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This report discuss about the political economy of India in terms of political system, economic system and legal system. The purpose of this report is to analysis the benefit, risk and cost of inverting into India. It include of four parts which are introduction, political economy, recommendation and conclusion. In the introduction, the background of India and the reason of investing in India will be indicated. The following part, political economy, is analyzing the benefit, risk and cost in terms of political system, economic system and legal system. After the political economy part, recommendation about investing in India will provide. Finally, the conclusion will conclude about the report in terms of the economy of India.
India is a developing country. It is the biggest and one of the oldest countries in southern-Asian. According to the ‘world factbook’ of the Central Intelligence Agency, in 2012, India become the 4th biggest economics in the world with GDP $4.761 trillion (USD). However, the GDP per capita based on purchasing power parity is just $3,900 (USD) which ranked 168th of the world because it is has the 2nd biggest population.(CIA, 2012) In India, 2 in 3 of the workforce in agriculture however services are the major source of economic growth in recent years. Since 1990, India opened its market and implemented the economic reforms by reducing the control from the government to foreign businesses and investments. Therefore, to an investor interesting in investing into Asian, India would be the most attractive country of investment. The purpose of this report is to analysis the political economy of India. The report would analysis the political economy in three different systems: Political System, Economic System and Legal System. In terms of the three systems, the report would discuss the benefit, risk and cost of each system.
Political Economy Analysis
The political economy indicates that the political, economic and legal systems of a country are interdependent by interacting and influencing each other so that they affect the economy. It is important to use political economy to analysis India because it is significance to understand the
potential benefit, risk and cost of political, economic and legal systems before investment.
India is a federal socialist republic belonging to the federal cabinet system which the powers of judicial, legislation and administrative. It has more 100 political parties and the three main parties are Congress, Bhartiya Janata Party and Communist Party of India. The highest leader is president who will change every 5 years.
The benefit in terms of political system of India is that the Indian government welcomes foreign investments and businesses. India opened its market since 1990 and the government develop a series of polices to increase the country’s attractiveness to the foreign direct investments (FDI). The policy of FDI is very loose. Most of the FDI are approved by the automatic route system. Furthermore, the Indian people respect the FDI as they help the economic growth. However, there is risk of unstable political situation as there is political unrest during the presidential transition every 5 year. In addition, everywhere corruption has become entrenched inside the Indian government so that there is a cost of bribe. As for taxation, there is no discount for the foreign investor as the government promotes fairly taxation rate.
India is developing into an open-market economy with a rapidly economic growth. The benefit in terms of economic system of India is the high GDP, low labor cost and the convenient and efficient capital markets and financing channels. India has the 4th highest GDP in 2012 and its GDP per capita based on purchasing power parity is $3,900 which is quadruple of 2007. In addition, India has the second large population of the world which helps to create a large labor market with low labor cost in India. Compare to Europe, Indian labor cost is only 10% of European labor cost with the same productive. There is 28% of the labor force in services industry and
they can provide 24 hours services to the Europe because of time differences. Moreover, India has a relatively perfect capital market. It has 23 stock markets which all connected to the internet and 65 billion USD daily turnovers which ranked 3rd in the world. This relatively perfect capital market creates a high efficiency, high transparency and convenient financing channel for the investor and entrepreneur.
As for the risk in terms of economic system, the stress of the large population makes the capita income low so that the capita purchasing power is low as well. On the other hand, the problem of lack of infrastructure is serious. The India government does not invest enough into the development of infrastructure so that the cost of FDI is increase.
India has a relatively complete legal system which is a benefit in terms of legal system. Market economy is the legal economy. The complete and perfect legal system will make the market function effectively. As a member of the Commonwealth countries, the India legal system is relatively complete and the public’s awareness of the law is also very strong. Therefore, the management of the legal system in India is more prominent which is walking in the forefront of developing countries. On the other hand, the risk is that the efficiency of judicial, legislation and administrative are very low. For example, a contract needs 425 days to be implemented while it only needs 286 days in other Asian countries. As for the cost factor, the law of Antitrust may increase the cost of FDI.
There are three recommendations about investing into India. Firstly, normally industrial products are more popular than high technology products in India because the capita purchasing power is low so that relative normally industrial products firm should research more about Indian market and become first-mover as soon as possible. Secondly, it is better to into the India market as a joint venture with a local firm. In this way, the local firm’s
network with the government and local customers can be used to open the market and reduce the cost. Finally, pay attention to the research of Indian policy because of its unstable political situation.
In conclusion, India is one of the fastest growth economies in the world. The amount of FDI increases rapidly. For example, according to the ‘Fact Sheet on Foreign Direct Investment’ of Indian government, the FDI amount in 2012 July is US$263,472million and in 2013 July is US$301,787million. India integrates into the global economic system and maintains a rapid development. Although there still some issues in terms of the investment environment, overall India still has considerable attractiveness to investors. India still has large space for development and it is possible that the development will be more rapid.
Central Intelligence Agency (2012). The World Factbook. India. Retrieved 24 October 2013, https://www.cia.gov/library/publications/the-world-factbook/geos/in.html
Department of Industrial Policy & Promotion (2012). FACT SHEET ON FOREIGN DIRECT INVESTMENT (FDI). Retrieved 24 October 2013, http://dipp.nic.in/English/Publications/FDI_Statistics/2012/india_FDI_July2012.pdf
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