How would privatization, deregulation and the removal of barriers to foreign direct investment affect the efficiency of business, new business formation, and the rate of economic growth in India during the post-1990 time period?
In 1991, India's government embarked on an ambitious economic reform program by which many of the industrial licensing system was dismantled, and several areas once closed to the private sectors were opened, including electrical generation, parts of the oil industry, steelmaking, airport and some areas of the telecommunications industry. Investment by foreign enterprise formerly allowed only grudgingly and subject to arbitrary ceilings, was suddenly welcomed. Approval was made automatic for foreign equity stakes of up to 51 percent in an Indian enterprise, and 100 percent foreign ownership was allowed under certain circumstances. Raw materials and many industrial goods could be freely imported and the maximum tariff that could be levied on imports was reduced from 400 percent to 65 percent. The top income tax rate was also reduced, and corporate tax fell from 57.5 percent to 46 percent in 1994 and then to 35 percent in 1997. The government also announced plans to start privatizing India's state-owned businesses, some 40 percent of which were losing money in the early 1990s.
However the result of reform program (such as privatization, deregulation and the removal of barriers to foreign direct investment) has been impressive.
The response to the program has been impressive. The economy expanded at an annual rate of about 6.3 percent from 1994 to 2004, and then accelerated to 9 percent annually from 2005 to 2008. Foreign investment jumped from $150 million in 1991 to $36.7 billion in 2008. Some economic sectors have done particularly well, such as information technology sector where India has emerged as a vibrant global center for software development with sales of $50 billion in 2007 (about 5.4 percent of GDP) up from just $150 million in 1990, furthermore pharmaceuticals have also done well.
However still problems persist. Actions taken by the government continue to limit efficiency gains for private companies and the country's high rate of poverty is still a major problem.