VWA-Studienakademie Stuttgart

How India Attracts Foreign Investors

Jennifer Joksch

Table of Contents

Section 1: India’s general Conditions for Foreign Investments ... 1

1.1 Indian History and its economic Reforms ... 1
1.2 India’s Economy ... 3
1.2.1 The economic Structure ... 3
1.2.2 The Impact of Foreign Investments ... 4
1.3 Political Economics - Challenges India is facing today ... 5
1.4 Social Conditions ... 7
1.4.1 Social Developments and Poverty ... 7
1.4.2 Emigration ... 8
1.4.3 Business Culture ... 8

Section 2: Foreign Investments ... 8

2.1 Possible Strategies for Investments in India ... 8
2.2 India’s Attractiveness ... 10
2.3 Foreign Companies in India ... 11
2.3.1 Foreign Investments ... 11
2.3.2 German Investments ... 12

Section 3: India’s special Structure ... 12

3.1 The physical Structure ... 12
3.2 The demographic Structure ... 13
3.3 Economic Areas in India ... 13
3.4.The Special Economic Zones ... 14

Section 1: India’s general Conditions for Foreign Investments

1.1 Indian History and its economic Reforms

The history of today’s Indian civilization goes back to at least 5,000 years. Until the British conquest in the 19th century, the Indian history was similar to the European. Indian colonial time started with the landing of the Portuguese seaman Vasco de Gama in 1498. In the following century more and more European countries entered into trade with the Asian subcontinent. Britain dominated the trades and gained full military and economic control by 1857, followed by the founding of the Indian Empire, ruled by Queen Victoria’s viceroy. Economical structures were formed to the purpose of Britain’s colonial interests but at the end of the century the awareness of Indian nationalism and culture rose. After World War One Indian strive for Independency was strengthened by two key figures: Mohandas Karamchad Gandhi (also known as Mahatma Gandhi) was not only able to mobilize the rural population, who had been ignorant, exploited and apathetic, but also to unite Hindus and Moslems in the fight against the cast system. With Jawaharlal Nehru as president of the Congress Party Great Britain granted parliamentary self-governance for the provinces in 1935 and allowed elections in 1937, followed by a total breach between Hindus and Moslems. By 1947 Gandhi’s principles of nonviolence, passive resistance and civil disobedience beard fruits: Great Britain left the Asian subcontinent. Still trying to unite Moslems and Hindus, Gandhi was murdered by a Hindu-extremist in 1948 followed by the empire’s divide into India and Pakistan. Another war in 1971 caused the separation of Bangladesh from Pakistan.¹
On January 26th 1950 the constitution of the “Sovereign Socialist Secular Democratic Republic of India“² became effective – its structures remain until today. India is the largest democracy in the world with a population of 1.1 billion inhabitants and an area of 3.3 million km², which survived crisis and remains stable despite of its enormous heterogeneity, an unrivaled cultural, social and economic variety. But still a free capitalist market was not able to prevail: Nehru favored a model of a centrally driven and planned economy to fulfill the vision of an “Independent India” - following the model of the former Soviet Union. The mixed economy should protect India from foreign investments and secure its independency and self-reliance. However it lead to India’s isolation from the world market. The lack of competition caused low quality and zero productivity, inefficiency and ineffectiveness of Indian companies: the annual economic growth of 3,6% between 1951 and 1981 was not enough to field the rapid growth of population. The new prime minister of 1984, Rajiv Gandhi, brought new ideas to the Indian economy: Knowing that an economy was generally more efficient when established on competition as well as seeing an autarchic economy as an utopia, he was the first politician to discern the vision of a renewed Indian economy with an open market. Still his reforms were not radical enough. Growing National Debt up to 8,5% of GDP, a trade deficit up to 6 billion US$ due to two oil crisis in 1973 and 1991, and increasing foreign monetary support followed. An inflation rate of 17% and a null growth by 1991 forced the new regime under Narasinha Rao to decide on a radical reform and transformation of the Indian economic system, which has not been concluded by today. Additional reasons were:³

• Declining support from agencies: the International Monetary Fund (IMF), the World Bank and the Asian Development Bank (ADB)
• the end of the Soviet era forced India to integrate more in world economy
• China – always seen as an opponent, competitor as well as a threat since the border wars in the 60’s – that had opened its market in 1978 and since then performed phenomenally, caused pressure to pursue a similar path with similar success

The core issues of the economic reformation were the manufacturing industries, trade, foreign investments and technology, resulting in an open market with gradually withdrawal by the Indian government. The following are the most important changes that have been announced until today:⁴

a) devaluation of the Indian Rupee: since February 1993 the government does not decide on the exchange rate anymore. Instead it is oriented on the market conditions.

b) greater allowance of foreign interests and shares in joint ventures from 40% to 51% of the ownerships fractions by 1991. Today foreign investments are welcomed in almost every sector of the Indian market and 100% of foreign ownerships fractions (foreign subsidiaries) are possible

c) easier procedures of approval for foreign investments: no approvals by the governments are necessary anymore, except for certain sectors on the government’s “black list”

d) reduction of import restrictions: by today 95% of products are free of import restrictions

e) reduction of import duties as well as tax rates: between 1990 and 2000 the average custom rates were lowered from 87% to 30% and the maximum rates from 35% to 39%

f) privatization of public enterprises since the mid 90’s

[...]

1 Wamser, J: [Standort], pp.28-44
2 Ministry of Information and Broadcasting, p. 25
3 Wamser, J: [Standort], pp.28-44
4 ibid.