INDIAN ECONOMICS & POLITICS.   Term Paper ID:26170 Click to get this paper

Essay Subject: In 20th Cent., focusing on 1990s. Leadership, parties, unrest, reform, development, liberalization, foreign investment & exchange, growth, trade.... More...

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Paper Abstract: In 20th Cent., focusing on 1990s. Leadership, parties, unrest, reform, development, liberalization, foreign investment & exchange, growth, trade. Paper Introduction: Political History Agitation against British colonial rule grew during the 1920s and 1930s. At independence in 1947 differences between Hindus and Muslims led to partition of British India into present-day India and Pakistan (from which Bangladesh broke away in 1971). India became a sovereign republic in 1950 under a constitution adopted in 1949. In addition to staggering problems of overpopulation, economic underdevelopment, and inadequate social services, India had to achieve the integration of the former princely state into the union and the creation of national unity from diverse cultural and linguistic groups (Basham, 1984). India's major foreign problems have been a border dispute with China that first surfaced in 1957, and continual conflicts with Pakistan. In the l Text of the Paper: The entire text of the paper is shown below. However, the text is somewhat scrambled. We want to give you as much information as we possibly can about our papers and essays, but we cannot give them away for free. In the text below you will find that while disordered, many of the phrases are essentially intact. From this text you will be able to get a solid sense of the writing style, the concepts addressed, and the sources used in the research paper. Theseindividuals were then forced to resign (Nicholson, 1998). India became a sovereign republic in195 under a constitution adopted in 1949. Power of states increasing,Financial Times. Yet it is also true that majoritythinking among the government elite about protection and regulation waslargely transformed. Industrial policy was dramatically restructured. Until the early 199 s it seemed thatmost people in India viewed any liberalization with hostility and fear.The argument that India was different was invoked to defend the mostarchaic policies not just by politicians and self-serving bureaucrats butalso by economists working in the country. Manyobservers inside and outside of India now worry that India's nucleartests, and Pakistan's matching blasts have destablized south Asia, torn ahole in the global non-proliferation regime, and generally raised questionsabout the direction of India's foreign policy for the future (Nicholson,1998). In 1997 and 1998 India experienced a slow-down in its exports.partially due to the Asian economic crisis. Unanswered questions. Nehru's daughter, Indira Gandhi played an important role in India'sdomestic politics in the 196 s, 7 s and early 198 's.In 1974 her position was put under tremendous pressure by politicalopponents who criticized the government for abusing its power. Some foreign banks were present in India and have been expandingtheir operations. A stabilization package was firstannounced which paved the way for loans from the IMF and the World Bank.Debt-servicing problems were thereby averted as a result of an increase inexternal financing.Import Liberalization With the exception of consumer goods, direct import controls onvirtually all items were abolished during the early to mid-199 s. & Srinivasan, T.N. Furthermore,the tax laws became more conducive to business investment (Byrd, 199 ). He moved quickly to end the rioting and thereafterpursued a domestic policy emphasizing conciliation with India's conflictingethnic and religious groups. Under economic liberalization foreign investment policy was alsoredefined. Firms are now free to issue capital and price new issuesaccording to market conditions subject only to some guidelines. Almost allsectors of the economy were opened to private investment, domestic andforeign. Allother foreign investment proposals, including those involving more than 51%equity and proposals outside the priority list were considered through afast-track procedure by a Foreign Investment Promotion Board housed in thePrime Minister's office. Furthermore, India had also recently joined the MultilateralInvestment Guarantee Agreement and was negotiating bilateral investmentguarantee agreements with several countries (Rao, 1995). (1995 July 31). Around 6 percent of the country's exportsare accounted for by textiles, garments and handicrafts--sectors which aredominated by small companies.Indian economists argue that such concerns find it harder to obtain crediton reasonable terms and that there is a shortage of venture capital to helpthem expand (Montagnon, 1998). (1985). Norms under which the bankingsystem functioned were revamped to bring them in line with theinternationally recognized Basle Committee norms. The areasreserved for the public sector were also reduced to six, eliminating thegovernment monopoly over critical infrastructures such as power, oil,hydrocarbons, air transport, and telecommunications (Rao, 1995). Borrowing at home and abroad largely financed thedeficits. Between 1995 and 1998, growth averaged 7% a year. The scrip was previously issued to exporters and used by them toimport items that were restricted at that time. Indira's eldest son, Rajiv Gandhi thenbecame Prime Minister. Opening up to consumer goods importsimplies a rethinking of the licensing system that reserves productionrights of such goods for smaller companies. Having grown at double digitrates during the mid-199 s, total exports actually fell in the first partof 1998. Over the next 7 years there was a mixed political response to theeconomic reforms introduced by Rao. Four decades of central economic control were dismantled. Thanks to the activism of India's Supreme Court 65politicians belonging to virtually all parties were investigated for takingbribes. In 199 Singh resigned as primeminister and called for new elections. India's average tariff in1997 was almost double that of China. Smith, V.E. 17, pp. In addition,because of the size of its domestic market, the government tended tounderemphasize exports. Increasingly India is also paying more attention to the role of smalland medium sized companies who supposedly form the backbone of themanufacturing export sector. In May of 1974 Indiabecame the world's sixth nuclear power by exploding an underground nucleartest in the desert (Smith, 1985). (ed.). Government officials are alsoconsidering more reforms of the tariff system. Because the higher rate in the market gave exporters an extraincentive, the government abolished what was known as the export-importscrip. The custom duty on capital goods was reducedto 25%, and those on many raw materials have fell well below the top 65percent rate (Bagwati & Srinivasan, 1993).Export Liberalization There was considerable liberalization on the export front. But over time, as the economygrew bigger and more complex, the determination of priorities over variousregions and industries became increasingly difficult (Byrd, 199 ). 4, pp. At independence in 1947 differences between Hindus and Muslims ledto partition of British India into present-day India and Pakistan (fromwhich Bangladesh broke away in 1971). Also in1973, India's ties with the USSR were strengthened. NY: HarperRowe. Interest rates were also deregulated. The totalnumber of items subject to export restrictions fell dramatically in theearly 199 s. Dividends were also freely repatriable andinvestors had the assurance that capital repatriation would be freelyallowed. In 1982 Sikh militants began a terrorism campaign intended topressure the national government to create an autonomous Sikh state in thePunjab. Planning in India: Lessons from fourdecades of development experience, Journal of Comparative Economics, Vol.14, No. Basham, A.L. Mahesh, U. However,economic analysts have also argued that India has a weakness in landtransport and port infrastructure, as well as cumbersome bureaucraticprocedures and a corrupt customs system. (1995 November 17). (1993). 35-38. The Oxford history of modern India. (1984). Rao, P.V. Withoutmuch hesitation India chose the path of planned development and self-sufficiency. It would thus seem that today foreign investors incorporated in Indiaare treated on par with domestic investors. (1998, October 26). But with the introductionof the dual exchange rate system, the need for scrip was eliminated. During this period of time religious conflict sparkedand exploited by militant Hindus and Hindu political parties intensified. The Congress Party won the ensuing election and Raobecame prime minister (Rao, 1995). (199 December). Soon after assuming power in July 1991, the Rao governmentdevalued the rupee by 22 percent. Of the 18 sectorspreviously reserved for the public sector, 11 were opened to private sectorownership. Financial marketswere also liberalized and bars against private banks lifted. India's credit ratings in the world financial marketsplummeted, thus limiting India's access to external commercial credit.The country was on the verge of defaulting on its international commitments(Byrd, 199 ). This is a political organization which is essentially a nationalistgrouping, with many factions, that claims Hinduism as the religion ofIndia. Furthermore India might also be able to reap benefits from it plannedliberalization of consumer goods. Exporters were allowed to keep 25 percent of their exportproceeds in foreign currency accounts in banks in India. Duty-drawback and duty-exemption schemes were strengthened togive exporters duty-free access to raw materials. Itscompanies have been squeezed by exporters in that part of the world, suchas Korea steel companies and Indonesian cement producers. 2. Importers were authorized to purchase foreign exchange in the openmarket at the higher price, effectively ending the exchange control.Within a year of establishing a market exchange rate, the governmentunified the official exchange rate with the market rate. A cultural history of India. These proceedscould be used for activities such as foreign advertising and promotionaltravel (Bhagwati & Srinivasan, 1993).Foreign Exchange The foreign exchange system was drastically reformed through theearly and mid-199 s. In additiongovernmental equity was reduced in profitable enterprises, thus creatingpublic participation in their equity subject to the restriction thatdisinvestment would not dilute public ownership below 51 percent. In addition manyrestrictions on exporters were relaxed such as the holding of propertyabroad, which had the consequence restricting exporters' presence inforeign markets. Less than six months later herson, Sanjay, who was expected to be her successor, was killed in a planecrash (Smith 1985). An Indian resurgence, HarvardInternational Review, Vol. Industriallicensing requirements for all but a select list of 15 strategic, hazardousor environmentally sensitive industries were abolished. This led to a steady decline inforeign exchange reserves--from $6.7 billion in 1986 to a little over $1billion by June of 1991, an amount insufficient to finance imports for eventwo weeks. They believed that because thedemand for developing-country exports was relatively poor, India could notexpect to expand its foreign exchange dramatically. Based on that experience, economists and policy makers were nearlyunanimous in their opinion that, in a poor country, centralized planningwas essential to allocate the economy's resources efficiently. These individuals included seven of Mr. Rao's ministers. In 1989 he was defeated by the Janata Dalparty under the leadership of Singh. In addition, therewas an attempt to promote foreign trade and more consumer purchasing power. In 1977Ghandi's New Congress Party was defeated by the Janata Party. Questions are being asked aboutimpact of reform. Financial Times,p. Once hostile to foreign investment, India began to seek it.Where once the share of foreign equity in joint ventures was rarely allowedto exceed 4 percent, automatic approval for foreign equity holdings of upto 51 percent in 35 high-priority areas were given. India's economic reforms, NewDheli: Ministry of Finance. This leadership dramatically altered India's global strategicrelations in May of 1998 when they detonated five nuclear blasts. This growth rate stillmakes India one of Asia's best economic performers (Nicholson, 1998). Existing private-sectorbanks were encouraged to expand and several new private-sector banks werelicensed. India economic reforms slammed byimportant establishment body, Inter-Press English Newswire (Internet). (1995 September 1). The government has also reducedthe tax rate on foreign companies incorporated abroad but earning income inIndia, from 65 percent to 55 percent (Rao, 1995). But thisgrouping soon fractured and in 198 Indira Gandhi and her New CongressParty won a resounding election victory. (1998 October 26). What a difference a year can make.Financial Times, p. Political History Agitation against British colonial rule grew during the 192 s and193 s. This prompted much reflection in New Delhi about whether economicreform really had as much impact as had previously been thought. Nicoll, A. By 1991 India found itself in the grip of a fiscal crisis and closeto defaulting on its external debt. The government also drastically cut importduties, with the highest duty rate falling from 4 percent in June of 1991to 5 % in February of 1994. However, in 1998it looks as if it will fall to approximately 5%. In February of 1992, the governmentintroduced a dual exchange rate system, under which exporters were allowedto sell 6 percent of their foreign exchange in the free market toauthorized dealers and 4 percent to the government at the lower officialprice. Sevenyears after the reform process started India's share of world exports wasstill on .6 percent (Montagnon, 1998). Rao immediately began sweeping economic reforms that moved India awayfrom the centralized planning that had characterized India's economicpolicy since Nehru. 713-735. It appears that the grip of theold ideas was so strong that a mild liberalization which took place in the198 s had to be carried out essentially by stealth, with much of the reformdone through "public notices" rather than through major policyannouncements (Bryd, 199 ). They want to reduce the maximumtariff to only 18 percent but they are still nervous about exposingdomestic industry to world market forces (Montagon, 1998). There was also awave of public euphoria about India nuclear blasts which lead widespreadsupport to the BJP (Nicoll, 1998). When the Rao government came to power in 1991 it moved swiftly toannounce major economic reforms. The commission also criticized the government for slashingbudgetary spending on health and education as part of the fiscalstabilization program (Mahesh, 1995). Thegovernment also encouraged public sector enterprises to raise fresh capitalfrom the public, which further dilutes the government's share of ownership(Rao, 1995). In addition to staggeringproblems of overpopulation, economic underdevelopment, and inadequatesocial services, India had to achieve the integration of the formerprincely state into the union and the creation of national unity fromdiverse cultural and linguistic groups (Basham, 1984). 1. References Bagwati, J. As late as 1995, for example, a prominentnational planning commission report argued that economic liberalization hadbrought about accelerating poverty, increased inflation, and reduced jobopportunities. Almostall capital goods and raw materials are imported without a license onpayment of custom duties. At this time a dramatic program of economicliberalization was introduced. The dual exchangerate was apparently a transitional step towards a fully market-determinedexchange rate. In addition, India's policy makers were deeply influenced by theprevailing ethos of export pessimism. A cease fire was negotiatedin August of 1965 but a new war broke out in 1971 that resulted in thecreation of an independent Bangladesh. It appears that the tests did indeed wininstant approval among India's foreign policy and defense establishment,with many experts arguing that they were long overdue. The following year Rajiv Gandhi wasassassinated during an election rally and was succeeded as head of theCongress party by Rao. Byrd, W.A. Government response escalated until, in June of 1984, army troopsstormed the Golden Temple in Amritsar, the Sikh's holiest shrine and thecenter of the independence movement. Sikh protest across India added tothe political tension, and in October Indira Gandhi was assassinated by twoSikh members of her personal guard. The country has lowered rates where they weretoo high and reduced the complexity of the rate system (Rao, 1995). With the exception of these 15 sectors that account for lessthan 15 percent of manufacturing value-added, the requirement for priorgovernment approval for domestic investment was abolished. Indian officials say that nuclear weapons remain theinternational currency of power and that if the five established nuclear-armed powers were serious about global disarmament they would do more toreduce their own arsenals. London:Oxford University Press. (1998, October 26). India's major foreign problems have been a border dispute with Chinathat first surfaced in 1957, and continual conflicts with Pakistan. Capital markets have also been reformed with the deregulation ofcorporate capital issues and the establishment of an independent regulatoryauthority. Many of the ardent defenders of protection have comeinto the fold of liberalization and are themselves making recommendationsfor further liberalization (Mahesh, 1995). Excessive expansion of government spending during the 198 s led toa steady rise in the fiscal deficit, which reached 8.3% of GDP in 199 .Both internal and external public-debt-to GDP ratios more than doubledduring the decade. A nationalstock exchange was created and a fully functional national clearance andsettlement system is in now operation. International Trade India, for the first 3 years of its existence, had articulated aneconomic program built around the idea of self-sufficiency. Therefore when controls began to be introduced theirimplementation was initially no challenge. During the 196 s and 197 s, protection against foreigncompetition became an important part of the government's strategy toachieve self-reliance. Once a system of bureaucratic allocation, today thereappears to exist virtually no foreign exchange restriction on currenttransactions (except restrictions on certain imports, mainly consumergoods). East Asia had taken more that 2 percent of its exports. This sector has grown significantly but it isunlikely to allow India the kind of export boom that has taken place inChina. Economic History When India initiated its development program in the 195 s, the SovietUnion was regarded as a success story and the model tofollow. This made the rupee convertible on the merchandise tradeaccount (Bhagwati & Srinivasan, 1993). In the field ofindirect taxation India has reduced the levels of and simplified thestructure of import duties. All these factors act as aserious deterrent to exporters. There is tremendousinfighting within these groups, as well as against the Congress Party.There is some hope that the BJP will be able to contain its more militantHindu followers, and therefor downplay many of its more divisive religious-based policies (Nicholson, 1998). Prior to liberalization in India large volumes of public resourceshad previously been invested in the public sector with mixed results.Remaining public sector enterprises were then given the message that theycould not rely on continuous financial support from the state. Import restrictions and tariffs were been cut, while the centralgovernment relaxed control over industrial licensing. The immediate cause for trade reforms came from a macroeconomiccrisis. In the spring of 1998 the BJP or Bharatiya Janata Party took power inIndia. Nicholson, M. In the 1996 and 1997 there were continuing scandals among India'spolitical class. In thelate 196 s there was friction with Nepal, which accused India of harboringNepalese politicians hostile to the Nepalese monarchy. Furthermore during this same period U.S.multinationals, such as IBM and Coca Cola, were nationalized (Byrd, 199 ). The external debt service payments as a proportion of exportstripled to 3 percent by 1988-1989. Government official also put some hope in software exports, whichwere $1.7 billion in 1997. Nicholson, M. However most Indians seem to fiercely defend their right to nucleardeterrent. The BJP-led coalition has managed to manufacture an awkward andvulnerable parliamentary coalition of over 18 parties. Financial Times, p. In the mid-196 sfighting broke out between India and Pakistan. Its major goal was more reliance on themarket rather than government guidance of the economy. 4. However, by the late 198 s leadership began torepudiate this policy and to place more emphasis on foreign trade. Inflation was in double digits, andGDP growth was just 1 percent. This meant allocatingthe scarce foreign exchange in accordance with priorities set by Five Yearplans.Finally, India had inherited an extremely proficient bureaucracy from theBritish. Montagnon, P. Foreign institutional investors arenow permitted to invest in Indian capital markets and foreign exchangecontrols are being reviewed (Rao, 1995). Tax rates for corporations have been lowered. They appear to be able toinvest in any sector, except plantations and agriculture, that is open tolocal investors, as long as they can mobilize domestic financing and willpay the same taxes as domestic companies. In 1973, India and Pakistan signedan agreement providing for the release of prisoners of war captured in 1971and calling for peace and friendship on the Indian subcontinent. These industriescovered approximately 5 percent of the value-added in manufacturing. If this paper is not what you are looking for, you can search again: Search for: or Click here to request an essay written just for you.