1991 Indian Economic Liberalization

After gaining independence from the British in 1947, the Indian government adopted a protectionist policy of strict control over the economy that left no room for innovative ventures . A mere 55 years later, the rest of the world is watching in marvel as India has transformed its closed-door model of self-sustenance into an economy fostering rapid developments and entrepreneurial endeavors in the technology sectors.

Shifts in the Indian economy began after the election of Rajiv Gandhi in 1984, when India's protectionist policies gave way to a new focus on opening up the economy for emerging IT and software- related industries. Soon after Gandhi took office, the government began to liberalize the computer and software industries and, in 1986, Texas Instruments received permission to establish a 100% foreign-owned subsidiary in India. This led to the influx of numerous MNC investments in India, with over 2000 ^[1] global IT companies involved in the Indian IT industry today.

India's economic crisis began in 1991, when it faced a foreign debt emergency that made international loans for the country less available. The World Bank recommended significant economic reforms in India, which the government followed with a mass liberalization of the economy to open up the Indian market. These liberalization efforts included a complete overhaul of foreign investment regulations, a simplification of existing tax policies and the introduction of significant new tax incentives in key sectors in need of development, such as building infrastructure. This led to the entry of MNCs that began to invest in specific innovative regions in India that comprise vibrant centers of IT development today.

Some of the key MNCs investing in India include IBM, whose Global Services in Bangalore include a 10-year outsourcing project for applications development, enhancement, and maintenance; Sun Microsystems, which has identified India as one of its top five locations, with the potential to create in excess of $1 billion over the next five years, and plans to expand its Indian working force from 400 to 4,000 in this period; and Intel, which has committed a $25 million investment and plans to expand its engineering staff by 50%. ^[2]

The investments brought in by these large MNCs are creating urban conglomerates of concentrated high-tech activities in India. In addition to the task of generating wealth within their own localities, these IT clusters have the added responsibility of fostering wealth in surrounding second- and third- tier regions, such as Mysore and Mangalore around Bangalore. In a developing nation like India, these regions have the potential to not only strengthen their distinct clusters, but also to diffuse wealth in specialized zones nearby that lack the negative burdens of their high-tech counterparts, like high costs of living, pollution, traffic congestion, and overpopulation.

The Indian economy is also currently benefiting from policy reforms made in the 1980s that opened up opportunities for a software export industry based on "body shopping" (migration of programmers to client sites) in the U.S. This growth in the IT industry has branded India as an important destination for large investments from MNCs that are seeking to outsource their software needs. NASSCOM (India's National Association of Software and Services Companies) is the unified voice lobbying collectively ” and effectively ” to promote the Indian IT industry both in India and abroad. Founded in 1988 with 38 members, by 1999 its 464 members represented 95% of Indian software industry revenues . ^[3] NASSCOM estimates that offshore outsourcing by MNCs will grow 23% during 2002, as companies rapidly seek to establish a presence in the Indian software export industry. ^[4] A significant chunk of India's software export revenues, 15%, ^[5] stems from accounts with MNCs. Thus, India is aggressively seeking to develop its competitive edge in this industry.

Under the new liberalization measures of the economy in 1991, India has become attractive for direct foreign investment. Since this process of economic reforms began, tax rates are on par with those of developed nations and shifts toward favorable economic policies, combined with an awakening of government support, are establishing India as a competitive destination for international companies expanding their global IT operations. While the country is catching up on much-needed developments in infrastructure and government policies necessary to support a thriving high-technology industry, specific IT clusters like Bangalore are leading the way with examples of conducive interactions between government, industry, and educational bodies for the sustainable growth of IT in India.