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4.2.3 India: The Steady Progress of a Democratic State

Deregulation in India began in 1980 when Indira Gandhi became the prime minister. The automotive and electronics sectors were pioneers in this deregulation. Suzuki used it as a chance to acquire a leg-up in the market, creating the Maruti Suzuki joint venture with the state-owned Maruti Udyog Limited. However, at the start of the 1980s, economic liberalization policies had not been fully put in place and, other than Suzuki in 1982, no other expansion into India's passenger vehicle market by foreign firms was allowed. While Toyota, Mazda, Mitsubishi, and Nissan formed joint ventures and technological alliances in the commercial vehicle market in India, their results were poor and they were forced to exit the market.

In addition, deregulation in the 1980s was done in an extremely closed market, with extraordinarily strict regulations on trade. The tariffs were high and limits were placed on import volumes. All imports of consumer goods were forbidden; imports of capital goods, raw materials, and work-in-process goods were sometimes allowed, but import licenses were required for any goods that could be manufactured domestically.

In the latter half of the 1980s, India fell into budget deficits and received assistance from the IMF and World Bank. From early 1990s, India worked to rebuild the country by implementing new economic policies. The country first improved its trade system, aiming to liberalize trade by gradually abolishing import licenses and reducing tariffs. Further, authorization for direct foreign investment, while varying by industry, was granted automatically to a certain extent, and the time it took to obtain authorization shortened. It was in this period that DaimlerChrysler, GM, and Ford as well as Japanese automakers' direct investment in India grew rapidly. At the same time, investors from foreign institutions were allowed to trade shares of public companies.

However, the Indian government did not begin its full-scale analysis to entice foreign capital until after the year 2000. India had a strong aversion to foreign capital because of its days under the British colonial rule, and the deregulation of foreign investment was only gradually accomplished. A major turning point in India on foreign capital regulation occurred in 2002 when the Indian government's Department of Commerce changed the theretofore one-off approval system for direct investment into a “negative” system. In doing so, industries not on a government list were automatically granted investment approval. In addition, industries such as electric transmission, financial services, and real estate were deregulated in 2005. The aggressive investment by foreign firms that occurred beginning in 2005 was because of policy measures that were put in place in India at that time.

Further, India enacted an Economic Zone Law in 2005, and as a result, hundreds of plans for construction are said to currently exist throughout the country. These economic zones have the aim of spurring exports and consist of many wholly owned subsidiaries of foreign concerns across a range of industries. The companies in the economic zones enjoy preferential treatment under the tax system. However, despite having received permission to do so, only a portion of the zones have undertaken construction, with many unable to establish construction plans because of local resistance.

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