Indias Transformation

Aaron Blackburn Fall 2011

Indias Transformation
Since independence from the United Kingdom, India has undergone a dramatic change politically and economically. The economic system that developed in India after 1947 was a mixed economy characterized by a large number of state-owned enterprises, centralized planning, and subsidies (Hill). As they sought to create a modern state, it is understandable that they choose to privatize important industries. It would guarantee a certain amount of jobs and some economic activity. Since the early 1990s, several areas once closed to the private sector were opened (Hill). This has allowed dramatic economic growth. The retreat of state-ownership has given space for new enterprises and firms the freedom to innovate products and processes. Two major impediments to India finishing the move to a market economy have been the presence of tariffs to prevent a flood of inexpensive Chinese products and the Indian Supreme Court halting some privatization (Hill). These are a continuation of economic protectionism established at independence. As India transforms, they will have to decide which market risks are worth the economic rewards.

Public-ownership severely restricted the economic areas where it exists. Indias private firms are 30-40 percent more productive than their state-owned enterprises (Hill). Without support from the government, private firms must rely on competitive advantages to survive. This has meant finding ways of out-performing public-owned companies. Before the 1990s, private firms faced many government imposed hindrances. They could only expand with government permission, had to wait years until they could diversity into a new product, and were limited by production quotas (Hill). These all stunted the growth of the economy and privately-owned companies. In 1994, Indias economy was still smaller than Belgiums despite having a population of 950 million (Hill), compared to Belgiums population of just over 10 million (Wikipedia). Economy activity was spread very thin amongst the population. This was a critical factor in India moving towards a market economy.

The move from mixed to market economy has given India tremendous gains. The economy expanded at an annual rate of about 6.3 percent from 1994 to 2004, and then accelerated to 9 percent per annum during 2005-2008 (Hill). For comparison, growth in the United States was 4.1% in 1994 and 0% by 2008 (Google). Indias performance has been spectacular. Direct investment from foreign entities jumped from $150 million in 1991 to $36.7 billion in 2008 (Hill). This is a testament by the international community about the positive transformation of the Indian economy. Their willingness to

invest acknowledges that opportunities for expansion and new company formation are available and profitable. Economic expansion and foreign investment have validated Indias reforms.

India has seen remarkable growth in the software and pharmaceutical industries. The importation of the English language during colonization has become a comparative advantage for India. It has allowed for outsourced software development as foreign firms haven taken advantage of Englishspeaking, technologically talented individuals with salary demands much lesser than their western counterparts. Pharmaceuticals have done well for another reason. The lack of patent protection made the Indian market undesirable to the multinational companies that had dominated the market, and while they streamed out, Indian companies started to take their places (Wikipedia). This has allowed India companies the opportunity to meet the needs of the domestic population. However, it has deterred foreign investment in the industry. Success in these technical industries will spur growth in other fields. Individuals with certain skills and work experiences will be recruited away for their expertise, or they might leave to create their own businesses. Economic gains could also be reinvested where opportunities are perceived. Software and pharmaceutical companies will translate into growth in other industries.

Foreign multinationals looking to invest in India and sell consumer products there should examine their opportunity carefully. While GDP growth rate was a robust 7.12% from 1998 to 2007, gross national income per capita was only $950 in 2007, compared to the United States $46,040, Chinas $2,360, and Nigerias $930 in the same year (Hill). The tremendous economic growth has created more disposable income and fostered expansion of the Indian middle-class. However, the market size for Indians that could afford consumer products could be too small. This also depends on the product itself, where price and the culture might also determine success. The tariff could also price the product out of the Indian market. Indians in general might favor a substitute over your product, such as tea once being preferable to coffee. Multinationals would do well to investigate these issues before investing in India.

Biopharmaceuticals in India
Since the article Indias Transformation was written in 2008, Indias pharmaceutical industry has continued to do well. In particular, their biopharmaceutical companies have lead the way. During 200910, biopharmaceuticals were the biggest contributor generating 60 percent of the industry's growth (Wikipedia). This represents a swift from manufacturing compounds towards the more technologically intensive genetic engineering of medicine. It shows that the pharmaceutical industry in India is maturing. It also shows that biotechnology is growing in India. Biopharmaceutical companies are born from Indias burgeoning biotechnology industry. Since the creation of the Department of Biotechnology in 1986, there have been a number of dispensations offered by both the central government and various states to encourage the growth of the industry (Wikipedia). Similar to the subsidies offered during the post-colonial, mixed economy years of India, these dispensations were aimed at creating expansion in a vital industry. But the Indian government is not alone. The International Finance Commission, the private investment arm of the World Bank, called India the centerpiece of IFCs global biotech strategy (Wikipedia). Like other forms of foreign investment, this is a signal that profitable opportunities in biotechnology are to be had in India. These investments in biotechnology have in recent years have benefit the pharmaceutical industry. This branch of pharmaceuticals is not without challenges unique to India. The most pressing ones are the lack of funding for start-ups and skilled employees. Government grants are difficult to secure, and due to the expensive and uncertain nature of biotech research, venture capitalists are reluctant to invest in firms that have not yet developed a commercially viable product (Wikipedia). So while the government and private investors have made moves into this industry, there is demand for more. The venture capital industry in India has not been able to grow with the rest of the economy. Biopharmaceutical firms have the disadvantage of competing against IT for ambitious, science-minded students but not being able to guarantee the same compensation (Wikipedia). Thus in rapidly expanding and modernizing India, the number of skilled employees are not enough. One estimate shows that 10% of upper-echelon biotech recruits have come from foreign countries. While this is not a problem, per se, it drives up cost in a country whose competitive advantage is based on cheap, highquality labor (Wikipedia). India will have to increase its supply of domestic skilled workers and working capital if it wants its biopharmaceutical firms to continue propelling the India pharmaceutical industry.

Works Cited
Google. Google Public Data Explorer: GDP Growth Rate. 2011. <http://www.google.com/publicdata/explore?ds=d5bncppjof8f9_&met_y=ny_gdp_mktp_kd_zg &idim=country:USA&dl=en&hl=en&q=gdp+growth+of+the+us>. Hill, Charles W. L. International Business. McGraw-Hill, 2011. Instructor Customization of the 8th Edition. Wikipedia. Demographics of Belgium. 2011. <http://en.wikipedia.org/wiki/Demographics_of_Belgium>. . Pharmaceutical Industry in India. 2011. <http://en.wikipedia.org/wiki/Pharmaceutical_industry_in_India>.