The Economic and Social Impacts to India and Its Citizens from Inward Foreign Direct Investment


: Development in India: A brief history



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4.2: Development in India: A brief history


India, a federation of 29 states located in southern Asia, is the world’s largest democracy and second most populous country and has a long and rich history of bewildering diversity (Bhaduri, 2005). India’s diversity applies not only to its geography and climate but also its religion, language and ethnicity (Bhaduri, 2005). Hindus are numerically the largest religious group (80.5 per cent) but many other religions form significant minorities such as Muslims, Christians, Sikhs, Buddhists and Jains (Bhaduri, 2005). India is very linguistically diverse as well with over sixteen major languages and over 500 dialects (Bhaduri, 2005). Hindi is the language of the Indian state although English is used for administrative communication and also for higher education. This makes India an attractive destination for FDI (Rao and Dhar, 2011b). However, this has created a linguistic divide as well as a divide of opportunity between those who can speak English and those who cannot (Bhaduri, 2005). Bhaduri (2005) argues, however, that India has experienced impressive progression of unity despite its multi-religious, multilingual, multi-ethnic and multinational characteristics.

This section will explore India’s development up to economic liberalisation. Analysis of India’s economic and social development and performance can be deconstructed and divided in different ways. I have chosen to deconstruct it with colonialism, independence and the years of import substitution industrialisation or state dirigisme as one period which is discussed in the proceeding subsection. India’s planned economic liberalisation from 1991 will be analysed in a separate subsection. The big conceptual divide for this chapter is pre-economic liberalisation and post economic liberalisation as liberalisation denotes a shift in India’s perception of FDI and subsequently begins to become incorporated into its development strategies (Rao and Dhar, 2011b). Equally important to note is the process of economic liberalisation as how a country implements liberalisation, arguably, helps to determine the impact of FDI on its economy and citizens (Chang, 2003, 2014). Thus India’s economic liberalisation and the way in which it opened its markets are examined separately in the third subsection. The years following economic liberalisation to the present day are categorised as India’s current development trajectory and are discussed in the section, 4.3.


4.2.1: Economic development within colonial rule and the ISI years


India’s relationship with FDI and the global economy is a unique and complex one. India’s primary experience with foreign investment occurred in 1600 when several European chartered companies came to India as trading merchants (Van Klaveren et al, 2010; Kohli, 2004, 2012). One such chartered company was Britain’s East India Company which would play a significant role in the colonization of the country (Kohli, 2004). Although it was British Crown rule that officially colonized India, the East India Company is known to have been the main facilitator; the Trojan horse, to this colonial oppression (Ratnam, 1998; Kohli, 2004,2012). The East India Company remains to this day, a unique transnational corporation in that the company effectively transitioned from an international trading enterprise into an operational colonial occupier of a subcontinent (Kohli, 2004, 2012). The Company was India’s primary experience with inward foreign investment and would cause lasting scepticism of its relationship with FDI (Ratnam, 1998). Contemporary movements in India against further liberalisation and TNC presence have often incorporated symbolic themes of colonial oppression and the East India Company in protest movements (Greer and Singh, 1996). As Ratnam (1998, p.577) emphasises, “The ghost of the East Indian Company still haunts the Indian psyche.”

The nationalist movement that developed during this time not only united the masses into a movement against the British but also united support for the protection and autonomy of domestic industry as colonialism forced free trade upon India to the detriment of its indigenous industries (Kohli, 1991; 2004, 2012). Sovereignty, independence, and protected markets were all embraced within the concept of nationalism (Kohli, 1991; 2004, 2012; Reed and Reed, 2004).

From independence in 1947 to the economic reforms in 1991, India’s development approach was state planned, directed and controlled, and is commonly referred to as the dirigisme, an economic system whereby the state exerts strong direction over investment and development (Shah and Patnaik, 2013). The original intention of the dirigisme was for the state to gain control over the ‘commanding heights’ of the economy through conforming the private sector to state planning priorities as well as through the expansion of public ownership of the means of production (Srinivasan and Tendulkar, 2003, p.13). The former goal was achieved through quantitative restrictions and regulations by an elaborate system of licenses (Srinivasan and Tendulkar, 2003; Pedersen, 2008), pejoratively termed the ‘Licence Raj’ (Rodrik and Subramanian, 2005; Mazumdar, 2011). This system of licensing has often been criticised as being inefficient for private enterprise and developmental priorities as well as evolving into a source of corruption (Mazumdar 2008, 2011).

The years of the dirigisme produced very mixed economic results (Nachane, 2011; Alfaro and Johnson, 2013). But the analyses of these years are even more mixed in their interpretations. That said, most would generally agree that the years from independence to the mid-1980s, often termed the ‘Hindu growth’ period, demonstrated a rather lacklustre economic performance within the confines of a heavily protected and regulated regime (Dreze and Sen, 1995, 2013; Srinivasan and Tendulkar, 2003; Nachane, 2011).

The years of India’s state dirigisme or ISI development period officially came to a close when in 1991 the government initiated structural reforms and liberalised the economy (Shah and Patnaik, 2013). Before analysing India’s economic liberalisation, it will be helpful to explore India’s social welfare development during the dirigisme years. Mazumdar (2011) argues that in order to understand India’s present day capitalism, one must take into account the important continuities between the pre- and post- liberalisation stages. By doing so, Mazumdar (2011) contends, the tendency for Indian capitalism to generate uneven development becomes apparent and the increasing uneven development post liberalisation becomes more understandable. Thus, briefly analysing social welfare prior to economic liberalisation will aid in the examination of contemporary problems with persistent poverty and inequality inherent in the contemporary Indian development scenario.

4.2.2: Indian social policy within the development process


One of the biggest disappointments of the ‘socialist’ years (and continues to remain a serious contemporary problem) was the lack of contribution towards a significant reduction in poverty alleviation or a decrease in inequality (Kohli, 2012; Dreze and Sen, 1995). Kohli (2004, 2012) argues that, despite the socialist rhetoric of the dirigisme years, the dismantling of structural inequalities was never whole heartedly embraced or attempted. Kohli (2004, p.265) states that unlike the government’s commitment to nationalism and state led development, the commitment to the poor was superficial in comparison:

…how else would one explain the limited political energy devoted to land reform or, for that matter, to promoting widespread access to primary education?

Bhagwati (1993) concurs and argues that Indian planners vastly underestimated the productive role of health, nutrition, education and, thus, grossly underspent on them. He goes further to argue part of the problem was linked to notions of caste:

…a caste defined view of life that undervalues economic and social mobility, and the sense of futility of educating the children of the poor. (p. 49)

Despite being outlawed by the Indian Constitution, the eradication of division of society along delineations of caste did not occur during the dirigisme and continues to be very exclusionary and marginalising for those in lower castes (Shah, 2004). The caste system, a religious based system of social hierarchy, will be explored further in an upcoming section (section 4.3.3).

Several researchers argue that widespread poverty alleviation following independence would have required major land reform and the breaking of land monopolies, economic redistribution and the reorganisation of the rural areas and none of these objectives were pursued to any extensive degree (Dreze and Sen, 2013; Prasad, 1989; Kohli, 2004, 2012; Chandrasekhar and Ghosh, 2006; Ghosh, 2011; Mazumdar, 2008, 2011). Ghosh (2011) states that the inability to implement these types of reforms kept the structures and patterns of inequalities in place:

The inability to undertake land reforms or other strategies that would have involved substantial redistribution of assets not only meant that wealth and income inequalities continued to be very high, but also affected the ability of the Indian state to undertake economic policies that would be perceived as going against the interests of the landed and other elites. (p.2)

As explored in Chapter Three (see section 3.6.2) there are ideological and political barriers to social policy construction due to its highly political nature (Mkandawire, 2004). Embedded features of the Indian political economy were class based and this limited the construction of social welfare policies (Ghosh, 2004; Chandrashaker and Ghosh, 2006; Kohli, 2004, 2012).

Kohli (2004, 2012) argues that because India is a democracy, unlike China and the Soviet Union at the time, its leaders had to worry more about political support and pursue multiple goals simultaneously, as they sought to satisfy multiple constituencies and this ultimately resulted in an inclination towards populism, promising benefits to the majority of the Indian population which resided in the lower classes while concurrently protecting the interests of the socio-economic elite classes. As the business class in India is representative of the middle and, in particular, upper classes (Kohli, 2012), the government’s pattern of paying lip service to the masses while catering to the interests of the elite is particularly important to this thesis. Perceptions of how the Indian government balances the needs of business and its citizens will be explored in upcoming empirical chapters.

There were several economic and social features of India’s post-independence growth strategy that structurally restricted the potential of the Indian economy to grow in a sustainable manner (Ghosh, 2004); however, often it is the economic policies that are held to blame (Dreze and Sen, 1995, 2013). Dreze and Sen (1995, p.8) stress that often there are tendencies to examine and highlight the market failures of the dirigisme years and to ignore the failures of advancing equality which occurred in equal measure during this time:

There are many failures, particularly in the development of public educational facilities, health care provisions, social security arrangements, local democracy, environmental protection, and so on, and the stifling of market incentives is only one part of that larger picture.

One set of policies that were implemented during the dirigisme years which is important to this thesis are labour laws. Discussion of labour laws is particularly relevant to contemporary demands from business groups for labour reform, a topic that will be explored extensively in upcoming empirical chapters. Thus, a brief exploration of India’s labour laws is warranted here.

Labour legislation in the context of trade unions and labour rights were shaped during the period of late colonialism and independence (Bhattacharya, 2007). Bhattacharya (2007) argues that following independence the Indian government passed a series of labour laws to increase the hold and control of the state in the industrial dispute process. The most notable was the Industrial Disputes Act (IDA) 1947 which continues to provide the basic framework governing industrial relations and labour protection in India (Hazra, 2005; Bhattacharjea, 2006; Bhattacharya, 2007; Eichengreen et al, 2010). Certain sections of the IDA, in particular V-B, continue to be a contentious for employers, employees and trade unions alike. Section V-B of the IDA requires firms employing one hundred workers or more to obtain government permission for layoffs, closures, and retrenchments (Bhattacharjea, 2006). Further legislation was passed during the dirigisme years such as the Industrial Employment (Standing Orders) Act, the Factories Act and the Contract Labour (Regulation and Prohibition) Act as well as legislation relating to social security in the organised sector (Murali, 2010). The Standing Order Act requires employees to obtain consent from workers and unions before changing the conditions and terms of employment including changes in technology (Bhattacharjea, 2006; Eichengreen et al, 2010). Provisions within the Factories Act try to ensure health and safety and other workplace and labour provisions are provided via inspections (Bhattacharjea, 2006). The Contract and Labour Act regulates and in some cases prohibits the use of contract labour (Murali, 2010). Both the centre and state governments have certain jurisdictional precedence in labour regulations and the involvement of both have resulted in a sprawling arrangement of laws whereby many are overlapping and contradictory (Ghosh, 2004; Nagaraj, 2004; Bhattacharjea, 2006).

One aspect of India’s labour market that is important to understand is that India has both formal and informal labour markets. The main distinction between the two is that the formal work sector is covered by national and state labour regulations and the informal sector is not (Dutta Roy, 2004; Hazra 2005; Anant et al, 2006; Eichengreen et al, 2010). It is equally important to note that the formal work sector in India is very small in comparison to the informal and employs less than 8 per cent of the labour force (Nachane, 2011). Thus, the overwhelming majority of India’s workforce is not covered by the aforementioned labour legislations (Murali, 2010). Yet despite this fact, as will be explored in empirical chapters, business groups continue to advocate strongly for labour reform (Murali, 2010).

As discussed in Chapter Three (see section 3.2.2) the relative power of other actors who have a vested interest in policy outcomes such as labour groups and civil society can restrain business influence in policy outcomes. Murali (2010) explores the issue of labour reform in India which serves to highlight the various power dynamics between political parties, business, and labour movements. Domestic business associations have continually called for greater flexibility in hire and fire policies as well as the implementation of an exit policy for plant closures (Bhattacharya, 2006; Eichengreen et al, 2010; Murali, 2010). Yet, formal labour reform has not occurred (Murali, 2010). Murali (2010) lists reasons as to why business power has been thwarted in labour reform, all of which involve the nature of India’s electoral politics. She explains that high levels of electoral competition have meant that no political party can ostracise key constituents or go against political issues that are of high concern to the majority of constituents and labour reform is a ‘mass politics’ (Varshney, 1998) issue in India even though organized labour is small section of the labour force. Varshney (1998) distinguishes between “mass politics” and “elite politics”. The former applies to issues that are of concern to the majority while the latter are issues that are confined to elite levels of discourse. Labour reform appears to be a very sensitive issue in India. Politicians avoid explicitly looking as if they are prioritising business interests above those of citizens (Murali, 2010), but this raises an important question as far as this thesis is concerned about how successful the Indian government has been in putting in place policies that simultaneously attract new investment but in a way that does not undermine labour conditions, burgeoning social policies or political support from the masses.

Having explored the social and economic development during the dirigisme years, I will now explore India’s official economic liberalisation in 1991.


4.2.3: Economic liberalisation in India


Perhaps the most significant development as far as India’s current approach to FDI can be traced back to 1991. In 1991, India implemented very significant economic and structural reforms. The economic reforms which took place in 1991 resulted from a balance of payments crisis; India was close to defaulting on its sovereign debt for the first time in its history (Srinivasan and Tendulkar, 2003). India was forced to take a loan from the IMF and the money was provided along with stipulations for the implementation of structural adjustments (see section 2.2.2). How much the reform policies were dictated from the IMF and how much the Indian government saw reform as inevitable is hotly debated. Many such as Greer and Singh (1996) and Patnaik and Chandrasekhar (1998) stress the influence that the IMF and the World Bank had on the reforms as being very significant. On the other hand researchers such as Chaudhry et al (2004, p.75) argue that India has experienced both successes and failures in working with the IMF but, overall, has done well to retain ownership of any conditionality imposed by the IMF.

India did liberalise its economy in 1991 but ‘gradualism’ has often been described as the hallmark of the Indian approach to the reforms as opposed to shock therapy style measures adopted in parts of Latin America in the 1980s (Singh, 2005; Mazumdar, 2011). The reforms liberalised both regulations for the domestic economy and the policies relating to foreign investment. For domestic businesses, the ‘permit license raj’- as it had become known- was dismantled and there was detraction from the primacy that was previously given to the public sector (Bhagwati, 1993). There were significant changes to the policies towards FDI as well. Even more significant was the shift in governmental opinion towards FDI and the possible benefits that could result in opening the economy to global markets. The government displayed a confidence in their country’s ability to compete globally (Rao and Dhar, 2011b).

Although the government appeared confident in its welcoming of FDI, concern and opposition was often expressed by domestic business and business associations such as the Confederation of Indian Industry (CII) (Singh, 2005, Kohli, 2012). Singh (2005) argues that because the anti-FDI rhetoric that was amassing in the country, this essentially meant that the government had to appear to proceed with caution. Mazumdar (2011) concurs and argues that one prominent feature of Indian liberalisation is that although there has not been any ambiguity in its direction, the pace of opening the economy has been a comparatively slow and gradual process and this was done intentionally to protect Indian business and business interests.

Against this background of protectionism, the government initiated a phased opening to FDI throughout the 1990s, lifting caps of foreign ownership from 40 to 51 per cent; then to 74 per cent; and finally to 100 per cent in most sectors by the mid-2000s (Singh, 2005; Shah and Patnaik, 2013). Automatic approval routes, meaning no prior approval from the Government of India or the Reserve Bank of India (RBI) is needed prior to the investment, were implanted for many sectors (Singh, 2005; Rao and Dhar, 2011b; Shah and Patnaik, 2013). By the mid- 2000s, FDI’s importance to development strategy came into full bloom and several agencies were created to promote India to foreign investors around the world: The Foreign Investment Promotion Council was established and the Foreign Investment Promotion Board was streamlined and made more transparent to ease the entry of FDI (Rao and Dhar, 2011a). Other promotional bodies that were created to endorse the investment climate in India include such organisations as the India Brand Equity Foundation and Invest in India (Rao and Dhar, 2011a).

The next two decades following liberalisation are the ones associated with India’s economic boom and it is during these decades that India emerges as a main contender for FDI and a globalisation triumph (Shah and Patnaik, 2013; Kohli, 2012). Post liberalisation for India is a time when India carves a niche for itself in the international division of labour as a magnet for IT, computer software, pharmaceutical and business process outsourcing investment (Ghosh, 2011). However, it is also a time when structural inequalities increase, increase in casual employment and adverse shifts in human development indicators (Dreze and Sen, 1995, 2013; Ghosh, 2011). The next section will explore the decades following economic liberalisation and examine the advances as well as failures.



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