The Process of Liberalization in India: Foreign Direct Investment and the Indian Auto Industry

Chapter 1 Introduction India, the second most populous country in the world, and the largest democ- racy, evokes images of teeming populations, widespread poverty and, more re- cently, of software technology and call centers. It has often been claimed that everything that can be said about India is true. India is a vast country with rampant problems of poverty, inequality, illiteracy and poor health care, ranking very low on the Human Development Index Scale (see Fig. 1.1). At the same time, Indian industry has picked up in the last decade to make India the third largest economy1 in the world, in GDP (Purchasing Power Parity) terms, after the U.S.A. and China. Today the Indian economy is a fourth of the US economy, and half of China
s. But current GDP growth rates, one of the highest in the world for India, suggest an upward trend. This increase in GDP has been contributed mainly by the industrial and service sectors, with the service sector playing an increasingly important role. India
s almost stagnant agricultural sector, even today one of the most under- developed in the world, still constitutes around a quarter of national GDP, much above the world average (see Fig. 1.1). It is widely believed that the current strength of industry in India has followed liberalization reforms that took place in the early 1990
s (see Section 2.3). Since then, India
s trade has boomed and there has been sustained investment into industry by foreign players, bringing in not only foreign capital, but also international technology and know-how. There have also been indirect consequences of development, employment, e- ciency and rising per capita incomes. The economic reforms of the the 1990's have changed the face of the Indian economy. They have made available to Indian consumers, at increasingly af- fordable prices, oerings that were never before available. While making India more attractive for foreign investors, the reforms have also helped integrate the Indian economy with the global economy, enabling Indian companies and labor to seek avenues abroad. An increasing level of foreign investment reects international condence in 1expected ranking 2005-06 7