1 Economic reforms:
Though economic liberalization in India can be traced back to the late 1970s, economic reforms began in earnest only in July 1991. A balance of payments crisis at the time opened the way for an International Monetary Fund (IMF) program that led to the adoption of a major reform package. Though the foreign-exchange reserve recovered quickly and ended effectively the temporary clout of the IMF and World Bank, reforms continued in a stop-go fashion. What has been accomplished and what remains to be done? Is the glass half full or half empty? The Good News: Achievements Thus Far India’s reforms have been piecemeal and incremental, giving the casual observer the impression that nothing has been happening. If one takes the totality of reforms over the last decade, however, the change is unmistakable. The analogy is with the hour hand of the clock, which looks completely static, and yet completes a full circle every 12 hours. To get an idea of the accomplishments, begin with the industrial policy prevailing prior to the launching of the reforms. The heavy industry was a state monopoly. Other industries were either subject to strict industrial licensing or reserved for the small-scale sector. The tight control of the government on industry was aptly captured by a leading cartoonist in a 1980s comic strip showing the industry minister tell his staff, ―We shouldn’t encourage big industry—that is our policy, I know. But I say we shouldn’t encourage small industries either. If we do, they are bound to become big.…‖ The reforms of the last 10 years have gone a long way toward freeing up the domestic economy from state control. State monopoly has been abolished in virtually all sectors, which have been opened to the private sector. The License Raj is a thing of the past. The small-scale industry reservation still persists but even here progress has been made. Apparel, with its large export potential, was recently opened to all investors. In the area of international trade, in 1991, import licensing was pervasive with goods divided into banned, restricted, limited permissible, and subject to open general licensing (OGL). The OGL category was the most liberal but it covered only 30 percent of imports. Moreover, certain conditions had still to be fulfilled before the permission to import was granted under the OGL system. Imports were also subject to excessively high tariffs. The top rate was 400 percent. As much as 60 percent of tariff lines were subject to rates ranging from 110 to 150 percent and only 4 percent of the tariff rates were below 60 percent. The exchange rate was highly over-valued. Strict exchange controls applied to not just capital account but also current account transactions. Foreign investment was subject to stringent restrictions. Companies were not permitted more

Ten years ago. The rate of inflation has been low and foreign exchange reserves are sufficient to finance imports for more than eight months. Progress has also been made in many areas that were previously off limits to reforms. This compares with a growth rate of 3. But.5 percent during 1950-1980. Diesel oil and gas prices have undergone some increases. As a result. The minister then added that if the Member was unhappy with the service. The foreign investment regime is as liberal as in other developing Asian countries. Whereas the vocal supporters of reforms within India were rare during the 1980s. the proportion of poor in total population has declined from 40 percent in 1993-1994 to 26 percent in 2000. The economy has grown at more than 6 percent coupled with full macroeconomic stability. both domestic and foreign. the greatest change in the last 10 years has been in the attitude toward reforms. the then telecommunications minister went on to remind him that in a poor country like India. At least symbolic reductions have also been made in fertilizer and food subsidies. the telecommunications services in India are mushrooming. but few disagree that reforms must continue. This includes textiles and clothing. The value added tax has undergone substantial rationalization. this goal has already been achieved. Rising incomes have helped bring down poverty. the private sector has become an active participant in the telecommunications sector. virtually every political party today recognizes the need for continued reforms. perhaps. Insurance has been opened to private investors. telecommunications services were a state monopoly and constituted a major bottleneck on the conduct of business activity. and the New Telecom Policy issued in 1999 sets the target of providing telephones on demand by the year 2002. These reforms have paid handsomely. According to official figures. So callous was the attitude of the government that when a Member of Parliament complained about poor telephone service in Delhi during the early 1980s. which remain protected in developed countries through the multi-fiber arrangement. As a result. he could return his phone since many customers had queued up for it for years! Today. The highest tariff rate has come down to 45 percent (including the tariff surcharge and the so-called Special Additional Duty) with the average tariff rate declining to less than 25 percent. import licensing has been completely abolished.than 40 percent foreign equity unless they were in the high-tech sector or were export-oriented. foreign investment amounted to a paltry $100-200 million annually. Initial . Today. the telephone was a luxury. The provision of cellular mobile as well as fixed service is now open to the private sector including foreign investors. In many cities. Differences on which reforms to undertake first and at what pace still exist.

With almost two thirds of the industrial output of the organized sector in these enterprises. or services—can achieve successful transformation without adequate supply of power. At present. trade liberalization must proceed apace with all tariffs brought down to 15 percent or less in the next three years. Second. To begin with. approximately 60 percent of India’s workforce still remains in agriculture. Given an already high debt-to-GDP ratio of nearly 60 percent. with trade liberalization. Virtually no sector of the economy—industry. Third. Roads. Again. a large number of highly labor-intensive products remain reserved for small-scale producers. It will also be salutary for poverty reduction. particularly in the area of roads. it is also crowding out private investment. Today. The power sector has been a government monopoly at the state level and suffers from proverbial inefficiency including large-scale thefts of electricity in almost every state. A key deficiency of India’s growth process has been the failure of the conventional industry to pull workers out of agriculture into gainful employment. The Bad News: Still a Long Way to Go The accomplishments of the past decade are dwarfed only by what remains to be done. and ports all need expansion as well as improvement in the quality of service. will find it almost impossible to survive. the ―old economy‖ must be further unshackled. The combined deficit at the center and states exceeds 10 percent of GDP. From the viewpoint of long-run growth. privatization of public sector enterprises needs to be speeded up. The most important area of reforms is perhaps India’s power sector. firms with 100 or more workers have no legal way to exit since they cannot lay off their workers. As a result. the labor-intensive industry has been scuttled in India and. The government has recently taken steps in this direction. Finally. This works as a major barrier to entry of new firms on a large scale: they hesitate to enter into a world that has no exit doors.fears that changes in governments will bring the reform process to a halt or even reverse it have proven to be without foundation. labor laws must be reformed so as to restore the employer’s right to layoff workers upon adequate compensation to them. The revival of conventional industry requires reforms in four key areas. Infrastructure is another important area of reforms. agriculture. the fiscal deficit is in a dire state. in contrast to virtually all successful developing economies. this deficit is unsustainable. This reservation must end with small-scale producers given assistance through alternative measures rather than a total ban on large-scale entry. Reforms . First. this is necessary to reallocate production toward labor-intensive products in which India has comparative advantage. it will be difficult to stimulate industrial growth in the short to medium run without faster privatization. but the pace remains slow. railways.

With the need to cut the fiscal deficit. While foreign banks are now allowed freely to open branches in India. like most other countries including Bangladesh and People’s Republic of China. But needed as well are reforms in the area of higher education. In the last five years. The need for the expansion of primary education is well recognized. Between food and fertilizer subsidies. these are provided free of charge but their supply is highly unreliable. the state has no resources to spare. Farmers must also be able to reap the full market price for their product rather than be subject to a procurement price below the market price. Fertilizer and food subsidies pose yet another challenge. the prices for fertilizer paid by farmers have been close to the world price. This is the area with highest payoffs for imaginative reforms. Layoffs in banks have been very difficult. Banking sector privatization will take time but large efficiency gains could be achieved if labor laws are reformed to restore the hire and fire policy. Economic reforms of the last decade have virtually bypassed agriculture. Guaranteed rates of return to fertilizer manufacturers have allowed firms with costs two to three times the price in the world market to stay in business. As much as 0. they have not yet moved in aggressively. remain a distant goal. export restrictions must be phased out. But with policy making becoming an increasingly sophisticated and specialized activity. Universities in India also remain a state monopoly. the reform of bureaucracy is essential.7 percent of GDP goes into fertilizer subsidies. made by the present author. The problem of a bloated bureaucracy and the need for downsizing it is well recognized. much of this subsidy goes to support the inefficient domestic fertilizer industry rather than farmers. Contrary to popular impression. is to open the positions at the level of Joint Secretary and above to outsiders rather than limiting competition to the existing bureaucracy as is the current practice. One proposal. it is necessary to open the top bureaucracy to outside specialists. Therefore. there is scope for generating savings worth more than 1 percent of GDP. Finally. Further. Currently. . Besides fertilizers among others.involving privatization of power generation and distribution have been undertaken in several states recently but no spectacular successes have emerged as yet. and voluntary retirement schemes extremely costly. farmers need adequate supply of water and electricity. Likewise. the bulk of the food subsidy has failed to reach the poor. India must allow the entry of private universities. particularly the reform of banking. Financial sector reforms.

is fortunately much stronger than it was 10 years ago. the Indian economy was generally mired in a vicious circle of low productivity/product obsolescence and slow growth. the success of the reforms in delivering growth and poverty reduction must make the road to future reforms less bumpy. Thus. While the fragilities in the Indian economy were largely homemade. 36 years to reach Thailand’s. Moreover. Not only was the performance of the Indian economy well below the targets set by the planning authorities. the authorities steadfastly pursued a Socialist strategy of state-directed. it will take 14 years to reach the current level of per capita income of People’s Republic of China. the need for accelerated growth can hardly be overemphasized. which had broadly similar levels of per capita income at the time of India’s independence (Kelkar. Q. the highly statist and interventionist development policies adhered to during this period of insulation led to a severely distorted production structure. While growth did pick up in the latter half of the 1970s. those wishing for rapid reforms will need to be patient. heavy industry based industrialization complemented by an across-the-board import substitution policy.2 Trade reform: The strategic objective of Indian policy makers at the outset of independence was the creation of a self-reliant economy and the reduction of the high levels of poverty that existed. The good news.Conclusion If India grows at 6 percent per annum on a sustained basis. though far from universal. the country was left lagging in terms of economic growth and development relative to its East Asian neighbours such as China and Korea. 2001). however. is that the experience of the past decade shows that change can occur. particularly with regard to escalating fiscal deficits. the shock of the 1990 Gulf war was . the task of implementing reforms in a democracy is complex. The imbalances corresponded to a period of severe political instability and uncertainty following three successive minority governments during 1989–91. Therefore. and 104 years to reach that of the United States. Notwithstanding some notable successes. all within a democratic political framework. At the same time. In order to achieve these objectives. financial repression and complex industrial requirements. Although some tentative steps were taken in 1985 to liberalise and unshackle the economy by delicensing a few industries. The support for reforms today. these partial and rather ad hoc measures contributed to the creation of severe and unsustainable macroeconomic imbalances in the Indian economy.

the pace of tariff compression in general. Prior to 1991.4 percent between 1992 and 1998 (Table 1). India’s trade liberalisation efforts can be broadly divided into two periods. as part of the IMF agreement. industrial.the single factor which ―broke the camel’s back‖ as India was brought to the brink of an international default. More precisely. In fact.4). having hovered at 355 percent in 1991. The first five years from 1991 to 1996 was a period of intense liberalisation as tariffs fell dramatically. there was a slight increase in the trade-weighted tariffs from a low of 25 percent in 1996 to 30 percent by 2000. while the simple average tariff rate remained more or less constant. The second half of the 1990s can at best be characterised as a period of consolidation of. barely sufficient to cover a fortnight’s worth of imports. Without attributing causation. India was the archetypical import substituting regime with ―one of the most complicated and protectionist regimes in the world‖ (IMF. In addition to the conventional expenditure switching and reducing policies. The Indian economy recovered smartly from the crisis. something that had never occurred in its post-independence history. India entered into an IMF structural adjustment program. a range of far-reaching economic policy reforms was launched in July 1991 in the external. 1998). ―the Indian economy appears to be…sound… Something has changed. Not only was this a marked improvement from India’s own past. Of equal importance to the pace of growth is the ―quality of growth‖. it is interesting to note that this corresponds to the decelerating trend in economic growth in the latter half of the 1990s compared with the first . However. it was the second highest rate of growth in the world behind China. thus ensuring that there was no significant pressure on the balance of payments position (compared with the consumption-led growth of the mid to late 1980s). financial and public sectors. while the maximum tariff rate fell to 45 percent in 1997. following steps towards the unshackling of its trade regime. we are no longer in the boom-and bust mode of the 1960s. India’s simple average tariff rate has come down significantly from 128 percent in 1991 to about 34 percent in 2000. This in turn may be partly attributable to the fact that post-1991 growth was driven principally by an expansion of private investment while national savings simultaneously rose. Faced with a severe balance of payments crisis as foreign exchange reserves plummeted to US$1 billion in late June 1991. These reforms appear to have paid significant dividends at the macroeconomic level. 1970s or 1980s‖ (p. but definite deceleration in. As Desai (2000) has noted. the average tariff rate remained largely unchanged. real GDP growing at an annual average rate of 6. The tradeweighted tariffs declined from 87 percent in 1991 to around 30 percent by 2000.

A series of ambitious economic reforms aimed at deregulating the economy and stimulating foreign investment has moved India firmly into the front runners of the rapidly growing Asia Pacific Region and unleashed the latent strength of a complex and rapidly changing nation. a sophisticated legal and accounting system and a user friendly intellectual infrastructure. India’s time tested institutions offer foreign investors a transparent environment that guarantees the security of their long term investments. joint ventures and collaborations. It is also the 4th largest economy in the world in terms of PPP. removed restrictions on expansion and facilitated easy access to foreign technology and foreign direct investment.While being fully cognizant of the fact that the recently announced reforms will take time to fully come into effect.3 Industrial reforms: India is the 7th largest and 2nd most populous country in the world. India’s dynamic and highly competitive private sector has long been the backbone of its economic activity and offers considerable scope for foreign direct investment. Foreign Direct Investment Policy . Industrial Policy The Government’s liberalization and economic reforms programme was initiated in July 1991. it is fair to ask if and to what extent the decade long reforms have been successful in integrating India with the global market economy. Q. These include a free and vibrant press. under the new Industrial Policy Resolution. 1998). provide India with a distinct cutting edge in global competition. Skilled managerial and technical manpower that matches the best available in the world and a middle class whose size exceeds the population of the USA or the European Union.five years since the crisis of 1991 (IMF. Industrial licensing has been abolished except in a small number of sectors where it has been retained on strategic considerations. The industrial policy reforms have substantially reduced the industrial licensing requirements. Today India is one of the most exciting emerging markets in the world. Reforms in Industrial Sectors in India: Industrial Sector was among the first sectors to be liberalized in India in a series of measures. a well established judiciary.

With the shifting of the FIPB to the Department of Economic Affairs. the FIPB has been reconstituted as under: . entry. Department of Economic Affairs Chairman . as and when necessary Entry Strategies and setting up a company (i) Entry Into India Foreign nationals (except citizens of Nepal and Bhutan) entering into India are required to carry a valid passport/travel documents and a valid visa. [Top] Foreign Investment Promotion Board (FIPB) Foreign Investment Promotion Board (FIPB) is a competent body to consider and recommend foreign direct investment (FDI). which do not come under the automatic route. of India and other top officials of financial institutions. Department of Commerce Member .Secretary. Ministry of Finance.Secretary. Visas for the purpose of tourism.Foreign Direct Investment in India is allowed on automatic route in almost all sectors except Proposals that require an industrial licence and cases where foreign investment is more than 24% in the equity capital of units manufacturing items reserved for the small scale industries. Ministry of External Affairs Member The Board would be able to co-opt Secretaries to the Govt. Department of Industrial Policy Promotion Member . Proposals in which the foreign collaborator has a previous venture/tie-up in India.Secretary. banks and professional experts of industry and commerce.Secretary. Proposals relating to acquisition of shares in an existing Indian company in favour of a Foreign/NonResident Indian (NRI)/Overseas Corporate Body (OCB) investor. . (Economic Relation). and Proposals falling outside notified sectoral policy/caps or under sectors in which FDI is not permitted and/or whenever any investor chooses to make an application to the Foreign Investment Promotion Board and not to avail of the automatic route.

(ii). draws heavily from the United Kingdom’s Companies Acts and although . To avail of this scheme. Business visas may be issued for upto 5 years. with multiple entry provision. Under this scheme. Change of purpose or type of visa is a not permitted.transit. The transfer of residence scheme applies to foreign nationals visiting India for long durations. Further. The Act. While a business visa is issued by an Indian Embassy abroad. Setting up of a company The principal forms of business organisation in India are:    Companies – both public and private Partnerships Sole proprietorships Companies incorporated in India and branches of foreign corporations are regulated by the Companies Act. in the case of smaller cities. holding a visa (other than a tourist visa) valid for a period exceeding 180 days. A bank guarantee has to be provided for this purpose. Foreign nationals who wish to work in India must obtain a Residential Permit from the Foreigners Regional Registration Office (FRRO) that are located in all major cities. foreign nationals can import certain personal effects without paying customs duty. The goods brought into India under the transfer of residence scheme have to be owned by the importer or his family for at least one year. or. conferences. A foreign national. which is returnable after the individual has stayed in India for a year. it can be renewed/extended within India if the applicant so desires. 1956 (the Act). student and entry are normally not considered for extension. business and employment in India re issued to foreign nationals by Indian Embassies and Consulates abroad. which has been enacted to oversee the functioning of companies in India. the goods have to be shipped within two months before the entry into India or one month after entry into India. is required to be registered with the FRRO within 15 days of arrival in India. visa other than employment. from the principal police station.

Apart from statutory government owned concerns.  The private company accepts or renews deposits from the public. . The maximum number of its shareholders is limited to 50 (excluding employees). Private companies are relatively less regulated than public companies as they deal with the relatively smaller amounts of public money.similar. A private company is deemed to be a public company in the following situations:  When 25 percent or more of the private company’s paid-up capital is held by one or more public company. the personal liability of members is limited to the amount unpaid on their shares while in the latter. the most prevalent form of large business enterprises is a company incorporated with limited liability. ensure compliance with the Act.  The private company holds 25 percent or more of the paid-up share capital of a public company. In the former. No offer can be made to the public to subscribe to its shares and debentures. The Registrar of Companies (ROC) and the Company Law Board (CLB). (i) Private Companies A private company incorporated under the Act has the following characteristics:     The right to transfer shares is restricted. both working under the Department of Company Affairs. For a company with unlimited liability. is more comprehensive. the liability of its members is unlimited. Companies limited by guarantee and unlimited companies are relatively uncommon. A company can be limited by shares or by guarantee. the personal liability is limited by a pre-decided nominated amount. [Top] (a) Types of Companies A company can be a public or a private company and could have limited or unlimited liability.

250 million during a period of 3 consecutive financial years. Electricity Board. a number of approvals/clearances are required from different authorities such as Pollution Control Board. a public company is one on which the above restrictions do not apply. This Act came into force on the 1st day of June 2000. 1999 to replace the Foreign Exchange Regulation Act. (iii) Foreign Companies Foreign investors can enter into the business in India either as a foreign company in the form of a liaison office/representative office. . The private company’s average annual turnover exceeds Rs. a flow chart presents the summary of the steps involved in formation of a company with Registrar of Companies. Municipal Corporations. New Delhi within 30 days of setting up a place of business in India or as an Indian company in the form of a Joint Venture and wholly owned subsidiary. etc. The object of the Act is to consolidate and amend the law relating to foreign exchange with the objective of facilitating external trade and payments and for promoting the orderly development and maintenance of foreign exchange market in India. 1973. Chief Inspector of Factories. Regarding the necessary procedures to be followed for registering the company. [Top] Foreign Exchange Management Act (FEMA) The Parliament has enacted the Foreign Exchange Management Act. (ii) Public Companies A public company is defined as one which is not a private company. In other words. For opening of the foreign company specific approval of Reserve Bank of India is also required. Approvals/Clearances required for new projects For starting a new project. a project office and a branch office by registering themselves with Registrar of Companies (ROC).

about investment opportunities available to Non Resident Indians (NRIs)/Persons of Indian Origin (PIO)/Overseas Corporate Bodies (OCBs). advance salary and perquisites. It will also be applicable to any contravention committed outside India by any person to whom this Act is applicable. Taxation in India Since the onset of liberalization in the country. pensions. commissions. Further. Ready Reckoner for NRI Investment The Ready Reckoner for Non-Resident Indians (NRIs) Investment provides information. Income received from sources outside India is not taxable unless it is received in India. The stock options granted by the employer are taxable as capital gains at the time of sale of shares acquired due to exercise of options. Foreign nationals working in India are generally taxed only on their Indian income. such approvals are not necessary. offices and agencies outside India owned or controlled by a person resident in India. If employment is for a short duration. provided the amount of remittance is within approved limits. profits in lieu of or in addition to salary. Remuneration includes salaries and wages.This Act extends to the whole of India and will also apply to all branches. Labour Rules/Regulations Under the Constitution of India. Taxable payments include all allowances and tax equalisation payments unless specifically excluded. fees. Labour is a subject in the Concurrent List where both the . tax structure of the country is also being rationalized keeping in view the national priorities and practices followed in other countries. A foreign national is allowed to repatriate 75 percent of his net after-tax earnings after his employment is approved by the government and the exchange control authorities. Repatriation of Earnings A foreign national may open bank accounts in India and receive funds from abroad. The Indian tax laws provide for exemption of tax on certain kinds of income earned for services rendered in India. at a glance. foreign nationals have the option of being taxed under the tax treaties that India may have signed with their country of residence. Remuneration for work done in India is taxable irrespective of the place of receipt.

12. 1923 | Maternity Benefit Act. the Geographical Indications of Goods (Registration and the Protection) Act. contains an Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS). viz. 1936 | [Top] Intellectual Property India is a signatory to the agreement concluding the Uruguay Round of GATT negotiations and establishing the World Trade Organisation (WTO). which are required to promote effective and adequate protection of Intellectual Property Rights with a view to reducing distortions and impediments to international trade. Some of the important Labour Acts. Health & Welfare) Act. As regards the status of various Intellectual Property laws in India and standards in respect of various areas of intellectual property. A new law for the protection of Geographical Indications. 1958.1999. The obligations under the TRIPS Agreement relate to provision of minimum standards of protection within the member country's legal systems and practices. This law repeals and replaces the earlier Trade & Merchandise Act. a law on Trade Marks has been passed by Parliament and notified in the gazette on 30. The Act has been brought into force from .1999. A law called the Designs Act. This Agreement.2000 relating to Industrial Designs which repeals and replaces the earliar Designs Act. 1999 has also been passed by the Parliament and notified on 30.12. It lays down minimum standards for protection and enforcement of Intellectual Property Rights in member countries. 1961 | Payment of Gratuity Act. 1972 | Factories Act. 1911 has also been passed by Parliament in its Budget Session.Central & State Governments are competent to enact legislation subject to certain matters being reserved for the Centre. 1986 | Mines Act. 2000. 1948 Dock Workers (Safety. which came into force from 1st January 1995. which are applicable for carrying out business in India are: Employees’ Provident Fund and Miscellaneous Provisions Act. 1948 Workmen’s Compensation Act.. inter-alia. 1972 | Minimum Wages Act | Payment of Bonus Act 1965 Contract Labour [Ragulation & Abolition] Act 1970 |Payment of Wages Act. 1952 | Employees’ State Insurance Act.

1999 and the Bill was passed by Parliament on 14. 1970 was introduced in Rajya Sabha on 20. many of them are offering incentive packages in the form of various tax concessions.12.2001.2002. Single Window System is now in existence in most of the States for granting approval for setting up industrial units. reduced power tariff. with a view to attract foreign investors in their states.11. nodal officers can be contacted.4 Trade off between growth and inflation: . FIIA is assisted by Fast Track Committee (FTC). capital and interest subsidies. Senior officers of the Department have been designated Nodal Officers for specific states for follow up of FDI cases and to bring to notice of FIIA any difficulties in implementation. help them obtain necessary approvals and by sorting their operational problems. States are also partners in the economic reforms being undertaken in the country.05. Q. In case of any difficulties. Most of the States are making serious efforts for simplifying the rules and procedures for setting up and operating the industrial units. A Bill on Patents to amend the Patents Act. which have been established in 30 Ministries/Departments of Government of India for monitoring and resolution of difficulties for sector specific projects. Moreover. The specific website addresses containing the incentive packages offered by various states/UTs are given in the List. Foreign Investment Implementation Authority (FIIA) Government of India has set up Foreign Investment Implementation Authority (FIIA) to facilitate quick translation of Foreign Direct Investment (FDI) approvals into implementation by providing a pro-active one stop after care service to foreign investors.05. etc. Incentives offered by States India is a federal country consisting of States and Union Territories.

the trade-off between growth and inflation worsens – an increase in AD tends to lead to higher prices rather than increased output and employment. Between 2% and 4%. But when SRAS becomes inelastic. Two percent doesn’t mean price stability. For example. this growth-inflation trade-off is always an interesting empirical question. We would have had to rely less on fiscal policy. this proposal was thrashed by most central banks/economists and some even called it the worst suggestion they have heard.Sustained growth caused by rising aggregate demand can lead to acceleration in inflation as the economy uses up scarce resources and short run aggregate supply becomes inelastic. an outward shift of aggregate demand can easily be met by a rise in real GDP (there is plenty of spare capacity and supply responds elastically to the higher level of AD). The only way to get there is higher inflation. that would have helped. An outward shift in LRAS means that the economy can meet a higher level of aggregate demand without putting upward pressure on the general price level Now we realize that if we had a few hundred extra basis points to rely on. The trade off between growth and inflation can be avoided if an economy is able to increase potential output by improving their supply-side performance. Policy makers have generally chosen a 2% (inflation rate target). As expected. LRAS can be increased by achieving sustained improvements in productivity. there isn’t much cost from inflation. advances in technology and the benefits that come from product and process innovations. Anyways. When SRAS is elastic. So it would have been good to start with a higher nominal rate. How much inflation can an economy tolerate? After what level of inflation does growth start to decline? Another set of IMF economists have released a paper looking at this relationship. Research on the inflation-growth nexus have addressed three key questions: (i) is there a robust negative relationship between inflation and growth? (ii) is there a ―kink‖ in the relationship such . Potential output is also increased by expanding the stock of capital goods (via higher investment) and through an increase in the available labour supply. But there was no very good reason to use 2% rather than 4%.

that at very low levels of inflation the relationship is positive (perhaps due to Phillips curve effects). Q. wars. the threshold is much lower. Nevertheless. The effect of higher inflation for oil producers is also stronger than for the rest of the countries. international and multinational company: . even after controlling for fiscal performance. and even human and physical capital. Measuring the threshold level of inflation in a cross-country framework runs the risk of being influenced by extreme values since samples typically include countries with inflation as low as 1 per cent and as high as 200 per cent. we estimate that for emerging market economies inflation above a threshold of about 10 percent quickly becomes harmful to growth. The findings are: Using a panel of 165 countries covering the period 1960–2007. allowing the incorporation of country specific characteristics. and the data rarely cover more than 40 years. since the relationship between inflation and growth is likely to be stronger at low frequencies. Ideally. droughts.5 Difference between a global. the estimates are less robust (there are two potential modes for the bootstrapping distribution. Empirical studies have found a significant statistical relationship between inflation and growth. For India some studies have shown it is around 5-7%. transnational. and allowing for simultaneity bias. inflation thresholds should be estimated for each country separately. tolerable) beyond which inflation has a negative effect on growth. The authors point to number of empirical studies. population growth. In this paper authors increase the number of countries. the literature has mostly relied on panel techniques. suggesting the need for a prompt policy response to inflation at or above that threshold. reflecting some heterogeneity among oil producers). For oil exporting countries. For the advanced economies. but at higher levels of inflation the relationship is negative? and (iii) does inflation have to reach some minimum ―threshold‖ before the growth effects become serious? A starting point to answering these questions is the identification of the threshold optimal. openness. but we estimate the threshold to be again about 10 percent.

They have invested in foreign operations. have a central corporate facility but give decision-making. * Transnational companies are much more complex organizations. * Multinational companies have investment in other countries. R&D and marketing powers to each individual foreign market. More focused on adapting their products and service to each individual local market. Emphasis on volume. They market their products through the use of the same coordinated image/brand in all markets. they have no investment outside of their home country. . cost management and efficiency.* International companies are importers and exporters. * Global companies have invested and are present in many countries. Generally one corporate office that is responsible for global strategy. but do not have coordinated product offerings in each country.

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