Capitalism with Indian Characteristics

The mighty Reliance Industries has been ranked 99th by Fortune magazine for the year 2012, improving its last year‟s stand on 134, but only 8 Indian companies have made it to the Fortune 500 list yet. Today, Indian government is introducing slew of reforms in all the major sectors of the economy and transiting to Capitalism. Is Capitalism new to India? The answer is No. The Bronze Age‟s Indus Valley Civilization had healthy trade relations with Central Asia, Arabian Gulf region, Northern Afghanistan and the distant Mesopotamian cities, and we know that international trade gives occasion to Capitalism. It continued during the Mauryans through the „Silk Road‟. The political economy and European trade during the Mughals clearly marked out the era as one of the most significant ones in India‟s economic history; the volume of import/export increased manifold and the indigenous manufacturers competed with their foreign counterparts. The East India Company was established in India, which later played lead role in colonizing the Indian Sub- continent, thus dampening the spirit of Capitalism.

Post-independence, the economic policy of India became very protectionist in nature, but followed a mixed-economy system unlike Soviet Union. The salient features of policy against Capitalism were: large public sector, overt regulation of business and central planning. Indira Gandhi initiated pro-business reform in 1980, followed by economic liberalization in 1991, during P.V. Narasimha Rao. The License Raj(industrial, investment and import licensing) was abolished, and public sector hegemony on the economy greatly reduced. Prior to 1991, the foreign investment was considered a „necessary evil‟, and only those investments were allowed, which brought some new technologies with them. This led to dwindling of foreign investments, and Forex Reserves of India plummeted; the problem of balance of payment became nightmare for statesmen and acolytes, and India faced some stiffest challenges of all time.

Globalization went viral in the early 1990s, and India adopted the LPG (liberalization, privatization and globalization) model, under which markets were deregulated, private participations were incentivized and economy became „open‟ to foreign investments. The impact of these reforms could be gauged from the fact that the total foreign investments (foreign direct investment, foreign portfolio investment and foreign capital investment) proliferated from miniscule US $132 million in 1991-92 to US $5.3 billion in 1995-96. Major cities of India became the hotspots for foreign investments, improving the infrastructure, logistics and even overall quality of workforce. The IIT/IIM and other elite institution graduates started preferring their own country over working abroad, thus limiting „Brain Drain‟. The economy saw a transition (although small degree) from agrarian to metropolitan kind viz. the share of agriculture in GDP reduced from 52.2% in 1950-51 to 24.4% in 1999 (Source: Economic Survey, GOI). The most sought-after Entrepreneurship Development started in India, and pools of entrepreneurs surfaced with innovative ideas and perseverance to take India for a long stride. The industrial sector witnessed massive restructuring by the way of mergers & acquisitions, process reengineering, foreign joint ventures and

technological up gradation. The service sector became the greatest beneficiary, the outsourcing industry comprising of IT/ITES became the poster boy of the economy, rendering professionals with large disposable income, which eventually helped the retail sector flourish.

The agricultural sector which is still employing more than 60% population of India and contributing more than 16% to its GDP, didn‟t see such surge in its growth. The World Bank “India Country Overview 2008” highlighted that agricultural practices in India were neither economically nor environmentally sustainable, and the yield was too low. Farmer‟s access to markets got hampered due to poor roads, rudimentary market infrastructure and excessive regulation. The situation demanded rural entrepreneurship and exposure to competition in agricultural marketing to let the farmers receive better prices of their produce. Recently, global financial services firm Moody‟s declared India under galloping stagflation, and attributed high inflation rate in spite of weaker growth as the responsible factor. The rupee is constantly losing its value against the dollar, GDP growth rate is below 5% and retail inflation is at all time high, causing losses in imports/exports and low purchasing power for consumers. RBI is reluctant to cut the interest rates, and continues tightening the monetary policy to curb inflation, which is leading to slow economic growth, unemployment and loss of investors‟ credibility in the economy. Recently, Forbes magazine analyzed the level of entrepreneurship development in India and called it substandard, thanks to the lack of funding, very few product companies, bureaucratic red tape, lack of good mentors and education. With strong governmental support, FDI has helped the Indian economy grow tremendously, but with US $34 billion in FDI in 2007, India gets only about 25% of the FDI in China, which is touching 10% annual growth.

It‟s speculated that India will become the third biggest economy (after USA and China) in the near future, which was possible by remaining isolated and over-regulated. The population of India is having median age of 25 and 65% of its population is below the age of 35. This may give her an edge over competitors like China, where median age is over 35, or it may even lead to high-level of unemployment. The Harvard Business Review praised East for devising long-term capitalistic plans unlike Europe, which they consider the rightmost strategy for ultimate success. Sectors like mining and agriculture are still facing scarcity of FDIs and FPIs, investment banking sector needs more foreign players and huge investment flow. The Economist magazine says Indian Capitalism is not growing out of an immature phase, nor shaking-off simpler ways of doing things, rather it seemed to establish its own equilibrium —what might be called “Capindialism”—in which profits are controlled not by institutional shareholders but mainly by the state, or by entrepreneurs and their descendants. The 30% local rule in multi-brand retail FDI of 51% shows the acumen and diligence of GoI. As McKinsey quotes “Future of Capitalism is building sustainable energy future”, our decision of opening-up‟ gets more substantiated, but skepticism can never end completely.

Azhar Hussain
IIT (BHU), Varanasi


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