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Global Reach
Which model—the Chinese or the Indian—ultimately produces the greatest economic benefit
remains to be seen: one manages from the top down in a way that is arguably more efficient but
is largely driven by state policy objectives, strategic guidance and resource allocation; the other
manages more haphazardly, from the ground up, and with the state often an obstacle, struggling
to keep pace with changing conditions. In the long term, India’s slower, more democratic processes
may prove a source of either competitive weakness or strength.
A partial answer rests with India’s focus on software and information technology (IT) services,
rather than manufacturing—a logical development in a country with a deep intellectual tradition
but unreliable water and power supplies, and poor infrastructure for physically getting
goods to market.
The reach of India’s engineers and programmers into core business processes across all sectors—
energy, health care, transportation, urban planning, financial services, telecommunications, retailing—provides
a competitive advantage in industrialized and emerging markets alike. This positions
India as a potential strategic partner and competitor in much broader ways in years to come.
1991: An Economic Sea Change
Pre-1991, India’s economy was centrally planned and regulated. Heavy industry was comprised
of state monopolies. Private industry was subject to strict industrial licensing, with certain sectors,
such as apparel, reserved for small-scale enterprises.
More than 7 in 10 import categories were subject to licensing restrictions or were banned outright.
Most tariffs were in the 110–150% range, and nearly all exceeded 60%. Capital account and current
account transactions were subject to exchange controls. Foreign investment was limited to 40%
equity ownership except in technology or export industries. Foreign direct investment (FDI) hovered
at a low $100–200 million annually. India’s foreign exchange reserves totaled $1 billion.
Iraq’s invasion of Kuwait, and the first Gulf War that followed, proved a tipping point for economic
reform in India as oil prices rose, export markets in Kuwait and Iraq dried up, and remittances
from Indian workers in the Gulf—which offset half to two-thirds of India’s global
trade deficit—slowed as workers fled home. An initial credit tranche from the International
Monetary Fund (IMF) failed to take hold, amid political instability.
A second IMF package imposed tougher conditions, beginning with an 18% rupee devaluation,
an end to import licensing (although import quotas continued until 2001), cuts in export subsidies,
and reduced public lending to state industries. Foreign investment rules were eased, more
than 60 industries were initially removed from the list reserved for small-scale enterprises, and
the number of industries reserved for the public sector was scaled back from 18 sectors to
four—minerals, railroads, munitions and nuclear power. In 2002, the maximum duty rate was
lowered to 30%. India saw an immediate jump to 6.7% average annual GDP (gross domestic
product) growth in the first 5 post-reform years.
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