The purpose of this report is to examine and evaluate the economic state of India in terms of economic growth, political economy and foreign direct investment. This report will also assess and criticise the drivers and obstacles of economic growth in relation to India and weather the legal, political and economic systems in place are inhibiting or optimizing India’s economic growth.
Describe the (current rather than historical) country context including current demographic data and other contextual data relevant to the assignment brief e.g. cultural aspects of the country that are important for international business, natural resource endowment, particular skills (implied by key industries))
India is a diverse nation, encompassing multiple beliefs, cultures and identities. 79.8% of India’s population identifies with Hinduism. In order to be a successful business in India it is important to understand how they manifest these beliefs in to their business environment (Office and Limited, 2017.) Cambridge economist Joan Robinson when referring to India said “Whatever you can rightly say about India, the opposite is also true.” (The Economist, 2017) This demonstrates that India cannot be accustomed to generalizations and in terms of integrating in to their business environment one must adapt to manifest these beliefs (Office and Limited, 2017.) India still suffers from a caste system which promotes inequality and this can also be seen across the business working environment with people from lower class backgrounds less likely to be hired.
India’s warm and tropical climate along along with annual monsoon means it is agriculture rich. 60.5% of land usage is for agriculture (Cia.gov, 2017). As a result, agriculture has always been the dominant job sector and contributes to half of India’s labor force. Despite this, the ‘service sector is the major source for economic growth, accounting for two thirds of India’s output.’. Recently the technological industry in India has resulted in India being regarded as a global player. "Change in demand and technology is changing the nature of jobs."
India is natural resource rich which makes India the ‘18th largest export economy in the world,’ According to the OEC website, the main exports of India are refined petroleum (9.9%) and diamonds (9.3%) mainly to USA and UAE and contributed to 19.18% of India’s GDP in 2016 (Atlas.media.mit.edu, 2017). Exports are beneficial to India’s economy along with other industries such as retail and textiles, pharmaceuticals and steel also which contribute greatly to India’s $6.57K GDP per Capita in 2016.
3. i) Explain briefly the different types of political, economic and legal systems that make up the political economy of a country
Political systems affect the economic environment and influence the socio-economic external factors affecting businesses. Government can offer incentives such as lower tariffs, trade control, or tax free zones to attract large multi national companies which can boost the economy and have a positive multiplier effect. Equally, political systems can also hinder economic growth by increasing interest rates and tax. A recent economic downfall due to political decisions would be Brexit which has ultimately reduced the strength of the GBP pound.
Political Economy is defined in Global Business Today as the ‘political, economic and legal systems of a country’; to stress that these factors influence and evolve from one another and are therefore interdependent upon each other for economic ‘well being’. The differences between these factors also navigate the international business principals specific to the country.
When examining political systems in relation to political economy, it is ‘the system of government in a country.’ This can be branched in to 4 distinct groups based upon ideologies, Individualism and Collectivism which then branches down further in to democratic or totalitarian government. Collectivism and totalitarian control is found hand in hand and vice versa for democracy and individualism which is all about the expression and freedom of ideas and beliefs. In a modern context this is essential in stimulating entrepreneurs and boosting the economy. Some countries still believe in the communism ideology proposed by Karl Marx however they are moving away from economic limitations by shifting towards a market based economy system which is more beneficial to the economy. State owned enterprises were established after World War II due to social democrats proposing that it was essentially for ‘public good rather than private profit.’ Unfortunately, this only contributed to stagnating economic growth as their monopoly position meant that there was no competition and continuous government funding equated to inefficient services. Aristotle proposed ideology of free market economies which run on a supply and demand model found it most beneficial to undergo privatization and therefore remove the monopolist status as this was found to be most productive.
A representative democracy followed by most western civilizations where the ‘political system is by the people by elected representatives.’ Whereas, totalitarianism is the practice of ‘absolute control over all spheres of human life,’ mostly demonstrated by North Korea. Theocratic totalitarian is the political system is that which governs on the basis of religious principals, most profoundly expended across the gulf in their practice of a theocratic legal system in the form of Islamic law. It is perceived to ‘limit freedom of political and religious expression.’
Economic systems where individualism is practiced over collectivism are more likely to be market-based economies where state owned enterprises have been privatized and production is based upon a supply and demand model. In contrast to this, a command economy is where ‘allocation of resources’ is determined by the government. However, the fall of the Soviet Union has indicated that this economic system is flawed as it stagnates economic growth due to a monopolist status which means there is no incentive for the enterprise to improve their services for the general public. Many countries have also evolved to become ‘Mixed economies’ which integrates both the free market and command economy.
Lastly, legal systems are immensely important in political economy as they determine the ‘manner in business transactions are to be executed.’ A legal system is ‘ a system of rules which regulate behavior.’ When examining the legal systems it is important to distinguish between international standards or ‘norms’ and those which have ‘the force of law. There are 3 legal system types which consist of Common Law, Civil law and Theocrats Law. Common law which was derived from England is ‘ a system based on tradition, precedent and custom.’ It is the most flexible legal system as it based upon interpretation and draws upon previous cases or ‘tradition’ to come to a judgment. Civil war on the other hand, is based upon ‘a system of detailed set of written laws and codes,’ which is more rigid as the law can only be ‘applied.’
ii) India currently inhabits a population of 1.2 billion people and therefore makes it the worlds largest democracy, recently established when India gained independence from Britain in 1947. As a result, India’s parliamentary system is largely based upon the UK’s. A constitution dedicated to justice, liberty and equality for all citizens is based upon the Government of India Act which was passed by the British parliament. India’s parliament consists of 29 States and 6 Unions each differ in legislations however Union has more power in judicial courts. Hints of Theocratic legal traditions can also be observed with 70.9 % of the population of Hindu’s having significant influence in political parties. The Lok Sabnha (The House Of People) mirrors the House Of Common, made up of 530 elected state representatives. India therefore follows a representative democracy and public funds are at the discretion of the leading party which happens to be at present the Bharatiya Janata Party. India has both a president from the head of union executives and a prime minister who is the leader of the elected party and holds greater political power.
India follows a common law legal system inherited from over the influence of 200 years of British colonialism. India’s legal system however is also dictated by the statutory and regulatory law. The judicial system follows a framework in line with The Constitution of India with the Supreme court being the highest court in the federal structure followed by High courts. Pre-independence Indian laws were passed in the Privy Court of London and this court still holds some judicial power in India.
India’s adopted a mixed economy was established after their colonial struggle. Influenced by the political pressures at the time when the Congress Party increased their control over the economy. A radical approach towards state intervention around the 1970’s meant that all commercial business was to be approved by the government this placed limitations on entrepreneur businesses and stagnated economical growth. Therefore, the freedom to do business in India was difficult and this acted as a barrier for international companies. Nehru, the prime minister at the time was inspired by the communist rule of the Soviet Union. India was shifting towards a closed economy or ‘self reliant economy’ from 1947-1974. State ownership was being enforced on most heavy industries such as steel, textiles and agriculture which only contributed to slowing economic growth. India’s economy only started to become more liberal economically when industries were delegalized around the 1990’s.India underwent an economic reform when their annual GDP was $310 and 40% of their population was living in poverty. Neighboring countries such as Taiwan and Singapore had a much faster rate of economic growth. (MUKHERJI, 2008) State enterprises such as electricity was privatized such as oil and steel. Foreign investment was accepted with open arms with incentives such as shareholders being able to own 51% of a company when previously it was only 40%. Tariffs on imports were reduced as well as tax. As a result, GDP grew from 1994-2004 and boosted by Foreign Investment to 7% annual growth in 2014. (Hill and Hult, 2017)
4. ECONOMY
i) Economic growth can only be valid under ‘defined economic and social conditions.’ (Kuznets, S.) Here, Kuznets is referring to the socio-economic factors which is used to measure economic growth such as Gross National Income (GNI) per head of population. An economic indicator which shows the annual income received per resident of the country. However, due to the generalization of GNI the measure does not take in to account costs of living and a higher GNI does not necessarily mean the country is developing economically as there can be wealth inequality between classes, in India for example. However, when paired with purchase power parity (PPP) it provides a more effective comparison, using the USA as the base adjustment. PPP is defined as ‘an adjustment in gross domestic product per capita to reflect differences in the cost of living’. In order to assess economic growth of a country we must look at how much profit is generated by all the goods and services produced by a country in the form of Gross Domestic Product (GDP). GDP demonstrates the growth of an economy annually. India and China although they are perceived as relatively poorer countries in comparison to the United States there economy is growing at 3 times of the US with China’s economy being forecasted to overtake the US for largest economy in the next decade. Drivers of economic growth is associated with resources, industries, labour inputs and technological advancements. It can also be catalyzed by Foreign Investment and bilateral aid.
Black economy?
In addition to this, economic growth can also be interdependent on social growth as a population. HDI is a common measure of economic and social growth as both factors are interdependent. It takes in to account measures of economic growth such as GNI, GDP and PPP along with social factors such as literacy rates, education statistics and crime rates. Generally, countries with a higher quality of life also has an impact on standard of living. Amartya Sen, noble peace economist winner, argued that it should be equally political processes as it is economic processes, this is because economic measures are too narrow. Social factors such as literacy rates should be emphasized as it can have a huge economic impact on a developing country, ‘The HDI was created to emphasize that people and their capabilities should be the ultimate criteria for assessing the development of a country, not economic growth alone.’ (Hdr.undp.org, 2017) HDI is defined as ‘an attempt by the UN to assess the impact of a number of factors on the quality of human life on a country,’ (Hill and Hult, 2017) and is arguably the most integrating measure of economic growth using a range of socio-economic factors.
ii) Examine the economic growth of your chosen country within the last 5 years identifying which of the drivers or obstacles that you discussed earlier apply to your chosen country.
India’s main driver of economic growth in the last 5 years is shifting more towards the free market economy. In a time of economic liberalization, economic policies in different states need to converge so that the wealth inequality gap between the richer and poorer states decrease. (Sachs, Bajpai and Ramiah, 2002). Economic reforms include large capitalization of India’s technological center.
According to the Economic Freedom Index 2017 India received a ranking of 143rd . In addition to this, government spending has depreciated, accounting for just 27.4% of total output of GDP. Labor freedom has also declined due to the regulatory framework which is reported as being ‘burdensome.’ A ‘weak’ legal framework however is beneficial to the informal economy which is still a significant source of employment nevertheless this does lead way to mass corruption and poor management of public funds. India’s emerging economy and shift towards economic liberalization is therefore hampered due to poor governmental responsibility and is to the extent of India’s economic freedom. This demonstrates the significance of political and legal systems on the economy and how each factor s reliant upon each other in order to develop as a nation.
When examining economic growth of India in the last 5 years there has been a steady increase since economic reforms in 1994. GDP has grown by an average of 7-8% since 2004. Yet when looking at the last 5 years, GDP value stalled from 2012-2013 and only rose by 4.5%, this is due to a decline in construction and mining also reforms of foreign investment policies in the retail sector one of India’s most prosperous industries. In addition, economic growth stalled because of a decline in export prices and high interest rates by the Reserve Bank of India. India’s economy is dependent upon Foreign Investment which can have negative impact and a reliance on high borrowings of funds which can ultimately lead to debt. This is supported by the negative trade balance at present (WorldBank.org). In comparison to the previous decade, India’s economic growth is occurring at a slower rate with forecasted GDP growth by the International Monetary Fund being revised regularly, for instance 2011-2012 GDP was revised to 8.9% from 9.3% estimate. Fortunately, India’s economy made a recovery after 2012 as structural policies have been revised in order to attract investment. Inflation was also softened. In 2013, GDP figures was at $1.857 trillion, in 2016 this has risen to $2.264 trillion. India also made it on to the World Banks top 100 Ease of Doing Business global rankings
for the first time. As India continues to revise and implementing a ‘strong reform agenda’ in order to attract international businesses. India is also one of the top 10 reformers by implementing 8 out of 10 ‘Doing business Indicators.’ (World Bank, 2017)
Narendra Modi the current PM is credited for building positive business relations with the US. As a result India’s technology, manufacturing and defense sectors have rapidly modernized. This is an example that a strong political system is essential for economic growth.
GNI has also steadily increased from 2011-2016, from $1480 to $1680. However, India’s economy although it is growing still needs to address pressing issues such as corruption. Development may also be hampered due to India’s major subsidies by the International Monetary Fund falling below 2% of annual GDP (Heritage.org, 2017).
5. (i) Define and explain Foreign Direct Investment (FDI)
Foreign Direct Investment (FDI) is defined by the OECD as “Foreign direct investment (FDI) is a key driver of international economic integration.”. OECD’s report identifies that when implemented correctly FDI can provide ‘financial stability, promote economic development and enhance the wellbeing of society.’ Used by policy makers to attract international investment. This can be achieved by making it easier to do business across borders by removing regulatory barriers and allowing the country to be more globally integrated by liberalizing the marketplace. Technological innovations have also catalyzed ‘cross-border financial flows.’ “Direct investment is a category of cross-border investment made by a resident in one economy (the direct investor) with the objective of establishing a lasting interest in an enterprise (the direct investment enterprise) that is resident in an economy other than that of the direct investor.”
Measures of FDI consist of FDI flow, stock, outflows and inflows. This flow of FDI