‘IMPACT OF MULTINATIONAL CORPORATIONS ON INDIAN ECONOMY’

SUBMITTED TO

MR. ABHISHEK SINHA

BY

ANIMESH

ROLL NO. 19LLB062

SEMESTER- II

BATCH 2019 - 2024

 ACKNOWLEDGMENT

I have taken efforts in this project. However, it would not have been possible without the kind
support and help of many individuals and organizations. I would like to extend my sincere
thanks to all of them.

I am highly indebted to Mr. Abhishek Sinha for his guidance and constant supervision as
well as for providing necessary information regarding the project & also for his support in
completing the project.

ANIMESH

Roll No.

19LLLB062

SEMESETER-II
 Table of Contents
ACKNOWLEDGMENT.............................................................................................1
Multi National Corporation.................................................................................................3
What is the difference between Multi National Corporation and Trans National
Corporation?The difference is more semantics than anything else. Multinationals operate
in several different companies will trans national implies "just across the border" as in the
US and Canada. Obviously, both operate internationally....................................................3
History :...........................................................................................................................3
Multinational corporate structure :..................................................................................3
International power :........................................................................................................4
Tax Competition :........................................................................................................4
Largest Economies :....................................................................................................4
Market Withdrawal :....................................................................................................4
Lobbying :....................................................................................................................5
Government Power :....................................................................................................5
Micro-Multinationals :.....................................................................................................5
Multinationals from Emerging Markets :........................................................................6
Multinational Companies in India :.....................................................................................6
What are advantages and disadvantages of MNCs?............................................................7
Pre-colonial :................................................................................................................8
Colonial :.....................................................................................................................9
Independence to 1991 :..............................................................................................10
After 1991 :................................................................................................................11
Government Intervention...............................................................................................11
State planning and the mixed economy.....................................................................11
Public expenditure :...................................................................................................12
Public receipts :..........................................................................................................13
General budget :.........................................................................................................13
Sectors............................................................................................................................14
Agriculture :...............................................................................................................14
Industry :....................................................................................................................15
Services :....................................................................................................................16
Socio-economic characteristics.....................................................................................16
Poverty :.....................................................................................................................17
External trade and investment.......................................................................................17
Global trade relations :...............................................................................................17
The Rise of India & the IIM Story.............................................................................19
 Multi National Corporation

A multinational corporation (or transnational corporation) (MNC/TNC) is a

corporation or enterprise that manages production establishments or delivers services in
at least two countries. Very large multinationals have budgets that exceed those of many
countries. Multinational corporations can have a powerful influence in international
relations and local economies. Multinational corporations play an important role in
globalization; some argue that a new form of MNC is evolving in response to
globalization: the 'globally integrated enterprise'.

What is the difference between Multi National Corporation and Trans National
Corporation?The difference is more semantics than anything else. Multinationals
operate in several different companies will trans national implies "just across the
border" as in the US and Canada. Obviously, both operate internationally

History :

There is a dispute as to which was the first MNC. Some have argued that the Knights
Templar, founded in 1117, became a multinational when it stumbled into banking in
1135. However, others claim that the Dutch East India Company was the first proper
multinational.

Multinational corporate structure :

Multinational corporations can be divided into three broad groups according to the
configuration of their production facilities:

 Horizontally integrated multinational corporations manage production

establishments located in different countries to produce the same or similar
products. (example: McDonalds)
 Vertically integrated multinational corporations manage production
establishment in certain country/countries to produce products that serve as input
to its production establishments in other country/countries. (example: Adidas)
 Diversified multinational corporations manage production establishments
located in different countries that are neither horizontally nor vertically nor
straight, nor non-straight integrated. (example: Microsoft)

Others argue that a key feature of the multinational is the inclusion of back office
functions in each of the countries in which they operate. The globally integrated
enterprise, which some see as the next development in the evolution of the multinational,
does away with this requirement.
International power :

Large multinational corporations can have a powerful influence in international relations,

given their large economic influence in politicians' representative districts, as well as
their extensive financial resources available for public relations and political lobbying.

Tax Competition :

Multinationals have played an important role in globalization. Countries and sometimes

subnational regions must compete against one another for the establishment of MNC
facilities, and the subsequent tax revenue, employment, and economic activity. To
compete, countries and regional political districts offer incentives to MNCs such as tax
breaks, pledges of governmental assistance or improved infrastructure, or lax
environmental and labour standards. This process of becoming more attractive to foreign
investment can be characterized as a race to the bottom, a push towards greater freedom
for corporate bodies, or both.

Largest Economies :

An inaccurate claim is that out of the 100 largest economies in the world, 51 are
multinational corporations.[2] This claim is based on a miscalculation, where two numbers
describing totally different things are compared: the GDP of nations to gross sales of
corporations. The problem with the comparison is that GDP takes into account only the
final value, whereas

gross sales don't measure how much was produced outside the company. According to
Swedish economist Johan Norberg, if one were to compare nations and corporations, then
one should be comparing GDP to goods only produced within the particular company
(gross sales do not take into account goods purchased from 3rd party vendors and resold,
just as GDP does not take into account imported goods). That correction would make
only 37 of 100 largest economies corporations and all of them would be in bottom box:
only 5 corporations would be in top 50.

Market Withdrawal :

Because of their size, multinationals can have a significant impact on government policy,
primarily through the threat of market withdrawal. For example, in an effort to reduce
health care costs, some countries have tried to force pharmaceutical companies to license
their patented drugs to local competitors for a very low fee, thereby artificially lowering
the price. When faced with that threat, multinational pharmaceutical firms have simply
withdrawn from the market, which often leads to limited availability of advanced drugs.
In these cases, governments have been forced to back down from their efforts. Similar
corporate and government confrontations have occurred when governments tried to force
companies to make their intellectual property public in an effort to gain technology for
local entrepreneurs. When companies are faced with the option of losing a core
competitive technological advantage

and withdrawing from a national market, they may choose the

latter. This withdrawal often causes governments to change policy. Countries that have
been most successful in this type of confrontation with multinational corporations are
large countries such as India and Brazil, which have viable indigenous market
competitors.

Lobbying :

Multinational corporate lobbying is directed at a range of business concerns, from tariff

structures to environmental regulations. There is no unified multinational perspective on
any of these issues. Companies that have invested heavily in pollution control
mechanisms may lobby for very tough environmental standards in an effort to force non-
compliant competitors into a weaker position. For every tariff category that one
multinational wants to have reduced, there is another multinational that wants the tariff
raised. Even within the U.S. auto industry, the fraction of a company's imported
components will vary, so some firms favor tighter import restrictions, while others favor
looser ones.

Government Power :

In addition to efforts by multinational corporations to affect governments, there is much

government action intended to affect corporate behavior. The threat of nationalization
(forcing a company to sell its local assets to the government or to other local nationals) or
changes in local business laws and regulations can limit a multinational's power.

Micro-Multinationals :

Enabled by Internet based communication tools, a new breed of multinational companies

is growing in numbers. These multinationals start operating in different countries from
the very early stages. These companies are being called micro-multinationals.What
differentiates micro-multinationals from the large MNCs is the fact that they are small
businesses. Some of these micro-multinationals, particularly software development
companies, have been hiring employees in multiple countries from the beginning of the
Internet era. But more and more micro-multinationals are actively starting to market their
products and services in various countries. Internet tools like Google, Yahoo, MSN, Ebay
and Amazon make it easier for the micro-multinationals to reach potential customers in
other countries.Contrary to the traditional powerful image of the large MNCs, the micro-
multinationals face the limitations and the typical challenges of a small business. In most
cases, the micro-multinational companies are being run by technically savvy people who
can use various Internet tools to overcome the challenges of remote collaboration,
customer service and sales infrastructures.

Multinationals from Emerging Markets :

Large number of multinationals are operating into emerging markets and at the same time
a number of multinationals are coming from emerging markets. Professor Rajesh K
Pillania is bringing out a special issue on Multinationals from Emerging Markets in
2008.

Multinational Companies in India :

The post financial liberation era in India has experienced huge influx of 'Multinational
Companies in India' and propelled India's economy to greater heights.
Although, majority of these companies are of American origin but it did not take too long
for other nations to realize the huge potential that India Inc offers. 'Multinational
Companies in India' represent a diversified portfolio of companies representing different
nations. It is well documented that American companies accounts for around 37% of the
turnover of the top 20 firms operating in India. But, the scenario for 'MNC in India' has
changed a lot in recent years, since more and more firms from European Union like
Britain, Italy, France, Germany, Netherlands, Finland, Belgium etc have outsourced their
work to India. Finnish mobile handset manufacturing giant Nokia has the second largest
base in India. British Petroleum and Vodafone (to start operation soon) represents the
British. A host of automobile companies like Fiat, Ford Motors, Piaggio etc from Italy
have opened shop in India with R&D wing attached. French Heavy Engineering major
Alstom and Pharma major Sanofi Aventis is one of the earliest entrant in the scene and is
expanding very fast. Oil companies, Infrastructure builders from Middle East are also
flocking in India to catch the boom. South Korean electronics giants Samsung and LG
Electronics and small and mid-segment car major Hyundai Motors are doing excellent
business and using India as a hub
for global delivery. Japan is also not far behind with host of

electronics and automobiles shops. Companies like Singtel of Singapore and Malaysian
giant Salem Group are showing huge interest for investment.
In spite of the huge growth India Inc have some bottlenecks, like -

 Irrational policies (tax structure and trade barriers).

 Low invest in infrastructure - physical and information technology.
 Slow reforms (political reforms to improve stability, privatization and
deregulation, labor reforms).

Reports says, performance of 3 out of every 4 'Multinational Companies' has met or

exceeded internal targets and expectations. India is perceived to be at par with China in
terms of FDI attractiveness by 'Multinational Companies in India'. In view of
'Multinational Companies' community, it ranks higher than China, Malaysia, Thailand,
and Philippines in terms of MNC performance. Multinational Companies Operating in
India cite India's highly educated workforce, management talent, rule of law,
transparency, cultural affinity, and regulatory environment as more favorable than others.
Moreover, they acknowledged, India's leadership in IT, business processing, and R&D
investments.
'Multinational Companies in India' are bullish on -

 India's market potential.

 Labor competitiveness.
 Macro-economic stability.
 FDI attractiveness.

What are advantages and disadvantages of MNCs?

For a person individual

Advantage: MNCs are globally recognized businesses so you have great potential for
your Career growth in a Global level
Disadvantage: Career path in MNC will take time to establish.

For Society
Advantage: MNCs remove established legacy businesses and promote local employment
opportunities. They also provide various charitable services to the society.
Disadvantage: MNCs induces competition, and their profit minded operations may
impact local market/produce.

For Government
Advantage: Tax Source Economic Benefit
Disadvantage: MNCs Strategy will influence various government policies making which
may not always be good for the economy

MNCs???? Even Indian companies should not allow. Have you ever given a second
thought to what will happen to small retail shop owners & farmers? These big retailers
would control the prices of commodities, farm produce etc. once they establish their
presence.

Majority of MNC's in India making profits:

A majority of foreign companies operating in India are making profits but the
multinationals felt the need to build brand India so as to attract more investors, a study by
FICCI has said.

According to FICCI's annual FDI survey, 70 per cent of the foreign companies here are
earning profits from their Indian operations.
The survey said 84 per cent of the respondents gave a positive assessment of India,
although they highlighted the need for building brand India and showcase India's
potential as an investment destination.

Despite an overwhelming majority, 91 per cent, were upbeat about the market conditions
and the potential for further FDI inflows, they expressed concerns about the quality of
infrastructure in India, it said.

Economy of India

The economy of India, when measured in USD exchange-rate terms, is the twelfth
largest in the world, with a GDP of US $1.25 trillion (2008). It is the third largest in terms
of purchasing power parity. India is the second fastest growing major economy in the
world, with a GDP growth rate of 9.4% for the fiscal year 2006–2007. However, India's
huge population results in a per capita income of $4,542 at PPP and $1,089 at nominal
(revised 2007 estimate). The World Bank classifies India as a low-income economy.
India's economy is diverse, encompassing agriculture, handicrafts, textile, manufacturing,
and a multitude of services. Although two-thirds of the Indian workforce still earn their
livelihood directly or indirectly through agriculture, services are a growing sector and
play an increasingly important role of India's economy. The advent of the digital age, and
the large number of young and educated populace fluent in English, is gradually
transforming India as an important 'back office' destination for global outsourcing of
customer services and technical support. India is a major exporter of highly-skilled
workers in software and financial services, and software engineering. Other sectors like
manufacturing, pharmaceuticals, biotechnology ,nanotechnology ,
telecommunication ,shipbuilding, aviation and tourism are showing strong potentials with
higher growth rates. India followed a socialist-inspired approach for most of its
independent history, with strict government control over private sector participation,
foreign trade, and foreign direct investment.
(13)
However, since the early 1990s, India has gradually opened up its markets through
economic reforms by reducing government controls on foreign trade and investment. The
privatization of publicly owned industries and the opening up of certain sectors to private
and foreign interests has proceeded slowly amid political debate. India faces a vastly
growing population and the challenge of reducing economic and social inequality.
Poverty remains a serious problem, although it has declined significantly since
independence. Official surveys estimated that in the year 2004-2005, 27% of Indians
were poor.

Pre-colonial :

The citizens of the Indus Valley civilisation, a permanent and predominantly urban
settlement that flourished between 2800 BC and 1800 BC, practised agriculture,
domesticated animals, used uniform weights and measures, made tools and weapons, and
traded with other cities. Evidence of well planned streets, a drainage system and water
supply reveals their knowledge of urban planning, which included the world's first urban
sanitation systems and the existence of a form of municipal government. Religion,
especially Hinduism, and the caste and the joint family systems, played an influential role
in shaping economic activities.[10] The caste system functioned much like medieval
European guilds, ensuring the division of labour, providing for the training of apprentices
and, in some cases, allowing manufacturers to achieve narrow specialization.

(14)
For instance, in certain regions, producing each variety of cloth was the speciality of a
particular sub-caste.

Estimates of the per capita income of India (1857–1900) as per 1948–49 prices. Textiles
such as muslin, Calicos, shawls, and agricultural products such as pepper, cinnamon,
opium and indigo were exported to Europe, the Middle East and South East Asia in return
for gold and silver. Assessment of India's pre-colonial economy is mostly qualitative,
owing to the lack of quantitative information. One estimate puts the revenue of Akbar's
Mughal Empire in 1600 at £17.5 million, in contrast with the total revenue of Great
Britain in 1800, which totalled £16 million. India, by the time of the arrival of the British,
was a largely traditional agrarian economy with a dominant subsistence sector dependent
on primitive technology. It existed alongside a competitively developed network of
commerce, manufacturing and credit. After the fall of the Mughals,

India was administered by Maratha Empire. The maratha empire's budget in 1740s, at its
peak, was Rs. 100 million.

Colonial :
Colonial rule brought a major change in the taxation environment from revenue taxes to
property taxes resulting in mass impoverishment and destitution of the great majority of
farmers. It also created an institutional environment that, on paper, guaranteed property
rights among the colonizers, encouraged free trade, and created a single currency with
fixed exchange rates, standardized weights and measures, capital markets, a well
developed system of railways and telegraphs, a civil service that aimed to be free from
political interference, and a common-law, adversarial legal system. India's colonisation
by the British coincided with major changes in the world economy—industrialisation,
and significant growth in production and trade. However, at the end of colonial rule,
India inherited an economy that was one of the poorest in the developing world, with
industrial development stalled, agriculture unable to feed a rapidly growing population,
one of the world's lowest life expectancies, and low rates of literacy. An estimate by
Cambridge University historian Angus Maddison reveals that India's share of the world
income fell from 22.6% in 1700, comparable to Europe's share of 23.3%, to a low of
3.8% in 1952. While Indian leaders during the Independence struggle, and left-nationalist
economic historians have

(16)
blamed colonial rule for the dismal state of India's economy in its aftermath, a broader
macroeconomic view of India during this period reveals that there were sectors of growth
and decline, resulting from changes brought about by colonialism and a world that was
moving towards industrialisation and economic integration.

Independence to 1991 :

Growth rate of India's real GDP per capita (Constant Prices: Chain series) (1950–
2006). Data Source: Penn World tables.
Indian economic policy after independence was influenced by the colonial
experience (which was seen by Indian leaders as exploitative in nature) and by those
leaders' exposure to Fabian socialism. Policy tended towards protectionism, with a strong
emphasis on import substitution, industrialisation, state intervention in labour and
financial markets, a large public sector, business regulation, and central planning.
Jawaharlal Nehru, the first prime minister, along with the statistician Prasanta Chandra
Mahalanobis, carried on by Indira Gandhi formulated and oversaw economic policy.
They expected favourable outcomes from this strategy, because it involved both public
and
 (17)
private sectors and was based on direct and indirect state intervention, rather than the
more extreme Soviet-style central command system. The policy of concentrating
simultaneously on capital- and technology-intensive heavy industry and subsidising
manual, low-skill cottage industries was criticized by economist Milton Friedman, who
thought it would waste capital and labour, and retard the development of small
manufacturers. India's low average growth rate from 1947–80 was derisively referred to
as the Hindu rate of growth, because of the unfavourable comparison with growth rates in
other Asian countries, especially the "East Asian Tigers".

After 1991 :

Goldman Sachs has predicted that India will become 3rd largest economy of the world
by 2035 based on predicted growth rate of 5.3 to 6.1%. Currently It is cruising at 9.4%
growth rate.
In the late 80s, the government led by Rajiv Gandhi eased restrictions on capacity
expansion for incumbents, removed price controls and reduced corporate taxes. While
this increased the rate of growth, it also led to high fiscal deficits and a worsening current
account.

(18)

Government Intervention

State planning and the mixed economy

After independence, India opted for a centrally planned economy to try to achieve an
effective and equitable allocation of national resources and balanced economic
development. The process of formulation and direction of the Five-Year Plans is carried
out by the Planning Commission, headed by the Prime Minister of India as its
chairperson.
The number of people employed in non-agricultural occupations in the public and
private sectors. Totals are rounded. Private sector data relates to non-agriculture
establishments with 10 or more employees.
India's mixed economy combines features of both capitalist market economy and
the socialist command economy, but has shifted more towards the former over the past
decade. The public sector generally covers areas which are deemed too important or not
profitable enough to leave to the market, including such services as the railways and
postal system. Since independence, there have been phases of nationalizing such areas as
banking and, more recently, of privatization.

Public expenditure :

India's public expenditure is classified as development expenditure, comprising

central plan expenditure and central assistance and non-development expenditures; these
categories can each be divided into capital expenditure and revenue expenditure. Central
plan expenditure is allocated to development schemes outlined in the plans of the central
government and public sector undertakings; central assistance refers to financial
assistance and developmental loans given for plans of the state governments and union
territories. Non-development capital expenditure comprises capital defense expenditure,
loans to public enterprises, states and union territories and foreign governments, while
non-development revenue expenditure comprises revenue defence expenditure,
administrative expenditure, subsidies, debt relief to farmers, postal deficit, pensions,
social and economic services (education, health, agriculture, science and
technology),grants to states and union territories and foreign governments.India's non-
development revenue expenditure has increased nearly fivefold in 2003–04 since 1990–
91 and more than tenfold since 1985–1986. Interest payments are the single largest item
of expenditure and accounted for more than 40% of the total non development
expenditure in the 2003–04 budget.Defence expenditure increased fourfold during the
same period and has been increasing due to growing tensions in the region, the expensive
dispute with Pakistan over Jammu and Kashmir and an effort to modernise the military.
Administrative expenses are compounded by a

large salary and pension bill, which rises periodically due to revisions in wages, dearness
allowance etc. subsidies on food, fertilizers, education and petroleum and other merit and
non-merit subsidies account are not only continuously rising, especially because of rising
crude oil and food prices, but are also harder to rein in, because of political compulsions.
Public receipts :

India has a three-tier tax structure, wherein the constitution empowers the union
government to levy Income tax, tax on capital transactions (wealth tax, inheritance tax),
sales tax, service tax, customs and excise duties and the state governments to levy sales
tax on intra-state sale of goods, tax on entertainment and professions, excise duties on
manufacture of alcohol, stamp duties on transfer of property and collect land revenue
(levy on land owned). The local governments are empowered by the state government to
levy property tax, Octroi and charge users for public utilities like water supply, sewage
etc.More than half of the revenues of the union and state governments come from taxes,
of which half come from Indirect taxes. More than a quarter of the union government's
tax revenues is shared with the state governments.The tax reforms, initiated in 1991, have
sought to rationalise the tax structure and increase compliance by taking steps in the
following directions:

 Reducing the rates of individual and corporate income taxes, excises, customs and
making it more progressive
 Reducing exemptions and concessions
 Simplification of laws and procedures
 Introduction of Permanent account number to track monetary transactions
 21 of the 29 states introduced Value added tax (VAT) on April 1, 2005 to replace
the complex and multiple sales tax system

The non-tax revenues of the central government come from fiscal services, interest
receipts, public sector dividends, etc., while the non-tax revenues of the States are grants
from the central government, interest receipts, dividends and income from general,
economic and social services.Inter-State share in the federal tax pool is decided by the
recommendations of the Finance Commission to the President.

General budget :

The Finance minister of India presents the annual union budget in the Parliament on the
last working day of February. The budget has to be passed by the Lok Sabha before it can
come into effect on April 1, the start of India's fiscal year. The Union budget is preceded
an economic survey which outlines the broad direction of the budget and the economic
performance of the country for the outgoing financial year. This economic survey
involves all the various NGOs, women organizations, business people, old people
associations etc.
India's union budget for 2005–06, had an estimated outlay of Rs.5,14,344 crores ($118
billion).

Earnings from taxes amount to Rs. 2,73,466 crore ($63b). India's fiscal deficit amounts to
4.5% or 1,39,231 crore ($32b).The fiscal deficit is expected to be 3.8% of GDP, by
March 2007.
 Sectors

Agriculture :

Composition of India's total production (million tonnes) of foodgrains and commercial

crops, in 2003–04.
India ranks second worldwide in farm output. Agriculture and allied sectors like forestry,
logging and fishing accounted for 18.6% of the GDP in 2005, employed 60% of the total
workforce and despite a steady decline of its share in the GDP, is still the largest
economic sector and plays a significant role in the overall socio-economic development
of India. Yields per unit area of all crops have grown since 1950, due to the special
emphasis placed on agriculture in the five-year plans and steady improvements in
irrigation, technology, application of modern agricultural practices and provision of
agricultural credit and subsidies since Green revolution in India. However, international
comparisons reveal that the average yield in India is generally 30% to 50% of the highest
average yield in the world.

The low productivity in India is a result of the following factors:

 Illiteracy, general socio-economic backwardness, slow progress in implementing

land reforms and inadequate or inefficient finance and marketing services for
farm produce.
 The average size of land holdings is very small (less than 20,000 m²) and is
subject to fragmentation, due to land ceiling acts and in some cases, family
disputes. Such small holdings are often over-manned, resulting in disguised
unemployment and low productivity of labour.
 Adoption of modern agricultural practices and use of technology is inadequate,
hampered by ignorance of such practices, high costs and impracticality in the case
of small land holdings.
 Irrigation facilities are inadequate, as revealed by the fact that only 53.6% of the
land was irrigated in 2000–01, which result in farmers still being dependent on
rainfall, specifically the Monsoon season. A good monsoon results in a robust
 growth for the economy as a whole, while a poor monsoon leads to a sluggish
growth. Farm credit is regulated by NABARD, which is the statutory apex agent
for rural development in the subcontinent.

Industry :

Per capita GDP (at PPP) of South Asian economies versus those of South Korea, as a
percentage of the US[20][54]
India is fourteenth in the world in factory output. They together account for
27.6% of the GDP and employ 17% of the total workforce.However, about one-third of
the industrial labour force is engaged in simple household manufacturing only. Economic
reforms brought foreign competition, led to privatisation of certain public sector
industries, opened up sectors hitherto reserved for the public sector and led to an
expansion in the production of fast-moving consumer goods. Post-liberalisation, the
Indian private sector, which was usually run by oligopolies of old family firms and
required political connections to prosper was faced with foreign competition, including
the threat of cheaper Chinese imports. It has since handled the change by squeezing costs,
revamping management, focusing on designing new products and relying on low labour
costs and technology.

34 Indian companies have been listed in the Forbes Global 2000 ranking for 2007.[57] The
10 leading companies are:
Market
Revenue Profits Assets
World Value
Company   Logo Industry   (billion (billion (billion
Rank   (billion
$)   $)   $)  
$)  
Oil and
Oil & Gas
239 Natural Gas 15.64 3.46 26.98 38.19
Operations
Corporation
Reliance Oil & Gas
258 18.05 2.11 21.75 42.62
Industries Operations
 State Bank of
326 Banking 13.66 1.24 156.37 12.35
India
Indian Oil Oil & Gas
399 34.22 1.11 22.68 10.92
Corporation Operations
494 NTPC Utilities 6.06 1.31 17.25 26.06
536 ICICI Bank Banking 5.79 0.54 62.13 16.72
Steel
800 Authority of Materials 6.30 0.91 7.06 10.16
India Limited
Tata
Software &
1047 Consultancy 2.98 0.67 1.93 26.27
Services
Svcs

1128 Tata Steel Materials 4.54 0.84 4.61 5.80

Infosys Software &

1130 2.14 0.55 2.09 26.19
Technologies Services

Services :

India is fifteenth in services output. It provides employment to 23% of work

force, and it is growing fast, growth rate 7.5% in 1991–2000 up from 4.5% in 1951–80. It
has the largest share in the GDP, accounting for 53.8% in 2005 up from 15% in 1950.
Business services (information technology, information technology enabled services,
business process outsourcing) are among the fastest growing sectors contributing to one
third of the total output of services in 2000. The growth in the IT sector is attributed to
increased specialisation, availability of a large pool of low cost, but highly skilled,
educated and fluent English-speaking workers (a legacy of British Colonialism) on the
supply side and on the demand side, increased demand from foreign consumers interested
in India's service exports or those looking to outsource their operations. India's IT
industry, despite contributing significantly to its balance of payments, accounted for only
about 1% of the total GDP or 1/50th of the total services. Since liberalisation, the
government has approved significant banking reforms. While some of these relate to
nationalised banks (like encouraging mergers, reducing government interference and
increasing profitability and competitiveness), other reforms have opened up the banking
and insurance sectors to private and foreign players.

Socio-economic characteristics
Poverty :

Percent of population living under the poverty line

Large numbers of India's people live in abject poverty. Wealth distribution in India is
improving since the liberalization and with the end of the socialist rule termed as the
license raj.While poverty in India has reduced significantly, official figures estimate that
27.5% of Indians still lived below the national poverty line in 2004-2005.A 2007 report
by the state-run National Commission for Enterprises in the Unorganised Sector
(NCEUS) found that 70% of Indians, or 800 million people, lived on less than 20 rupees
per day with most working in "informal labour sector with no job or social security, living
in abject poverty."Since the early 1950s, successive governments have implemented
various schemes, under planning, to alleviate poverty, that have met with partial success.
All these programmes have relied upon the strategies of the Food for work programme
and National Rural Employment Programme of the 1980s, which attempted to use the
unemployed to generate

productive assets and build rural infrastructure. In August 2005, the Indian parliament
passed the Rural Employment Guarantee Bill, the largest programme of this type in terms
of cost and coverage, which promises 100 days of minimum wage employment to every
rural household in 200 of India's 600 districts. The question of whether economic reforms
have reduced poverty or not has fuelled debates without generating any clear cut answers
and has also put political pressure on further economic reforms, especially those
involving the downsizing of labour and cutting agricultural subsidies.

External trade and investment

Global trade relations :

Until the liberalisation of 1991, India was largely and intentionally isolated from the
world markets, to protect its fledging economy and to achieve self-reliance. Foreign trade
was subject to import tariffs, export taxes and quantitative restrictions, while foreign
direct investment was restricted by upper-limit equity participation, restrictions on
technology transfer, export obligations and government approvals; these approvals were
needed for nearly 60% of new FDI in the industrial sector. The restrictions ensured that
FDI averaged only around $200M annually between 1985 and 1991; a large percentage
of the capital flows consisted of

foreign aid, commercial borrowing and deposits

of non-resident Indians.

Share of top five investing countries in FDI inflows. (1991–2004)

[81]
India's exports
were stagnant
for the first 15
years Inflows after
Rank Country Inflows (%)
(Million USD)

1  Mauritius 8,898 34.49%[82]

2  United States 4,389 17.08%

3  Japan 1,891 7.33%

4  Netherlands 1,847 7.16%

5  United Kingdom 1,692 6.56%

independence, due to the predominance of tea, jute and cotton manufactures, demand for
which was generally inelastic. Imports in the same period consisted predominantly of
machinery, equipment and raw materials, due to nascent industrialisation. Since
liberalisation, the value of India's international trade has become more broad-based and
has risen to Rs. 63,080,109 crores in 2003–04 from Rs.1,250 crores in 1950–51. India's
major trading partners are China, the US, the UAE, the UK, Japan and the EU.The

(31)
exports during August 2006 were $10.3 billion up by 41.14% and import were $13.87
billion with an increase of 32.16% over the previous year.India is a founding-member of
General Agreement on Tariffs and Trade (GATT) since 1947 and its successor, the World
Trade Organization. While participating actively in its general council meetings, India
has been crucial in voicing the concerns of the developing world. For instance, India has
continued its opposition to the inclusion of such matters as labour and environment issues
and other non-tariff barriers into the WTO policies. requirements, removed restrictions
on expansion and facilitated easy access to foreign technology and foreign direct
investment FDI. The upward moving growth curve of the real-estate sector owes some
credit to a booming economy and liberalized FDI regime. In March 2005, the government
amended the rules to allow 100 per cent FDI in the construction business.This automatic
route has been permitted in townships, housing, built-up infrastructure and construction
development projects including housing, commercial premises, hotels, resorts, hospitals,
educational institutions, recreational facilities, and city- and regional-level
infrastructure.A number of changes were approved on the FDI policy to remove the caps
in most sectors. Restrictions will be relaxed in sectors as diverse as civil aviation,
construction development, industrial parks, petroleum and natural gas, commodity
exchanges, credit-information services and mining. But this still leaves an unfinished
agenda of permitting greater foreign investment in politically sensitive areas such as
insurance and retailing.

The Rise of India & the IIM Story

The Rise of India

In last couple of years, The Rise of India & China is a story being watched with much
awe, fascination & even fear in the global media. Most of these stories are inspired by the
huge strides made by Indian & Chinese companies in Service & Manufacturing sectors.
Many of the key drivers of their success has been their prowess at creating high quality
but low cost Software & Outsourcing services in case of India and manufacturing in case
of China. Some analysts have also highlighted the Research & Development investments
being made in India by corporations as diverse as GE to Google leading to possible
emergence of Asia as the R&D hub for world. However what seems to have missed the
attention of media is emergence of Indian Managers in the top ladders of US Corporate
arena. There have been isolated stories like rise of Rajat Gupta (ex-Chief Mckinsey),
Victor Menzes of Citibank, but one big emerging trend has been the rise of Indian
Managers or MBA. This is a story, which is still to unfold in a big way but already has
started making waves in recent years. It will be interesting to trace the rise of IIMs along
with India's rise in the world economy.

The Turnaround
In late 90s when the current Indian PM, Manmohan Singh, began the liberalization of
Indian economy, as the Finance Minister, it opened up a wealth of opportunities for
private sector enterprises and also drew a horde of MNCs to India. The size of Indian
middle class by then estimates of 200-300MM was one of the fastest growing markets in
the world. To cater to this market corporate needed a horde of management professionals
to run & grow the new markets. This brought in a tonne of opportunities to India’s
thousands of MBA grads and more so for the students of IIMs who were the crème-la-
crème of India. Slolwy but surely, the middle class dream career was not to get into the
Civil Service but rather to earn an MBA degree as a route of entry to the corporate world.
Also many of India’s top brains like IIT engineers, Chartered Accountants were allured
into seeking an MBA degree to their portfolio especially so from an IIM. The
competition for gaining a seat into these b-schools was hyper competitive even after
discounting the huge population of India. Imagine an admission rate of .6% vs. 10% for
the top ivy-league schools of US. Only recently, The Economist in its recent ratings of B-
Schools rated IIM-A (Ahmedabad) as the “toughest B-school in world to get into”. Also
being able to attract many Indian profs who had acquired their doctorates at top US
Universities added to their reputation as hubs for excellence. Thus best of breed students
combined with best of breed professors and availability of rewarding placement
opportunities, all at a fraction of Ivy-league rates created a unique selling proposition in
the hyper-competitive MBA school world.

Arrival of Mckinsey, Lehman & Co.

In corporate world especially US, Consulting & Investment Banks are among the most
demanding careers and also most competitive in the war for talent globally. The likes of
Mckinsey & BCG in consulting & Lehman Brothers, JP Morgan in I-Banks thus were
quick to use the IIMs as a recruiting ground mainly for their Indian Operations to start
with. However impressed by the performance of the initial recruits they started recruiting
for their global practices. In fact the war for heads has become so hot these days that
many of these try to pick the cream via the summer trainee route and offer Pre-Placement
Offers. Year 2000 was a ground breaking year in the sense, more than 10% of IIM-A
grads was recruited purely for placements in Manhattan, NYC and it also was the
inaugural year for Goldman Sachs. Also given the profile of IIM students, 70% of who
boast of an engineering degree from India’s top Colleges and mostly IITs, it became even
more tempting for the leading recruiters to shun many 2nd rung b-schools elsewhere to
get thesetalent

The Path Ahead

More recently, the success of many Indian corporate in IT & BPO arena people, made
people note of the management behind these companies. One key competitive advantage
Indian companies had vis-à-vis Chinese ones was the breadth & depth of management
talent. While China had a huge success in managing and running cheap assembly line
production of goods at lowest price, India’s success were more in the higher end of value
chain. This is where Indian Managers were miles ahead and much of this success is
credited to the IIMs & the second line of b-schools, which are no less competitive.One of
the key facets of market economy is changing skill sets requirements and being able to
deal with complexity and uncertainty. This is one area where Indian students come with a
unique advantage. Life in India or any developing world can be full of chaos,
uncertainity, scarcity and greys. This meant that most of these young MBA aspirants get
the experience of many life times even in families and a 2 year structured thinking
process and arming with tools & techniques of a typical b-school curricula would prepare
them to take on the corporate world by thorns.A random invenory of India's non-family,
non-govt sector WHO IS WHO would read like the alumni list of IIMs.Below are some
examples from tradition sectorsVindi Banga (IIM-A) - HLL's top gun ( HLL is India's
largest consumer goods company, part of Unilevers) K V Kamath (IIM-A), ICICI's top
gun ( ICICI is India's largest private sector bank), Even in the new brave world of dot
com, software & BPO we have many IIM alum leading the charge, Rediff.com (Ajit
Balakrishnan) , Genpact ( Tiger Tyagrajan), mphasis (Jerry Rao) .However what is new
or changing is that unlike in past, we have relatively younger alums are taking the risk to
start their own firms. This is what was needed. No more you needed to have spent a
stable/secure career at Citi or GE or P&G but rather you can start with your own thing. If
things don't work well then you can always go back to the big corporate world. As Indian
economy becomes a bigger % of global economy not in terms of GDP alone but also as a
bigger % of global innovation then many of these IIM grads to have step up and be
counted. Just like technology innovation was the source of competitive advantage in past
and IITians were a key enabler to that, now Business Process & Management related
innovations will be key to success in this hyper-competitive economy. Hopefully IIMs
will live up to the great expectations.