FALLSEM2015-16_CP0925_23-Jul-2015_RM01_Role-of-Multinational-Corporations-in-the-Indian-Economy - Role of Multinational Corporations in the Indian

FALLSEM2015-16_CP0925_23-Jul-2015_RM01_Role-of-Multinational-Corporations-in-the-Indian-Economy

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Role of Multinational Corporations in the Indian Economy: Prior to 1991 Multinational companies did not play much role in the Indian economy. In the pre- reform period the Indian economy was dominated by public enterprises. To prevent concentration of economic power industrial policy 1956 did not allow the private firms to grow in size beyond a point. By definition multinational companies were quite big and operate in several countries. While multinational companies played a significant role in the promotion of growth and trade in South-East Asian countries they did not play much role in the Indian economy where import- substitution development strategy was followed. Since 1991 with the adoption of industrial policy of liberalisation and privatization rote of private foreign capital has been recognised as important for rapid growth of the Indian economy. Since source of bulk of foreign capital and investment are Multinational Corporation, they have been allowed to operate in the Indian economy subject to some regulations. The following are the important reasons for this change in policy towards multinational companies in the post- reform period. 1. Promotion of Foreign Investment: In the recent years, external assistance to developing countries has been declining. This is because the donor developed countries have not been willing to part with a larger proportion of their GDP as assistance to developing countries. MNCs can bridge the gap between the requirements of foreign capital for increasing foreign investment in India. The liberalised foreign investment pursued since 1991, allows MNCs to make investment in India subject to different ceilings fixed for different industries or projects. However, in some industries 100 per cent export-oriented units (EOUs) can be set up. It may be noted, like domestic investment, foreign investment has also a multiplier effect on income and employment in a country.
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For example, the effect of Suzuki firm’s investment in Maruti Udyog manufacturing cars is not confined to income and employment for the workers and employees of Maruti Udyog but goes beyond that. Many workers are employed in dealer firms who sell Maruti cars. Moreover, many intermediate goods are supplied by Indian suppliers to Maruti Udyog and for this many workers are employed by them to manufacture various parts and components used in Maruti cars. Thus their incomes also go up by investment by a Japanese multinational in Maruti Udyog Limited in India. 2. Non-Debt Creating Capital inflows: In pre-reform period in India when foreign direct investment by MNCs was discouraged, we relied heavily on external commercial borrowing (ECB) which was of debt-creating capital inflows. This raised the burden of external debt and debt service payments reached the alarming figure of 35 per cent of our current account receipts.
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