ABSTRACT

The study explores the impact of economics and institutional factors

on a country's economic growth. These factors include: trade, taxation,
government intervention in the economy, monetary policy, foreign
investment, banking, wages and price policies, property rights, regulation,
and black markets. The study estimates a formulated linear regression
model. The results of the regression analysis demonstrate that despite the
positive and low level contributions of the variables in a country's overall
growth, three of the factors namely, absence of black market, lower level of
government intervention, and unrestricted direct foreign investment show a
more statistically significant impact on a country's growth (GDP).

INTRODUCTION
The phenomenon of value and growth has occupied a central position in the
history of economic thought. Economists have considered it a challenge to
provide an intellectually convincing and statistically testable explanation for
the difference in the value of various commodities at the micro level and
reasons behind variation in economic growth that different countries
experience at the macro economic level. With the development of marginal
analysis and the theory of supply and demand, the problem of valuation has
long been laid to rest. The phenomenon of variability in growth on the other
hand, has been found to be more intractable. Despite tremendous advances
in economic development theory and methodology over the last few
decades, the reasons for differences in the growth of GDP within and across
nations are still hotly debated (Rostow, 1990). In the ensuing economic
debate, these reasons have ranged from esoteric, such as geographic, cultural
and environmental determinism to more mundane debate such as quality of
human and material resources, differences in saving rates, technological
development as well as nations' institutional and political framework.

A review of the latest research provides substantial theoretical as well as

empirical evidence on the effectiveness of these factors on development. The
studies by Levine and Renelt (1990) and Gould and Ruffin (1993) indicate a
positive impact of lower restrictions on foreign trade whereas Baldwin
(1989) discovers an underestimation bias from gains of free trade in the old
growth models. Studies by Barro (1991), Landau (1986), Marlow (1986),
Engen and Skinner (1992), and Grier and Tullock (1989) demonstrate
negative influence of Government's Spending and higher level of
Government Intervention through an active fiscal policy on economic
growth. King and Rebelo (1990) discuss the impact of taxes whereas Dowd
(1994) and Fisher (1993) provide evidence for the distortionary effect of
inflation on growth. The salutatory effect on growth of a sound banking and
financial system is quite evident from King and Levine (1993) research. The
evidence for economic distortion that wage, price, exchange, and other
governmental regulations and controls create is furnished in Barro and
Martin's (1995) recent work in economic growth. Knack and Keefer (1995)
discuss the effectiveness of maintaining rule of law and property and
contract right in maintaining all those robust economic institutions that
contribute significantly to economic growth.

The positive role of the institutional variables on economic growth becomes

even clearer when one compares the performance of the recently failed
controlled economies with the robust economic growth of the free European
and South Asian countries. In order to explain the significant difference in
growth that various countries have experienced in the last few decades,
Heritage Foundation has ranked all 150 independent countries on the basis
of 50 independent variables, which have been further grouped into 10
factors. These economic factors as mentioned earlier are: trade, taxation,
government intervention, monetary policy, foreign investment, banking,
wage and price policies, property rights, regulation and black markets.
Countries have been ranked on a scale of 1 to 5 on the basis of a concept of
economic freedom. This concept is defined as the "absence of Government
Coercion or constraint on the production, distribution or consumption of
goods and services". On the basis of this definition a country which allows
free and full unrestricted foreign trade receives a rank of 1 and one which
restricts trade with heavy tariffs or complete government controls gets a rank
of 5. The lower the country's score, the higher is its place on the scale of
economic freedom.
Objective of Study

Investment in Indian market

India, among the European investors, is believed to be a good investment

despite political uncertainty, bureaucratic hassles, shortages of power and
infrastructural deficiencies. India presents a vast potential for overseas
investment and is actively encouraging the entrance of foreign players into
the market. No company, of any size, aspiring to be a global player can, for
long ignore this country which is expected to become one of the top three
emerging economies.

Success in India

Success in India will depend on the correct estimation of the country's

potential, underestimation of its complexity or overestimation of its
possibilities can lead to failure. While calculating, due consideration should
be given to the factor of the inherent difficulties and uncertainties of
functioning in the Indian system.Entering India's marketplace requires a
well-designed plan backed by serious thought and careful research. For those
who take the time and look to India as an opportunity for long-term growth,
not short-term profit- the trip will be well worth the effort.

Market potential

India is the fifth largest economy in the world (ranking above France, Italy,
the United Kingdom, and Russia) and has the third largest GDP in the entire
continent of Asia. It is also the second largest among emerging nations.
(These indicators are based on purchasing power parity.) India is also one of
the few markets in the world which offers high prospects for growth and
earning potential in practically all areas of business.Yet, despite the
practically unlimited possibilities in India for overseas businesses, the
world's most populous democracy has, until fairly recently, failed to get the
kind of enthusiastic attention generated by other emerging economies such
as China.
GOVERNMENT POLICIES

Check on Economic Policies

The general economic direction in India is toward liberalization and

globalization. But the process is slow. Before jumping into the market, it is
necessary to discover whether government policies exist relating to the
particular area of business and if there are political concerns which should
be taken into account.

Foreign Investment Policy:

The Ministry of Industry has expanded the list of industries eligible for automatic
approval of foreign investments and, in certain cases, raised the upper level of
foreign ownership from 51 percent to 74 percent and further in certain cases to 100
percent. In January 1998, the RBI announced simplified procedures for automatic
FDI approvals. The announcement further provided that Indian companies will no
longer require prior clearances from the RBI for inward remittances of foreign
exchange or for the issuance of shares to foreign investors.

Facilitating foreign investment

In the recent budget, the finance minister announced the government's

commitment to a 90-day period for approving all foreign investments. Government
officers will be assigned to larger foreign investment proposals and will facilitate
Central and State clearances in a time-bound manner. Unlisted companies with a
good 3 year track record, have been permitted to raise funds in international
markets through the issue of Global Depository Receipts (GDRs) and American
Depository Receipts (ADRs).
A number of recent policy changes have reduced the discriminatory bias
against foreign firms.

• The government has amended exchange control regulations previously

applicable to companies with significant foreign participation.

• The ban against using foreign brand names/trademarks has been lifted.

• The FY 1994/95 budget reduced the corporate tax rate for foreign
companies from 65 percent to 55 percent. The tax rate for domestic
companies was lowered to 40 percent.

• The long-term capital gains rate for foreign companies was lowered to 20
percent; a 30 percent rate applies to domestic companies.

• The Indian Income Tax Act exempts export earnings from corporate income
tax for both Indian and foreign firms.

Other policy changes have been introduced to encourage foreign direct and foreign
institutional investment.

For instance, the Securities and Exchange Board of India (SEBI) recently
formulated guidelines to facilitate the operations of foreign brokers in India on
behalf of registered Foreign Institutional Investors (FII's). These brokers can now
open foreign currency-denominated or rupee accounts for crediting inward
remittances, commissions and brokerage fees.

Relaxation
The condition of dividend balancing (offsetting the outflow of foreign exchange
for dividend payments against export earnings) has been eliminated for all but 22
consumer goods industries. A 5-year tax holiday is extended to enterprises
engaged in development of infrastructural facilities. Even without a registered
office in India, foreign companies are allowed to start multimodal transport
services in India.

The Reserve Bank of India (RBI) now permits 100 percent foreign investment in
the construction of roads/bridges. The peak custom duty rate was reduced to 50
percent from 65 percent in the March 1995 budget. Import regime changes
included enhancement of the scope of Special Import License (SIL) programs, and
the expansion of freely importable items on the Open General License (OGL) list
to include some consumer goods.

Dispute Settlement

Currently, there are no investment disputes over expropriation or nationalization.

Government demands for penalty payments for alleged overcharging by
pharmaceutical companies during the 1980's could lead to de-facto expropriation
of some foreign drug companies' assets in India.

In pharmaceutical sector

A committee has been named to study these longstanding disputes, but the failure
of successive governments to produce a swift and transparent resolution has led to
a virtual standstill in foreign investment in India's pharmaceutical sector. Indian
courts provide adequate safeguards for the enforcement of property and contractual
rights.

Case backlogs

However, case backlogs frequently lead to long procedural delays. India is not a
member of the International Center for the Settlement of Investment Disputes, nor
of the New York Convention of 1958. Commercial arbitration or other alternative
dispute resolution (ADR) methods are not yet popular ways of commercial dispute
settlement in India. The recent introduction in Parliament of a new Arbitration Bill
signals the importance now accorded to this matter by the GOI.

Foreign Companies Entering India

A foreign company planning to enter India, is required to meet all requirements of

doing business in India as required by domestic Indian businesses. In addition
foreign companies are required to seek governmental approval before investing in
India. Some approvals are automatic, - RBI Approvals - though application is
required for those approvals. Special Permission - FIPB Approvals - could be
obtained to invest over and above the regular percentage allowed. See our FDI in
India Sector wise Guide for more information on various conditions of investing in
India. Also see Withholding Tax Rates For Foreign Companies Doing Business In
India Under The Tax Treaties & the Joint Ventures in India. Also see Entry
Strategies in India for Foreign Investors

Please feel free to contact us for further information

STRATEGIES or Investment Routes for Investing in India, Entry
Strategies for Foreign Investors

A foreign company planning to set up business operations in India has the

following options:

1) As an Indian Company

A foreign company can commence operations in India by incorporating a

company under the Companies Act, 1956 through

• Joint Ventures; or

• Wholly Owned Subsidiaries

Foreign equity in such Indian companies can be up to 100% depending on

the requirements of the investor, subject to equity caps in respect of the area
of activities under the Foreign Direct Investment (FDI) policy. Details of the
FDI policy, sectoral equity caps & procedures can be obtained from
Department of Industrial Policy & Promotion, Government of India. See
also FDI in India Sector wise Guide

Joint Venture With An Indian Partner

Foreign Companies can set up their operations in India by forging strategic

alliances with Indian partners.

Joint Venture may entail the following advantages for a foreign investor:

• Established distribution/ marketing set up of the Indian partner

• Available financial resource of the Indian partners

 • Established contacts of the Indian partners which help smoothen the
process of setting up of operations

Wholly Owned Subsidiary Company

Foreign companies can also to set up wholly owned subsidiary in sectors

where 100% foreign direct investment is permitted under the FDI policy.

Incorporation of Company

For registration and incorporation, an application has to be filed with

Registrar of Companies (ROC). Once a company has been duly registered
and incorporated as an Indian company, it is subject to Indian laws and
regulations as applicable to other domestic Indian companies.

See also Formation of Subsidiary in India | Incorporating company in

India | Procedure for Formation of Company in India

2) As a Foreign Company

Foreign Companies can set up their operations in India through

• Liaison Office/Representative Office

• Project Office

• Branch Office

Such offices can undertake any permitted activities. Companies have to

register themselves with Registrar of Companies (ROC) within 30 days of
setting up a place of business in India.

Liaison office/ Representative office

Liaison office acts as a channel of communication between the principal
place of business or head office and entities in India. Liaison office cannot
undertake any commercial activity directly or indirectly and cannot,
therefore, earn any income in India. Its role is limited to collecting
information about possible market opportunities and providing information
about the company and its products to prospective Indian customers. It can
promote export/import from/to India and also facilitate technical/financial
collaboration between parent company and companies in India.

The approval for establishing a liaison office in India is granted by the

Reserve Bank of India (RBI).

Project Office

Foreign Companies planning to execute specific projects in India can set up

temporary project/site offices in India. RBI has now granted general
permission to foreign entities to establish Project Offices subject to specified
conditions. Such offices cannot undertake or carry on any activity other than
the activity relating and incidental to execution of the project. Project
Offices may remit outside India the surplus of the project on its completion,
general permission for which has been granted by the RBI.

Branch Office

Foreign companies engaged in manufacturing and trading activities abroad

are allowed to set up Branch Offices in India for the following purposes:

• Export/Import of goods

• Rendering professional or consultancy services

 • Carrying out research work, in which the parent company is engaged.

• Promoting technical or financial collaborations between Indian

companies and parent or overseas group company.

• Representing the parent company in India and acting as buying/selling

agents in India.

• Rendering services in Information Technology and development of

software in India.

• Rendering technical support to the products supplied by the parent/

group companies.

• Foreign Airline/shipping Company.

A branch office is not allowed to carry out manufacturing activities on its

own but is permitted to subcontract these to an Indian manufacturer. Branch
Offices established with the approval of RBI, may remit outside India profit
of the branch, net of applicable Indian taxes and subject to RBI guidelines
Permission for setting up branch offices is granted by the Reserve Bank of
India (RBI).

Branch Office on "Stand Alone Basis"

Such Branch Offices would be isolated and restricted to the Special

Economic zone (SEZ) alone and no business activity/transaction will be
allowed outside the SEZs in India, which include branches/subsidiaries of its
parent office in India. No approval shall be necessary from RBI for a
company to establish a branch/unit in SEZs to undertake manufacturing and
service activities subject to specified conditions.
Growth of Foreign Investment

New Delhi, June 19 (IANS) India is likely to register the largest growth in
attracting foreign investment worldwide, and is poised to become the global
leader for investment in manufacturing, according to a report by
international consultancy KPMG released Thursday. “Respondents expect
India to do particularly well in industrial products, where it will displace the
US to take second place behind China, and in manufacturing, where it is
expected to lead the world in terms of investment, with 25 percent of
corporates expecting to invest five years from now,” the report said.

“India will move from seventh to fourth in the investment league table,
overtaking the UK, Germany and France,” it said.

In terms of influence, India is expected to achieve the remarkable feat of

overtaking Japan, France, Russia and Brazil in the ranks of the most
influential countries, with rising influence in all sectors, particularly
business and consumer services, IT, telecom and manufacturing.

The report paints an optimistic outlook for India, saying its share of
international corporate investment is expected to rise by 8 percent to 18
percent over the next five years, the largest increase recorded in this survey.

“By contrast with the other BRIC countries, in the next year 64 percent of
the investment into India is expected to come from new entrants to the
country,” the report said.

Investments would move away from the US, Japan, Singapore and the UAE,
to Bric nations - Brazil, Russia, India and China.

According to the survey, the US currently leads by a long way, with 27

percent of investors planning a significant investment in the country in the
next 12 months.

China comes next, with 17 percent, followed by the UK with 14 percent,

Germany with 13 percent, Russia with 12 percent and India at seventh place
with a 10 percent share.

“In five years’ time, however, China is expected to head the table, with 24
percent planning an investment, followed by the US with 23 percent and
Russia with 19 percent. Fourth, and the biggest winner overall, will be India
with 18 percent, a rise of 8 percent,” the report said.

Indian business expects the bulk of its investment in year 2008-09 to go to

the US (35 percent) with 15 percent expecting to invest in West Asian
countries and 10 percent in Singapore and Hong Kong.

In next five years, for Indian corporates, the US stays popular with 25
percent, and West Asia with 15 percent, but countries of the Asia Pacific
region can expect an increase in investment, with Singapore, Australia, and
Malaysia the choice of 10 percent of respondents, along with South Africa.

“It is clear that India has the potential to play an even more influencing role
in the flow of capital and it’s a great opportunity to further improve the
economic and fiscal climate,” Sudhir Kapadia, head of KPMG’s tax and
regulatory services in India said.

1. EMPIRICAL MODEL AND DATA SOURCES

A stepwise regression is performed on the above linear regression model and

the result is reported in table 1 under analysis of results. The data on the ten
economic variables for the 150 countries with a rank order ranging from a
low of 1 to a high of 5 is made available in the Heritage Foundation Report
(Holmeus et al, 1997). In this report, for example, black market variable for
a country is ranked at 1 if there is negligible black market activity in that
country and at 5 if such activities permeate the entire society to such a
degree that it has become an acceptable practice in its entire business
culture. In order to quantify these ranks we converted these ranking scales
into dummy variables by assigning a variable X = 0 for ranks less than 3 and
X = 1 for ranks 3 to 5. All ten independent variables were converted with
this scheme. Growth for 150 countries was measured with 1994 GDP per
capita at 1987 dollars and it was used as dependent variable in the multiple
regression models. Until recently, foreign investment remained closely
regulated. Rules and incentives directed the flow of foreign capital mainly
toward consumer industries and light engineering, with major capital-
intensive projects reserved for the public sector. Under the Foreign
Exchange Regulation Act of 1973, which went into effect on 1 January
1974, all branches of foreign companies in which nonresident interest
exceeded 40% were required to reapply for permission to carry on business;
most companies had reduced their holdings to no more than 40% by 1
January 1976. Certain key export-oriented or technology-intensive industries
were permitted to maintain up to 100% nonresident ownership. Tea
plantations were also exempted from the 40% requirement. Although the
government officially welcomed private foreign investment, collaboration
and royalty arrangements were tightly controlled. Due to the restrictiveness
of these policies, foreign investment remained remarkably low during the
1980s, ranging between $200 and $400 million a year.

Government reform measures in mid-1991 changed this picture

significantly. Under the New Industrial Policy, the amount of money
invested in the country doubled annually from 1991 to 1995. In 1997 the
New Exploration and Licensing Policy (NELP) was announced permitting
the participation of foreign oil companies in upstream exploration and
development of oil and gas resources. In 2000, the first exploration blocks
were awarded in two rounds of bidding, but the major international oil
companies (BP, Shell, ExxonMobil) have yet to become involved. Effective
1 April 2001, imports of crude oil and petroleum products were liberalized,
with state-run enterprises losing their exclusive right to import certain
petroleum products for domestic consumption. Also in 2001, India removed
quantitative restrictions (QRs) from 715 items (147 agricultural products,
342 textile items, and 226 manufactured goods, including automobiles) in
compliance with WTO standards. Under the New Industrial Policy as
amended most sectors have been opened for 100% foreign investment.
Sectors such as banking, telecommunications, and print media are still
restricted. In some restricted sectors, foreign investment up to 49% or 74%
is allowed in the equity of an Indian joint venture company. Recently the
requirement prior approval by the Reserve Bank of India was removed from
enterprises falling within categories allowing 100% foreign investment.

India has eight export processing zones (EPZs) designed to provide

internationally competitive infrastructure and duty-free, low-cost facilities
for exporters. Foreign investors in some industries can operate in EPZs,
export oriented units (EOUs), special economic zones (SEZs) and Software
Technology Parks of India (STPIs). Under the Market Access Initiative of
2001, greater access was to SEZs was afforded, although as of 1 April 2003
profits and gains derived from the STPIs and EOUs would only be 90% tax-
free. SEZs are regarded as foreign territory for purposes of duties and taxes
and sector caps that limit foreign direct investment (FDI) in different
industries do not apply in the SEZs. In any case, the corporate tax rate on
foreign companies was reduced to 48% to 40%, and the peak customs rate
was reduced from 35% to 30%. Other liberalizing steps in the 2002/03
budget include the removal of price controls on petroleum products, the
removal of price controls from all but 99 drugs, and permission for foreign
banks to set up subsidiaries instead of only branches. In November 1999 the
government announced its intention to disinvest in 247 state-owned
enterprise to the general level of 26% ownership, and established the
Ministry of Disinvestment. Although the program has involved the transfer
of significant amounts of equity and management control from the
government to private sector, it has yet to generate appreciable foreign
investment. Despite the trend towards liberalization, India's foreign
investment regime remains complex and relative restricted. Although FDI
has increased, average a net $2.64 billion per year 1997/98 to 2001/02, the
inflow is still small compared to China, the most relevant comparison, where
FDI is running $30 billion to $40 billion a year. The net flow dropped to
$1.8 billion in 2000/01, and then recovered to a net $3.4 billion in 2001/02.
Net portfolio investment, $1.8 billion in 1997/98, turned negative in
1998/99, at net -$100,000. Over the next three years, however, the net
portfolio inflow averaged about $3 billion.
RESEARCH BASIS

The Variables: The ten variables were used in various regression equations
for the following reasons.

Taxation: In all free societies taxes are viewed as a necessary evil. They are
necessary because public services cannot be financed without them and evil
because they transfer resources from individuals to the state thus limiting
individual economic freedom while at the same time increasing the coercive
power of the state. Since governmental bureaucracy is assumed to be
inherently inefficient, higher taxes take away extra purchasing power from
an efficient economic unit--the individual to an inefficient unit--the state.
Therefore, higher taxes are expected to create a negative impact on GDP.

Governmental Intervention: In the discussion of taxes it was pointed out that

a tax represents a transfer of economic resources from an efficient economic
unit to an inefficient one. Therefore, a country with higher tax rates on the
average individual is expected to experience a negative impact on its GDP.
The same negative impact on a larger scale will be evident if the
governments' bureaucracy, which is represented through a public sector,
either consumes a major portion of its production, or accounts for a larger
percentage of the total GDP. There are a number of ways a government can
intervene in an economy. It can get involved in the economy through a
major public service program, through a large defense establishment or even
worst, by directly engaging in production and distribution of economic
resources through the ownership and control of state enterprises. When a
state carries out a large defense program through a policy of subcontracting
outlays on various defense production and procurement items, the resources
although controlled by the state are still coming back to the economy
through competitive and efficient allocation to private producers and
enterprises. On the other hand when the state directly owns a steel mill or a
hospital and either fully produces or distributes the products or services or
competes with other privately owned enterprises, it is distorting and
disturbing the free flow of resources to the most efficient channels.
Therefore, one can safely assume that the proportion of the size of the state
owned enterprises to the total GDP of the country will constitute the best
measure of the governmental intervention in the economy. On the
quantitative scale one can therefore expect a negative correlation between
this variable and GDP growth. The recent failure of the socialist as well as
semi-socialist economies provides convincing evidence to this effect. It is
further confirmed by our analysis.

Foreign Investment: Foreign investment provides a supplement to

domestic savings. When it is freely allowed, officially encouraged and
legally protected, its unencumbered flow within the framework of stable
currency regime, will contribute significantly to a country's economic
growth. South East Asian countries provide a testament to the productive
role of foreign investment. Despite recent currency turmoil these
countries experienced during the last quarter of 1977, they are still way
ahead of others, such as India, Russia and China, who placed heavy
restrictions on foreign capital in the early stage of their development. In
view of the positive role that free flow of foreign capital plays in a
country's development, it is expected that a country that places heavy
restrictions on foreign investment will experience a negative impact on
its GDP and its growth. This conclusion is borne out by our regression
analysis.

Property Rights: Most economic activities are undertaken with a

pecuniary motive. Entrepreneur, risk takers and producers, make
commitments to an enterprise primarily in view of its future profitability.
The incentive for profit is not however sufficient for risk takers. They
should be fully granted not only a protection of their profits but also their
rights to accumulate and enhance their properties and wealth. Freedom of
ownership and full legal protection from any expropriation as
fundamental economic rights are needed for the establishment of a stable
investment climate. Countries that provide complete control and
ownership of property to the producing business enterprises will
experience higher GDP and economic growth.

Wages and Prices: One of the basic features of the functioning of a free
enterprise private economy is the freedom that it allows by law and the
guarantees it provides to the individual entrepreneur to work within the
framework of the market determined wages and prices. Any time a public
body or an instrument of government intervenes in the market in order to
arbitrarily formulate wages or prices, market determined efficient
allocation is disturbed and, maximum returns from resource utilization
are adversely affected.
RESEARCH METHODOLOGY

Three different tests were conducted in order to separate the effect of

the variables as well as to evaluate the incremental effect of the
independent variables in the regression equation. The first regression
tested for regulatory measures with respect to GDP. As shown in table
1 (factor 1), the dependent variable is significant but negatively
correlated, justifying our earlier assumption that excessive regulation
could be detrimental to the growth of the economy. The R-square
shows a 52.9% level of explained variable. Table 1 (factor 2) tested
for black market and regulation. The result and signs were consistent
with our a priori assumptions that black market activities and
government regulations tend to have negative effect on the growth of
the economy. There is improved result for the R-square over the first
test with a 68.2%. Table 1 (factor 3) tested for black markets, direct
foreign investment, and government regulations. The result of the
regression and their signs were consistent with our prior assumptions
and significant at 95% level. The R-square showed improved level in
explaining the variation in the regression equation with a value of
72.4%.
Limitation

Lack of enthusiasm among investors

The reason being, after independence from Britain 50 years ago, India
developed a highly protected, semi-socialist autarkic economy. Structural
and bureaucratic impediments were vigorously fostered, along with a
distrust of foreign business. Even as today the climate in India has seen a
seachange, smashing barriers and actively seeking foreign investment, many
companies still see it as a difficult market. India is rightfully quoted to be an
incomparable country and is both frustrating and challenging at the same
time. Foreign investors should be prepared to take India as it is with all of its
difficulties, contradictions and challenges.

Developing a basic understanding or potential of the Indian market,

envisaging and developing a Market Entry Strategy and implementing
these strategies when actually entering the market are three basic steps to
make a successful entry into India.
Developing a basic understanding or potential of the Indian market
The Indian middle class is large and growing; wages are low; many workers
are well educated and speak English; investors are optimistic and local
stocks are up; despite political turmoil, the country presses on with
economic reforms.But there is still cause for worries-

Infrastructural hassles.

The rapid economic growth of the last few years has put heavy stress on
India's infrastructural facilities. The projections of further expansion in key
areas could snap the already strained lines of transportation unless massive
programs of expansion and modernization are put in place. Problems include
power demand shortfall, port traffic capacity mismatch, poor road conditions
(only half of the country's roads are surfaced), low telephone penetration
(1.4% of population).

Indian Bureaucracy.

Although the Indian government is well aware of the need for reform and is
pushing ahead in this area, business still has to deal with an inefficient and
sometimes still slow-moving bureaucracy.

Diverse Market .

The Indian market is widely diverse. The country has 17 official languages,
6 major religions, and ethnic diversity as wide as all of Europe. Thus, tastes
and preferences differ greatly among sections of consumers.

Therefore, it is advisable to develop a good understanding of the Indian

market and overall economy before taking the plunge. Research firms in
India can provide the information to determine how, when and where to
enter the market. There are also companies which can guide the foreign firm
through the entry process from beginning to end --performing the requisite
research, assisting with configuration of the project, helping develop Indian
partners and financing, finding the land or ready premises, and pushing
through the paperwork required.
CONCLUSION

Economic growth is a complex phenomenon. Starting an economy on a

growth path and maintaining a proper growth rate and avoiding or
minimizing unexpected shocks that may derail it from a steady growth
path requires not just economic discipline and resource mobility but also
a free and stable political, social and institutional environment. An
environment that is transparent, fairly honest, regulation free and one that
global investors can find profitable as well as accountable is desirable.
The results of our analysis demonstrate that although numerous variables
contribute to a country's economic growth, the absence of black markets,
government regulations, and restrictions of foreign investment would
have significantly more important impact on a country future growth than
the host of many other economic and non-economic factors. These three
factors are more significant because the absence of black markets
provides transparency in business interactions that is needed for building
and maintaining confidence in the economy. The absence of regulations
and restrictions on foreign investment establish an environment of
economic freedom within as well as outside the country. Both types of
freedoms when established and promoted will provide an environment
for the entrepreneurs and providers of risk capital to contribute to a
country's economic growth with investment as well as to benefit from its
growth when such investments turn out to be profitable.
RESEARCH ANALYSIS

Table 1: Analysis of Variance among Countries By factors

Dependent Variable: Gross Domestic Product 94
Factor 1. Regulation
Multiple R .72762
R Square .52942
Adjusted R Square .52158
Standard Error 1958.08836

Analysis of Variance

DF Sum of Squares Mean Square

Regression 1 258815208.78777 258815208.78777

Residual 60 230046600.69610 3834110.01160
F= 67.50333 Signif F = .0000

Variables in the Equation

Variable B SE B Beta T Sig T

Regulation -6455.953247 785.774200 -.727615 -8.216 0000

(Constant) 7274.571429 740.087834 9.829 .0000

Variables not in the Equation

Variable Beta In T Sig T

Banking -.056688 -.621 .5369

Black Markets -.426310 -5.321 .0000
Foreign Investment -.248055 -2.970 .0043
Government Intervention -.088913 -.978 .3323
Monetary Policy -.064628 -.717 .4763
Price Rights -.282513 -3.209 .0022
Taxation -.199655 -2.270 .0269
Trade -.327771 -3.572 .0007
Wage & Prices -.070995 -.725 .4715

Factor 2. Black Markets

Multiple R .82585
R Square .68203
Adjusted R Square .67125
Standard Error 1623.15151

Analysis of Variance

DF Sum of Squares Mean Square

Regression 2 333419180.13284 166709590.06642

Residual 59 155442629.35103 2634620.83646
F = 63.27650 Signif F = .0000
Variables in the Equation

Variable B SE B Beta T Sig T

Black Markets -4048.967466 760.890873 -.426310 -5.321 .0000

Regulation -4941.534247 710.823290 -.556933 -6.952 .0000
(Constant) 9588.267123 751.944752 12.751 .0000

Variables not in the Equation

Variable Beta In T Sig T

Banking -.082774 -1.099 .2762

Foreign Investment -.207362 -2.981 .0042
Government Intervention -.100680 -1.344 .1840
Monetary Policy -.041169 -.549 .5852
Price Rights -.168020 -2.091 .0409
Taxation -.127594 -1.687 .0970
Trade -.230922 -2.843 .0062
Wages & Prices .044375 .526 .6006

Factor 3. Foreign Investment

Multiple R .85104
R Square .72427
Adjusted R Square .71001
Standard Error 1524.46752
Analysis of Variance

DF Sum of Squares Mean Square

Regression 3 354069738.71909 118023246.23970

Residual 58 134792070.76478 2324001.22008
F = 50.78450 Signif F = .0000

Variables in the Equation

Variable B SE B Beta T Sig T

Black Markets -3812.508413 719.019483 -.401413 -5.302 .0000

Foreign
Investment -1166.975383 391.483957 -.207362 -2.981 .0042
Regulation -4893.576354 667.800644 -.551528 -7.328 .0000
(Constant) 9953.279971 716.765211 13.886 .0000

Variables not in the Equation

Variable Beta In T Sig T

Banking .002565 .033 .9739

Government Intervention -.015445 -.197 .8448
Monetary Policy -.075053 -1.060 .2935
Price Rights -.099417 -1.206 .2330
Taxation -.107494 -1.499 .1395
Trade -.15395 -1.729 .0893
Wages & Prices .101959 1.269 .2094
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Dr. Imtiaz Ahmad received his Ph.D. from the State University of New
York, Buffalo in 1968. He has several journal articles in the areas of applied
economics and quantitative methods. Dr. Ahmed was an Associate Professor
of quantitative methods in the Department of Business, Management and
Accounting, University of Maryland Eastern Shore, Princess Anne,
Maryland.