Module 2: CASE STUDY

India’s Transformation to a Liberal Economy

India is a study in contrasts. It is the world’s leading emerging economy in information
technology and e-business. However, government intervention is widespread. India has many
trade barriers and business regulations and much government bureaucracy. Not only does the
Indian federal government impose countless regulations, standards, and administrative hurdles
on businesses, each of India’s 28 states also imposes its own substantial red tape. A wide
variety of import taxes and controls affect foreign investment. Tariffs average more than 15
percent on many products, compared to less than 4 percent in Europe, Japan, and the United
States. Hundreds of commodities, from cement to household appliances, can be imported only
after receiving government approval. Licensing fees, testing procedures, and other hurdles can
be costly to importers. India enforces numerous regulations aimed at ensuring animal-based
products are produced safely and humanely. In an effort to protect millions of mom-and-pop
shops scattered across India, the Indian government denied Walmart, Carrefour, and other
foreign retailers the opportunity retailing sector to participate in the country’s huge retailing
sector.

However, the country is making progress to-ward free trade and open markets. Since the
1980s, India’s government has been liberalizing the nation’s regulatory regime. The
government has reduced import licenses and tariffs. Many state enterprises have been
privatized—sold to the private sector and to foreign investors. India’s economic revolution is
unleashing the country’s entrepreneurial potential. The government is establishing special
economic zones (SEzs), virtual foreign territories that offer foreign firms numerous free trade
benefits. In a typical SEz, firms are exempt from trade barriers, sales and income taxes, licensing
requirements, restrictions on foreign direct investment, and customs clearance procedures.
Mahindra World City is home to a massive SEz that boasts a $277 million software development
center built by Infosys Technologies, India’s leading IT firm. In Europe and North America, the
outsourcing of jobs to India has led to calls for protectionism—trade barriers and defensive
measures intended to minimize the export of jobs abroad. Trade barriers and government
bureaucracy in India, as well as calls for protectionism in Europe and North America, exemplify
the complex world of government intervention.

Guide Questions
1. Describe the nature of government intervention in India. What is the likely effect on
business activities?
2. Why has the Indian government hindered the entry of Walmart, Carrefour, and other
large retailers into the country?
 3. Describe how India’s government is attempting to liberalize the nation’s regulatory
environment.
SOURCES: Sy Banerjee, Thomas Hemphill, and Mark Perry, “India Doors to Wal-Mart Shut by
Crony Capitalism,” Investor’s Business Daily, December 28, 2011, p. A13; Central Intelligence
Agency, World Factbook, 2018, www.cia.gov; Economic Times, “US Presses India on IP
Protection, Market Access and Trade Barriers,” October 27, 2017,
www.economictimes.indiatimes.com; Economic Times, “Walmart India Ties Up 20 Sites, New
Stores to Open Next Year,” December 1, 2017, www.economictimes.indiatimes. com; Udayan
Gupta, “Modi: Obstacles and Opportunities for a New India,” Global Finance, July/August 2014,
pp. 12–15; Kiran Stacey, “Battling India’s Bureaucracy for Babies and Businesses,” Financial
Times, January 9, 2018, www.ft.com; United States Trade Representative, 2017 National Trade
Estimate Report on Foreign Trade Barriers, www.ustr.gov; Tim Worstall, “Walmart Expands
Again in India—But Still Not Able to Open Consumer Stores to Consumer Detriment,” Forbes,
April 30, 2017, www.forbes.com.