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 preventconcentration of economic power industrial policy 1956 did not allow the private firms to growin size beyond a point. By definition multinational companies were quite big and operate inseveral countries.While multinational companies played a significant role in the promotion of growth and trade inSouth-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 industrialpolicy of liberalisation and privatization rote of private foreign capital has been recognised asimportant for rapid growth of the Indian economy.Since source of bulk of foreign capital and investment are Multinational Corporation, they havebeen allowed to operate in the Indian economy subject to some regulations. The following arethe 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 isbecause the donor developed countries have not been willing to part with a larger proportion oftheir GDP as assistance to developing countries. MNCs can bridge the gap between therequirements of foreign capital for increasing foreign investment in India.The liberalised foreign investment pursued since 1991, allows MNCs to make investment inIndia subject to different ceilings fixed for different industries or projects. However, in someindustries 100 per cent export-oriented units (EOUs) can be set up. It may be noted, likedomestic investment, foreign investment has also a multiplier effect on income and employmentin a country.
For example, the effect of Suzuki firm’s investment in Maruti Udyog manufacturing cars is notconfined to income and employment for the workers and employees of Maruti Udyog but goesbeyond 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 forthis many workers are employed by them to manufacture various parts and components used inMaruti cars. Thus their incomes also go up by investment by a Japanese multinational in MarutiUdyog Limited in India.2. Non-Debt Creating Capital inflows:In pre-reform period in India when foreign direct investment by MNCs was discouraged, werelied heavily on external commercial borrowing (ECB) which was of debt-creating capitalinflows. This raised the burden of external debt and debt service payments reached the alarmingfigure of 35 per cent of our current account receipts.