Country report on India

Globalization and National Differences in Political Economy

India is in the process of transforming from a developing country to a developed one. In spite of dire problems such as overpopulation, environmental degradation, poverty and corruption, quick economic development is fueling India's rise on the world stage. In this paper, the author will compare it to China in its neighborhood. China is mostly dominated by the patina of a communist ideology with an open economy. India is under democratic principles with a competitive market. Both China and India tend to be facing some of the same problems under their economic structures because of political, institutional and societal factors. Throughout the paper, India will be the base, both China and India will be compared and contrasted political culture systems and their impact upon trade regarding the economic process at the domestic and global levels.

To a lesser extent, it will be compared to the United States market. Luckily for India there was a lack of various negative issues that sank the United States market in the 2008 market meltdown, especially in the area of securitization of mortgages. In this way, India has kept up the wall between speculative and commercial investment in the crucial real estate sector of the economy. Attracting FDI will be critical in India's entry into the global capital market, for its strategy of and organization of itself in the international business arena. For India's economic success to be permanent (and it appears to be so) FDI will spur imports and exports as well as manufacturing in this era of globalization

A key part of this success has been in the area of globalization. It has brought India much needed wealth and development as companies in the United States and Europe have outsourced high-tech work with computers and business process outsourcing (BPO) services. Essentially, these corporations have succeeded in expanding their bases of operation with a minimum of increased labor and investment costs. These corporations have taken advantage of India's lower cost, but highly educated and English-speaking workforce by utilizing modern communication technologies such as voice-over internet protocol (VOIP), email and the internet. A new Indian middle class has developed around the wealth development that the computer and BPO industries have brought to the country. Due to this, a new consumer base has developed. Additionally, international companies such as Pepsi, Coca-Cola, McDonald's, and Kentucky Fried Chicken are also expanding their operations in India to service the large growth opportunities this middle class has opened ("Economy Watch").

India has therefore developed well into an open-market economy, yet traces of its past policies remain as well. The economic liberalization (such as reduced controls on foreign trade and investment has greatly accelerated the country's growth. This has averaged more than 7% per year since 1997 ("World Fact book").

Differences in Cultural Strategy, Regional Economic Integration

Unlike many of its neighbors, India has chosen economic development over becoming dependent upon any one superpower for help. This self-reliance in economic and defense terms has been a key factor in the country's economic success. it's rivalry with China is in marked contrast in every way, including in the economic arena. Previously, most analysts have seen China on top, but lately India has been catching up, despite its lagging behind China in the past. While China's economy has been developing at breakneck pace, the Indians have been more deliberate, wanting to depend upon a sustainable model. Top economist Jim Walker of the Hong Kong -- based research firm Asianomics says in an article by Michael Schuman "The way I see it is that the growth in India is much more sustainable." The way Schuman sees it, India's edge is due to the different stimulus programs adopted by the two countries to support growth during the recent economic downturn. China implemented what Walker calls "the biggest stimulus program in global history." On top of government funding for new infrastructure as well as tax breaks, Beijing counted on a massive credit growth to spur the economy. This credit boom may have overheated the Chinese economy, especially in the critical real estate market. By contrast, India did the same as China, but on a much smaller and sustainable scale without jeopardizing its banking industry. Therefore, economists see continued strength in India's banks. And analysts do not harbor the same concerns that India's monetary policies are not sending the prices real estate into a bubble situation (Schuman). While the planned, command economy of China is faster to respond the Indians have counted upon slow and steady to win the race and this may have paid off. We shall see later that this is now finally having results in attracting FDI money to update this infrastructure with badly needed upgrades.

India's diverse economy includes traditional village farming and modern agriculture, traditional handicrafts, a wide array of modern industries as well as a multitude of services. Unfortunately, more than half of the workforce is in agriculture. However, services have become the major source of economic growth. They now account for more than half of India's output. Amazingly, this includes only one-third of its labor force. India has wisely capitalized on its huge educated English-speaking population and has become probably the major exporter of information technology services and software workers. Due to the industrial slowdown in early 2008, followed on by the global financial crisis, this led annual GDP growth to slow to 6.5% in 2009. Even with the recession, this was still the second highest growth in the world among major economies across the board (developing and developed), exceeded only by China and its less conservative policies. India has escaped the brunt of the global financial crisis because of its cautious banking policies with a relatively low dependence on exports for growth. Domestic demand driven as it is by the purchases of consumer durables and automobiles has again as the key driver of domestic growth even as exports have fallen since the start of the global crisis. India's fiscal deficit increased substantially in 2008 due as the government increased agricultural subsidies. It therefore abandoned its deficit target and allowed it to reach 6.8% of GDP in fiscal year 2010. Despite all of this, both government spending and taxation are among the lowest in the world in shares of GDP. Therefore, the government had the financial room to commit to a fiscal stimulus in FY10 while engaging in deficit reduction the following 2 years. Wisely, the government has increased the pace of privatization of government-owned companies to offset the deficit, showcasing the pragmatic economic real politick that has been the hallmark of the Indian approach to economics ("World Factbook").

As we saw earlier in the Schuman article, China has not been so prudent and may have shot its bolt in terms of credit when and if its real estate bubble bursts. Slow and steady may be the key to success in the long run (Schuman).

Despite a seemingly rosy picture, much of this increase in economic growth is due to high technology and foreign direct investment (FDI) in terms of service industries. In comparison to China, the picture is not as good. China and Hong Kong received U.S.$106 billion in 2009 versus U.S.$3.6 billion for India. India Watch posits that only better infrastructural improvement can attract FDI and lucrative tourist money. In terms of exports, China is almost over 700% of what India exports. If the exports of Hong Kong and Macau were taken into account, China's exports would over 1000% higher than that of India! The Chinese GDP is 50% in manufacturing or $650 billion per year. India's GDP is 25% in manufacturing or $110 billion per year, making China's manufacturing base nearly 6 times of India's ("I Watch").

While China's growth might seem to be reckless, in the long run it is a question of what is the weaker reed: service industries or manufacturing. In the opinion of this author, it can be historically argued that it has been manufacturing that have been the keys to world leadership. Service industries and the "post-industrial" model has been the recipe for a lowering of the status of the United States (a model for a present service economy) and the economic growth that is only outwardly impressive. China's economic growth is across the board and India may be copying the U.S. To its peril.

In this vein, India has survived the global economic crisis but there are "swadeshi" (self-sufficiency) vulnerabilities. The vulnerabilities may not be similar to what other countries have, but they exist. According to Dr. Y.V. Reddy, former Reserve Bank of India Governor, one must look at these vulnerabilities. He thinks thinking the analysis that financial development will solve all problems is not right by itself. According to Dr. Reddy, "It has been an uneven, multi-speed recovery. The financial sector is growing, but the real sector is not picking up. There are several features of recovery. This means that global coordination is required. If there is a fire in the village, everyone coordinates to douse the fire. But when the village is being rebuilt, consensus is not easy (Kurup)." This is a pointed criticism of using a U.S. model where the financial sector is doing well (the speculative economy) as opposed to the "real" economy on the street. Dr. Kurup feels that the infrastructural problems that have dogged India for years need to be solved as well so the recovery is even and across the board. He further remarked in the article that "You have to see the context. Just because we were not affected by the crisis, it does not imply we are safe. One has to look at what is the purpose behind the changes. There is a perception if you develop the bond market, infrastructure will develop. Infrastructure will not develop if the bond market alone is developed. In fact, no country in the world, except for partly the U.S., developed infrastructure through the bond market (ibid)." In other words, for there to be overall health in the Indian economy industrial growth and the strong infrastructure that it brings along with it is necessary for real, sustained economic growth that will benefit all Indians. In other words, he is looking across the border at China and eyeing their successful infrastructure development and acknowledging the reality.

Entry Strategy and Strategic Alliances

Was Mr. Reddy appreciated before the economic crisis kicked in 2008? The answer to that question was no. Joe Nocera in a New York Times Business Column article observed that "So it was. And our regulators, unlike theirs, just stood by and let it happen. The next time we're moving into bubble territory, perhaps we can take a page from Mr. Reddy's book -- sometimes it's better to apply the brakes too early than too late. or, as was the case with Mr. Greenspan, not at all (Nocera)." Rather than let easy money propel the system, the Indian Reserve Bank put the brakes on the loans before the bubble was allowed to burst and their conservatism paid off. In this way, there was a lack of various negative issues that sank the United States market in the 2008 market meltdown, especially in the area of securitization of mortgages. In this way, India has kept up the wall between speculative and commercial investment in the crucial real estate sector of the economy.

Unfortunately, inflation is a problem and the Indian government is taking steps to stem this crisis. "The Indian government is making serious efforts to moderate inflation…"I can assure ... that our government is making serious efforts to moderate the inflation rates. We have difficulties but we shall overcome," said Prime Minister Manmohan Singh." India's annual headline inflation was at 8.58 per cent, making the central bank uncomfortable. The expectations are that the central bank will hold rates steady in the near-term. In contrast, house China which is taking more direct action to control inflation. The People's Bank of China said that it would raise the percentage of deposits commercial banks need to hold with the central bank by 50 basis points.

China's State Council said it will adopt 16 measures to stabilize consumer prices, including temporary subsidies and price monitoring according to local media reports.

China has however stopped short of raising interest rates for now, fearing a rush of speculative money into the economy ("Economy").

The Global Trade and Investment Environment, Imports and Exports,

This conservative strategy may very well be paying off. The Indian export sector is small, but increasing. Having been an agro-based economy, Indian trade has traditionally been devoid of manufactured or industrial goods. Post liberalization, imports dominated the Indian trade scene in the form of heavy machinery and information technology products and, thus, created an imbalance of trade. Indian trade was impacted by the global recession of 2007-2009. Indian exports fell from $200.9 billion in 2008 to $165 billion in 2009. India ranked 22nd in the world in terms of export volume. Indian trade has undergone massive restructuring following the 1991 liberalization policies. Ever since, India's exports have experienced a growth rate of 18.11%. The big surprise has been the import sector that has experienced a growth rate of 34.30%. The Indian economy is headed towards becoming a developed economy and all its sectors are in need of machinery and energy. Therefore, Indian imports are dominated by crude oil and machines. In 2009, total imports amounted to $253.9 billion, down from the 2008 figure of $322.3 billion. Indian trade has undergone massive restructuring following the 1991 liberalization policies. Ever since, India's exports have experienced a growth rate of 18.11%. The big surprise has been the import sector that has experienced a growth rate of 34.30%.

The Political Economy of International Trade, FDI and Its Political Economy, International Monetary System

India has been one of those emerging markets however that has traditionally lagged behind China in the area of Foreign Direct Investments (FDI) by Trans National Corporations (TNCs) China gets some 60 billion dollars FDI annually while India does not even bet 6 billion dollars (Swapna, p. 2). For India's economic future, this is the key question. Earlier in this paper, we considered this point. The lack of infrastructural attention has been a major contributing factor in the past to India's inability to attract FDI. However, the overheated nature of the present Chinese market is causing the TNCs to reexamine India, especially now that the Indian government is putting major capital into improving this infrastructure. In the Swapna journal article, statistical data based upon regression analysis research was done on variables taken from data in the six mega states of Maharashtra, Gujarat, Hyderabad, Andhra Pradesh, Tamil Nadu and Delhi where most of the Indian growth is concentrated. The first variable was human capital. Others included variables from a national level such as market size (GDP) market growth rate (GDP % growth), political stability (Interest rate), corruption and exchange rate volatility (% change over a year). The FDI model included the above variables and their impact on the tested model to predict FDI inflows and changes. Swapna's FDI model used data for the period 1992-2005, with FDI data for the mega states. What Swapna found was that FDI inflows in the emerging market of India in a globalization scenario are positively correlated with the human capital present in the market. Political stability, corruption and exchange rate volatility also were found to be partially significant (ibid, pp. 5-6). Swapna believes that India needs $300 billion dollars in foreign FDI to catch up (ibid, p.12). Finally, this is happening very nicely now. India is finally catching up with the other BRIC (Brazil, Russia, India, and China) countries in the emerging markets.

Regional Economic Integration

Indeed one issue that has traditionally kept India behind may be a key to its growth. A core problem in the past has been that India's overpopulation has eaten up much of its economic growth. Now, with the demographic implications of China's one child per family kicking in, it will soon be an aging nation. India is overwhelmingly young and will continue to be so. This huge, new vibrant population is bursting with energy and will undoubtedly overtake and overwhelming China's aging and continually more conservative population which will less and less able to keep up with technological and other changes. The operative word in today's fast-paced global market is change and the ability to adapt and develop will be the difference between global leadership and obsolescence in the fast-paced world of the twenty-first century.