AN EVALUATSGN OF FOREIGN PREV‘ATE INVES’E’MENT CLFMATE E?!“ INDEA Thesis far i'hea- magma of Ph. D. MiC-HIGAN $7A'FE UNEVERSITY Anant R, Negandhi 1964 THESlS LIBRARY Michigan State ' University This is to certify that the thesis entitled An Evaluation of Foreign Private Investment Climate in India presented bg Anant R. Ne gandhi has been accepted towards fulfillment of the requirements for _P_h..D_____ degree in Wt flwé “Z r 7,1flén Major professor .» ! / Dategujf ix 64' 0-169 ABSTRACT AN EVALUATION OF FOREIGN PRIVATE INVESTMENT CLIMATE IN INDIA by Anant R. Negandhi This research involved the study of the private foreign investment climate in India. The main purpose of the research was to investigate various obstacles and imped— iments to foreign investment in India, particularly the obstacles that are inherent in the Indian government's policies. The ultimate aim of the study was to pinpoint shortcomings in these policies, which, if removed, could result in increasing the inflow of foreign private invest- ment into India. In the last few years, the Indian government has been trying to attract more foreign investors in India. Greater investments from the industrially advanced countries are needed to promote rapid economic development in India and to provide needed foreign exchange, along with advanced managerial and technical know-how. To increase such investment, the Indian government has made several adjustments in its policies, but these changes have failed to produce desired results. Anant R. Negandhi Since World War II, several studies have dealt Specifically with the obstacles and impediments to United States private investment in the lesser-developed countries. These studies include: the so—called Paley Report, 53- sources for Freedom; a report by Mr. Gordon Gray, Special assistant to President Truman, entitled Report to the Pres— ident on Foreign Economic Policies; the National Industrial Conference Board study of Obstacles to Direct Investment; the United States Department of Commerce survey of Factors Limiting United States Investment Abroad; and the Barlow and Wender study of Foreign Investment and Taxation. Most of these researchers disclosed that fear of war and expropria— tion and socio-economic and political instability were limiting factors for the greater inflow of United States private investment into the underdeveloped countries. 0n the basis of the findings of these researches this author formulated two hypotheses which, in general, asserted that socio-economic and political instability, fear of war, and fear of expropriation were not limiting factors for the greater inflow of foreign private investment into India. But the factors which do limit such investment are inherent in certain Indian government policies. To test these hypotheses and to achieve the main purposes of this study, 188 American companies in the United States were surveyed by questionnaire, and some eighty-two Anant R. Negandhi executives of the American, British, and Indian companies were personally interviewed. Prior to this, extensive library work was done to collect factual data concerning Indian socio-economic and political conditions and the Indian government's various policies affecting investment in India. Within the limitations of the research design and the conceptual framework, findings of the study support both of these hypotheses. The main findings of the study show that Indian socio-economic and political conditions were stable and favorable for foreign private investment. This was confirmed both by factual data and by foreign investors' evaluations of these conditions in India. It also was found that such fac- tors as red tape and excessive government bureaucracy, prag- matism in Indian industrial and foreign investment policies, and higher tax rates were limiting the greater inflow of foreign investment into India. Other factors limiting such investment in India were: foreign exchange and import pol- icies, Indian policies concerning minority participation of foreign companies, the 'uncommercial' attitude of Indian government officials, and lack of proper communication chan- nels between the foreign investor and the Indian government. AN EVALUATION OF FOREIGN PRIVATE INVESTMENT CLIMATE IN INDIA By _ _ '5‘?) 63:55)" Anant R?’Neghandi A THESIS Submitted to Michigan State University in partial fulfillment of the requirements for the degree of DOCTOR OF PHILOSOPHY Department of Management 1964 ACKNOWLEDGMENT As a recipient of willing cooperation from many people, the author has incurred obligations, all of which may not be enumerated, for which this expression of thanks is his acknowledgment of gratitude. The author wishes to express his sincere thanks and appreciation to the dissertation committee members: Dr. Claude McMillan, Jr., Chairman; Dr. Dalton E. McFarland; Dr. Richard F. Gonzalez; and Dr. Edward W. Smykay. They all provided valuable help and encouragement, without which this thesis would not have become a reality. Sincere thanks is also expressed to Dr. A. E. Warner, Director of Doctoral Studies at Michigan State University for his continuous help and encouragement. Deepest gratitude and sincere appreciation is owed to the management of Dow Chemical International, partic- ularly Mr. E. K. Stilbert, Vice President; and Dr. E. R. Boedekar for their financial help in undertaking this re- search. Many of the author's Indian friends and family mem- bers provided their time and necessary facilities to under- take this research in India. Not all can be mentioned here, and simple naming of them is insufficient recognition and acknowledgment of their help. The author owes Special debt and gratitude to the following persons in India: Mr. A. M. Parikh, Mr. Pratap Parikh, Mr. C. R. Negandhi, Ranjit, Badu, Lalji, and Dinu. Sincere thanks also are expressed to Mrs. Grace Rutherford and Miss Elsie E. VanAlstine for their typing and editorial help. The author extends his sincere thanks and apprecia- tion to many executives of the American, British, and Indian companies who gave their valuable time for this study. This work is dedicated to my mother, Mrs. Prabhaban Ranchhoddas; Dr. Lady Thackersey; and Sheth C. M. Khatau, without whose moral support my studies in the United States would have been a nightmare. ii TABLE OF CONTENTS Chapter I. INTRODUCTION Justification of the Study Guiding Hypotheses II. THE RESEARCH DESIGN Basic Assumption . . Research Methodology Scope of the Study III. SOCIO-ECONOMIC AND POLITICAL CONDITIONS IN INDIA . Indian Economy Social and Political Conditions in India Market Potential and Investment Opportunities Summary IV. INDIAN GOVERNMENT POLICIES AND THE FOREIGN INVESTOR Factors Influencing Investment Decisions of Foreign Investors in India Indian Industrial Policy Indian Private Foreign Investment Policy Indian Taxation Policy Indian Remittance and Repatriation Policies Indian Foreign Exchange and Import Policies iii Page 10 14 16 16 18 25 27 28 48 56 66 68 69 75 77 90 109 115 Chapter IV. Continued The Indian Government's Apparatus of Decision-Making Summary . V. SUMMARY AND CONCLUSIONS Summary of Findings . . Indian Policies Limiting Foreign Private Investment in India Sources of Red Tape . . . Implications . . . . . . . . . Suggested Areas for Additional Investigation . . . . . . . Main Conclusions . . . . . Appendix 1. SOME ADDITIONAL FINDINGS . II. COVER LETTER, SAMPLE QUESTIONNAIRE, AND SAMPLE INTERVIEW GUIDE BIBLIOGRAPHY iv Page 117 123 125 126 127 132 136 138 139 141 148 156 Table O‘Ut-wa 10. 11. 12. 13. 14. 15. 16. LIST OF TABLES Companies Surveyed by Questionnaire Companies Surveyed by Interview . Growth of the Indian Economy Since 1950-51 Public and Private Sector Investment Key Economic Indicators . . . . . . . . . . Effects of Increased Industrial Production on National Income . . . . . . . . . . .,. Progress in Education, Health, Agriculture and Agricultural Services in India Views on Indian Socio-Economic Environment Views on the Political Situation in India The Earnings Ratio of United States Manufacturing Companies in the Far East in 1962 Earnings Ratio of United States Manufacturing Companies in European Countries in 1962 Earnings Ratio of United States Companies in Latin American Countries in 1962 Experience with the Indian Investment World Money Values Factors Influencing Investment Decisions (Results of questionnaire survey) Factors Influencing Investment Decisions (Results of interview survey) Page 21 23 34 38 39 -43 51 53 54 6O 6O 61 62 64 71 73 Table 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. Views Concerning the Indian Industrial Policy . . . . . . . . . . View on Indian Industrial Policy Views on the Foreign Investment Policy Percent of the United States Capital and Management Preferred in Indian Operation (Results of questionnaire survey in the United States) ,Tax as Percentage of Earned Income——India Compared with Certain Advanced Countries . . . . . . . . . Tax as Percentage of Earned Income-~India Compared with Certain Developing Countries . . . . . . . . . Comparative Rates of Corporate Taxation in Developing Countries Corporate Tax Rate on Foreign Branches Total Tax-Burden on Subsidiary Making 100 Per Cent Dividend Distribution Tax on Royalty Payment to Non-Residents Views on Taxation in India (Results of Survey) Views on Taxation in India (Interview Analysis) Views of the United States Executives Concerning Indian Remittance and Repatriation Policies Views of the United States and the British Executives Concerning Indian Repatriation Policy vi Page 81 82 83 89 93 95 97 98 102 103 107 108 111 113 Table 31. 32. 33. 34. 35. 36. Views of the United States and British Executives Concerning Indian Remittance Policy . . . . . . . . . . . . Initial Difficulties of Negotiations (Results of survey) Problems and Difficulties in the Initial Negotiations (Interview Analysis) . . Problems of Operating in India (Interview Analysis) Factors Limiting Foreign Private Investment in India Comparative Ranking of Eight Countries for Their Foreign Investment Climate vii Page 114 119 120 122 128 135 CHAPTER I INTRODUCTION The main purpose of this research is to investigate various obstacles and impediments to foreign private invest- ment in India. More Specifically, the research attempts to ascertain obstacles that are inherent in Indian government policies and to pinpoint shortcomings in these policies which, if removed, could result in increasing the inflow of foreign capital into India. In the last few years, the Indian government has been trying hard to increase the private investment from the industrially advanced countries. Foreign private investment is needed to promote rapid economic development in India and to provide much needed managerial and technical know-how. To attract such investment, the Indian government has made several changes in its foreign investment policies. But still the inflow of such capital into India is quite inade- quate. Although much has been written on the subject of obstacles and impediments to United States private invest- ment in the lesser developed countries, none of these studies provides guidelines for precise policy changes that may be needed to increase the inflow of foreign investment into India. In other words, most of the previous researches in this field of inquiry have thus far disclosed general factors limiting United States private investment abroad but have not attempted to determine the importance of Specific factors in retarding investment in the lesser developed countries. A study undertaken by the President‘s Material Pol- icy Commission in 1951 stated that the fear of legal uncer— tainties, fear of expropriation, excessive controls on im- port-export, and limitation on convertibility of earnings into United States dollars were some of the important fac- tors limiting United States private investment in foreign countries. In 1950, Gordon Gray, in his study of the United States foreign economic policies, said: . . there are now substantial obstacles to an expansion of such investment. The present inter- national tensions are a controlling deterrent in those areas where an actual military threat exists. In other areas the obstacles are largely due to actions or expressed unfriendly attitudes of other governments towards foreign capital, political in- stability, fear of government control or expropria- tion and economic difficulties, particularly those resulting in exchange restrictions. . . . A lack of adequate basic services, port facilities, roads, power facilities, sanitation facilities, irrigation, etc., is also a bar to many types of private 1William S. Paley, Resources for Freedom, A Report to the President by the President's Materials Policy Com— mission, Vol. 1, June, 1952. industrial development.2 The research undertaken by the Foreign Economic Commission in 1953 stated similar obstacles and impediments to United States private investment in underdeveloped coun- tries: The small flow of private investment abroad may be attributed to the concern of potential investors over the general political, economic and military uncertainties abroad as well as over other aSpects of the "climate" for invest- ment in particular countries. 3 Countries desiring to attract capital must provide a secure legal status for private cap- ital and enterprise, domestic as well as foreign. United States investors can hardly be expected to venture into countries and fields which local capital and enterprise consider unattractive or insecure. On the other hand, United States in- vestors will venture into areas with political and economic stability which provide fair and equitable treatment and with it, an opportunity for reasonable profit and an assurance of remit- ting earnings. Barlow and Wender in their study of Foreign Invest— ment and Taxation5 found that the unfriendly attitude of foreign governments, lack of interest and knowledge, 2Gordon Gray, Report to the President on Foreign Economic Policies, United States Government Printing Office, Washington, D.C., 1950, pp. 57-62. 3Clarence B. Randall, Report to the President and .the Congress, Commission on Foreign Economic Policy, January, 1954, p. 17. 41bid. 5Barlow and Wender, Foreign Investment and Taxation (Harvard Law School, International Programiin Taxation), Harvard University Press, Cambridge, 1955. convertibility problems, and poor 'climate' for investment were some of the important factors limiting United States private investment in foreign countries. The researches of the National Industrial Conference Board6 and the United States Department of Commerce7 have been more Specific and detailed. The National Industrial Conference Board Study, conducted in 1949, stated the following obstacles and impediments to United States private investment in India: 1. Multiple exchange rates 2. Control of capital movements 3. Limitation on remittance of profits 4. Export and import quotas 5. Lack of trained native personnel 6. Inability to recruit personnel in the United States 7. Foreign restriction on importation of personnel from home country 8. Burden of Social Security legislation 9. Special taxation of foreign enterprise 10. Discriminatory enforcement of tax laws 6Obstacles to Direct Investment, National Industrial Conference Board, New York, 1951. 7Factors Limiting United States Investment Abroad, United States Department of Commerce, Washington, D.C., 1953. ll. Restriction of foreign investment to certain fields 12. Required local participation 13. Nationalization and expropriation l4. Inability to deal with reSponSible government officials 15. Lack of adequate roads, railroads, harbors, or storage facilities 16. Inadequate power facilities 17. Underdeveloped banking system 18. Lack of health and sanitary facilities 19. Inadequacy of housing, recreational, and shop- ping facilities for employees. However, here also, as in previous research, no attempt was made to discover whether certain factors men- tioned by companies as obstacles actually prevented invest- ment or were regarded merely as minor problems. Other weak- nesses of this survey, with respect to India, lie in its Small sample size and in the timing of the research under- taking. The research sample consisted of only 21 United States companies operating in India.9 During the present time there are about 178 United States companies Operating 8Obstacles to Direct Investment, op. cit., p. 95. 9 Ibid., p. 94. in India.10 Therefore, the sample size of this survey can hardly be considered as representative for the present time. With respect to its timing, the Survey was conducted in 1949-50 when India had just won her independence and was facing serious problems of resettling refugees from Pakistan. (In 1947 India was divided into two different countries, and the new nation of Pakistan was born. Some twenty million Hindus then living in Pakistan were asked to leave that coun- try.) A survey conducted during such turmoil tends to exag- gerate the importance of some factors. The Department of Commerce Survey of Factors Limit- ing Foreign Investment was published in 1952. It is the most comprehensive survey yet made of the experience and attitudes of companies interested in foreign investment. The survey was conducted by using the interview technique. In all, about 400 companies were interviewed for this study. The purpose of this survey was to discover legal and other impediments to private investment abroad and to find the methods and means whereby these impediments could be removed or decreased. The findings of this survey are reported by area and by country. With reSpect to India, the survey reported cer— tain Specific obstacles and impediments to United States 10United States Department of Commerce, Investment Factors in India, Washington, D.C., December, 1962, p. 2. private investment: 1. The nature of India‘s screening policy, which has denied admission to some types of investment Slow and costly procedural setup The existence of import, export, exchange, and other controls Government policy of nationalizing certain types of industries. Lack of proper communication channels between potential investors and the Indian government The unfamiliarity of the American investor with Indian business ways and custom Low stage of Indian economic development Absence of a double—taxation agreement between India and the United States . 11 High tax rates. The findings of this research have increased our understanding of some Specific obstacles and impediments to United States private investment in India. But still this survey is unable to provide us with an understanding of the relative importance of such specific factors in investment decisions. In other words, no attempt was made in the 11 Factors Limiting United States Investment Abrpad, op. cit., p. 101. Department of Commerce survey to determine the relative importance of various obstacles which retard investment in India. It can be seen from their findings that such general factors as "low stage of economic development" and ”fear of nationalization" and such Specific factors as "slow and costly procedural setup," "high tax structure," and "screen- ing policy" were listed together, but one has no way of know- ing which of these factors were critical and which ones were of minor importance. Unless we know the relative importance of factors retarding investment in India, it becomes very difficult, if not impossible, to make Specific policy changes to attract investment. Moreover, this survey, as well as all other research mentioned above, was conducted during 1949—52. But as pointed out by the Department of Commerce, ”the study of foreign investment problems must be continuous Since it requires the evaluation of rapidly changing conditions.”1 It is indeed true that ever since these studies were conducted India has witnessed many major changes in her socio- economic and legal frameworks. Some of the events which may have changed the entire investment climate are given below. 121bid., p. 1. Some Impo£tant Changes in Indian Economic Policies l. Drastic changes in Indian economic policy were announced in 1951. The new policy advocated a philosophy of 'mixed' or planned economy. Under this philosophy the Indian government's role in development of industries has increased considerably. Substantial governmental investment in the economy during 1951-63 has created both opportunities and problems for private enterprise in India. But the over- all effect of the new economic policy on the private invest— ment climate has not been investigated. 2. In 1956, the Indian government announced its industrial policy. Under this policy, private enterprise—- both domestic and foreign-~is restricted to starting new business in the so-called basic and heavy industrial sectors. The foreign investor also is restricted to establishing majority owned subsidiaries. But the over-all effect of these changes on private investment has thus far remained unexplored and undocumented. 3. Changes in the tax structure in recent years have altered investment opportunities for private enterprise. Prior to 1951 the tax System was designed primarily to raise sufficient revenues for the expenditure of government on administrative and allied services. However, Since then the fiscal policy of the Indian government has been pushed into higher gear to meet an enormous increase in the needs of the 10 developing economy. But the effect of high taxation on private investment has remained a matter of speculation. This study therefore was undertaken to incorporate the effects of these and other changes in Indian socio- economic, political, and legal conditions on the foreign private investment climate in India. Justification of the Study The Indian government has fully recognized the role and importance of foreign investment and licensing arrange- ments in promoting economic development in India. This is quite evident from various high-level pronouncements made from time to time. G. L. Mehta, former Indian ambassador to the United States and now chairman of the Indian Investment Center, recently said: the justification of foreign private enterprise lies not only in the compulsions of our foreign exchange problem but our needs of securing ad- vanced technical and managerial know— how. Trade in capital and know- how takes place among advanced countries and even among countries which have no capital or foreign exchange Shortages . . . I would therefore, say . . . foreign invest- ment would be advantageous to us. . . . We are a part of the comity of nations and should not seek to close our doors to winds of knowledge and skills from abroad. 13G. L. Mehta, ”Investment of Foreign Capital in India," Broadcast talk over All India Radio, New Delhi, March 24, 1964. 11 The Finance Minister of India in his recent budget- ary Speech said: In the matter of foreign private investment our attitude has always been one where we have wel- comed such investment and have given it fair and hospitable treatment.14 He further added: I think the stage has come when we would be justified in opening the dopgs even wider to private foreign investment. DeSpite the Indian government's favorable attitude toward private foreign investment, the inflow of such capital investment into India is small. The net inflow of all foreign business investment was only 77.6 million dol- lars in 1956 and 80 million dollars in 1959.16 Total out- standing foreign private investment in India at the end of 17 1960 was only 1.45 billion dollars. The limited partic- ipation of North American investments is strikingly empha— sized by the following statistics. At the end of 1959, total United States private investment in India was 172.9 14Quoted from Monthly News Letter, Indian Invest- ment Center, New Delhi, India, December 15, 1963, p. 1. lSQuoted from A. C. Banerjee, "Role of Foreign Private Investment in India's Development," India News, Washington, D.C., February 4, 1964, p. 4. 16$. Kannappan and E. Burgess, Business Performance Abroad, A case study of Aluminum Ltd. in India, National Plann1ng Association, Washington, D.C., 1962, p. 20. 17India News, Indian Embassy, Washington, D.C., December 12, 1962, p. 4. 12 million dollars or about 4 per cent of the net annual global outflow from the United States as recorded in recent years.18 The inflow of foreign private investment has increased dur- ing 1960-61. It was 111.9 million dollars in 1960.19 In recent years it has been at the rate of 100 to 120 million dollars per year.20 Considering the actual needs of India for private foreign capital, the net inflow is inadequate. The outline of the Indian Third Five-Year Plan indicates the actual need of foreign private capital to successfully carry out envis— aged economic plans. The total requirement for foreign capital is approximately 5.7 billion dollars.21 Out of this total 5.7 billion dollars, Lewis feels that approximately 945 million dollars should come through private channels.22 To achieve the various targets of the Third Five-Year Plan, India thus needs a minimum of 189 million dollars per year from private sources, while the present inflow of such capital has been only 100 to 120 185. Kannappan and E. Burgess, loc. cit. lglndiaf News, December 12, 1962, loc. cit. 20G. L. Mehta, loc. cit. 21Third Fiye—Year Plan: A Draft Outline, Government of India Printing Press, New Delhi, India, 1961. 22John Lewis, Quiet Crisis in India, The Brookings Institution, Washington, D.C., 1962: p. 217. 13 million dollars per year. In recent years, due to the Chinese invasion and shortages of foreign exchange, the actual need of foreign private investment is estimated to be some 300 million dollars a year. A high government official recently said, We have the need and scope for $300 million worth of outside investment yearly, [three times the current rate]. . . . The govern— ment, in fact, would like to corral some $300 million of United States §nvestments alone over the next 24 months.2 To increase the inflow of foreign private invest- ment, the Indian government has made certain policy adjust— ments. These include: 1. Greater willingness to grant majority con- trol to foreign manufacturers. 2. Continued payment of profit and technical assistance remittances in dollars deSpite the tight reserves situation. 3. Abolition of various wealth and excess dividends taxes and of the compulsory deposit scheme. 4. Transferring industries formerly reserved for the public sector to private invest- ment. 23Wa11 Street Journal, New York, July 22, 1964, p. 1. 24Investment and Licensing Opportunities in Thirty- Seven Countries, Business International, New York, 1961, p. 111. 14 These changes in policies, however, have failed to produce the desired increase in the inflow of foreign pri- vate investment into India. The findings of previous re- searchers in this field of inquiry are quite inadequate in providing guidelines for policy changes which will help to increase foreign investment in India. This research there- fore, was undertaken to fill the gap in our understanding of specific obstacles and impediments to foreign investment in India. To guide this research the following two hypotheses were formulated. Guiding Hypotheses 1. Environmental factors have differential effects on the inflow of foreign private capital into India. Social, political, and economic stabil- ity are, in varying degrees, directly related to the inflow of foreign capital into the lesser- developed countries. 2. If social, political, and economic stability are found neutral to the inflow of foreign capital into India, then such Indian government policies as industrial and foreign investment policies, taxation policy, exchange control, import policies, and governmental apparatus of decision-making should explain the lesser in- flow of foreign capital into India. To test these hypotheses and to achieve the main purpose of the study, the following factors are investigated. 1. The socio—economic and political conditions in India. 2. Indian policies affecting foreign private 15 investment and particularly policies which appear to be retarding such investment in India. In analyzing these factors both the factual data and the subjective evaluation of this data by foreign investors in India will be presented. However, an outline of the re- search design used for collecting data for the study precedes the analysis of these factors. CHAPTER II THE RESEARCH DESIGN Basic Assumptions The ultimate aim of this study is to utilize the potential of foreign private investment in promoting economic development in the lesser—developed countries. In recent years much has been written on the subject of economic devel- opment of underdeveloped countries. Indeed, this subject has become the intellectual battle ground for the political scientist, the economist, the sociologist, and the anthropol- ogist. Each of these Specialists, in process, has contrib- uted considerably toward solving various socio-economic and political problems encountered in developing these nations economically and industrially. Both theoretical and applied researchers in this field of inquiry have been motivated by three basic convictions: 1. That the diSparity in stages of economic develop- ment and in rates of growth between nations is not a 'natural' condition. 2. That in order to bridge this gap, industrially advanced countries can and must help these _1esser-developed countries. 16 17 3. That to accelerate the industrialization of these countries, not only substantial amounts of foreign capital-—both private and public—- but advanced managerial and technical know—how from the industrialized countries will be necessary. 1See (a) W. W. Rostow, The Stages of Economic Growth, Cambridge University Press, Boston, Mass., 1960. (b) John P. Lewis, Quiet Crisis in India, ThélBrook- ings Institution, Washington, D.C., December, 1962. (c) Raymond F. Mikesell, "America's Economic ReSpons— ibility as a Great Power,” American Economic Review, Vol. 50, 1960, pp. 258-270. (d) Jack N. Behrman, "Promoting Free World Economic Development Through Direct Investment," American Economic Review, Supp. 1960, pp. 271—281. See also his ”Foreign L1censing, Investment and United States Economic Policy," The Patent, Trademark, and Copyright Journal of Research and Education, Vol. 4, Summer, 1960, pp. 153-172. (e) J. N. Behrman, "Licensing Abroad of American Held Patents, Trademarks, and Techniques,” The Patent, Trade— mark, and Copyright Journal of Research and Education, Vol. I, 1957, pp. 145-158. See also various issues of the same journal since the Fall of 1959. (f) Charles A. Myers, Labor Problems in the Indus- trialization of India, Harvard University Press, 1958. (g) George Rosen, Industrial Change in India, Glencoe, Illinois, The Free Press, 1958. (h) C. McMillan and R. Gonzalez, International Enterprise in a Developing Economy, Bureau of Business and EconomiE Research, Michigan State University, East Lansing, Michigan, 1964. 18 The present researcher accepts the above convictions and. in addition, accepts the following premises: 1. That the role of private foreign capital and its advanced managerial and technical know—how is significant in promoting rapid economic development in India. 2. That the potential role of private foreign capital in promoting the economic development in India has not been fully utilized. Research Methodology The following research steps were undertaken to test the hypotheses and achieve the purposes described in Chapter I. 1. Documentary research in the United States and India. 2. Questionnaire survey of 188 American companies investing in India. 3. Personal interviews with top executives of: (a) American companies in the United States and India and (b) British and Indian companies in India. Each of these research steps is described below. 19 Documentary Research During the period of January, 1963, through November, 1963, extensive library work was done to gather factual data concerning Indian socio-economic and political conditions and Specific Indian policies affecting foreign private in- vestment. Factual data of this nature were collected to compare and contrast the objective facts with the subjective evaluation of these factors by foreign investors. Foreign investment decisions—-and for that matter any business deci- sion--are being made both on the basis of factual data and subjective evaluation of these data. The questionnaire survey in the United States and personal interviews in the United States and in India were conducted to ascertain for- eign investors' evaluation of the various factors in the Indian investment climate. Questionnaire Survey To design an appropriate questionnaire and interview guide, ten executives of American companies and three execu- tives of the Indian Investment Center were interviewed in September, 1963. Following these interviews, a preliminary questionnaire was prepared and pre-tested on six American executives and five academicians. As a result of this pre- testing, selection of items to be included in the final questionnaire was determined. It became clear that the questionnaire should solicit information to ascertain: 20 (1) factors or policies influencing investment decisions of foreign investors in India, (2) attitudes of foreign inves- tors toward Indian policies affecting foreign investment decisions, and (3) various problems and difficulties en- countered by foreign investors in their initial negotiations with Indian government officials. The revised questionnaire was distributed to Amer— ican companies during November and December, 1963. The Questionnaire Sample Some 188 United States Companies either investing or contemplating investment in India were sent the question- naire. Out of the 188 American companies, 29 companies returned this questionnaire saying either that they were not in a position to complete this questionnaire or that it was against the company policies to fill out Such a question- naire. Of the remaining 159 companies, a total of 101 com- panies filled out and returned the questionnaire, thus giv— ing us 63.52 per cent of questionnaire returns. There are about 178 United States firms operating in India at the pres- ent time.2 Thus the sample size for the questionnaire was 89.4 per cent of the total United States companies in India, 2”Investment Factors in India," Overseas Business Reports, United States Department of Commerce, December, 1962, p. 2. 21 while the actual response constituted 56.7 per cent of this total. Of the 101 United States companies responding to the questionnaire survey, some 74 have investments in India, 6 were only licensors, and the remaining 21 companies were contemplating investment in India. The following table shows the distribution of these companies by principal type of activity. TABLE 1 COMPANIES SURVEYED BY QUESTIONNAIRE . . . . N TYPe of Pr1nc1pal Act1v1ty umber 0f Companies Chemical and pharmaceutical . . . . . . . . 22 Machine tools and spare parts . . . . . . . 21 Non-electrical heavy machinery . . . . . . . 17 Electrical machinery . . . . . . . . . . . . 8 Engineering and management consultants . . . 7 Petroleum refining . . . . . . . . . . . . . 3 Rubber . . . . . . . . . . . . . . . . . . . 3 Banking . . . . . . . . . . . . . . . . . . 4 Trading . . . . . . . . . . . . . . . . . . 3 Automobile . . . . . . . . . . . . . . . . . 4 All other industries . . . . . . . . . . . . 9 Total 101 22 Personal Interviews in the United States and India Executives were selected for interviews from differ- ent types of industries. During the interviews, executives were asked to express their viewpoints on Indian socio— economic and political environments. They also were asked questions concerning factors influencing investment deci- sions, their attitudes toward such factors, and their expe- rience with Indian investment. Interview Sample The following groups of executives were interviewed. Total 'ggppp Number Indian industrialists in India . . . . . . . . . . 12 Indian government officials . . . . . . . . . . . 8 Indian economists in India . . . . . . . . . . . .“ 6 American executives in the United States (vice- president level) . . . . . . . . . . . . . . . . 22 American executives in India (top level) . . . . . 13 American advisers to government of India . . . . . 3 British advisers to government of India . . . . . 2 British executives in India (top level) . . . . . __19 Total 82 The samples of the questionnaire used and the guide for the interview questions are given in the appendix. 23 TABLE 2 COMPANIES SURVEYED BY INTERVIEW - - American American British Indian TypeApiisiinc1pal Executives Executives Executives Ind. in y in U.S.A. in India in India India Chemical and pharmaceutical 5 4 4 3 Machine tools and Spare parts 4 3 4 3 Non-electrical machinery 4 3 3 4 Electrical machinery 2 1 l 1 Engineering and management con- sultants 5 - - - Rubber - 1 l — Banking 2 l 2 1 Trading - — 1 - Automobile — — _ _ Total 22 13 16 12 Rationale Behind the Choice of Sample Although this research was conducted both in the United States and in India, major field work was done in the United States. The time and financial restraints made this choice inevitable, but the following economic consider- ations also justified this choice. 24 In recent years the net inflow of United States pri— vate capital has been more than half of the total inflow of net foreign capital into India. In 1959, the net inflow of American private capital was 69.04 per cent of the total foreign private capital inflow into India. It was 15.96 million dollars as compared with 3.15 million dollars from the United Kingdom and 7.14 million dollars from all other countries.3 Yet the total private investment from the United States is relatively insignificant. The limited participation of the United States private investment in India can be seen from the following statistics. In 1962, total United States private investment was 188 million dollars, which is less than 4 per cent of the net annual global outflow from the United States.4 This is less than a fifth of United States business investments in relatively tiny Mexico.5 Thus there is great potential in increasing the United States private investment in India. The Indian government is aware of the small share of the United States private investment in India, and this awareness is manifested in her various efforts to increase such investment in India. 3Indian News, op. cit., p. 4. 4United States Department of Commerce, United States Direct Foreign Investments and Earnings Ratios, 1959—62, Washington, D.C., 1963, p. 4. 5 Wall Street Journal, July 27, 1964, p. 1. 25 Scope of the Study The main purpose of this research is to ascertain Specific obstacles and impediments to foreign private in- vestment in India. More specifically, the research attempts to ascertain obstacles and impediments that are inherent in Indian governmental policies. The aim is to pinpoint Short— comings in these policies which, if removed, could result in increasing inflow of foreign capital into India. It must be admitted, however, that a host of factors may restrict in- vestment of some foreign companies in India. Barlow and Wender, for example, found that many companies do not invest in foreign countries because of: a. Lack of interest or knowledge on the part of the top executive. b. The company does little exporting and therefore has not been brought into con— tact with the foreign situation. c. The products made by the company are so Specialized that foreign countries do not provide a large enough market. d. Inadequate management, technical personnel and money needed to invest in foreign countries. These and other business reasons may be important factors preventing investment of some foreign companies in India, but it is beyond the scope of this research to in- vestigate such factors. 6Barlow and Wender, op. cit., pp. 192-193. 26 Secondly, the study is conducted with particular reference to private foreign investment with or without partnership with Indian companies. In recent years, how- ever, many foreign companies have collaborated with the Indian government, and this practice may increase in years to come. This research has not attempted to investigate the problems and difficulties encountered by foreign companies in this type of collaboration. Again, it must be admitted that there is a dynamic milieu of factors that influence investment decisions of foreign investors in India. We cannot fully investigate all these factors. Our attempt is simply to investigate the factors that seem quite obvious and logical. It is hoped, however, that knowledge of these obvious factors retarding foreign investment in India will provide guidelines in mak— ing policy changes for attracting foreign investments in India. We shall now proceed to analyze these factors. First, in Chapter III, we shall analyze Indian socio-economic and political conditions and then, in Chapter IV, we shall discuss various Indian policies affecting foreign investment in India. CHAPTER III SOCIO-ECONOMIC AND POLITICAL CONDITIONS IN INDIA Introduction The decision to invest or not to invest in any foreign country depends upon many complex factors. However, it is safe to assume that capital seeks profitable invest— ment, whether domestic or foreign. In other words, invest- ment is based on the expectation of future profits. The private investor, besides seeking profits, looks for the security of his invested capital. The security of capital, in turn, depends upon social, economic, and political condi- tions in the host country. Such social strifeS as prolonged and/or frequent Strikes, excessive labor troubles, and social disorder endangering private property tend to dis— courage investment, particularly from foreign countries. Also, rampant inflation, a stagnant economy, and an unstable government are discouraging elements in the investment cli- mate. Many researchers in the field of international in- vestment have clearly shown that such socio-economic and political instability in foreign countries has retarded greater inflow of United States private investment in those countries. 27 28 In this chapter, therefore, attempts have been made to analyze socio-economic and political environments, along with market potential and profitability of foreign venture in India. Indian Economy Indian Planning: Historical PerSpective India is, perhaps, the first country in the world which has tried to undertake economic planning in a com- prehensive way at the national level and under a democratic structure. Earlier, planned economic development had been associated with a regimented and highly centralized polit- ical system, but India has tried to follow the middle path by combining economic planning with democracy. Although the National Planning Commission was Set up by the government of India in March, 1950, valuable work had been done by Indian national leaders in regard to the planned economic development of the country even before the advent of political freedom in August, 1947. Under the chairmanship of the late Prime Minister Nehru, the Indian National Congress (the present ruling party) had set up a National Planning Committee in 1938. This committee pro— duced a series of social and economic studies which formed the broad basis for a more organized planning effort after independence. Mahatma Gandhi regarded political freedom a 29 means to the attainment of economic and social objectives for raising the masses from poverty, hunger, and unemploy- ment. His program of socio-economic reconstruction of the countryside constitutes the very foundation of the present community development movement in India. The First Five-Year Plan: 1951-1956 In 1951, India embarked on formal economic planning. During the decade from 1951 to 1961, India successfully completed two Five-Year Plans. At the present time, India is in the third year of her Third Five-Year Plan. The First Five-Year Plan (1951-1956) was largely a preliminary effort emphasizing agriculture, irrigation, power, communication, and tranSportation. The plan took over several projects which had been worked out earlier and integrated them into a well-knit scheme of economic and social development, embracing every part of the country. Through its emphasis on agriculture, irrigation, power, and tranSportation, the plan aimed at creating the base for more rapid economic and industrial development in the future. Total investment during the First Five-Year Plan was Slightly over seven billion dollars, of which 3.27 billion dollars was invested by the public sector, that is, the Indian government.1 The bulk of industrial investment was 1Subbiah Kannappan and Eugene W. Burgess, op. cit., 30 by the private sector. On the whole, the targets set under the First Plan were exceeded. National income increased by 18 per cent, while the target was only 12 per cent.2 Per capita income, in real terms, rose about 10 per cent.3 The agricultural output index went up from 95.6 in 1950-51 to 116.9 for 1955—56.4 The index of industrial production rose from 100 in 1951 to 132.6 in 1956.5 The rate of savings was increased to 7 per cent of the national income in 1955—56 as against the target of 6.75 per cent.6 The Second Five-Year Plan: 1956-1961 In contrast to the preliminary nature of the First Five-Year Plan, the Second Five-Year Plan was designed to industrialize the nation at a rapid speed. The higher growth rate in population (2 per cent per year instead of the 1.2 per cent estimated under the First Five-Year Plan) necessitated a significant shift in objectives. Thus the objectives of the Second Five-Year Plan were: 1. A 25 per cent increase in national income dur- ing 1956—1961. 2Ibid. 31bid. 4Ibid. 5Ibid. 6 Ibid. 31 2. Rapid industrialization of the country with emphasis on basic and heavy industries. 3. A large expansion of employment opportunities. 4. Reduction of diSparities in income and wealth and in concentration of economic power. In the Second Five-Year Plan, expenditures shifted in favor of capital—intensive investments in heavy industry and of social and economic overhead capital. Due to these reasons, the public sector investment was higher than that of the private sector. Originally, the Second Plan aimed at total public expenditures of ten billion dollars and total private investment of five billion dollars.8 The course of the Second Five-Year Plan was not altogether free from ups and downs. Such natural causes as floods and failure of monsoons, coupled with deficiencies in implementation, the Suez crisis, and other international developments presented difficulties for the successful implementation of the en- visaged plan. Moreover, due to reduced exports and increased costs of imports, India's foreign reserves declined rapidly. In 1956, they fell 23 per cent and, in 1957, another 34 per 7Second Five-Year Plan, Government of India Printing Press, New Delhi, India, 1956, pp. 24-25. 81bid. 32 cent.9 Increased foreign aid reduced the pressure on the exchange situation, but despite this assistance, it seemed clear that the Second Plan's goals were too high. This was realized by the Indian government, and the Plan targets for the public sector outlays were cut down to 46 billion rupees or about 9.7 billion dollars. Thus the performance of the Second Five-Year Plan did not measure up to expectations. The net national out— put at current prices went up from about 21 billion dollars in 1955-56 to over 26.5 billion dollars in 1958-59.11 The index of industrial output went up from 132.6 in 1956 to 151.1 in 1959.12 The agricultural output lagged Signif- icantly behind, and the national income increased by 20 per cent against a target of 25 per cent.13 However, taking the decade as a whole, the picture is one of over-all progress. Basic facilities like irriga- tion, power, and transportation, which are essential for agricultural and industrial development, were greatly ex- panded. Valuable mineral deposits, which feed small and 9Sir Donald MacDougall, ”India's Balance of Payment," Economic Weekly, Bombay, India, April 22—29, 1961, p. 675. 10Kannappan and Burgess, op. cit., p. 11. 11Ibid. 12Ibid. 131bid. 33 large industries, were discovered. During the 1951-61 decade the national income increased in real terms by 42 per cent, and per capita income by 17 per cent, despite the 20 per cent increase in population.14 Industrial production approximately doubled during this period.15 Agricultural production rose by 40 per cent.16 Electric power generation tripled.17 The rate of investment of national income more than doubled.18 Total annual new investment in 1960-61 was three times that in 1950-51.19 The economic progress made during the decade of 1951—61 is summarized in Table 3. The Third Five-Year Plan: 1961-1966 The achievements of the Second Five-Year Plan seem to indicate that the Plan was too ambitious. Indian planners became a target of excessive criticism from both foreign and domestic "experts.” They were advised by these ”experts" to plan less and give a free hand to private enterprise to do the job of economic development. However, population growth (2 per cent per year) was greater than expected (1.5 per cent per year) and made it more difficult for the Indian 14Investing in India, Basic Facts of the Indian Economy, Indian Investment Center, New Delhi, India, p. 64. 15Ibid. lblbid. 17Ibid. 18Ibid. 19Ibid. 34 TABLE 3 GROWTH OF THE INDIAN ECONOMY SINCE 1950-51 f 1950-51 1955-56 1960-61* 1965-66** 4. National income (Rs. 100 million) 1,024 1,213 1,420 1,900 4. Per capita income (Rs) 267 255 327 385 Population (million) ' 361 397 438 492 Production: Agricultural (year ' , ended June 1950:100) 96 117 139 176 Foodgrains (million tons) 52B 66B 79 100 Industrial (1950—51:100) 100 139 194 329 (94) " (70) Electricity capacity (million kw.) §2.3 §3.4 5.7 12.7 (148) (123) *Estimatesz Figures in brackets in this column show percentage increase over 1950-51. *IFigures in brackets in this column Show percentage increase over 1960-61. +At 1960-61 prices. fiFigures relate to calendar years 1950 and 1955. flAdjusted for changes in statistical coverage and methods of estimation Source: Investing in India: Basic Facts of the Indian Econom , Indian Investment Center, New Delhi, India, 1962, p. 64. 35 TABLE 3--Continued 1950-51 1955—56 1960-61* 1965-66** Community development: Blocks (no.) Villages covered ('0005) Population served (million) Transport: Railway: freight carried (million tons) Surfaced roads ('000 miles) Commercial vehicles on roads ('000S) Shipping ('000 GRT) Education: School students (million) Health: HOSpital beds ('OOOS) Doctors ('0005) Consumption per capita: Food (calories per day) Cloth (yards per annum) 92 98 116 390 23.5 113 56 1,800 9.2 114 122 166 480 31.3 125 65 1,950 15.5 3,110 368 204 154 144 (48) 210 (81) 900 (131) 43.5 (85) 186 (65) 70 (25) 2,100 15.5 (68) 5,223 550 (49) 359 (76) 245 169 (17) 365 (74) 1,090 (21) 63.9 (47) 240 (29) 81 (16) 2,300 17.2 (11) * . . , . . Estimates: Figures 1n brackets 1n thls column Show percentage increase over 1950—51. **Figures in brackets in this column Show percentage increase over 1960-61. 36 government to achieve targeted economic growth. Yet, instead of turning back, Indian planners accepted the challenge. Consequently, the Third Five-Year Plan is much bigger in size and bolder in conception than the first two Five-Year Plans. The main objectives of the Third Five-Year Plan are: 1. To secure an increase in national income of over 5 per cent per annum. To achieve self-Sufficiency in food grains and increase agricultural production to meet the requirements of domestic industry and exports. To expand basic industries like steel, chemicals, fuel and power, and machine tools. To utilize to the fullest possible extent the manpower resources of the country and to insure a substantial expansion in employment opportu- nities. To establish progressively greater equality of opportunity and to bring about reduction in diS- parities in income and wealth and more even dis- tribution of economic power.20 20Third Five-Year Plan: A Draft Outline, Government of India Printing Press, New Delhi, India, 1961, pp. 31-54. 37 The total outlay for the Third Five-Year Plan is ex- pected to be 24.78 billion dollars.21 A description of the over-all investment targets of the Third Five—Year Plan by different sectors is given in Table 4. Indian Economy: (1961-1963) ConditiEns and Prospects The Indian economy experienced many setbacks between 1961 and 1963. Much of the slower rate of growth during the first year of the Third Plan can be attributed to the rephras— ing of the Second Plan after 1958-59 because of the foreign exchange Shortage and slower progress in the implementation of programs. The Indian economy suffered a further setback due to the Chinese invasion in October and November, 1962. An over-all picture of the state of the Indian economy during 1960—63 can be obtained from Table 5. Following is a brief summary of the state of the Indian economy during 1960—63. National Income The national income declined from an annual growth rate of 7.1 per cent in 1960—61 to 2.2 per cent in 1961—62.22 lebid. 22Indian Economy 1961-1963: (Conditions and Prospects), National Council of Applied Economic Research, New Delhiji India, 1963, p. 10. 38 TABLE 4 PUBLIC AND PRIVATE SECTOR INVESTMENT Second Third Plan Plan Estimates Targets (RS. million) Agriculture & community development . . 8,350 14,600 Public sector . . . . . . . . . . . . 2,100 6,600 Private sector . . . . . . 6,250 8,000 Irrigation (major and medium) 4,200 6,500 Public sector . . . . . . . . . . . . 4,200 6,500 Private sector . . . . . . . . . ** ** Power . . . . . . . . . . . . . . 4,850 10,620 Public sector . . . . . . . . . . . . 4,450 10,120 Private sector . . . . . . . . 400 500 Village & small industries . . . . . . 2,650 4,250 Public sector . . . . . . . . . . . . 900 1,500 Private sector . . . . . . . 1,750 2,750 Organised industries &. mining . . . . . 15,450 25 700 Public sector . . . . . . . . . . . . 8,700 1 ,200 Private sector . . . . . . . . 6,750* 10,500* TranSport & communications . . . . . . 14,100 17,360 Public sector . . . . . . . . . . . . 12,750 14,860 Private sector . . . . . . 1,350 2,500 Social services & miscellaneous . . . . 12,900 16 970 Public sector . . . . . . . . . . . . 3,400 6,220 Private sector . . . . . . . . . . . 9,500 10,750 Inventories . . . . . . . . . . . . . . 5,000 8,000 Public sector . . . . . . . . . . . . Nil 2,000 Private sector . . . . . . . . . . . 5,000 6,000 Total investments . . . . . . . . . . . 67,500 104,000 Public sector . . . . . . . . . . . . 36,500 63,000 Private sector . . . . . . . . . . . 31,000fl 41,0000 **Inc1uded under agriculture and community development. *Excluding expenditure on replacement and modernisation. flExcluding transfers of RS. 2,000 million from public to private sector. Source: Investing_in India: Basic Facts of the Indian Economy, Indian Investment Center, New Delhi, India, 1962, p. 66. 39 TABLE 5 KEY ECONOMIC INDICATORS 51 Year No. Item 1960-61 1961—62 1962-63 a, 1. Annual growth of national income (per cent) +7.1 +2.2 N.A.* 2. Annual increase in the index of agricultural output with ~ 1950-51 as baSe (per cent) +8.9 +0.0 N.A.* 3. Annual increase in the index of industrial production with 1956 as base (per cent) +10.0 +7.2 +7.1a 4. (a) Annual increase/decrease b in imports (per cent) +16.7 -7.4 -1.5 (b) Annual increase in exports (per cent) +0.4 +3.1 +5.7 (c) Balance of trade (+) sur- plus, (-) deficit c (Rs. crores) . -471.80 -310.50 -225.60 5. Percentage rise in the index of wholesale prices with d 1952-56 as base +6.7 +0.2 +2.2 6. Annual increase in money e supply (per cent) +5.5 +6.1 +3.4 aPercentage change refers to the period January—October, 1962 over January-October, 1961. bRefers to the period April-September, 1962 over April— September, 1961. CRefers to April—September, 1962. dRefers to April 1962 to January 1963. ePercentage change refers to the period January 25, 1963 over March 31, 1962. *N.A.—-not available. 40 TABLE 5--Continued 51. Year No. Item 1960-61 1961-62 1962-63 7. Overall budget surplus or deficit of government of India (Rs. Crores) +48.0 —l34.0 -119.0 8. Annual increase in the index of electricity generated with 1950-51 as base (per cent) +13.l +12.6 N.A.* 9. Annual increase in the index of traffic-~railway--goods originating with 1950-51 as base (per cent) +6.6 +2.8 +10.5 10. Annual increase in the number of applicants on live regis- ter of employment exchanges (per cent) +13.0 +14.l +29.8 fPercentage change refers to the period April- November, 1962,over April-November, 1961. *N.A.--not available. Source: Indian Economy 1961-63, National Council of Applied Economic Research, New Delhi, India, 1964, p. 101. It witnessed an increase of 2.4 per cent in 1962-63 over 1961-62.23 ThuS,three—fourths of the Plan still remains to be achieved within three-fifths of the allotted time. In other words, the national income will have to rise at a much faster rate, viz., 7 per cent in each of the following years, 23Ibid., p. 11. 41 to achieve the Plan target.24 A 7 per cent cumulative rate of growth will clearly mean a higher rate of growth in each sector of the economy than has been achieved in the past two years. Broadly, the required cumulative rates may have to be nearly 5 per cent in agriculture and allied activities, 14 per cent in indus- try, and 6 per cent in the tertiary sector.25 These annual rates are undoubtedly higher than those envisaged in the Plan because the deficiency of growth in the national income during the first two years of the Third Plan must be made up in the remaining parts of the Plan period. Industrial Output: (1961—1963) The general index of industrial production (base: 1951 = 100) for 1961 was 180.9 as compared to 169.7 in 1960.26 It increased by 6.6 per cent in 1961 as compared to an 11.6 per cent increase in 1960 and an 8.9 per cent increase in 1959.27 This poor performance in 1961 can largely be attributed to the Shortage of power, tranSporta- 28 tion, foreign exchange, raw material, and spare parts. 24Ibid. 25Ibid. 26Ibid., p. 32. 271bid., p. 33. 28Ibid. 42 A mere recital of increased industrial production in the form of indices, especially if the base is low, is bound to give an exaggerated picture of the industrial growth over a period of time. It is true that such indices provide a rough yardstick for measuring industrial progress at differ— ent points of time, but they do not provide a correct ap- praisal of industrial development. A correct appraisal of industrial development over a period of time can be done only by measuring the impact of such development on the economy as a whole. Effect of Increased Industrial Producfion on Income The national income of India rose from 102,400 mil- lion rupees in 1950-51 to 121,300 million rupees in 1955-56, and to 145,000 million rupees in 1960-61.29 The contribu- tion of the industries and mining sectors to these total figures is quoted in Table 6. Since the industrial sector of the economy has been increasing its contribution to the national income, it may be concluded that there has been some progress in the coun~ try, although it may not be considered as spectacular as is often claimed. In fact, the progress is only modest, because 29Third Five-Year Plan, Government of India Printing Press, New Delhi, India, 1961; quoted from Indian Economy, 1961-63, op. cit., p. 35. 43 the increase in the index of percentage contribution was only 14.5 per cent over the ten-year period of 1951-61, while the general industrial output index increased from 30 100 in 1951 to 181 in 1961. TABLE 6 EFFECTS OF INCREASED INDUSTRIAL PRODUCTION ON NATIONAL INCOME (One croes = 10 million rupees) (In croes at current prices) Industry 1950-51 1955-56 1960-61 Mining 70 100 160 Large-scale industry 550 780 1,320 Small-scale industry 910 970 1,120 Total 1,530 1,850 2,600. Per cent of national income 16.1 18.5 18.4 Index of per cent con- tribution 100.0 115.0 114.5 Source: .Estimates of national income 1948-49 to 1961—62, Central Statistical Organization, New Delhi, India, quoted from Indian Economy,7196l—63, National Council of Applied Economic Research, New Delhi, India, 1963, p. 35. 3OIbid., p. 36. 44 Another important facet of industrial growth is its impact on employment. The picture is not very bright on this score either. The percentage of labor employed by major groups of industries indicates that increases in direct employment arising out of industrial growth do not fall in line with the high figures quoted for industrial output in- dices. After ten years of government planning, industries employed only 4.6 per cent of the population in 1960—61.31 Thus, the progress achieved in the industrial sector does not appear to have made any great impact on employment. Yet there is a brighter aSpect to India's industrial program and its organization. This is the extraordinary growth of and diversity in industrialization in the country over the last twelve years. Industry has been diversified by a wide range of manufactures, both in the heavy basic industries and in the field of consumer goods. Advanced manufacturing techniques have been imported, and there is a solid and massive foundation for further industrial expan- sion. All this growth in economic power and resources has 'greatly strengthened the economy. An important landmark in the history of India's industrialization is the debut of some products of the engi— neering industries during the Second Plan period. Most im- portant were: industrial boilers, cranes, precision 31Ibid., p. 37. 45 instruments, road rollers, tractors, aircraft, and welding electrodes.32 There is no doubt that some of the achieve- ments in the industrial sectors had far-reaching consequences, eSpecially in the manufacture of such items as bicycles, Sew— ing machines, telephones, electrical goods, and textile and sugar machinery. However, advances in these industries failed to affect the general conditions of the population, as they did not radically alter the structure of the econ- omy. In addition, the industries which will eventually change the structure of the economy have failed to reach target production levels. These industries include: iron and steel, fertilizers, industrial machinery, heavy castings and forgings, newsprint, raw films, chemical pulp, soda ash, caustic soda, dyestuffs, and cement.33 Several causes con- tributed to the below-target performance of these vital industries. The most significant among these were: 1. Shortage of foreign exchange, especially hard currencies. 2. Lack of proper technical and managerial know-how. 3. Inadequacies in designing and executing projects. 4. Shortage of fuel and power. 5. TranSportation bottlenecks.34 32Ibid., p. 34. 33Ibid. 34Ibid. 46 Perhaps the shortage of foreign exchange is the Sin- gle most important factor reSponsible for hindering Indian economic development. The deteriorating balance of payment position can easily be visualized from the following statis- tics: Balance of Payments on Current Account (In millions of rupees) 1951-52 1955-56 1960-61 1961-62 Total exports 7,301 6,402 6,319 6,620 (f.o.b.) Total imports 9,629 7,614 10,880 10,386 (c.i.f.) Trade Balance -2,328 -1,212 —4,561 -3,766 Source: Investing in India: Basic Facts of the Indian Econom , Indian Investment Center, New Delhi, India, 1963, p. 75. The trade deficit increased in 1961-62 to 3,766 million rupees as compared to 2,328 million rupees in 1951- 52. Preliminary figures released for July and August, 1963, Showed a total trade deficit of 88 million dollars for these months alone.35 Foreign exchange reserves declined from 1,566.6 million dollars in 1956 to 256 million dollars in 36 . . 1961. Thus, one can say that the impact of economlc 35United States Department of Commerce, International Commerce, January 13, 1964, p. 17. 361bid. 47 development has been the most severe on India's balance of payments and exchange reserves because of the larger imports necessitated by the growing economy. As the Council for Applied Economic Research has stated: Foreign exchange will be one of the crucial fac- tors determining many facets of the growth of the Indian economy in the decade that we are passing. India will need vast amounts of foreign exchange both for defense preparation and for stggngthen- 1ng the 1ndustr1al base of the economy. The shortage of foreign exchange and below-target performance of some sectors in the economy are discouraging to Indian planners. However, these factors in themselves do not restrict the opportunities for foreign investors in India. These shortages point up the vast unexplored market Situation in India. If there were no shortages and bottle- necks and if the Indian market was saturated, then probably foreign investors would not have been welcomed so eagerly in India. In Spite of these setbacks in the Indian economy, one can say that India has made considerable progress in the economic Sphere. This vote of confidence in India's econom- ic growth was expressed by many executives interviewed in United States and India. For example, Mr. J. R. Galloway, the leader of the United States Business Delegation to India, recently said, 37Indian Economy, 1961—63, op. cit., p. 96. 48 In the light of significant strides which the Indian economy has already made in recent years, with the political and financial stability which has stemmed from democratic government, with the vast potential market which India's large and industrious population represents, India should offer an ouggtanding opportunity for business enterprise. Mr. Franklin D. Roosevelt, Jr., United States Undersecre- tary of Commerce, said, ”The economic progress of India has . . . . 39 been mighty. Its potentlal for the future 15 also mlghty.” Social and Political Conditions in India A foreign private investor not only expects a higher rate of return from his investment abroad, but he also looks for the security of his invested capital. The security of his capital depends upon social and political conditions in the host country. Therefore, such social strifes as pro- longed strikes, excessive labor troubles, and riots are dis- couraging to both foreign and domestic private investors. Such political troubles as revolutions, overthrow of ruling authorities, and military coups are also discouraging to private investors. As we have Seen in Chapter I, most of the previous 38Quoted from India News, Embassy of India, Washington, D.C., June 26, 1964, p. 4. 391bid. 49 researchers mentioned social and political instability aS important factors limiting United States private investment in the underdeveloped countries. These factors therefore have been analyzed below. Since her political independence in August, 1947, India has been fortunate in having stable government, at both the state and federal levels. While most of the devel— oping countries in the Far East, Middle East, Africa, and Latin America have been victims of revolutions against rul- ing authorities and have experienced military coups, India has had no such governmental overthrow or military coup. At the social level, India has not experienced such problems as prolonged and/or frequent strikes and rioting endangering private property. Respect for the private prop- erty is firmly rooted in the heart and mind of every Indian. Besides, India has made considerable progress at social and educational levels. This can easily be seen from the following. Today in India the life expectancy is forty-two years as compared to twenty—seven years in 1947. Mr. Chester Bowles, the United States Ambassador to India, commenting on India's socio-economic progress, had this to say: "India has freedom of Speech, freedom of religion, freedom of press and a private enterprise sector that has been chalking up sizeable 50 gains." There has been rapid advance in education, especially in technical education and various other fields. The number of students in schools has increased by 85 per cent, and the number of students getting a technical education has in- creased by more than three times Since 1947. The number of hOSpital beds has grown by 65 per cent and the number of practicing doctors by 25 per cent in the last fifteen years.41 Where there was only 10 per cent literacy fifteen years ago, now 60 per cent of all Indian children under twelve go to school.42 The progress in education, health, agriculture, and agricultural services can be seen from Table 7. However, these figures understate the full extent of India‘s changing conditions and growth. Statistics cannot give full meaning to the human revolution that is quietly, yet perceptibly, taking place in the country. After centuries of passive acceptance, millions of villagers all over India are taking part in what is happening and are beginning to ask more of life and of the future. 4OChester Bowles, "On India's Progress," a speech given at the University of Texas, April 26, 1963; quoted from India News, Washington, D.C., 1963, p. 3. ” 41Third Five-Year Plan: A Draft Outline, op. cit., p. 54. 421bid. 51 .s .d .HooH .ruow Roz .HddOMpmnuoch mmocfimnm .oanmuocnom :mMch Hmeofipmcuoch mmoqfimnm .mfiUCH noonsom wsa mmw ooo.H com mm 2 mo neon ooo. openneoo muomfiafipuom mnocomouuflz om cm 0.00 0.05 m.Hm mmuom confide: popmwfluufl «mum deuce “oz mm0H>mmm A m.mn moo“ coaaaez mafimum ooom ZOHHODoomm AHfismm ea so o.eH o.ma o.w nooenooee noeueneooneo one .mamuflmmoz .mcoa93pflpmeH mHA mooa .m> 000a cosmooa ommmuocH omnucoonom Amo-omoav mmm nHHS nooxm.EmeHum 0.00H mH 5.8 H m.Ho w 0.0m v «HUGH CH wo>Hpn nooxm cmoHuoE< 0.00H w 0.mm m 0.mn o mopmpm oopHGD :H mo>Hus nooxm odoHuoE< pcoouom .oz pcoouom .oz acoouom .oz unmouom .oz unmouom .oz pcoouom .oz HmpoH nozmc< oz “coeeoo oz wchmoupmHQ Emsoom poow mchmunoocm o>Hpsooxm BBQ 3.... >uo> AmHm>Hmc< 36H>uochv HzmzzomH>zm UHZOZOOMIOHUOm z w mqmup::oo UoQOHo>oU Honwo >cm mm oHnmwm mHu= -ooxm onHuHum 0.00H MH 5.5 H 5.5 H 0.MN m N.o¢ 0 v.mH N «HocH :H mo>st nooxm :moHuos< 0.00H w m.um m m.No m moumpm UoHHGD :H mo>Hp3 nooxm :moHnoE< unmouom .oz «coouom .oz pcoouom .oz unmouom .oz unmouom .oz “coupon .oz o>szooxm “mauH RoHnmquEoo nmzoqm poz on oHonpm Hmuoh uozmu< oz oHnmum >uo> AmHmszc< 30H>uouch 0 mqm..n Hfiumunmm GNOMHmE/w ............. .-----------1-------------i--------------r--1-------------------------------- o.ooH ..w m.mH H m.sw s nooeem oooHo: eH mo>Hu:ooxm :moHHoE< pzouuom .oz pcoouom .oz «doouom .oz unmouom .oz ucouuom .oz HmHoH Hosmd< oz zuopommmemm >uouomMmemm zuovomMmHumm o>Hpnooxm on poz . . >uo> mmHm>Hmn< 30H>Houch HZNZHmm>zH zHpo nooxm EmHHHHm 0.00H mH «.mH N m.Ho w H.MN m «HUGH :H mo>Hps nooxm :moHHoe< 0.00H MH v.mH N m.n H m.>m 0H mopmpm oopHca . :H mo>Hus nooxm emoHHoE< unmouom.oz unmouom.oz unmouom .oz pcoouom .oz unmouom.oz “doouom.oz o>Hpsooxm HmpoH Hosmc< oz o>HpoHuumom o>Huoanmom oHnHXon o>HHomHHH< >uo> >DHHOm HHmc< 30H>Houde z 83 0.00H vm w.H H o.H H 0.0N 0H ¢.0N HH m.0¢ mN HNHOH 0.00H NH m.w H m.w H S.Hv m n.0H N 0.mN m mHmHHmHHH umsan cmecH 0.00H 0H m.bN 0 0.mN v m.>m 0 «HUGH GH mo>Hus -ooxm EnHHHum 0.00H NH 0.mN m w.0m v N.0v 0 «HveH :H mo>Hps nooxm :onHoe< 0.00H MH v.mH N m.w H M.>b 0H mmvmwm UTHHGD :H mo>Hpo nooxm :moHHoE< unmouom .oz unmoumm.oz unmouom .oz “coouom .oz paoouom.oz udoonom.oz Hnooe momcmnu copwo Hozme< oz m>HuoHmeQm uanm Hfi< o>Huomupu< AmHm>Hmc< 36H>Hoch0 wOHHom Hzmzfimm>zH szmMOm mzh zo mzmH> 0H mHmHps -ooxm EnHuHum «HUGH :H mo>Hu3 nooxm :moHHoE< «.5 v H.HH 0 m.Hw fie 0.0N H 0.00 w m.m H m.mm v ¢.wm b 0.00H 0H 5.5 H m.N0 NH 0.mN N m.NH H m.N0 m museum oooHe: :H mo>Hp3 nooxm :moHumE< unmouom Honezz unmouom Honssz pcoouom Honesz unmouom Honszz Heooe Hozme< oz oHanprmSH pan ENHI anz >uo> o>Hp:ooxm AmHm>Hmc< 36H>Hochv 0N mHmHpC -ooxm EnHHHum nHooH CH o>HpComxm nopnom oooHea nooeum ooHHe: CH mo>HHC nooxm CmoHCoE< uCooCom.oz “Coouom.oz “Coouom .oz pCooCom.oz pCoouom.oz “Coouom .oz mo>HuCooxm anoe CoBmC< oz o>HHoHHumom oHnmCommom HeuooHH HmCoDHH >Co> WUHHOm ZOHHHH30mxm ImHHHmm NIH QZ< mmH 0m mqmHpC nooxm,CmeHHm 0.00H 0H 5.5 H 5.5 H H.0N m m.Ho 0 mHCCH CH mo>HpC tooxm CmoHHoS< 0.00H 0 m.NH H 0.50 5 mopwpm.popHCD CH mo>HHCooxm moumpw poHHCD “Coouom.oz pCooCom .oz “Coouom .oz pCoouom.Oz “Coouom.0z abbouom.oz HCHOH o>HuoHHpmom o>HpoHHumom oHCmCommom HmCoCHH HmCoCHH 5Hm> NOHHOm NOZHHDUmxm mmHHHmm Qz< mMH Hm mHmHpCooxM 0800* m mECHm 0CHuHCmCoo mmumpm CowHCD m 0H mumHHeHnH umCUCH CmHUCH N 3 «HQ: CH mo>HpC -ooxm EnHuHum H N 0H wHCCH CH mo>HCC nooxm CmoHHoE< m m nopnom oooHu: oCu CH mo>HHC nomxm CmoHCoE< uCoouom Conaaz pCooCom Coneaz uCoouom CoCECz uCoouom Coneaz mo>HuCooxm CoBmC< oz moHoHHom 0CH0CCCO COHmHooUCH mash Com r rem mpCopCommom Hench AmHmszC< 30H>uopCHv WZOHHHpCo0x0 0800*, e.s e 4.5 e s.oH o e.Hw ee Heooe m mEHfim 0CHHHCwCoo noonow oopHea H m m w nonHHnHup umCUCH CNHCCH H H mH «HooH CH m0>HuC -ooxm EnHoHum H m 4 HH aHouH CH m0>HHC no0xm CmoHC0E< H m m noonom oouHe: CH m0>HHC |o0xm CmoHCOE< «C0ou0m C0DECZ uC0ou0m HODsaz pC00C0m C0CECZ pC0uu0m u0nenz m0>HuCo0xm u03mC< oz H0CComC0m HmoHCCo0H mHmHC0pmz 30¢ 0&0H U00 0o spHHHoeHHe>< 0o CHHHHonHHn>< vn muC0CComw0a Hench AmHm5HmC< 30H>C0HCHV