How can the growth of the Indian economy be increased?

India: Economic Reforms Since 1991 / Dirk Matter. - [Electronic ed.]. - Bonn, 1999. - 10 pp. = 37 Kb, text. - (FES analysis)
Electronic ed .: Bonn: FES Library, 2000

© Friedrich Ebert Foundation

After the British colonial rulers had determined Indian economic policy for decades and clearly interpreted it in favor of Great Britain, it was not surprising that the young Republic of India initially sealed itself off from strong foreign influence. "Self-reliance"is the keyword that expresses the idea of ​​a self-sufficient Indian republic that trusts in its own strengths. Mahatma Gandhi was one of the intellectual fathers of this policy. The quest for independence in young India -alsoinmore economicalRespectexpressed itself in a strong restriction of foreign engagements, e.g. through the Forown Exchange Regulation Act (FERA) ". Due to the high unemployment rate at that time, the government laid its protective hand over small and medium-sized enterprises, the so-called "Small Scale Industry". Thus, around 800 sectors were defined in which large-scale production was not permitted and investments by large companies were not tolerated. Large companies were subject to the so-called "Monopolies and Restrictive Trade Practice Act (MRTP)". The restrictions onLarge farmswentsometimesso far,thatoutControl purposesOfficerintheManagement of these companies were posted.

India's first prime minister, Nehru, believed that the Commanding Heights" should be in government hands. This principle provided that through Nationalization of parts of the heavy and basic industries that would control key industries through the state. This model of a "dual" or "mixed economy" should, from the Indian perspective, be the third way between capitalismandsocialismrepresent.The raw materials or heavy industry should be in statehandlie,whiletheLight orConsumer goods industryinmore privateHand remained. India thus approached the socialist countries ideologically, but nonetheless remained significantly more liberal than, for example, the former Soviet Union. Five-year plans were also introduced, but these were to be interpreted more in the sense of target corridors. But even today there is still a central planning committee with over 1000 employees.

This economic policy since India's independence led to problems that are still current today. In the large state-owned companies with their bureaucratic management, the outdated machine park and their high workforce, losses are predominantly produced. Many large companies thus became recipients of subsidies that were dependent on the central government.

Mass layoffs are not allowed for political reasons, as there is no social network in India that could cushion such an approach. Even private companies do not receive a permit to dismiss employees, but are placed under compulsory administration in the event of insolvency. In order to avoid social unrest, both state-owned companies and large private companies are kept alive with billions in subsidies.

TheoutthisEconomic policyThe resulting problems can be summarized as follows: Due to a pronounced protectionism, there was no competition with domestic and foreign competitors. Having a sophisticated licensing system came in handyeachentrepreneurialactivitylicensing, and Indian private companieswasittherebyjustheavypossible to respond to rapid market changes. The tariffs were sometimes over 200 percent and thus offered very good protection against foreign competition. BureaucraticObstaclesStrengthandstrike unions and labor legislation,theatOperatedWithmorewhen 100 workers practically guaranteed life-long employment, resulted in low productivity. The underdeveloped infrastructurebroughtlogisticProblemswith himself.weaknessesIndianCompaniesin theResearch and development led to a high dependency on imports of new technologies.

Ultimately, India was unable to develop global competitiveness in many industries. India has therefore until 1991 pursued a completely different economic policy than the Asian tiger countries. The focus in India was not on building up new export industries, but on building up a domestic industry to cover itofdomesticAs needed. Due to the licensing system and the related monopoly positions of many companies and the strong isolation from foreign countries, a real sellers' market had developed in India. However, the quality and price level of many products did not stand up to international comparison. On the other hand, because of protectionism, India also has a broadly diversified industrial structure, which represents a good starting point for medium-term integration into the world market.

Due to the modest growth rates that this policy brought with it, the politicians and the population became increasingly dissatisfied with the chosen course. As early as the mid-1980s there were the first steps towards tentative reforms, but these were carried out half-heartedly and did not bring any significant relief. The economic situation escalated in an acute balance of payments crisis in 1990–91. The Gulf War in 1991 As a result, remittances from Indian guest workers in the Gulf States to their families at home did not materialize and Iran and Iraq were no longer important trading partners. India had to supply itself with crude oil at the highest prices on the world markets overnight. The Soviet Union, another important trading partner, also slipped into a deep crisis that severely affected Indian foreign trade. India suddenly only had foreign exchange reserves of around one billion US dollars, which would only have secured imports for a period of two weeks.

There were new elections in the spring of 1991, and within six weeks a comprehensive package of reforms was presented and passed in parliament. A wave of national cohesion swept through the country, and the Congress Party was able to implement the long-discussed reform policy. Even during this crisis, the Indians were characterized by an unbroken high level of national pride. India had never been rescheduled before. This should also be avoided in view of the profound crisis. A backup loan from the International Monetary Fund was taken out and secured with gold, which was flown to London on a chartered plane. Imports to India have been drastically reduced through various emergency measures. These Emergency measures were only valid for a few months and were intended to contain the acute balance of payments crisis.

More important, of course, were the long-term reforms that were adopted in 1991. For most of the industries the licensing systemfinalabolishedwhich resulted in increased competition in the Indian domestic market. The expansion of the infrastructure area was wanted by means of Privatization measures drive forward. In relation to foreign trade, there were some existing ones Import licenses abolished and the market for capital goods practically completely open.

The Import duties, an important source of income for the Indian state, have been gradually reduced over the years, so that, for example, a basic tariff rate of 25 percent has been achieved in the mechanical engineering sector. The about-face with regard to the was also important Foreign Investor Guidelines. While before 1991 foreign investments were only approved very reluctantly and slowly, since 1991 there have been increased efforts to attract foreign companies. Initially, 34 priority areas were defined for investors, in which an accelerated and simplified approval process is used (AutomaticApproval). With every new budget since 1991, new reform steps have been announced and implemented, see abovethatitForforeignCompaniesit is sometimes quite difficult to get the latest information on investment policy.

Nevertheless, despite these deep and comprehensive measures in India, there is still more urgent need Need for reform, for example in the area of ​​land law and the acquisition of real estate. Trade and investment in the consumer goods market continue to show deficits in liberalization. Since India has been a member of the WTO for years, further liberalization measures are inevitable. In tough negotiations, the Indian side is repeatedly pushing for the longest possible transition periods.

In the spring of 1999, a new patent law came into force that complies with WTO requirements. India was expressly praised by the International Monetary Fund for implementing this reform program and presented as a model country because India is one of the few countries in which reform steps did not lead to a reduction in economic growth. Indeed, Indian companies took advantage of the freedom they had gained and invested heavily in new products and systems. During the reign of the Congress Party under Narashima Rao, macroeconomic growth rates of up to 8 percent were achieved in the period from 1991 to 1996. Industrial growth even rose to over 12 percent in individual years. India showed greater economic dynamism than the Asian tiger countries during this period.

Despite these economic successes, the 1996 elections for the Congress party ended in disaster. The Hindu BJP had grown into a powerful party but did not get enough votes to form the government. From 1996 to 1998 the so-called ruled United Front, a coalition of smaller popular and regional parties. During this period, the liberal economic policy was largely continued, because the course was largely determined by the finance minister P. Chidambaram, who in 1991, while still a member of Congress, had played a key role in the reforms. Chidambaram emerged particularly through a tax reform in which the maximum The tax rate for companies has been reduced to 35 percent and the top tax rate for private individuals has been reduced to 30 percent. It was hoped that this measure would generate increasing tax revenues, because tax evasion is still the order of the day in India.

Although a large majority of all parties in the Indian parliament was in favor of the liberalization process, some Indian companies formed the so-called Bombay Club and warned against the rapid integration of India into the world market. Many family-owned Indian companies were concerned about excessive competitive pressures from abroad. Due to the abolition of the license system, of course, also felllotsMonopoliespath,Whatalsoled to more competition between Indian companies. Last but not least, the fears of the dominance of multinational corporations played a decisive role in the rapid rise of the BJPBecause this party promised under the catchphrase "Swadeshi" to put the interests of the domestic industry back at the center of economic policy. In the elections in 1998 the BJP clearly missed an absolute majority, but became the strongest party and was forced to join several This government coalition only lasted for a year and broke up in April 1999. After 1996 and 1998, elections at the federal level will take place again in September 1999, but these will probably not change the framework of economic policy significantly .

The election victory of the Indian national Hindu party BJP im March 1998 was noted with mixed feelings in the industrialized countries. The election campaign was marked not least by verbal attacks against foreign companies and warnings of a sell-off in India. Some observers already saw the successful economic reforms of the last few years in jeopardy. However, all of these fears turned out to be unfounded, as the BJP government did not reverse the reforms of the previous governments. However, to finance the deficit in the national budget, the tariffs were raised again slightly. Especially after the nuclear tests in May 1998 and the resulting sanctions, the Indian government endeavored to create an investment-friendly climate. Some major American projects got particularly fastapproved,andabout thatoutanother 340 products, including consumer goods,toimportwithoutLicenseApproved.

The following figures for the 1998/99 marketing year are still based on estimates, as the marketing year ended on March 31, 1999 and the final data are not yet available. It is still unclear whether the predicted growth rate of 5.8 percent could actually be achieved. It remains to be seen that industrial growth, at only 3.5 percent, has weakened considerably compared to previous years. The domestic political uncertainties in particular have considerably restricted the propensity to invest among Indian entrepreneurs. Due to the Asian crisis, exports to neighboring regions also suffered. The Wholesale Price Index remained relatively well under control last year at 5.8 percent, but it must be taken into account that it is largely made up of government-administered prices. The more important one for the population Consumer Price Index is around 14 percent and thus clearly in the double-digit range, i.e. a significant deterioration compared to previous years.

At the end of February 1999, the Indian finance minister Sinha presented his budget for 1999-2000 in parliament. The aim is to reduce the current fiscal deficit from over six percent to four percent. The government's attempt to cut subsidies for fertilizers had already been shipwrecked in 1998 and its budget planning has focused on increasing taxes and duties. The direct taxes, both corporate tax and personal income tax, were each subject to a surcharge of 10 percent, i.e..themaximumCorporate tax rateincreasesof35percentto 38.5Percent.TheMaximum rateForthepersonal income tax increases from 30 percent to 33 percent. With a population of 975 million, only 14 million people paid income tax at all last year. The direct taxes therefore only make up a small part of the Indian national budget.

Indirect taxes are of the utmost importance, first and foremost Excise duty(Production tax). There have also been some serious changes to the tariffs, in particular a Surcharge charged by 10 percent. Calculated using a specific example, these changes in import duties mean that theTotal tarifffor German machines, for example, increased from 41 percent to now 53 percent. In view of the already declining German exports to India and the weakened economic growth, this development is to be assessed quite negatively.

However, there are some in the new Indian budget as well positiveClues: The Forown Investment Promotion Board(FIPB) is obliged to decide on foreign investment projects within 30 days. Furthermore, a new authority is to be set up with the title Foreign InvestmentImplementationAuthority". This should significantly increase the percentage of investments actually made. So far, only around 25 to 30 percent of the approved investment amounts have actually been used in recent years.

As a result of the WTO negotiations, a further 600 products that were previously not allowed to be imported were eligible for import Specialin theportLicense" or OpengeneralLicense". The Indian press noted in line with this budget: No gain - no pain budget": the new budget will not give a big boost to the economic upturn in India.

India was not drawn into the vortex of the Asian crisis. Although the Indian rupee lost around 10 percent of its value per year against the DM in the 1990s, India is still a long way from the dramatic decline in the currency, as can be seen in some Asian countries. India's approximately $ 90 billion debt consists largely of long-term debt and Softloans.

The strong exchange controls and the lack of convertibility of the Indian rupee have prevented Indian companies from becoming heavily indebted abroad. Due to the high level of foreign debt that already exists, there is agreement among all social forces that one can do without foreignInvestmentsaCannot successfully advance modernization of the Indian economy.

Some German companies such as Krupp, Siemens and Bayer have been represented in India for over 100 years. Most major German corporations now have their own branches in India. But German medium-sized companies are also involved in India to a considerable extent. DifferentasinChinameetstheGerman medium-sized companies in India on a large number of medium-sized companies. The same size of company and similar company structures usually make cooperation easier.

The German exporting companies were able to benefit considerably from a reduction in tariffs and the liberalization of the markets and increased their exports to India from 2.3 billion DM in 1991 to 4.6 billion DM in 1996which is pretty much a doubling. Over half of German exports relate to machines and electrical engineering products, i.e. capital goods for the development of the indigenous Indian industry. In 1998, German exports to India collapsed by 13 percent and were thus hit hard by the weak growth in Indian industry.

A breakdown of German machine exports to India shows that Machine tools, textile machines and pumps are the most important German export products represent for this Asian market. The textile industry is by far the largest branch of industry in India. Aggregated across all processing stages, around 20 million people find employment there. Since India already has a highly developed industry, often only components from Germany are imported and assembled by a joint venture partner. Completely new machines are usually used for export production in order to be able to achieve international quality standards. India also buys used in large quantitiesmachineryinGermany. This important business becomes one in 1999considerableSetbacksuffer,theresince1.April1999theimportofUsed machinery has become subject to license; This isadistinctdeteriorationcompared to the previous regulation. It is difficult to judge whether isolation from unpleasant competition or the partial circumvention of foreign exchange regulations when importing used machines were in the foreground.

TheGermanImportsoutIndiareached a value of 4.2 billion DM in 1998 and have increased slowly and continuously over the past few years. The Indian deliveries mainly consist of textiles and Leather goods. The Indian deliveries of chemicaland pharmaceutical products. This is partly due to delivery obligations with the German parent companies.

Due to the strong devaluation of some Asian currencies, the competition for Indian exporters on the world market is getting tougher. China is by far India's largest competitor in the European market. Since India mainly supplies consumer goods to Germany, Indian export opportunities are also directly related to private consumer goods demand in Germany. Due to the crisis in the German retail trade in recent years, the growth rates of German imports have been correspondingly modest.

The USA remains the most important trading partner for India, both in export and in import. The German position is nevertheless quite strong, because Germany is one of the five most important countries as a trading partner.

An important The aim of the 1991 reforms was to attract more foreign investment. This goal was partially achieved because direct investment, starting from a low level, has exploded. In 1991, German companies received investment permits for around DM 20 million. After the Germans recognized the new opportunities in India, the value of the newly approved projects rose sharply, reaching a record value of around DM 1 billion in 1997. In total, there are currently around 1000 license agreements between German and Indian companies and 600 manufacturing German-Indian joint ventures. German direct investment has risen to the same extent as total foreign direct investment.

The United States is the most important foreign investor, as American companies often invest in large-scale energy generation, oil exploration and telecommunications projects. These large projects lead to a strong inflation of the investment figures. On average, only 20 percent of these approved investments are actually implemented, since the large projects usually have a long duration and the investment sums are stretched as a result.

As a special feature, Mauritius and the Cayman Islands emerge as important investment countries in the investment statistics. This is related to the fact that Non-resident Indians and large international companies consider these locations as the basis for their investments in India due to favorable double taxation agreements. If you take these two states out of the equation as special cases, then lies Germany in third place after the USA and Great Britain as an investor. If you only look at the number of cooperation agreementslayGermany1997totheUSA in second place with a total of 254 new collaborations. The high number of German collaborations is a clear indication of the strong participation of small and medium-sized companiesCompaniesontheindian market.HowbeautifulthestructuretheGerman exports suggests, German investments focus on mechanical engineering, electrical engineering and chemistry and pharmacy. The German automotive industry has been added as a new important sector in recent yearswhich has now become active in India and has followed suit with a number of suppliers. Due to the high price level of German machines, many German manufacturers are forced to enter into cooperation with Indian partners in order to create a Mixed calculation to reach. Only so-called critical components are supplied from Germany, the rest is bought in India and assembled according to German plans.

Due to the still underdeveloped infrastructure, the Indo-German joint ventures concentrate on the mainIndustrial regions in India. The continues to lead Greater Bombay-Pune, followed by Delhi-FaridabadThe cities follow at a considerable distance Bangalore, Calcutta and the StateGujarat.

Due to the gloomy economic outlook, the sum of approved German foreign investments in India fell by over 50 percent in the first half of 1998 compared to the previous year. In comparison, the number of approved foreign partnerships fell by 23 percent. This makes it clear that at least the middle class is still looking confidently to the further development in India. Large projects in particular were at times difficult to finance on the international capital market due to the sanctions introduced by the Americans for the atomic bomb tests in May 1998. That is why the investments of the Americans have plummeted even more than those of the Europeans.

In discussions about the motives for direct investments in India, the so-called affluent middle class is always mentioned, a buyer segment that is of course very differentiated: On the one hand, it turns out to be Income estimates in India are very problematic, since reliable sources cannot be used. Statistics on income relationships should therefore always be read with a certain amount of skepticism and not over-interpreted. The steep pyramid of income relationships in India shows a markedly unequal distribution of income. Almost 40 percent of the population live below the poverty line. 2.5 percent of households belong to the group of top earners and have an income of over DM 4,000 per year.

According to other estimates, there were around 2.3 million households in India in 1996 with an annual income of over DM 20,000. 74,000 households had an income of more than DM 200,000 a year. While the income pyramid paints a rather negative picture with regard to potential buyers, the income profile is already raising hopes for the existence of a few households with high purchasing power. In order to lighten this diffuse picture a little, it makes sense to use some rather unconventional indicators. When analyzing the distribution of selected consumer goods, one must of course always bear in mind that a total of around 975 million people live in India. The question of the size of the sales market can only be answered specifically for one product. Theoretically, the number of potential buyers for a wristwatch in India is around 200 million people today, but with regard to durable consumer goods, these high numbers have to be cut back considerably. Still existing restrictions on the import of consumer goods and high tariffs of up to 80 percent will further reduce the sales potential in this market segment for the next few years. These reasons are of course one of the reasons why German investors concentrate on the capital goods sector, which is largely liberalized.

© Friedrich Ebert Foundation | technical support | net edition fes-library | September 2000