India's Growth Path: Steady but Not Straight; Contentious Internal Political Debates Have Slowed India's Movement into the Global Economy, but Its Commitment to Democratic Processes Will Serve It Well in the Long Term
Tripathi, Salil, Issues in Science and Technology
By almost any reckoning, the Indian economy is booming. This year, Indian officials revised their estimated economic growth for 2006 from 8% to 9.3%. This growth has been sustained over the past several years, effectively doubling India's income every eight to nine years.
Since 1991, the year India removed some of the most crippling controls ever imposed on business activities in a non-communist country, it has not only been attracting large amounts of foreign investment, it has also begun luring back many skilled Indians who had chosen to live overseas. It has also lifted millions of Indians out of poverty.
Such a scenario seemed impossible to conceive in 1991, when the Indian economy was on the ropes, as its foreign reserves plummeted to a level that would cover only three weeks of imports and the main market of its exports (the Soviet Union, and by extension, the eastern bloc) unravelled. Forced to make structural adjustments to its economy, India lifted many restrictions on economic activity, as a result of which macroeconomic indicators have improved vastly (Table 1). Foreign investors, once shy, have returned.
The gross domestic product grew at a compounded rate of 9.63% annually during this period, and capital inflows increased dramatically. This change is remarkable because since India's independence in 1947, it had pursued semi-autarkic policies of self-sufficiency and self-reliance, placing hurdles and barriers in the path of foreign and domestic businesses. Foreign investors shunned India because they were not welcome there. Restrictions kept multinational firms out of many areas of economic activity, and once in, companies were prevented from increasing their investments in existing operations. In 1978, the government asked certain multinationals to dilute their equity to 40% of the floating stock or to divest. IBM and Coca Cola chose to leave India rather than comply. Six years later, a massive explosion at a Union Carbide chemical plant in Bhopal, which killed more than 2,000 people within hours of the gas leak, brought India's relations with foreign investors to its nadir.
The biggest change in 1991 was that India stopped micro-managing its economy by instituting policies:
* Allowing foreign firms to own a majority stake in subsidiaries;
* Liberalizing its trading regime by reducing tariffs, particularly on capital goods;
* Making it easier for businesses to take money in and out of India;
* Lifting limits on Indian companies to raise capital, to close business units that were no longer profitable, and to expand operations without seeking approval from New Delhi; and,
* Complying with the World Trade Organization (WTO), after considerable internal debate and opposition, by strengthening its patent laws.
This last measure is a brave one, because there is a considerable body of Indian opinion, ranging from anti-globalization activists to open source enthusiasts, aligned against strengthening the patent regime. India has had an ambivalent relationship with the idea of property and private ownership: Squatting on somebody else's property is not unusual; Indians copy processes and products, not always successfully; they resent multinationals exercising intellectual property rights; they protest when foreign firms establish such rights over products or processes Indians consider to be in public domain; and India has one of the world's most enthusiastic communities of software developers who prefer the open-source model.
After passing legislation confirming India's compliance with the WTO intellectual property rights regime, government officials now hope that many more companies will join the 150 multinational companies, including GE and Microsoft, that have set up research and development (R & D) labs in India to tap into the country's talent pool of engineers. But its legislative will is already under challenge. …