Globalization and the Indian Economy

GLOBALIZATION AND THE INDIAN ECONOMY- REFORMATORY MEASURES UNDERTAKEN BY THE STATE

                                     Globalization literally translates into the transformation of local and regional phenomena into global ones. It involves such processes wherein nations and people across the world are unified into a global community popularly known as the ‘global village’. Though, globalization entails a combination of several economic, technological, socio-cultural and political forces, in the modern world it is largely referred to in terms of economic globalization.

 It may thus be explained in economic terms as the integration of domestic economies into the world economy with the help of free-trade agreements, foreign investments, removal of trade and tariff barriers across borders, etc. The United Nations ESCWA has accordingly written that globalization “is a widely-used term that can be defined in a number of different ways. When used in an economic context, it refers to the reduction and removal of barriers between national borders in order to facilitate the flow of goods, capital, services and labour...”

Modern Day Globalization is mainly based on the philosophy of ‘Internationalism’. Internationalism may be defined as ‘a political movement that advocates a greater economic and political cooperation among nations for the theoretical benefit of all.’ Supporters of this doctrine call for the creation of a world body and the concept of world citizenship. Globalization has its foundation in the economic perspective of internationalism which envisages the creation of a global economic community guided by principles of increasing economic cooperation amongst nations. This broadly involves international trade, international finance, international macro and monetary economics. International trade refers to exchange of capital, goods, and services across international borders or territories. Industrialization, Globalization, Multinational and Transnational Corporations, Outsourcing, etc have added to the system of international trade. International finance on the other hand is the branch of economics that studies the dynamics of exchange rates, foreign investment, and how these affect international trade.  These two form a part of International Economics and are important facets of the theory of globalization. 

                                 Globalization was thus a result of planning by several political leaders especially after the IInd World War to unite the world community on the grounds of internationalism based on economic unity of nations. This was particularly reflected in the Bretton Woods Conference wherein world politicians laid down the foundations of international trade and commerce by the setting up of institutions like the World Bank and the International Monetary Fund (IMF). Since then, globalization has been encouraged with the help of several free-trade agreements amongst nations as under the General Agreement on Tariffs and Trade (GATT). These agreements include the reduction or elimination of tarrifs, creation of free-trade zones with minimal or no tariffs, reduction in transportation costs, reduction in capital controls, harmonization of subsidies for local businesses and creation of subsidies for global corporations, harmonization of intellectual property laws, etc. The Uruguay Round which led to the creation of the World Trade Organisation, a body to help in mediation of trade disputes and creation of a uniform trading system, the Maastricht Treaty in Europe and North American Free-Trade Agreement (NAFTA) are other agreements which may be seen as landmarks in international economics and trade.

   

                           

                                   Globalization in the Indian scenario mainly emerged as a result of the financial crisis of the early ninetees. But, never the less it becomes imperative to look into the economic policies of the Indian government post independence so as to be able to perfectly understand the importance of globalization in the Indian economy. Tracing the history of the policies of the Government of India on international trade and investment reveals much about the globalization process in India. The policies of the government were greatly influenced by the colonial experience which initially made them develop a somewhat hostile attitude towards foreign trade even though the first industrial policy of 1948 assured foreign investors of unrestricted remittances of profits and dividends and treated them at par with their Indian counterparts. Based on the principles of socialist pattern of society as envisaged in the Constitution of India, the Government of India decided to work towards the creation of a ‘mixed economy’ with a greater involvement and prevalence of the public sector.

 The Industrial policy, 1956 further strengthened this position and strategic industries were reserved for the public sector. Foreign concerns were denied access into the same. But, they were treated at par with the local companies on other grounds. They were also given several incentives and concessions by the Government. The second five year plan popularly known as the Mahalanobis plan after its architect, P.C. Mahalanobis further affirmed the role of state regulation and involvement in the national economy. This plan spelt out the increased role of the state in the following terms- “The pattern of development and the structure of socio-economic relations should be so planned that they result not only in appreciable increases in national income and employment but also in greater equality in incomes and wealth. Major decisions regarding production, distribution, consumption and investment – and in fact all significant socio-economic relationships – must be made by agencies informed by social purpose.”

Then came the Foreign Exchange Regulation Act, 1973 which laid down that all foreign companies that owned more than 40% equity in their Indian operations were required to get the permission of Reserve Bank of India to continue their business in India. The law required the foreign firms to include local participation in the equity of foreign companies in India. With this act, foreign companies were treated on par with Monopolies and Restrictive Trade Practices (MRTP) companies. The foreign companies also had to meet the export obligations under Industrial Licensing Guidelines, 1970 for MRTP companies. The Industrial Policy Statement, 1977 then announced the relaxation in remittances of profits, royalties, dividends and repatriation of capital of foreign companies.

 The Industrial Policy of 1980 somewhat relaxed the system and steadily brought in an era of liberalization in the Indian economy. Industrial licensing was streamlined and made easier. Provisions in MRTP Acts were modified to simplify business transactions. Export-Import norms were also changed. The number of items under the Open General License were increased which meant greater liberalization on the export and import of items to and from India.

                                   But, then the Indian economy faced a major blow in the form of the financial crisis of 1991. Its foreign exchange reserve had reached to rock bottom. There were high fiscal and current account deficits, heavy external borrowing from the IMF and the World Bank to finance such deficits, rising debt service obligations, rising inflation, and inadequate exchange rate adjustment. The deficit had reached upto 9.4% of the GDP by 1990-91. The oil shock and increased expenditures on defense worsened the situation. The acute economic crisis even made us go to the extent of mortgaging the country’s gold in the Bank of England. Inflation was as high as 17% as on August 1, 1991. There was steady depreciation in the value of the rupee. Foreign exchange reserves had fallen to a meager 1.2 billion dollars in 1991-92.

 Fiscal imbalances in India, which assumed serious proportions since the mid 1980s, had two important facets. First, the outpacing of the rate of growth of revenues by the expenditure growth considerably reduced the resources available for public investment in the economy. The increasing use of borrowed funds to meet current expenditures rendered the latter self-propelling. Second, the increasing diversion of household savings to meet public consumption requirements not only resulted in the expansion of public debt to unsustainable levels, but also reduced the resources available for private investment. Alongwith that, the external debt, inclusive of non-resident Indian (NRI) deposits, rose from 12 percent of GDP at the end of 1980-81 to 23 percent of GDP at the end of 1990-91. This external debt started dominating the Balance Sheet peaking at 38.7% of the GDP in 1991-92. Consequently, the debt service burden rose from 10 percent of current account receipts and 15 percent of export earnings in 1980-81 to 22 percent of current account receipts and 30 percent of export earnings in 1990-91.

 The Gulf crisis, global recession and political instability in the country owing to communal violence after the Ayodhya episode added to the already existing problems.

                                  The new Congress Government headed by P.V. Narasimha Rao realized the importance of liberalizing the economy so as to save it from the crisis. Pressure also began to build up from the IMF and other world financial institutions who agreed to advance loans only if India liberalized her foreign policy and opened up her markets to international players.

 The New Economic Policy of 1991 thus came into place which introduced the concepts of liberalization and globalization into Indian economics. Some of the important reforms introduced included launching of reform of major taxes, devaluation of the rupee, phased reduction of import licensing and peak customs duties, policies to encourage direct and portfolio foreign investment, building up of foreign exchange reserves, switch from a fixed exchange rate regime operating in an environment of restrictive trade policy to a market-determined exchange rate operating in an environment of liberalized trade, more remunerative procurement prices for cereals, reduction in protection to the manufacturing sector, amendment of the FERA to reduce restrictions on firms, virtual abolition of industrial licensing and abolition of the Monopolies and Restrictive Trade Practices (MRTP) Act, reduction in industries reserved for the foreign sector, greater access to foreign technology, phasing in of Basle prudential norms, gradual freeing up of interest rates, reduction of reserve requirements in bank notably those of the Cash Reserve Ratio(CRR) and the Statutory Liquidity Ratio(SLR), establishment of the Securities and Exchange Board of India(SEBI) and the National Stock Exchange(NSE), abolition of government control over capital issues, reduction of the peak customs tariff from over 300 per cent prior to reforms, to the 30 per cent rate that applies now, cautious and gradual restructuring of the capital account, wide-ranging financial sector reforms in the banking, capital markets, and insurance sectors, including the deregulation of interest rates, strong regulation and supervisory systems, and the introduction of foreign or private sector competition, disinvestment of sick public sector units, greater accountability for public enterprises, etc.

 This policy of the Indian Government was further supported by the 500 million dollar ‘Structural Adjustment Operation’ of the World Bank. This was complemented by an IMF supported stabilization programme. The objective was to help India out of the financial crisis and liberalize the Indian economy for foreign investors and private entrepreneurs keeping in mind the Indian political democracy. All abovementioned measures were then gradually undertaken under the auspices of this programme.

                        The operational strategies of the Indian Government could thus be broadly divided into (i) stabilization measures, (ii) adjustment measures and (iii) complementary social measures. The abovementioned steps taken came within the ambit of the first two categories. The third category dealt with social spending. It was said that even though there was a reduction in economic spending, there was no reduction as such in social spending.

 Several welfare programmes with respect to poverty alleviation, the Public Distribution System, etc were undertaken by the Government to ensure that the new economic policies introduced did not in any way hamper the benefits and amenities provided to citizens. Infact, the eighth five year plan also emphasized on the need for state monitoring and regulation with respect to the new policies and the additional responsibility of the state to provide security. This led to what may be called as the Socially Responsible Market Economy (SRME) development paradigm in India. This stands for a competitive market but calls for state regulation at the same time in order to protect the consumer from government as well as market excesses. It calls for maximization of interests of consumers while satisfying and reconciling the claims of  economic players. It operates largely on a system of incentives and disincentives. This system thus seeks to reorient the role of State and planning through public sector and joint sector economic and social activities, infrastructural development, target employment generation, eradication of poverty, etc.

 According to this, the role of the State would be strengthened by enforcement of private contracts, controlling trade practices, external and internal security, etc. Thus, it stands for a greater role being played by the State in the wake of the new reforms so as to protect the interests of the people in a liberalized market.

                                  A major breakthrough made during this period was the coming in of the eighth five year plan(1992-97) which laid down the basic foundation of a liberalized economy in India. This plan stressed on the need for reliance on domestic sources for investment and availing of global facilities and advanced technology at the same time.

 The main objectives of the Eighth Five Year Plan India were

to prioritize the specific sectors which requires immediate investment 

to generate full scale employment 

to promote social welfare measures like improved healthcare, sanitation, communication and provision for extensive education facilities at all levels 

to check the increasing population growth by creating mass awareness programs 

to encourage growth and diversification of agriculture 

to achieve self-reliance in food and produce surpluses for increase in exports 

to strengthen the infrastructural facilities like energy, power, irrigation 

to increase the technical capacities for developed science and technology 

to modernize Indian economy and build up a competitive efficiency in order to participate in the global developments 

to place greater emphasis on role of private initiative in the development of the industrial sector 

to involve the public sector to focus on only strategic, high-tech and essential infrastructural developments 

to create opportunities for the general people to get involved in various developmental activities by building and strengthening mass institutions 

                                 Several measures were undertaken to implement the same. The public sector was to be withdrawn from several areas where it was making losses or where no ‘public purpose’ was said to be served due to its presence. Thus, this led to the opening up of doors for the private and foreign players to venture into such arena. It also emphasized the role of the Planning Commission and said that the same needs to undergo a change. The Planning Commission’s job was not to be mere allocation of resources but it was to focus its attention on the effective implementation of its plans. Planning and market mechanism were regarded as being complementary to each other. The plan also talked of partial convertibility of the rupee on the current account. It introduced a new Export-Import(EXIM) Policy which specified certain negative lists of exports and imports which included such goods or products which were either banned to be exchanged or required a license. It also introduced a set of incentives for exports and there was lowering of the customs tariff rates. The Government also liberalized capital flow in the form of Foreign Direct Investment. Now there was to be greater foreign collaboration and foreign equity participation upto 51% in 31 key areas. The FERA norms were liberalized and at the same time, the Government also undertook to monitor the foreign investment in the country. Privatization was encouraged and several unviable public sector undertakings were now privatized. Later, the Board of Industrial and Financial Reconstruction (BIFR) was established and was assigned with the responsibility of hearing cases that apply for being declared sick and deciding whether or not the unit deserves to be termed "sick." The BIFR is also the authority that must approve takeover of a sick unit.

                                  Gradually, certain other measures and policies were introduced in the forthcoming years. This includes the Trade and Investment Policies, 1994-95. In pursuance of the same, India signed the agreement on trade related investment measures during the Uruguay round of negotiations of the GATT in 1994 which forced her to do away with protection of Indian industry from severe global competitions within five years.

 Of the 13 investment measures that were identified to distort global trade, India has been using as many as eleven of the measures to meet the myriad needs of social and economic development of the country. Custom duties on imports were steadily brought down with respect to the Industrial Licensing Policy, 1991. Subsequently, in January 1995, as a founder member of the GATT, India joined the World Trade Organisation and agreed to stand by the regulatory framework of free global trade and competition.

                                 In 1999, the Foreign Exchange Management Act (FEMA) replaced the FERA, 1973 that regulated all foreign exchange transactions. The objectives of FEMA have been to facilitate external trade and payments and to promote orderly development and maintenance of foreign exchange market. All residents can now put foreign exchange on current account transaction through an authorized dealer. Foreign firms also qualify for this under the resident status. But other than sectors like banking, Non-Banking Finanacial Corporations, civil aviation, petroleum, real estate, venture capital funds, investing companies in infrastructure and service sector, atomic energy, defense, agriculture and plantation, print media, broadcasting and postal services, automatic approval of FDI is allowed in all other sectors. The role of Reserve Bank of India and secretariat of Industrial Assistance has become more that of a facilitator. 

                                    The results of this process of reforms could be seen in the forthcoming years. The real GDP in 1990s increased at an annual rate of 6% which was quite impressive because the rest of the world was going through a minor recession. A very high increase in real GDP was subsequently experienced in 1996-1997 with 7.8%.  Increased production had its effect on the prices. Average inflation rate of 13.6 percent in 1991 was reduced to 1.3 percent in 2001-2002, a remarkable achievement by any standard. Foreign capital inflows increased from around 100 million dollars in 1990-91 to

5 billion dollars in 2000-01. Foreign Direct Investment soared from less than 100 million dollars in 1990-91 to 2.3 billion dollars in 2000-01. The current account deficit has hovered at less than 1 per cent of GDP in recent years. Foreign exchange reserves currently stand at more than 54 billion dollars. These were less than 1 billion dollars during the 1990–91 balance of payments crisis. The composition of debt is also favourable. Short-term debt amounts to 3.5 per cent of external debt and concessional debt amounts to 36.5 per cent of total debt. The external debt burden looks sustainable according to a range of measures of indebtedness. Both debt service payments as a proportion of current receipts, and the external debt-to-GDP ratio have been falling steadily during the 1990s, and currently stand at around 17 per cent and 22 per cent, respectively.

                                  Thus, the Indian experience gives us a proper idea of the importance of globalization in the modern era. Globalization has not only cut down on trade barriers between nations of the world but has also led to several other benefits. It has increased employment opportunities with the coming in of multinational and transnational corporations. Foreign investment has generated benefits and profits which have helped accelerated economic growth and added to the national income. It has also brought about provision of better facilities and greater quality of services to the people of the world in general by way of effective competition. There has also been transfer of better technology and labour across borders.

 None the less, globalization has been criticized as being a system which has led to the destruction of domestic initiative and indigenous industries. The multinationals and transnational corporations have been accused of practicing economic imperialism and targeting domestic economies. Also, it has been said that globalization has largely benefited only developed economies like those of the United States of America, the European Union countries, the oil-producing Gulf countries and advanced Asian nations like Japan. It has not really promoted the interests of the least developed and developing nations of Africa, Asia and South America. The products and services provided by these nations are virtually not being accepted into the world market and they face tremendous competition from the developed nations. Reforms introduces have largely been advantageous to the developed world and the World Trade Organization and the International Monetary Fund are alleged to have been practicing policies which cater to the needs of the advanced nations, something now being referred to as a kind of ‘economic terrorism’ of the North bloc on the South bloc by critics.

 This brings us to the conclusion that globalization alone is not the solution to the problem. Controlled trade policies is what must be stressed on. No nation must be allowed to infringe upon the rights of other nations to trade freely in the world market. Greater concessions must be given to products of the developing nations so that they may develop themselves to the fullest. At the same time quality of goods available and efficiency of services provided must not be compromised. The developed nations must allow developing nations access into their markets and third world dumping must be discouraged. This has become all the more important in the modern era particularly after the Iraq war and the economic recession which the world is facing today.

 This problem calls for global cooperation and greater participation by world economies. Also, the WTO and IMF must play a supportive role in the entire process and must lay down such norms which help minimize the problem. They must devise such standards for international trade and development which are in accordance with the national conditions of every nation rather than forcing such a system of regulations on them which is impracticable for them to adapt to in the present as well as in the future. 

 

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Prithvi 
on 09 August 2010
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