Tutorial 5 Case Study Building a Market Economy in India 1. What kind of system did India operate under 1947-1990?

? What kind of system is it moving today? What are the impediments to completing this transformation? During 1947-1990, India is operating under mixed economic system which characterized by a large number of state-owned enterprises, centralized planning, and subsidies. In this economy system, government and private ownership resources split rather evenly. This system also constrained the growth of the private sector. However, private companies could expand only with government permission and take years to get permission to diversify into a new product. Now India is moving to a market economic system. In 1991, the government started an economic reform program. Much of the industrial licensing system was dismantled and several areas once closed to the private sector were opened. Raw materials and many industrial goods could be freely imported, and the import tariff was reduced. Furthermore, the top income tax rate and corporate tax also have been reduced. Thus, India is striving to be a country with market economy. Nevertheless, there are some impediments to completing this transformation. First, attempts to further reduce import tariffs have stalled by political opposition. Next, the privatization program continues to obstruct by Indian Supreme Court. There has also been strong resistance to reforming many of Indias laws that make it difficult for private business to operate efficiently. As a conclusion, India still has a long way to be a country with market economy. 2. How might widespread public ownership of businesses and extensive government regulations have impacted (i) the efficiency of state and private businesses, and (ii) the rate of new business formation in India during the 1947-1990 time frame? How do you think these factors affected the rate of economic growth in India during this time frame? (i) First for all, the government had businesses that were losing money. By giving the businesses to private owners it gave them the freedom to manage it themselves for a profit. New businesses were allowed and thereby helped to increase Indias economy. This is because before of this the private companies could expand only with government permission. It could take years to get permission to diversify into a new product. Besides that, the heavy industry such as auto, chemical was reserved for state-owned enterprises.

Production quotas and high tariffs on imports also stunted the development of a healthy private sector and the labour laws made it difficult to fire employees. After an ambitious economic reform program, the industrial licensing system was dismantled and several areas once closed to the private sector were opened. Investment by foreign enterprises formerly allowed only grudgingly and subject to arbitrary ceilings was suddenly welcomed. Approval was made automatic for foreign equity stakes of up to 51% in an Indian enterprise, and 100% foreign ownership was allowed under certain circumstances. Raw materials could be freely imported and the maximum tariff reduced from 40% to 65%. The corporate tax fell from 57.5% to 46%. (ii) During the 1947-1990 timeframe, it was a slow process and did not affect Indias economy until in 1991 the government embarks on an ambitious economic reform program. The economic reforms have been impressive where the economy expanded at an annual rate of about 6.5% from 1994 to 2006. Their economy has jumped from 150 million in 1991 to 9.5 billion in 2006. (iii) Through some changes of Indian government to their economy, it has attracted more of the foreign investor to involve and invest in their country; this can help to enrich their people and help to develop their country. 3. India now has pockets of strengths in key high technology industries such as software and pharmaceuticals. Why do you think India is developing strength in these areas? How might success in these industries help to generate growth in other sectors of the Indian economy? In my opinion, India developing strength in high-technology industries such as software and pharmaceuticals because the industries have helped the India improves the economy. For example, India has emerged as a vibrant global centre for software development with export sales from $150 million in 1990 to $23.4 billion in 2006. Besides that, in pharmaceuticals industry, Indian companies are emerging as credible players on the global marketplace, primarily by selling low-cost, generic versions of drugs that have come off patent in the developed world. As these industries continue to grow, other sectors of the economy should also see the benefit of the effects, the government also will continue to open up other industries for the foreign

countries. These will lead the citizen increase their quality of life, when the consumer purchasing power is strong, the nation of the economy will growth. 4. Given what is now occurring in the Indian economy, do you think that the country represents an attractive target for inward investment by foreign multinationals selling consumer products? Why? Yes, I do think India is an attractive target for inward investment by foreign multinationals selling consumer products. This is because among the growing economies of all the countries in the world, India is the second. The countrys GDP has been growing at an average rate of 8.5% for the last five years. Besides, India has a very large population, about 1.2billion. Due to the increase of modern technology available in India had brought changes to the lifestyles and the consumption pattern of the India citizens. Therefore, its domestic consumption is strong too and it also becomes one of the key factors that drive overseas investments to the country. India ranks third among the most attractive destination for foreign direct investment in the world. This is because the government has offered attractive incentives to encourage foreign investment. Special investment and tax incentives are given foe export and import sectors. Other than that, investors will not have to undergo any hassle if they were to invest in India. Decisions on all foreign investment proposals are usually taken within 30 days of submitting an application. Use of foreign brand names or trademarks s permitted for the sale of goods in India (Ernst & Young 2010).