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India presence essential for international success

Recently, a U.S. commercial officer in Bombay, India, suggested that any U.S. company that wants to be an international company in the next 10 years should have a presence in India.
This comment is understandable when you consider that with a population of more than 900 million and the world’s second-biggest potential market after China, India’s population will surpass China’s by the middle of the next century. India then would rival China as the new economic force, not only in Asia but in the world.
The question then is what brought about this dramatic change in a country that was near bankruptcy in mid-1991.
The answer to this question is that India began a plan for economic liberalization about 15 years ago with attempts to stimulate international trade and restrict (or at least reduce) its strict bureaucratic controls.
While some of these changes took place under Prime Minister Rajiv Gandhi, it wasn’t until after his assassination in 1991 that some truly significant reforms began. The two men credited with this reform movement are the new prime minister, PV Narasimha Rao, and his Cambridge University-educated finance minister, Manmohan Singh.
Among the changes these two men have instituted is the lowering of tariffs from nearly 300 percent to 65 percent. Local Indian producers are unhappy about lower tariffs, but there is no going back to the old days.
The two also have facilitated greater political stability, though a number of obstacles remain: religious riots, especially in the North; some recent losses in local elections due to the feeling by the poor that the economic revolution was leaving them behind; and the issue of a power struggle between the federal government and a regional government.
This latter issue made our front pages when the regional government of Maharashtra canceled a $2.8 billion power-plant-construction deal with a U.S. consortium.
(Prime Minister Rao stated recently that this deal, the largest foreign investment made in India since 1991, could be salvaged, and thus began arbitration proceedings.)
Also among recent changes was the devaluation of India’s currency–the rupee–which now is convertible for trade (full convertibility is expected by 1997).
Currency and tariff reforms, and the liberalization of investment opportunities have been instrumental in bringing more than $1 billion into the economy from outside investors; that is in addition to the $5 billion put into India’s stock markets. However, there remains the problem of privatization, which is moving very slowly. This is because of the traditional belief that government is the solution to all of the economic woes of India.
Furthering the complication are the labor unions. In large state-owned industries, the unions, which are tied closely to political parties, oppose any change that will involve large-scale firing of workers. Protective labor laws give the government veto power over large-scale sacking of workers; consequently, you cannot close a plant without government approval.
Finance Minister Singh has indicated his interest in changing this, but that won’t happen until after the elections of 1996. It is expected that Prime Minister Rao’s Congress party will win the elections, and this should accelerate reforms. One of these reforms, and certainly one of the most important issues on the government’s reform agenda, is the elimination of its antiquated and inefficient tax system. The current tax base is too narrow since its major source excludes India’s agricultural base and its traditional cottage (handicraft) industries; this excludes almost 64 percent of the population from the tax net. Evasion is rampant.
The consequence of all of this is that the reform movement appears to be irreversible, even at the state level, which accounts for half of the country’s gross domestic product. When compared to China, investors find India has several advantages. The culture is accustomed to Western influences, and its people have traveled or studied overseas. And the Indian middle class is familiar with Western goods and products.
However, few investors are looking for cheap labor; instead, the appeal of India’s labor force is that it has skilled workers (India graduates more engineers each year than China and South Korea combined). Also, unlike China, India has a well-developed legal system with courts that enforce laws with reasonable objectivity; though rules and regulations sometimes are slow-moving, they, for the most part, are reliable.
In conclusion, the advice to foreign investors is to be patient. Don’t let the bureaucracy overwhelm you. Remember the population of 900 million, with roughly a third of that an emerging middle class with tastes for those products that are Western in nature. Outside investment will further the growth of this middle class. In the meantime, India must liberalize more quickly and effectively than Asia’s other emerging countries. Nevertheless, for U.S. investors to be players in Asia, they must be in India.
Following is a collection of facts and figures about India:
It is an area slightly more than a third the size of the United States and has a population of approximately 920 million people. Its natural resources include coal (it has the fourth-largest reserves in the world), iron ore, manganese, titanium ore, natural gas, diamonds, petroleum and limestone.
Its religious makeup is 80 percent Hindu and 14 percent Moslem. Hindi is the national language, but the most important language for national, political and commercial communication is English. India’s government is a federal republic with a bicameral parliament (Sansad), a constitution, a legal system based on English common law and a Supreme Court. The capital is New Delhi.
(Walter Boston Jr. is director of the International Institute at SUNY College at Brockport.)

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