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Study notes

India’s Path to Economic Development

  • Levels: AS, A Level
  • Exam boards: AQA, Edexcel, OCR, IB

India is one of the BRIC economies (Brazil, Russia, India and China), forecast in 2001 by the Head of Global Economic Research at Goldman Sachs to become the next big four global economies. China’s global manufacturing success in the last 20 years is well documented, Brazil has become the driver of industrial expansion in South America and Russia’s oil and gas-driven geopolitical power has had a profound effect on energy security in Eurasia.

India has taken a different path to economic development. It has ‘leapfrogged’ large-scale industrialisation and instead drawn upon its highly skilled, IT literate, English-speaking workforce. India has driven the globalisation of services since the late 1980s and looks set to continue to develop in the tertiary and quaternary sectors

Post-colonial economy

India achieved independence from Britain in 1947 and thereafter embarked on a largely protectionist (some say isolationist) approach to economic development. The Indian government termed it ‘state capitalism’ and aimed to stimulate the previously suppressed domestic market. The country adopted a politico-economic framework of parliamentary democracy committed to a self-reliant, planned economy. Unlike the Asian Tigers and China subsequently, India therefore adopted an Import Substitution Industrialisation approach to development whereby Foreign Direct Investment (FDI) was severely restricted so that domestic industry was encouraged to produce goods for the Indian market rather than importing foreign-produced items. Industry was largely state-owned and state-run and India developed into an inward-looking economy.

It is almost certain that this approach to economic development was a direct to reaction to almost 300 years of colonial rule. Under British rule the focus of Indian industrial activity had been shifted away from the domestic market towards the external market and the post-colonial government sought to reverse this trend

Change in economic policy

India’s economy continued largely in this way until the 1980s when there was a small growth in manufacturing. The turning point came, however, in 1990 when India threatened to default on its loans (it had the third largest foreign debt in the world - $72bn – after Brazil and Mexico, and was said to have only two weeks’ of currency reserves left to pay for imports) and was forced to adopt a significant set of economic reforms in exchange for the largest loan ever given by the International Monetary Fund (IMF) at the time.

From 1991 import quotas (fixed limits on quantities of particular goods imported) were removed, tariffs (taxes on imports) were reduced, the currency was devalued and – very significantly – foreign investment liberalised (freed up). This opened up the Indian economy to FDI although while the inflows in the 1990s were huge compared to the past (averaging nearly $4 billion), on a per capita basis India remained one of the least exposed countries to foreign investment in the world.

Industrial growth in post-reform India did not increase significantly in the decade that followed, although by the mid-2000s a pro-business model had begun to accelerate economic growth rates.

India's IT industry

The Indian software and services export sector has grown rapidly since the early 1990s and today employs more than a million professionals. The sector has become a major export earner for India and has maintained momentum throughout the 2000s, consolidating partnerships with overseas customers. Early partners in outsourced call centres and other administrative functions included British Airways and American Express and now includes Aviva, Accenture, Dell and Lloyds TSB. Many early call centres were located in New Delhi, although Bangalore, Chennai and Mumbai have since emerged as major centres in this sector. The Business Process Outsourcing (BPO) sector is the fastest growing segment within India’s software services sector with many back-office functions such as customer care and finance administration being performed for western TNCs (Trans National Corporations). Approximately 60% of global offshore BPO takes place in India.

India has also become a destination of choice not only for low-end work like BPO but also high-end development work like application design. The sector has undergone some movement up the value chain from code writing and software testing to project management and packaged software exports. India has subsequently become a software exporter through domestic TNCs such as Infosys and Wipro. These Indian IT companies were supported by government policies promoting technological capability and together now employ just under 500,000 people globally. They were ranked 672nd and 811th respectively in the Forbes Global 2000 List in 2015 (a comprehensive list of the world’s largest public companies by revenue and profit).

A more recent development is the location of R&D (Research and Development) functions in India by TNCs. Hewlett Packard set up Software Universities in 8 cities (it opened in 2009 in Mumbai, Delhi, Pune, Kolkata, Hyderabad, Noida, Chennai and Bangalore) and Honeywell has invested in an R&D facility in Bangalore.

Advantages of India as a location for outsourcing

It is estimated that 52,000 British jobs have been outsourced to India since the 1980s. British companies are said to save £10 million per year for every 1000 jobs moved to India.

Some of the reasons for the popularity of India as a location for offshore BPO and software development are:

· A large number of highly skilled, English-speaking employees.

· Low wage costs compared to other offshore outsourcing competitors such as China and Mexico.

· Flexible working practices: working conditions in India have traditionally seen long hours, flexible shift patterns and are not heavily unionised.

· India is politically stable, although recent terrorist incidents and continued unrest in Kashmir casts doubt on this status.

· India is benefitting from the demographic dividend (India’s fertility rate fell during demographic transition stages 3 and 4 and the result has been fewer dependent children and an increasing proportion of productive teenagers and young adults. A large, young workforce serves as a magnet for FDI.

Disadvantages of India as a location for outsourcing

Poorly developed infrastructure: under colonial rule, India’s infrastructure was urban-focused and the post-colonial governments have done little to change this so there are limits on electricity transmission, clean water and internet coverage.

Red tape: doing business in India is still characterised by a complex system of permits and licences, despite economic liberalisation since 1991

Wages are rising as domestic demand increases: this could cause TNCs to relocate to areas of cheaper labour

The demand for skilled labour has been so high that India is now beginning to experience a shortage of graduates in engineering and IT

Brain drain: IT, science and medical professionals continue to migrate to MEDCs, particularly in North America, where salaries and quality of life are higher.

Poor basic education and low literacy rates on a national scale: this could impede future economic development

Large rural/urban and regional inequality: the benefits of economic growth have largely been restricted to the urban middle classes who form the political and economic elite

Low status of women in many rural areas: this is a problem both socially and economically

Outward investment (Tata)

The isolationist policies of post-colonial India encouraged family-run companies to grow and expand and some have now become major driving forces in the Indian economy. Tata is India’s second largest company and has grown to become an important investor in foreign markets, most notably the UK. Tata has diversified into wide-ranging markets such as satellite TV, steel, tea and insurance. A relatively new market which Tata is investing in is frugal engineering. These are innovations designed for the growing middle-classes of India who still have relatively low incomes but who aspire to higher standards of living. Tata has developed the Nano car, Swach water purifier and even housing estates.

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