INTERNATIONAL TRADE AND

FINANCE ASSIGNMENT

Topic: Globalization

Submitted by:
Taiyeba Noor Fatima
B.A LL.B(Hons.) S/F
5th Sem
Roll No.-57
Acknowledgment
I Taiyeba Noor Fatima would like to express my special thanks of gratitude to my teacher Mr.

Gaurav Sir who gave me the golden opportunity to present the project on the topic

‘Globalization’ which also helped me in doing a lot of Research and I came to know about so

many new things I am really thankful to him. Secondly I would also like to thank my parents and

friends who helped me a lot in finalizing this assignment within the limited time frame.
 References

 Essentials of business environment (seventh edition), author; k.Aswathappa,

Himalya publishing house.
 http://en.wikipedia.org/wiki/File:BPL_Data_GOI.png
 http://mpra.ub.uni-muenchen.de/9597/
MPRA Paper No. 9597 posted 10. August 2008 / 11:49
 General economics, The institute of charted accountants of India.
Definition of Globalisation
Globalisation can be defined in the following manner:

Globalisation may be defined as a primarily economic phenomenon, which involves increasing

interaction and integration of national economic systems. This leads in turn to growth in
international trade, investment and capital flows. Moreover, there is a rapid increase in cross-
border social, cultural and technological exchanges because of the phenomenon of globalization

In simple economic terms Globalisation is a process of linking the economy of a country with the
economy of the world more and more.

Meaning of Globalisation
It is a process which draws countries out of their insulation and makes them join rest of the world
in its march towards a new world economic order. It involves increasing interaction among
national economic systems, more integrated financial markets ,economies of trade, higher factor
mobility, free flow of technology and spread of knowledge throughout the world.
The World Bank defines globalisation as “Freedom and ability of individuals and firms to initiate
voluntary economic transactions with residents of other countries”.

The International Monetary Fund (IMF) defines as “the growing economic interdependence of
countries worldwide through increasing volume and variety of cross-border transactions in goods
and services, freer international capital flows, and more rapid and widespread diffusion of
technology”.
In the words of Jagdish Bhagwati “Economic Globalization constitutes integration of national
economies into the international economy through trade, direct foreign investment (by
corporations and multinationals),short term capital flows, international flows of workers and
humanity generally, and flows of technology”.

In a broad sense, the term ‘globalisation’ refers to integration of

Economies and societies through cross country flows of information, ideas, technologies, goods,
Services, capital, finance and people.

India and Globalisation

In the Indian context ,it implies opening up of the economy to foreign direct investments by
providing requisites facilities, removing administrative and other constraints, allowing Indian
companies to enter into joint ventures and foreign collaborations, bringing down quantities and
non-quantities restrictions to trade, diluting the role of public sector and encouraging
privatization and so on.beggining haltingly in 1980s, Globalization got the real thrust from the
new economic policy of 1991 and it was further pushed forward by the coming up of the World
Trade Organisation(WTO). Globalization would eventually mean being able to manufacture in
the most cost effective way anywhere in the world. It aims at integrating the world into one
global village.

As a result of Globalisation efforts taken by India we find all types of goods available here.

For example, Reebok-T shirts, Rayben sunglasses, Coca-cola and pepsi, Armani’s shirt, apple’s
iPods etc. have flooded the Indian market.

Need For Globalisation:

India’s experience in globalisation could be divided in to two phases.
The first phase of economic liberalisation began in 1981, under pressure from the International
Monetary Fund andthe World Bank. During this phase, India received the U.S. $5 billion loan
that was conditionalon an ‘adjustment programme’ from the IMF.
The second phase of globalisation began in 1991 where the economic measures initiated were
based on the World Bank’s Structural Adjustment Programme (SAP) designed to restructure the
economy However, India’s entry into globalisation is relatively later than most of other third
world countries
After Independence, India followed the policy of planned growth and for this it pursued
conservative policies. The public sector was given dominant position and was made the main
instrument for growth. The fiscal policy was framed in a way that it mobilized resources from
the private sector to finance development programme and public investment in infrastructure.
Similarly monetary policy sought to regulate financial flows in accordance with the needs of the
industrial sector and to keep the inflation under control.
Foreign trade policy was formulated to protect domestic industry and keep trade balance in
manageable limits.

These conservative policies continued for decades, but it was noticed as early as in 1980s that
there was:

 Excess of consumption and expenditure over revenue resulting in heavy government

borrowings;
 Growing inefficiency in the use of resources;
 Over protection to industry;
 Mismanagement of firms and the economy;
 Mounting losses of public sector enterprises;
 Various distortions like poor technological development and shortage of foreign
exchange; and imprudent borrowings from abroad and mismanagement of foreign
exchange reserves.

Realizing these drawbacks, economic reforms were set in motion though on a modest scale in
1985.however, measures undertaken were ad-hoc, half-hearted and non serious.

Following were the sign of crisis;

Which began to manifest themselves in 1991, these were Low Foreign Exchange, Inflation etc.
New Economic Policy -1991
Liberalisation: In general, liberalisation refers to relaxation of previous government
restrictions usually in areas of social and economic policies. Thus, when government liberalises
trade it means it has removed the tariff, subsidies and other restrictions on the flow of goods and
services between countries

Thus in the process of liberalization:

 Restrictions and controls of economy are gradually reduced.

 As a result, economy is liberated from government interference.
 Economic decisions are taken by the market system.

Privatisation: In general, privatisation refers to the transfer of asset or services functions from
public to private ownership or control and the opening of hitherto closed areas of private sector
entry. Privatization can be achieved in many ways –franchising, leasing, contracting and
divesture.

Globalisation: Globalisation as explained earlier, means integrating the domestic economy

with the world economy.

Measures taken towards Globalisation

To pursue the objective of Globalisation, the following measures have been taken:

Convertibility of rupee: The most important measure for integrating the economy of any
country is to make its currency fully convertible.ie, allow it to determine its own exchange rate in
the international market without any official interventions.

India achieved full convertibility on current account in August, 1994.

Current account convertibility means freedom to buy or sell foreign exchange for the following
transactions:

 All payments due in connection with foreign trade, other current account
business, including services and normal short term banking and credit facilities,
 Payment due as interest on loans and as net income from other investments
 Payment of moderate amount of ammortisation of loans or for depreciation of
direct investment and
 Moderate remittances for family living expenses

Certain steps towards full convertibility on capital account have also been taken like authorized
dealer have been allowed to invest abroad their unimpaired Tier1 capital, they have been
delegated powers to release exchange for opening of offices abroad, banks fulfilling certain
criteria have been permitted to import gold for release in India. Resident individuals and listed
companies have been permitted to invest in overseas companies listed on a recognized stock
exchange, limit on banks investment from/in overseas market has been raised , Indian companies
are allowed to access ADR/GDR markets through an automatic route, Indian companies with a
proven track record are allowed to invest up to 100 percent of their net worth in foreign entity,
ADs are allows to issue international credit cards,NRIs are allowed to remit up to U.S.$1 million
per calendar year out of their non-resident ordinary accounts/sale proceeds of assets and so on.

Import liberalisation:

As per the recommendations of the World Bank, free trade of all items except negative list of
imports and exports has been allowed. In addition, import duties on a wide range of capital
commodities have been drastically cut down.

The peak rate of custom duty (on non agricultural goods) has been brought down from 150
percent in early 90’s to just 10 percent in 2007-08 budget. Tariffs on import of raw materials and
manufactured intermediates have also been reduced. In addition to the phased reduction of
import duties, India, being member of World Trade Organisation(WTO) has since April
2001,totally removed the quantitative restrictions on foreign trade.moreover,as a part of the
agreement on Trade Related Intellectual Property Rights (TRIPs),the Patents (amendments)
act,1999,was passed in 1999 to provide for Exclusive Marketing Rights (EMRs).

Opening the economy to foreign capital: The government has taken a number of
measures to encourage foreign capital in India. Many facilities and incentives have been offered
to the foreign investors and non-resident Indians in the new economic policy. The foreign direct
investment floodgates have been opened. Foreign direct investment up to 26%,49%,51%,74%
and even up to 100% has been allowed in different industries. These include drugs and
pharmaceuticals, hotels and tourism, rope-way, ports, hydro-equipment, oil refineries,
construction and maintenance of roads and many more. Even defense and insurance sector have
been partially opened.

Other measures: Many other measures have been announced from time to time. For instance,
foreign companies have been allowed to use their trademarks in India and carry on any activity
of a trading, commercial or industrial nature; repatriation of profits by foreign companies has
been allowed, foreign companies (other than banking companies) wanting to borrow money or
accept deposits are now allowed to do so without taking the permission of the RBI, foreign
companies can deal in immovable property in India, restrictions on transfer of shares from one
non-resident to another non-resident have been removed, reputed Foreign Institutional Investors
(FIIs) have been allowed to invest in Indian capital market subject to certain conditions etc. All
these initiatives are supposed to integrate the Indian economy with the world economy.

Main Organisations facilitating Globalisation

There are many international organizations which have facilitated the process of globalization
these are:

 The International Monetary Fund (IMF).

 The International Bank for Reconstruction and Development (IBRD) ie.World Bank.
 The World Trade Organisations (WTO).
The International Monetary Fund: The international monetary fund (IMF) was
organized in 1946 and commenced its operation in March, 1947.

Objectives of the IMF:

 The elimination or reduction of existing exchange controls.
 The establishment and maintenance of currency convertibility with stable exchange rate.
 The widest extension of multilateral trade and payments.
 The solving of short-term balance of payments problems faced by its member nations.

The fund is an autonomous organisation affiliated to the UNO. Starting from the initial
membership of 31 countries at the time of inception, the Fund now has a membership of 185
countries. It is financed by the participating countries, with each country’s contribution fixed in
terms of quotas according to the relative importance of its prevailing national income and
international trade. The quotas of all the countries taken together constitute the total financial
resources of the fund. Moreover; the contributed quota of a country determines its borrowing
rights and voting strength.

The World Bank: The International Bank for Reconstruction and Development (IBRD)
more popularly known as the World Bank was formed as a part of the deliberations at Betton
Woods in 1945. The World Bank was floated in order to give loan to members’ countries,
initially for the reconstruction of their (world) war-waged economies, and later for the
development of the economies of the poorer member countries. The World Bank provides its
member countries (185 in number) long term investments loan on reasonable terms. By far the
bulk of the World Bank loans have been for financing specific projects. In recent years, it has
also been engaged in giving structural adjustments loans to the heavily indebted countries. The
World Bank is an inter-government.

The World Bank group consists of, apart from the World Bank itself,

The International Development Association (IDA),

The International Finance Corporation
(IFC),

The Multi-lateral Investment Guarantee Agency (MIGA) and

The International Center for Settlement of Investment Disputes (ICSID).

Objectives of the World Bank:

The World Bank works in 185 countries with the primary focus of helping the poorest people
and the poorest countries. It emphasises the need for;

 Investing in the people, particularly through basic health and education.

 Focusing on social development.
 Protecting the environment
 Supporting and encouraging private business development.

 Prompting reforms to create a stable macro-economic environment, conductive to

investment and long-term planning.

The World Trade Organisation: As mentioned earlier, it was The World Trade
Organisation which gave a real push to the process of globalisation The World Trade
Organisation (WTO) came into existence on 1st January, 1995.the WTO is a powerful body
which broadly aims at making the whole world a big village where there is free flow of goods
and services and where there are no barriers to trade. It is the only global international
organisation which deals with the rules of trade between nations. At its heart are the WTO
agreements’, negotiated and signed by the bulk of the worlds trading nations and ratified in their
parliaments

Features of the World Trade Organisation (WTO):

 The WTO is the main organ of implementing the Multilateral Trade Agreements.
 The WTO is global in its membership. Its present membership is 151 countries and with
many other considering accessions.
  It is forum for negotiation among its members. In the forum, the member-nations discuss
issues related to the Multilateral Trade Agreements (MTAs) and associated legal
instruments, it is also the forum for negotiations on terms of the Plurilateral Trade
Agreements (PTAs). In fact, it is the third economic pillar of worldwide dimensions
along with the IMF and the World Bank.

 It has a far wider scope than its predecessor GATT, bringing into the multilateral trade
system, for the first time, trade in service, intellectual protection and investment.

 It is a full-fledged international organisation in its own right.

 It administers a unified package of agreements to which all members are committed.
 The decision-mankind under the WTO is carried out by consensus. Where a consensus is
not arrived at the issue shall be decided by voting. Each member has one vote.
 The WTO has legal personality. Members shall endow it with such legal capacity,
privileges and immunities as are necessary for the exercise of its functions.
 The representatives of the members and all officials of the WTO enjoy international
privileges and immunities.

Effects of Globalisation on Indian Economy:

Industrial Sector Reform: This reform sought to remove the barriers preventing entry of
newfirms and the limits to growth in the size of existing firms.
The strategies are:
 Abolition of industrial licensing as an instrument of control over private investment.
 Abolition of the restriction on investment by large industrial groups.
 Drastic reduction in the list of industries reserved for the public sector.
 Elimination of price control on several industrial items.
 Reduction of the list of items reserved for production in the small-scale sector.
 Opening the economy to FDI
Trade Sector Reform: The objective of the trade reform is to encourage free flow of
importsand exports to the maximum possible extent.
This involves:
 Elimination of quantitative import licensing.
 Reduction in import tariff levels.
 Abolition of subsidies on exports.
 Adoption of a flexible exchange rate regime.

Financial Sector reform: The financial sector reforms aimed at profit oriented
financialservices and the better functioning of the money and capital markets.

Till mid eighties, the Indian economy was a controlled one in the sense the public sector was
given a dominant role and the private sector was regulated with the help of a number of Acts like
Industrial Development Regulation Act, Foreign Exchange Regulation Act, Monopolistic and
Restrictive Trade Practices Act and many more.

These acts and regulations strangulated the initiative of the private sector to grow and resulted in
inefficiencies, corruptions, and mismanagement.to meet the challenge economic reforms were
introduced in industrial, financial, external and fiscal areas.

As a result of these reforms, many positive changes have taken place in India such as improved
rate of growth, lesser prices, more efficiency and competition. But failure to have fiscal
discipline, ad-hocism, slow financial reforms and not fully opening the economy still mar the
progress of economic reforms.

Liberalisation, Privatisation and disinvestment are the outcomes of the modern economic world.

Liberalisation refers to relaxation of government’s restrictions in the arena of economic and

social policies., Privatisation refers to partial or full transfer of ownership and control
of PSUs to the private sector. Disinvestment is one of the methods of privatisation. It means
selling of government share in the PSU to other PSUs or private sector or banks.

In India, disinvestment has progressed slowly. It has been carried out in a hasty, unplanned and
hesitant manner. As a result, the progress has been quite poor.

Merits and Demerits

Merits: Imported goods are available. The country can produce what it produces best and import
the rest. There is a feeling of an international economy. The local industries work hard to
compete with international firms. Raw material is available. The standard of life becomes better.
More jobs are created. There is security from famine, disease, etc as international firms
intervene.

Demerits:
Local industries get dislodged. In times of war, there is a problem. There is political
interference and conflicts arise. The balance of payments is badly affected. Under developed
countries are exploited

The impact of globalisation on employment in India is more of warning signals. The unorganised
workers would expand further due to globalisation. Under the present deprived conditions of
unorganised sector, this would lead to imbalance in the labour market leading to more supply of
labors, low wages and low level of income. This situation would affect the social and economic
conditions of the unorganised working population. The unorganised workers will be in the highly
disadvantageous position as there would be a shift in the technology from labour to capital
intensive and use of unskilled to skilled workers. To conclude, it can be argued that the benefits
of economic reforms on the Indian economy would get achieved, only if the negative impacts on
employment are settled or neutralised. Hence, along with globalisation and restructuring the
economy, efforts should be initiated to absorb the potential labour force and provide required
security for work, income and life so that they would also benefit in that process on the one hand,
and on the other, contribute towards the success of globalisation.

A new trust on international business has emerged recently although business transcending
national boundaries has always been there in the past .Of late, there has been a growing
realization among countries of the significance of economics of markets and international
competition.india is no exception. It has also embraced globalisation .Globalisation broadly
implies free movement of goods and services and people across the countries. The global
corporations of today conduct their operations world-wide as if the whole world were a single
entity.

Globalisation has thrown certain opportunities for India like it can raise capital from the world
market, it can become a premier production centre and it can attract foreign investors etc.after
globalisation, India is beginning to shed its insularity and trying to become a global giant.