India adopted a democratic system of government and a mixed economy after gaining independence in 1947. However, a large part of their economy was still comprised of state-owned entities. Because of this, the private sector was stifled and any growth came only with hard-won government permission. This was especially true in the auto, chemical, and steel industries.
Compounding the issue of strict government control was the fact that various laws made it difficult for businesses in the private sector to flourish. If a business grew to over 100 employees, then it was very difficult to fire a worker. In turn, business owners kept the size of their firm under the threshold. Unfortunately, those businesses did not grow to their full potential and could not reach the size necessary to be competitive in the international market.
At this time, due to the rules and regulations, India was not taking advantage of foreign direct investments. Thankfully, the lack of progress and growth led the government to reform the economic system. In 1991, many industries once closed to the private sector, including electricity generation, oil industry, steel production, air transport and telecommunications, were opened. Foreign investments were given automatic approval up to a 51 percent stake in an Indian enterprise and, in some cases, 100 percent investment was granted. Tariffs on imports were dramatically reduced as were income tax rates and corporate tax rates. Each of these measures led to an increased rate of economic progress and tremendous growth within India’s private sector.
India’s economy is still in a transition phase. While they have seen growth in private sector enterprise and increased foreign investment, they still have to navigate political barriers and help mitigate risks. Some import tariffs are still in place because the government fears a flood of inexpensive Chinese products. In addition, even though the private sector has proven more efficient...
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