Role of Foreign Capital and Multinational companies in

Industrial development of India

 

The development of any Society or country without is a myth. Economic development brings prosperity which in turns is directly proportional to the amount of goods and Services produced quantitatively or in broad sense we can say in Money equivalent.

So the factor of production depends on the following parameters.

• Land
• Labour
• Capital

 

 

For a country like India which is the second largest populous country in the world, expected to become most populous by 2050 if Population–Growth“>Population Growth is continuing at the current pace, where labour is available in abundance. Similarly, land is also available where more economic prosperity can be brought than the currently pursued economic activity. So after considering all these factors, capital played a crucial role.

 

So to fulfill the aspirations of common masses and general wellbeing of the society various governments are competing against each other to attract the foreign capital.

 

 

 

This theory is particularly gained ground after the Latin American crises which resulted in the Washington Consensus/Washington model. This is further ascertained by East Asian miracle. India has also experienced the taste of after Economic Reforms of 1991, which is better known as LPG Reforms. However from the experience of various countries various model of foreign capital and model have emerged. It also requires some kind of reduction regulation and restraint.

 

Why there is a need of foreign capital?

 

Foreign capital is required because of following reasons.

1. Inadequate domestic capital to fuel the economic growth.

Foreign capital is perceived as a resource of filling the gap of the capital scarce country. It helps in maintaining the Foreign Exchange, accelerating government revenue, planning the Investment necessary to achieve development target.

For example ‘Savings-investment’ gap

To achieve a planned growth rate of 7 percent per annum and the capital-output ration of 3 percent, rate of saving should be 21 percent. For domestic mobilization of 16 percent, there will be a shortfall of 5 percent. Thus the foremost contribution of foreign capital to national development is its role in filling the resource gap between targeted investment and locally mobilized savings.

 

 

 

2. Stability of Foreign exchange.

Foreign capital is needed to fill the gap between the targeted foreign exchange requirements and those derived from net export earnings plus net public foreign aid. This is generally called the foreign exchange or trade gap.

3. Reducing the Balance of Payment deficit.

An inflow of private foreign capital helps in removing deficit in the Balance of Payments over time if the foreign-owned enterprise can generate a net positive flow of export earnings.

4. Helps in realizing the estimated tax revenue of government

The third gap that the foreign capital and specifically, foreign investment helps to fill is that between governmental tax revenue and the locally raised taxes. By taxing the profits of the foreign enterprises the governments of developing countries are able to mobilize funds for projects (like energy, Infrastructure) that are badly needed for economic development.

5. Foreign investment meets the gap in management, Entrepreneurship, technology and skill.

These can be transferred to the host country through suitable training programmes and the processes. Further foreign companies bring with them

 

 

 

sophisticated technological knowledge about production processes while transferring modern machinery equipment to the capital-poor developing countries.

In fact, in this era of Globalization, there is a general belief that foreign capital transforms the productive structures of the developing economics leading to high rates of growth. Besides the above, foreign capital, by creating new productive assets, contributes to the generation of EMPLOYMENT a prime need of a country like India.

Forms and types of foreign Capital

Foreign capital flow in a country can take place either in the form of investment, concessional assistance, foreign aid.

1. Foreign Investment includes Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI) / Foreign Institutional Investment (FII).

FPI includes the amounts raised by Indian corporate through Euro Equities, Global Depository Receipts (GDR’s), and American Depository Receipts (ADR’s).

2. Non-Concessional Assistance mainly includes External Commercial Borrowings (ECB’s), loans from governments of other countries/multilateral agencies on market terms and deposits obtained from Non-Resident Indians (NRIs).

 

 

 

3. Concessional Assistance includes grants and loans obtained at low rates of interest with long maturity periods. Such assistance is generally provided on a bilateral basis or through multilateral agencies like the World Bank, International Monetary Fund (IMF), and International Development Association (IDA) etc.

Grants do not carry any obligation of repayment and are mostly made available to meet some temporary crisis. Foreign Aid can also be received in terms of direct supplies of agricultural commodities or industrial raw materials to overcome temporary shortages in the economy. Foreign Aid may also be given in the form of technical assistance.

 

 

 

 

 

 

 

 

 

 

 

Role of Multinational Corporations in the Indian Economy

Prior to 1991 Multinational companies did not play much role in the Indian economy. In the pre-reform period the Indian economy was dominated by public enterprises.

Earlier Industries and firms are regulated through Industrial Policy, 1956 put some kind of restraint on private firms, as a consequence of which they didn’t able to expand beyond a limit.

While multinational companies played a significant role in the promotion of growth and trade in South-East Asian countries they did not play much role in the Indian economy where import-substitution development strategy was followed. Since 1991, with the adoption of industrial policy of Liberalization, Privatization

And globalization role of private foreign capital has been recognized as important for rapid growth of the Indian economy. So Multinational corporations have been allowed to operate in India subjected to some regulations.

 

Impact of Multinational countries on the country and general population.

1. Promotion Foreign Investment:

In the recent years, external assistance to developing countries has been declining. This is because the donor developed countries have not been willing to part with a

 

larger proportion of their GDP as assistance to developing countries. MNCs can bridge the gap between the requirements of foreign capital for increasing foreign investment in India.

The liberalized foreign investment pursued since 1991, allows MNCs to make investment in India subject to different ceilings fixed for different industries or projects. However, in some industries 100 per cent export-oriented units (EOUs) can be set up. It may be noted, like domestic investment, foreign investment has also a multiplier effect on income and employment in a country.

For example, the effect of Suzuki firm’s investment in Maruti Udyog manufacturing cars is not confined to income and employment for the workers and employees of Maruti Udyog but goes beyond that. Many workers are employed in dealer firms who sell Maruti cars.

Moreover, many Intermediate Goods are supplied by Indian suppliers to Maruti Udyog and for this many workers are employed by them to manufacture various parts and components used in Maruti cars. Thus their incomes also go up by investment by a Japanese multinational in Maruti Udyog Limited in India.

2. Non-Debt Creating Capital inflows:

In pre-reform period in India when foreign direct investment by MNCs was discouraged, we relied heavily on External Commercial Borrowing (ECB) which was of debt-creating capital inflows. This raised the burden of External Debt and debt service payments reached an alarming figure of our Current Account receipts.

 

 

 

This created doubts about our ability to fulfill our debt obligations and there was a flight of capital from

India and this resulted in balance of payments crisis in 1991. As direct foreign investment by multinational corporations represents non-debt creating capital inflows we can avoid the liability of debt-servicing payments. Moreover, the advantage of investment by MNCs lies in the fact that servicing of non-debt capital begins only when the MNC firm reaches the stage of making profits to repatriate Thus, MNCs can play an important role in reducing Stress strains and on India’s balance of payments (BOP).

3. Technology Transfer:

Another important role of multinational corporations is that they transfer  sophisticated technology to developing countries which are essential for raising productivity of working class and enable us to start new productive ventures requiring high technology. Whenever, multinational firms set up their subsidiary production units or joint-venture units, they not only import new equipment and machinery embodying new technology but also skills and technical know-how to use the new equipment and machinery.

As a result, the Indian workers and engineers come to know of new superior technology and the way to use it. In India, the corporate sector spends only few Resources on Research and Development (R&D). It is the giant multinational

 

 

 

corporate firms (MNCs) which spend a lot on the development of new technologies can greatly benefit the developing countries by transferring the new technology developed by them. Therefore, MNCs can play an important role in the technological up-gradation of the Indian economy.

4. Promotion of Exports:

With globalization and producing products efficiently and therefore with lower costs multinationals can play a significant role in promoting exports of a country in which they invest. For example, the rapid expansion in China’s exports in recent years is due to the large investment made by multinationals in various fields of Chinese Industry.

Historically in India, multinationals made large investment in plantations whose products they exported. In recent years, Vistara airlines made a large investment in airline industries with a joint collaboration with Tata Industries.

BrahMos missile is a joint venture of Govt. of India with Russia, which is being sold to Vietnam, will bring income to India.

As a matter of fact until recently, when giving permission to a multinational firm for investment in India, Government granted the permission subject to the condition that the concerned multinational company would export the product so as to earn foreign exchange for India.

 

 

 

However, in case of Pepsi, a famous cold -drink multinational company, while for getting a product license in 1961 to produce Pepsi Cola in India it agreed to export a certain proportion of its product, but later it expressed its inability to do so. Instead, it ultimately agreed to export things other than what it produced such as tea.

5. Investment in Infrastructure:

With a large command over financial resources and their superior ability to raise resources both globally and inside India it is said that multinational corporations could invest in infrastructure such as power projects, modernization of Airports and posts, Telecommunication.

The investment in infrastructure will give a boost to industrial growth and help in creating income and employment in the India economy. The external economies generated by investment in infrastructure by MNCs will therefore crowd in investment by the indigenous private sector and will therefore stimulate economic growth.

In view of above, Make in India initiative, Skill India Initiative, current demographic scenario of India, foreign direct investment (FDI) will be encouraged and actively sought, especially in areas of (a) infrastructure, (b) high technology and (c) exports, and (d) where domestic assets and employment are created on a significant scale

 

 

One of the basic tenets of our has been non-alignment. As an element of foreign policy non-alignment m e a n s i n d e p e n d e n t o f b l o c s , peaceful coexistence, global peace, disarmament, struggle against all manifestations of injustices like imperialism, colonialism, apartheid etc.

After India’s adoption of non-alignment as the core element of its foreign policy, it also became a model for other newly independent countries. Most of them adopted it as an instrument for independence in International Relations. Soon non-alignment, in addition to a significant perspective of foreign policy, became a movement of solidarity and cooperation among the newly liberated countries of Asia, Africa and Latin America. Non-Aligned Movement (NAM) was thus founded as a solidarity movement for giving voice to Third World Countries.

Its essential purpose was to maintain equidistance in cold War rivalries and advocate principles for the promotion of world peace and cooperation. In due course of time, NAM became the largest membership movement as also the largest peace movement in the HISTORY of humanity. In both, in its founding and later consolidation and development, India played a significant role. In fact, in many ways India has been considered as a non-formal leader of the NAM.

ORIGIN OF NAM AND INDIA’S ROLE

Though as a formal organised movement NAM started with the holding of the Belgrade Summit of Non- Aligned countries in 1961, its seeds were sown by India, particularly by Jawaharlal Nehru even before attainment of India’s independence. It is quite clear that Nehru was articulating the ideas of decolonisation, national independence, non-bloc politics, peaceful coexistence, eradication of racialism and the need for the developing countries to play an active role in international affairs. It was at the initiative of Jawaharlal Nehru that India became the venue of the first forum of the liberated nations, when representatives of 28 countries met in New Delhi in March 1947 (before formal declaration of independence of India) at the Conference on Regional Cooperation among the Asian Countries known as Asian Relations Conference.

The Asian Relation Conference thus can truly be called the foundation stone for NAM.

BANDUNG CONFERENCE

Along with Nehru some other leaders in the world were also projecting these perceptions of newly independent countries. President Josip Broz Tito of Yugoslavia, President Gamel Abdul Nasser of Egypt (then called United Arab Republic), President Kwarne Nkrumah of Ghana and President Ahmed Soekarno of Indonesia were prominent among these. Together with Nehru they evolved a coherent outlook and position on Non-Alignment.

These leaders were largely instrumental in channelling the emerging changes towards the liberation of the people of the world and towards evolving a new vision of the world order. They rejected outright the notion that East- West relations alone constituted international affairs and asserted their own role in shaping these affairs. On the initiative of these leaders the conference of Afro-Asian Nations was held in Bandung (Indonesia) in April 1955.

The participants from 23 Asian and 6 African States represented mainly the people of young States which had been setup as a result of the new balance of forces of Democracy and freedom on the one hand and of colonialism and oppression on the others. The states participating in the conference did not belong to any military or political blocs, arid they had taken clear and definite positions the problems facing mankind. Despite their different perspectives, the countries represented at the Bandung Conference arrived at a common position in the larger interest of world peace. One of the most important achievements of the Bandung Conference was the Declaration on World Peace and Cooperation. This declaration embodied the principles of Panchsheel which were first stated in The Preamble to the agreement between India and China in April 1954.

INDIA’S PIVOTAL ROLE AT NAM

It is quite clear that in the founding of NAM India not only played an active role as one of the founders but in many ways it was the initiator of the Movement. As we have already seen non-alignment as a concept of global politics, as a foreign policy premise and as a perspective of maximising national interest of the newly liberated countries was a vision Indian national Leadership had developed during its freedom struggle itself.

The vision became the core element of India’s foreign policy after independence rand of other countries which attained independence from that period onwards.

The non-aligned movement, thus, emerged from India’s initiative for formulating an independent foreign policy. This independent foreign policy was based on a solid moral and Sound political foundation. It was a non-partisan foreign policy. India’s moral approach to international politics was further projected through the Panchsheel in 1954.

Within three years, eighteen countries had endorsed the Panchsheel principles in joint communiqués with Indian leaders. These principles were practically incorporated in the Ten Principles declared at Bandung. In addition during its initial years of independence itself, India played a very active role in peaceful resolution of some complex international issues and persistently lobbied in United Nations for disarmament.

All these made the idea of non-alignment, the initial basic tenet in India’s foreign policy, a mechanism providing link between the coordinated actions of the anti- imperialist and anti-colonial forces, as an assertion of independence in foreign  affairs, as a process of weakening of power blocs, as a symbol of defiance against big power domination and as a diplomatic innovation in the phase of politics of confrontation and cold war.

Over decades of its existence the NAM has been developing a comprehensive political Philosophy, a programme of action, and a new and positive system of international economic and political relations. From its founding India has remained one of the most active members of NAM and has played a pivotal role in its various activities and developments.