The Sub-continent has become the prime target for foreign direct investment. India ranks 6th among the top 10 countries for Foreign direct investment. Although not in the front line, it has become an attractive destination for foreign investment1. India’s economic policies are tailored to attract substantial capital inflows and to sustain such inflows of capital. Policy initiatives taken over a period of years have resulted in significant capital inflows of foreign investment in all areas of economy including the public sector. This paper analysis the structure of economic reforms during the pre- independence and post independence era in the context of growth of foreign direct investment and the risks posed by the political, economic and social conditions for foreign investors. Essentially, this paper seeks to analyse and understand the economics and politics of India’s progressive integration with the global economy.
FDI In India: A study of economic reforms and risks
Prior to understanding the economic progress of India, it is vital to first identify the current economic status of India so that it is easy to retrace the process leading to the current status. India presently enjoys the status of an attractive emerging market. However, this status has been the result of numerous economic reforms adopted over the years. India intent to open its markets to foreign investment can be traced back to the economic reforms adopted during two prime periods- pre- independence and post independence.
Pre- independence, India was the supplier of foodstuff and raw materials to the industrialised economies of the world and was the exporter of finished products- the economy lacked the skill and means to convert raw materials to finished products. Post independence with the advent of economic planning and reforms in 1951, the traditional role played changes and there was remarkable economic growth and development. International trade grew with the establishment of the WTO. India is now a part of the global economy. Every sector of the Indian economy is now linked with the world outside either through direct involvement in international trade or through direct linkages with export and import transactions of other sectors in the economy.
Development pattern during the 1950-1980 period was characterised by strong centralised planning, government ownership of basic and key industries, excessive regulation and control of private enterprise, trade protectionism through tariff and non-tariff barriers and a cautious and selective approach towards foreign capital. It was a quota, permit, licence regime which was guided and controlled by a bureaucracy trained in colonial style. This inward thinking, import substitution strategy of economic development and growth was widely questioned in the 1980’s. India’s economic policy makers started realising the drawbacks of this strategy which inhibited competitiveness and efficiency and produced a much lower growth rate that was expected.
Consequently economic reforms were introduced initially on a moderate scale and controls on industries were substantially reduced by 1985 industrial policy. This set the trend for more
innovative economic reforms and they got a boost with the announcement of the landmark economic reforms in 1991. After nearly five decades of insulation from world markets, state controls and slow growth, India in 1991 embarked on an accelerated process of liberalization. The 1991 reforms ensured that the way for India to progress will be through globalization, privatisation, and liberalisation. In this new regime, the government is now assuming the role of a promoter, facilitator and catalyst agent instead of the regulator and controller of economic activities.
India has a number of advantages which make it an attractive market for foreign capital namely, political stability in democratic polity, steady and sustained economic growth and...
References: 1. World Investment Report, 2003.
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