Business Environment
Dr. Pallavi Mody
Email: pallavimody@spjimr.org
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India Story- Political Factors
Influence of Political leaders on India’s
Business Environment
Period under Review: Decades
1951-71 Mindset-Policies-Impact
1971-91 Mindset-Policies-Impact
1991-2022 Mindset-Policies-Impact
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The Government Mindset & Policies: 1951-71
• The aversion to Globalization
• Hangover of British Rule. Protect domestic industry’Infant Industry Argument’
Nehruvian Socialism
• The aversion to Capitalism
• Two world wars and great depression fresh in memory
• Attraction to Socialism
• Success of Soviet Union with rapid progress + providing
basic needs to masses
• Mixed economy model emerged
• ‘Government only’ for ‘basic and key’ sectors + Private
sector in the rest of the economy
• Central Planning
• Government allocated resources according to plan +
licenses were given for private sector
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The impact on economy and businesses 1951-71?
• Impact on Economy-GDP grew at an average of 5%
• Impact on Society-Optimism and confidence in the country was at high level
• Impact on Business
• In a closed protected economy businesses were denied of local global competition,
innovation
• Socialist tilt led to Bureaucratic set up where they became very powerful
• Licensing Policy lead to
• Getting license: needed ‘connection’ or ‘bribe’ or both- seeds of corruption sown
• Businesses procured multiple licenses to pre-empt competition-lazy monopolies --Unrelated
diversification -Tatas/Birlas
• License owner would get finance from banks or FIs upto 90% of the project cost
• License-Permit-Raj created poor businesses but their owners were rich
• The income inequality widened. The rich became richer at the cost of poor.
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The Government Mindset/Policies: 1971-91?
• Businesses and private sector viewed as ‘devious capitalists’
• Government priority shifted from Nation Building and Growth to
Equitable Distribution of Income & Wealth in 70s
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By 70s MRTP was introduced - a cap on investment in fixed assets
FERA - Caps on ownership of foreign companies
Controller of Capital Issues
High income tax rates with more than 10 slabs with highest at 97.5%
Control of foreign exchange: for a traveler $8 per day.
Nationalization of banks
• Government took direct action to deliver social good, promote
equality of income and regional distribution
• Garibi Hatao/Remove Poverty
• Backward area incentives + Promotion to SMEs by reservation
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What was the impact of these policies on
economy and businesses?
• Impact on Economy-GDP growth was at dismal 3.5%, Hindu rate
• Impact on Society
• Disenchantment in the country increased, pessimism set in.
• Impact on Business
• MRTP restricted the expansion of the firms to grow to the global scale and led to lazy monopolies
• Indian products were characterized by ‘poor quality’ and ‘high cost’.
• Shortages of essential commodities like steel, cement, car, scooter, sugar, butter- led to black markets and
smuggling
• Taxation and foreign exchange regulation led to ‘parallel economy’ and ‘havala market’.
• Through the 1960s and 1970s, as policies suppressed entrepreneurship, joblessness soared. Most
of India’s violent trade union movements trace their origins in this period.
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Economic Reforms 1991
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Economic Reforms
• Liberalization
• Industrial licensing & MRTP dismantled
• Taxes rationalized and rates lowered
• Important sectors opened to private enterpriseBanks, Insurance, Steel, Power, Infrastructure…..
• Globalization
• FERA dismantled and trade barriers reduced
• Tariffs reduced to ASEAN level
• Foreign direct investment: considerably liberalized
(insurance, retail)
• Privatization
• Public sector monopolies diluted & assets privatized
• PSUs listed on stock exchange
• Strategic sale
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Impact of Economic Reforms on
Business Environment (1991-2009)
• Impact on Economy-GDP growth of 6%
• Impact on Society-High business
confidence
• Impact on Business
• Clean Balance Sheet: Book value
represented true value
• Capital infusion through public issues and
foreign funds
• Capital Markets boomed
• Entering hitherto reserved areas for PSUs
• Bought assets of PSUs
• Global Aspirations
• Access to global funds
• Inbound and outbound foreign investments
• Competition & Efficiency increased
• Products became world class
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Economic Reforms Eliminated Entry Barriers But Exit
Barriers Continued (2009-2014)
• Reforms have Lowered Entry Barriers
• Industrial licensing & MRTP dismantled
• FERA dismantled and trade barriers
reduced
• Foreign direct investment liberalized
(insurance, retail, auto, banking)
• Public sector monopolies diluted & assets
privatized
• Exit Barriers continued
• There was no provision for shut down,
bankruptcy or insolvency
The businesses were affected due to the
problem of Twin Balance Sheet (TBS).
1. Large corporate who borrowed
heavily to invest in
• Infrastructure and Real Estate
• Commodity-related businesses
2. Banks who lent the corporate
• The NPAs of banking sector increased
exponentially
• Banks responded by limiting the flow of
credit to conserve capital
• The scams vitiated the Business
confidence
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Reforms in a new direction (2014-2023)
Simplification of administration
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Aadhaar (Unique Identity to every citizen)
Jan Dhan Yojna (Universal Banking)
Direct Benefit Transfer
Digital India is changing the administration and the private sector
Government Finances
• Goods and Services Tax (GST)
• Competitive Corporate taxes
• Government thrust on Infrastructure
Money and banking
• Demonetization
• Monetary Policy Framework & Inflation control
• Measures to address the overhang of Non-Performing loans (NPLs)
India’s foreign Policy
• Military power
• Diplomatic relations
• India’s standing improved
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Impact on the Economy (2014-2023)
• Impact on the economy
• India’s GDP growth is uneven but post pandemic
India is the fastest growing economy post
pandemic
• Focus on ease of doing business index
• India’s ranking internationally improves
• Corporate tax at ASEAN level, more foreign
companies attracted to invest in India
• Massive investment in physical and digital
infrastructure
• Focus on ease of living Index
• Houses, power, toilets, cooking gas
• Social and Political agenda lead to polarization
• Human rights and democratic values are
questioned by international agencies
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GDP Growth %
10
7.4
8
6.4
6
4
5.2
8
8.7
8.3
6.8
6.5
6.5
5.5
3.7
2
0
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
-2
-4
-6
-8
-6.6
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What is the take away?
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