and Levi jeans have become omnipresent in India. By expanding the external market through reduction and removal of quantitative restrictions, the domestic competition has increased. Increased competition means that the consumers can now buy quality products and markets. They also do not have towait for long times to buy products such as refrigerator and washing machine. Many foreign companies like Lafarge, Hyundai, Oréal etc. have profited by this measure to enter the ever-growing huge Indian market. In addition, the domestic industry can now attract capital from the foreign investor to scale up their operations. Already companies such as The FDI regime continues to be liberalized and according to Tirthankar only a small number of sectors are barred from receiving foreign investment (62). Trade sector reforms Prior to the introduction of reforms, the Indiantradepolicy was characterized by high tariffs and pervasive import restrictions. To encourage exportation of goods to other countries, the Indian governments eliminated import and export licensing. The licensing system negatively impacted on the freedom of the traders to import goods from other countries. Moreover, the process of issuance of the import licenses was non-transparent. Import licences for capital goods and intermediates was abolished in 1993 while quantitative restrictions were removed on April 1st, 2001. In April, 2001, the government replaced the system with a collection of measures for protecting Indian producers. To further improve exportation and importation of products, the Indian government rationalized the existing taxation regime and shed off some of its trading functions. In this regard, direct taxes were significantly reduced while indirect taxes were simplified. The most affected was the excise duty structure which was rationalized while a nationwide single value-added tax system was adopted: in fact, a drastic lowering of the rates of customs duties has brought India’s tariff-level nearer to that of other countries. At the same time, a flexible exchange rate was adopted. Following these changes, the investors are protected from over-taxation practices, and thus can be able to realize good returns for the efforts. Trade liberalization has resulted in efficient allocation of resources and ultimately, productivity improvement in domestic industry. With trade liberalization, competition increased and firms are now to access cheap imported inputs. With more liberalization, it is expected that India will achieve a better economic environment and produce goods cheaply compared to other countries. Availability of labour The country has reported a changing population structure with the working population increasing significantly. The largepool of labour is able to support industrial growth while creating a ready market for consumer goods and services. The availability of cheaperlabour has seen a number of firms outsource some of their functions to the Indian companies. Beside the IT industry, the auto ancillary industry has been expanding and provides the investors with vast opportunities. Means, Methods and Conditions for investing in India With the liberalization of the economy, the information technology, telecommunications and financial sectors have registered steady growth. Prior to the reforms, the government was solely responsible for power generation and distribution, but the passage of the Electricity Laws Act in 1998, set the stage for private participation. Investors can also take advantage of the educated workforce, to set up call centres and participate in the infrastructure-related projects. To invest in the country, one could consult the ‘Invest India enterprise’ which is a joint venture between the Ministry of Commerce and the Federation of Indian Chamber of Commerce and Industry. At the state level, a potential investor could procure the services of the ‘Indutrial Development Corporation’. Investors should have adequate information about FDI, and which sectors that they can invest in. Currently FDI is not permitted in nuclear, real estate, tobacco and lottery industries.Communication between the investors and the Indian authorities is facilitated through Liason offices. Foreign investors have the permission of opening subsidiaries and projects offices, provided the contracting companies have obtained loans for a fixed period from Indian public financial institutions. Investors can operate in Special Economic Zones but should ensure they comply with existing rules and regulations. In particular, investors should adhere to conditions and rules that have been established by the Food Safety and Standard Authority, Preventions of Food Adulteration Act, and the Directorate General of Foreign Trade. Which is the best investment destination India or China? In an article titled, India’s economic growth and market potential: benchmarked against China, Gurumurthy uses an empirical approach to compare the Indian and the Chinese models (60). In this article, Gurumurthy also compared the market potential in China and India (61). China has adopted policies that increase consumer demand and entrepreneurial spirit while on the other hand, China’s economy focuses on resource mobilization. Gurumurthyfurther notes that China’s infrastructure is good-based and requires huge social investment whereas the Indian economy is service-based and is more sustainable (Graph 3). The sections below compares other aspects of the two economies. Graph 3: Exports of goods (% of GDP) The available literature has examined the factors that influence the investment decision-making processes. According to the available literature, the motivations of the foreign direct investment are based on the accessibility of cheap labour and resources, market access, price differences, inter-firm trade and government policy decisions (Dossani 67). Dossani further notes that countries with large GDP, high GDP growth rates and high international trade, attract large FDI flows. In this regard, Panagariya argues that investing in China is likely to be affected by the political environment, hence the need for the government to reform the state-owned entities in order to obtain the full benefits of inward foreign direct investment. The section below compares the economic sustainability and political environment in both countries. Growth sustainability China has a higher investment ratio compared to India, which means that China has been over-investing. Most of the FDI comes from the multinationals which have set up export-oriented operations. In contrast, India depends highly on domestic resource mobilization, and this explains why its investment ratio is lower. Although its investment ratio is lower than that of China it has proportionately higher effect on output growth. In other words, the India’s investment is more efficient and sustainable in the long-run. Based on these findings, short-term investors would rather invest in India, where sustainable returns are assured, than in China whose economic growth is uncertain. It is also important to note that China’s need for the foreign direct investment is related to the export oriented industrial structure. However, at the moment, this model has become saturated and China is no longer in need of FDI. In contrast, India requires financial investment to fund its current account and infrastructure deficits. Political environment Both countries are dominated by large state-owned entities, hence the need for more privatization. Investing in both economies is also affected by costs, licensing and governance challenges. To address thesechallenges, it is important for both governments to adopt more transparent political systems and embrace democracy. Both countries also have problems of policy inconsistency and corruption. As a result, investing in these countries is likely to be problematic in the long-term. However, India government is considered to be more democratic and it institutions are independent. A good example is the Reserve bank whose operations are independent from the government. In contrast, themonetary institutions in China are influenced by the members of the Communist Party. In addition, unlike China, India has a vigorous and opinionated press and its media is not state controlled. Based on these findings, it is right to conclude that unlike China, India has a positive business environment is more predictable and favorable, Labour costs Both countries provide the multinationals and investors with adequate and cheap labour. However, in China, the government’s decision to increase minimum wages is driving low-skilledmanufacturing jobs to other countries. At the same time, China’s one child policy has affected its long-term labour force and economic growth. In contrast, India not only has a huge population of 1.24 billion, but its age distribution is favourable. India also has a young population that will drive productivity and economic growth in the future. Moreover, a sizable share of its population is English speakers and thus are able to work comfortably with western companies. Domestic market As suggested earlier, China’s market is export oriented, and most of the goods produced in the country are destined for foreign markets. In contrast, a sizable share of products and services produced in India is destined for the domestic market. With the growing population, it is expected that the local companies will reduce over-reliance on the foreign markets. Besides having a larger domestic market, India is more financially open than China. The financial system in India is reasonably structured and permits intra-firm transactions. In sum, India and China are the fastest growing BRIC economies, and make a sizable contribution to the world output. With trade liberalization and market-oriented structural reforms, India has created new opportunities for the private sector. The India’s economy is primarily service-oriented and provides the foreign firm with prospects for cheap labour and sustainable growth. On the other hand, China’s economy is still state-controlled but with the huge trade and current account surplus, the country will continue attracting foreign investors. However, despite the huge gains made, the two countries are faced with serious challenges. India’s fiscal and current account deficit has been widening while the government is spending immensely in subsidies. On the other hand, despite China’s economic growth has been phenomenal, economists indicate that it will not be sustainable. Moreover, China’s future growth will be hinged on the domestic market, whose purchasing power is still very low. Works Cited Cohen, Stephen. India: Emerging Power. Washington, D.C.: Brookings Institution Press, 2001. Print Dossani, Rafiq. India Arriving: How This Economic Powerhouse Is Redefining Global Business.New York: AMACOM, 2008. Print Gurumurthy, Kalyanaram. Indias economic growth and market potential: benchmarked against China. Journal of Indian Business Research1.1(2009): 57 - 65 Panagariya, Arvind. India: The Emerging Giant. Oxford and New York: Oxford University Press, 2008. Print Tirthankar, Roy. The Economic History of India 1857–1947. Oxford University Press, 2006. Print Virmani, Arvind. Propelling India from Socialist Stagnation to Global Power, Volume 1: Growth Process.New Delhi: Academic Foundation, 2006. Print Read More