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ANNASAHEB VARTAK

COLLEGE

Project on :

IMPACT OF MULTINATIONAL
CORPORATION ON INDIAN ECONOMY

Submitted To:

Prof. Nair

Submitted By :

Abhijeet Kulshreshtha

Roll No :
(1)

CONTENT

Sr.No. TOPIC
1. MULTINATIONAL CORPORATION
2. MULTINATIONAL CORPORATION
IN INDIA
3. Advantages & Disadvantages
4. Indian economy
5. MULTINATIONAL CORPORATION &
Indian economy
6. MULTINATIONAL CORPORATION
IN INDIA
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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.

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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.
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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

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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

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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.

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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.
(8)

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

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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.

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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.

(11)

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.
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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.Othersectorslikemanufacturing, 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.
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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
privatisation 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 fastly
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.

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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,

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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

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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

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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.

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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.

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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

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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

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• 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 by 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).

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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.

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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.

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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.

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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.

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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
326 Banking 13.66 1.24 156.37 12.35
of 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
Authority of
800 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

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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.

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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

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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

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foreign aid, commercial borrowing and deposits
of non-resident Indians.
Share of top five investing countries in FDI inflows. (1991–
2004)[81]

Inflows
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%

India's exports were stagnant for the first 15 years after


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

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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.

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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.

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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

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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

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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

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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
expactations !!!