Section B:

UNIT I

Q.2: Evaluate the growth and development of International Business in India

India's journey in international business has been nothing short of transformative, especially
since the economic reforms of 1991. From a largely closed and centrally planned economy,
India has emerged as a significant global player, driven by a strategic shift towards
liberalization, privatization, and globalization (LPG). This evaluation will delve into the historical
context, the key drivers of this growth, the evolution of its trade and investment landscape,
and the persistent challenges that still shape its international business trajectory.

1. The Pre-1991 Era: A Closed and Controlled Regime

For much of its post-independence history, India pursued an inward-looking,

import-substitution industrialization strategy. This approach was characterized by:
●​ High Tariffs and Quantitative Restrictions: Very high import duties and extensive
non-tariff barriers (like quotas and strict licensing requirements) were in place to protect
nascent domestic industries.
●​ Industrial Licensing (License Raj): Domestic industries required licenses for
establishing new units, expanding capacity, or diversifying production, leading to
inefficiencies and limited competition.
●​ Foreign Exchange Controls: Stringent regulations on foreign exchange transactions and
capital flows made it difficult for foreign companies to invest and for Indian companies to
venture abroad.
●​ Skepticism towards Foreign Capital: There was a cautious, if not outright restrictive,
attitude towards Foreign Direct Investment (FDI), often limiting foreign equity
participation and imposing technology transfer requirements.
●​ Dominance of Public Sector: State-owned enterprises held a commanding position in
strategic sectors like banking, heavy industry, telecommunications, and aviation.
●​ Low Trade-to-GDP Ratio: India's share in global trade was minuscule, reflecting its
limited engagement with the world economy.

While these policies aimed at self-reliance and protecting domestic industries, they
inadvertently led to inefficiencies, technological stagnation, limited choice for consumers, and
a perennial balance of payments crisis. The Gulf War in 1990-91 exacerbated these issues,
pushing India to the brink of sovereign default and necessitating a fundamental policy
overhaul.
2. The 1991 Economic Reforms: A Paradigm Shift

The crisis of 1991 served as a catalyst for sweeping economic reforms, often referred to as the
Liberalization, Privatization, and Globalization (LPG) model. These reforms fundamentally
reoriented India's economic policy towards greater openness and market orientation,
unlocking its international business potential.
●​ Liberalization: This involved dismantling the "License Raj," reducing industrial
regulations, easing foreign exchange controls, and simplifying business procedures to
foster domestic and foreign private sector participation.
●​ Privatization: This entailed divesting government stakes in public sector enterprises,
aiming to improve efficiency and reduce the fiscal burden.
●​ Globalization: This was the most direct driver of international business growth. It
involved opening up the economy to foreign trade and investment through:
○​ Tariff Reduction: Steep cuts in import duties across various sectors.
○​ Removal of Quantitative Restrictions: Elimination of quotas, especially after India's
commitments to the WTO.
○​ FDI Policy Liberalization: Gradual but significant opening of sectors to FDI,
increasing foreign equity limits, and shifting from approval-based to automatic routes
for many sectors.
○​ Exchange Rate Management: Moving towards a market-determined exchange rate,
enhancing currency convertibility for current account transactions.
○​ Integration with Global Institutions: Active participation in the World Trade
Organization (WTO) and increased engagement with the IMF and World Bank.

3. Key Pillars of Growth and Development in International Business Post-1991

The 1991 reforms laid the groundwork for sustained growth in India's international business.
Several interconnected factors contributed to this expansion:

a) Surge in Foreign Direct Investment (FDI) Inflows:

The liberalization of FDI policy transformed India into an attractive destination for foreign
capital.
●​ Policy Evolution: From highly restrictive limits and sectoral prohibitions, India
progressively allowed higher foreign equity (e.g., 51%, 74%, 100%) in a wide range of
sectors. The introduction of the "automatic route" for many sectors significantly
streamlined the approval process.
●​ Sectoral Distribution: Initial FDI inflows were concentrated in traditional sectors like
food processing and manufacturing. However, over time, a significant shift occurred
towards the services sector (telecommunications, financial services, IT, retail) and
infrastructure. Manufacturing, particularly automobiles and electronics, also attracted
substantial investment.
●​ Impact: FDI has been crucial for:
○​ Capital Formation: Bridging the investment-saving gap.
 ○​ Technology Transfer: Bringing in modern production techniques, R&D capabilities,
and managerial know-how.
○​ Employment Generation: Directly and indirectly creating jobs.
○​ Export Promotion: Many foreign firms established production bases in India to serve
both the domestic and export markets, integrating India into global supply chains.
○​ Enhanced Competition: Fostering competition within domestic industries, leading
to improved quality and efficiency.

b) Robust Export Growth and Diversification:

India's export basket and destinations have diversified significantly since 1991.
●​ Services Exports as a Powerhouse: This is arguably India's biggest success story in
international business. The IT and Business Process Outsourcing (BPO) sectors have
grown exponentially, leveraging India's large pool of English-speaking, skilled workforce.
Companies like TCS, Infosys, and Wipro became global giants. Software services, remote
technical support, and call centers became major foreign exchange earners. More
recently, growth areas include cybersecurity, AI, and cloud services.
●​ Pharmaceuticals: India emerged as the "pharmacy of the world," especially for generic
drugs. Its cost-effective manufacturing capabilities, strong R&D, and adherence to
international quality standards (e.g., US FDA) enabled it to become a leading exporter of
bulk drugs, formulations, and vaccines, particularly to the US, Europe, and Africa.
●​ Gems and Jewellery: This traditional sector has consistently been a top export earner,
leveraging India's skilled craftsmanship and global demand.
●​ Engineering Goods and Automobiles: Liberalization spurred investment in
manufacturing, leading to increased exports of machinery, auto components, and even
complete vehicles (especially two-wheelers and small cars). India has become a
significant base for global automotive manufacturers.
●​ Textiles and Apparel: Despite facing global competition, India's textile sector, with its
abundant raw materials (cotton) and labor, continues to be a major exporter, moving
towards higher value-added products.
●​ Agricultural Exports: While often volatile, India remains a significant exporter of basmati
rice, spices, tea, and other agricultural commodities.
●​ Market Diversification: While traditional markets like the US and Europe remain crucial,
India has increasingly diversified its export destinations to include ASEAN countries,
Africa, Latin America, and newer markets in Eastern Europe, reducing reliance on a few
major economies.

c) Increasing Outward Foreign Direct Investment (OFDI):

The growth hasn't been unidirectional. Indian companies, too, began investing abroad,
becoming multinational corporations themselves.
●​ Drivers: Seeking new markets, acquiring technology, securing raw materials, leveraging
lower costs, and establishing a global footprint (e.g., Tata Steel acquiring Corus, Bharti
Airtel acquiring Zain's African operations).
●​ Sectors: Indian OFDI has been prominent in IT services, pharmaceuticals, manufacturing,
 and natural resources. This signifies the growing maturity and global aspirations of Indian
businesses.

d) Bilateral and Multilateral Trade Agreements:

India's engagement with international trade has been characterized by active participation in
various agreements.
●​ WTO Commitments: As a founding member of the WTO, India adhered to its principles,
undertaking tariff reductions and dismantling non-tariff barriers, which facilitated
smoother international trade.
●​ Free Trade Agreements (FTAs) and Regional Trade Agreements (RTAs): India has
actively pursued FTAs and Comprehensive Economic Partnership Agreements (CEPAs)
with key partners such as ASEAN, Japan, South Korea, UAE, Australia, and is currently
negotiating with the UK, EU, and Canada. These agreements reduce tariffs and non-tariff
barriers, enhance market access, and deepen economic integration.
●​ BIMSTEC, SAARC: Regional groupings, though some have seen slower progress, aim to
foster closer trade ties within South Asia and Southeast Asia.

e) Government Initiatives and Policy Support:

Successive Indian governments have continued to introduce policies to facilitate international
business.
●​ "Make in India": Launched in 2014, this initiative aims to promote manufacturing within
India, encouraging both domestic and foreign companies to set up production facilities,
with an eye on boosting exports.
●​ "Digital India": Focused on digital infrastructure, digital literacy, and e-governance,
which supports the growth of the IT and digital services sectors, facilitating digital trade.
●​ Production Linked Incentive (PLI) Schemes: Introduced for various sectors
(electronics, pharmaceuticals, automobiles, textiles, etc.), these schemes offer incentives
on incremental sales from products manufactured in India, specifically to attract foreign
investment and boost domestic manufacturing and exports.
●​ Foreign Trade Policies (FTPs): The Directorate General of Foreign Trade (DGFT)
periodically updates FTPs, offering schemes and incentives (like RoDTEP - Remission of
Duties and Taxes on Exported Products, MAI - Market Access Initiative) to promote
exports and streamline trade procedures.
●​ Ease of Doing Business Reforms: Continuous efforts to simplify regulations, reduce
bureaucratic hurdles, and improve the overall business environment for both domestic
and foreign investors.
●​ Infrastructure Development: Massive investments in roads, ports, airports, and logistics
(e.g., PM Gati Shakti National Master Plan, National Logistics Policy) are crucial to
enhance India's competitiveness in international trade by reducing lead times and costs.
●​ Districts as Export Hubs: An initiative to identify products with export potential in each
district and provide support to local manufacturers/exporters.

4. Challenges and Future Outlook

Despite remarkable progress, India's international business landscape is not without
significant challenges:
●​ Infrastructure Gaps: While improving, inadequate infrastructure (logistics, power,
last-mile connectivity) can still impede the smooth flow of goods and increase costs,
affecting competitiveness.
●​ Regulatory and Bureaucratic Hurdles: Despite "Ease of Doing Business" efforts,
navigating complex labor laws, land acquisition procedures, and varying state-level
regulations can still be cumbersome for foreign investors. The pace of reforms can
sometimes be slow.
●​ Global Volatility: India's increased integration means it is more susceptible to global
economic downturns, trade protectionism, geopolitical tensions, and supply chain
disruptions.
●​ Competition: Intense competition from established global players and other emerging
economies (e.g., Vietnam, Bangladesh in textiles, China in manufacturing) requires
continuous innovation and efficiency improvements.
●​ Skilled Labor and Education: While India has a large talent pool, ensuring the
availability of highly skilled labor across all sectors and improving the quality of vocational
training remains crucial.
●​ Research and Development (R&D): While some sectors show strong R&D, overall R&D
spending as a percentage of GDP remains low compared to developed nations, which
could limit future innovation-led export growth.
●​ Protectionism in Developed Markets: Rising protectionist sentiments and non-tariff
barriers (like stringent environmental or labor standards) in key markets can pose
challenges for Indian exporters.
●​ Global Supply Chain Resilience: The COVID-19 pandemic highlighted the need for
diversification and resilience in global supply chains, prompting India to focus on
becoming a manufacturing hub.

Conclusion:

India's journey in international business since 1991 is a testament to the transformative power
of economic liberalization. It has moved from a position of relative isolation to a significant
global trading and investing nation. The growth of its services sector, the increasing
sophistication of its manufacturing capabilities, and its proactive engagement in global trade
agreements underscore its rising stature. While challenges related to infrastructure,
regulatory efficiency, and global economic uncertainties persist, the government's continued
focus on structural reforms, digital transformation, and investment promotion positions India
to further enhance its role in the global economy. The ambition to achieve a $2 trillion export
target by 2030 reflects the confidence in India's sustained growth in international business.