Current foreign economic policy of India Essay

 In terms of Purchasing Power Parity (PPP), the Indian economy is at the third rank in the world.(CIA: The World Fact Book – India 2004-05).

The country has clocked Gross Domestic Product growth rate between 7 to 9 percent in recent years. Today, India has been accepted as a major emerging force in the world’s financial markets.With over a billion people to cater, the outlook for Indian economy was not always so rosy. It had to face its chunk of recessions and setbacks.

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The end of cold war and subsequent irrelevance of Non-Aligned Movement had brought the Indian economy to its knees by 1991. Suddenly, the socialist policies backfired with the loss of major trade partner in Soviet Union. India, which had blocked foreign direct investment in many fields including Banking, Insurance and Telecommunications, was reduced to even mortgaging its gold overseas. India was largely and intentionally isolated from the world markets, to protect its fledging economy and to achieve self-reliance. Foreign trade was subject to import tariffs, export taxes and quantitative restrictions, while foreign direct investment was restricted by upper-limit equity participation, restrictions on technology transfer, export obligations and government approvals; these approvals were needed for nearly 60% of new FDI in the industrial sector.The restrictions ensured that FDI averaged only around $200M annually between 1985 and 1991; a large percentage of the capital flows consisted of foreign aid, commercial borrowing and deposits of non-resident Indians.(Srinivasan TN, 2002) The protectionist principals and trade-tariff barriers on import were strangulating the economy. Heavy duties on import items had made the trading partners weary of buying from India.

Transnational trade follows simple logic of give and take. Unfortunately, India was not willing to expose its market to international manufacturers, insisting on protecting its local industry. The time was perfect to launch liberalization of trade policies and critical economic reforms.Dr Manmohan Singh, ironically the current Prime Minister, laid the foundations of India’s economic liberalization.

He was Finance Minister in the Congress led government under PV Narsimha Rao as the Prime Minister. Manmohan Singh had impeccable credentials as an economist to turn India’s economy around. There were three major elements of the liberalization policies.

First, India deregulated and liberalized all markets. Second, it vowed to increase competitiveness in all spheres of economic activity. Thirdly, the government learnt to live within its means of a strong budget constraint. All aspects of licenses and control were to be given up. The market that had proved to be the “most prone to imperfection” was that of the financial market. The reasoning behind this decision resulted from the belief that the government’s tampering in market forces led to the financial market’s inability to clear.(Arjun Sengupta, 1997).The two fundamental goals of India’s adjustment policy were to enter the global economy, through the “exploitation of benefits that accrue from economic independence,” and to win political maneuvering room.

(C. P. Chandrasekhar and Jayati Ghosh. (1993) Though the government was supposed to “get out of the economy,” and pursue more laissez-faire economic policies, there still existed institutional requirements for the smooth running of the economy. The predominant requirement was that the government, in a free market economy, provide regulatory institutions that implement policies with regards to competition, while protecting “people from negative, predatory externalities.

” (Murali Patibandla, 1997)Though only partially through her program of economic liberalization, fortunate for India, the deficit identified by Jeffrey Garten as being India’s “political instability,” turned out to be an asset. If India had had a “stable government,” international investors pulling their capital out of the “Asian Tigers” would have drowned India. Without an adequately institutionalized financial system, India would have gone the way of South East and East Asia. (Salil Tripathi, 1997). As Andrew Freris, the managing director at Bank of America Research in Hong Kong pointed out, “India is one of the least trade-dependent economies. Its economic cycle is entirely driven by domestic factors.” Furthermore, India’s total exports amount to approximately 10 percent of GDP. (M.

N. Panini, 1995).  AlThough the gradualist approach as well as India’s perceived political instability prevented what might have been to a repeat of South East-East Asia, the explanation for why India should gradually “liberalize” is precisely the lack of broad based, fully developed market and financial institutions.Import liberalization was undertaken with the expectation that it would promote more efficient export production, leading to improved export earning potential which would reduce the current account deficit (import and export deficit) alleviating the payment crisis that had obligated India to seek IMF assistance. (Ranjit Sau, 1993). Governmental expenditures were the first to be assaulted under the IMF stabilization package.

Governmental expenditures declined as a proportion of gross domestic product (GDP) from 11 percent during the 1986-91 period to 10.1 percent during the 1992-95 period. As a result of this, social programs became the first casualty of stabilization. The actual expenditure on rural development and social services declined by 0.4 percent of GDP between 1990-91 and 1992-93. Though the economy picked up after the IMF “programs” were implemented, the amount of public investment declined.10 One rationale for the decline in social entitlement programs and subsidies was that they were mis-representative, and heavily distorted.

Liberalization infused so much energy in the Indian economy, that the momentum has become almost surprising. Indian manufacturers upgraded themselves to make better products or to make parts of the finally assembled components. Reforms have opened doors for the much needed foreign direct investment and the outlook keeps improving every year.

(See Chart). The recent policies of setting up Special Economic Zones (SEZs), has added incentive for foreign investors to set up shop in India. These zones typically provide freedom from local tax regimes like excise, municipal duties, customs etc. (Ministry of Commerce and Industry).

This also culminated a boom in the employment through the vast field of Business Process Outsourcing (BPO). Biggest of Forbes 500 companies recently decided to transition or transfer some their operations to India due to the availability of low-cost, well-trained and vast resource of labor. Business Process Outsourcing (BPO) is the delegation of one or more IT-intensive business processes to an external provider that in turn owns administers and manages the selected process based on defined and measurable performance criteria.

It is one of the fastest growing segments of the Information Technology Enabled Services (ITES) industry. (BPO Industry in India – A Report) Another recent phenomenon that has pumped in lot of capital in India’s financial markets is the influx of the Foreign Institutional Investors (FIIs). Non-Indian firms with a fair track of integrity in financial dealings could enlist as FII with the Reserve Bank of India and the stock exchange watchdog: SEBI (Securities Exchange Board of India).

(FII Division, Securities and Exchange Board of India)  FIIs are allowed to invest in open equities, stocks, mutual funds, pension funds etc. Astonishingly, a lot of money has been invested by the tycoons of Middle East via Mauritius route. The underlying reason for this is the low interest rates offered by the financial institutions of most of the Islamic countries. (Economy Watch, 2005). The last two years have seen massive increase in the trends of FII investment and FDI in India.

(Indian Budget 2005-06). Also the stock exchange brokers expressed the reducing dependence of share prices on FIIs as the Indian industry was now standing up to the challenges and outperforming its competitors in the world.The confidence of burgeoning economy reflects in the Indian Industry.

The recent acquisition spree abroad by Indian companies like Mittal Steel may have come as a surprise to many developing countries. With one stroke, Mittal had become world’s largest steel maker by tying-up with Arcelor. (BBC News, 2006)Indian economy has truly arrived in the global arena.             ReferencesCIA: The World Fact Book – IndiaAvailable at:

htmlSrinivasan, T.N. (2002).

“Economic Reforms and Global Integration”. 17 January 2002.Arjun Sengupta. (1997) “Financial Sector and Economic Reforms in India.” Economic and Political Weekly.C. P. Chandrasekhar and Jayati Ghosh.

(1993) “Economic Discipline and External Vulnerability: A Comment on Fiscal and Adjustment Strategies.” Economic and Political Weekly. April 10. Vol.28, No.15; p.667-668.

Murali Patibandla. (1997) “Economic Reforms and Institutions: Policy Implications for India.” Economic and Political Weekly. May 17-23, 23-30. Vol.

32, No.20&21; p.1083.Asia.Salil Tripathi. (1997) “If OnlyYen.” Far Eastern Economic Review. December 4.

Vol.160, No.49; p.25.M. N. Panini. (1995) “The Social Logic of Liberalization.

” Sociological Bulletin. March. Vol.44, No.1; p.

45.Ranjit Sau (1993) “Costs of Stabilizing the Economy.” Economic and Political Weekly. April 10. Vol.

28,No.15; p.675.Department of Industrial Policy & Promotion Ministry of Commerce and IndustryAvailable at

htmMinistry of Commerce and IndustryAvailable at Industry in India – A ReportAvailable at: http://www.bpoindia.

org/research/bpo-in-india.shtmlFII Division, Securities and Exchange Board of IndiaEconomy Watch: Share of Top Investing Countries in FDI Inflows. Retrieved on August 9, 2005. Available at: Budget 2005-06Available at: News, 2006: Mittal Steel unveils Arcelor bidAvailable at:


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