Globalization and India

IIPM SM
 What is Globalisation?

Stephen Gill: defines globalisation as the reduction of transaction cost

of transborder movements of capital and goods thus of factors of
production and goods.

Guy Brainbant: says that the process of globalisation not only includes
opening up of world trade, development of advanced means of
communication, internationalisation of financial markets, growing
importance of MNC’s, population migrations and more generally
increased mobility of persons, goods, capital, data and ideas
but also infections, diseases and pollution
 Impact of Globalization on India
•The frontiers of the state
•Increased reliance on the market economy
•Renewed faith in the private capital and resources,
•Process of structural adjustment spurred by the
studies and influences of the World Bank and
other International organisations have started
•Globalisation has brought in new opportunities to
developing countries.
•Greater access to developed country markets and
technology transfer hold out promise improved
productivity and higher living standard.
 Disadvantages
Globalisation has also thrown up new challenges
- growing inequality across and within nations,
-volatility in financial market and environmental
deteriorations.
-Another negative aspect of globalisation is that a
great majority of developing countries remain
removed from the process
 India and Globalization
• Till the nineties the process of globalisation of the
Indian economy was constrained by the barriers to
trade and investment
• Liberalisation of trade, investment
and financial flows initiated in the nineties has
progressively lowered the barriers to competition and
hastened the pace of globalisation

• In 1700 India had a share of Global Trade of 22.5%, 3.5% in 1947

•Dr Manmohan Singh at Oxford in July 2005
 Impact on Indian Economy
India opened up the economy in the early nineties following
a major foreign exchange crunch that dragged the economy close
to defaulting on loans. Domestic Needs and also Multilateral
Organizations pushed towards the new policy regime in favour
of a more open and market oriented economy.
Major measures :
- scrapping of the industrial licensing regime,
- reduction in the number of areas reserved for the public secto
- amendment of the MRTP act,
- start of the privatisation programme
- reduction in tariff rates and
- change over to market determined exchange rates.
 Impact.. Contd
Over the years there has been a steady liberalisation of
the current account transactions, more and more sectors opened
up for foreign direct investments and portfolio investments
facilitating entry of foreign investors in telecom, roads, ports,
airports, insurance and other major sectors

• The Indian tariff rates reduced a weighted average of

72.5% in 1991-92 to 24.6 in 1996-97 .
• Tariff rates went up slowly in the late nineties it
touched 35.1% in 2001-02.
• Peak tariff rates are to be reduced to be reduced to the minimum
with a peak rate of 20%, in another 2 years.

• Most non-tariff barriers have been dismantled by March 2002,

including almost all quantitative restrictions.
 India is Global –
India’s position in the global economy has improved from the 8th
position in 1991 to 4th place in 2001 (PPP basis)

The liberalisation of the domestic economy and the increasing

integration of India with the global economy have helped step up
GDP growth rates,
-5.6% in 1990-91 to a peak level of 7.78% in 1996-97.
-Growth rates have slowed down since the country has still been able
to achieve 5-6% growth rate in three of the last six years.
- Growth rates has slumped to the lowest level 4.3% in 2002-03
mainly because of the worst droughts in two decades
-Now at around 6.5%, expected to go up to 7%
- India is now the fastest growing just after China.
- This is a major improvement from 1970’s at 3% GDP
-India still behind growth in countries like Brazil, Indonesia, Korea,
and Mexico was more than twice that of India.
•Globalisation and Income Distribution
Globalisation in the form of increased integration though trade and
investment is an important reason why much progress has been made
in reducing poverty and global inequality over recent decades.
• But it is not the only reason for this often unrecognised progress,
good national polices , sound institutions and domestic political
stability also matter.
• Despite this progress, poverty remains one of the most serious
international challenges we face up to 1.2 billion of the developing
world 4.8 billion people still live in extreme poverty.
• India has to concentrate on five important areas or things:
- technological entrepreneurship,
- new business openings for small and medium enterprises,
- importance of quality management,
- new prospects in rural areas and
- privatisation of financial institutions.
 Role of Technology
• The manufacturing of technology and management of
technology
are two different significant areas in the country.
• There will be new prospects in rural India. The growth of
Indian economy very much depends upon rural participation in
the global race.
• For example food processing and packaging are the one of the
area where new entrepreneurs can enter into a big way.
•It may be organised in a collective way with the help of co-
operatives to meet the global demand.
 Challenges
Understanding the current status of globalisation is necessary for
setting course for future.

•For all nations to reap the full benefits of globalisation it is essential

to create a level playing field.
•President Bush’s recent proposal to eliminate all tariffs on all
manufactured goods by 2015 may exacerbate the prevalent inequalities.

•According to this proposal, tariffs of 5% or less on all manufactured

goods will be eliminated by 2005 and higher than 5% will be lowered
to 8%. Starting 2010 the 8% tariffs will be lowered each year
until they are eliminated by 2015.
 Export and Import
India’s Export $ 32.5 Bn Import ($75bn est 2005)$ 38.4 bn(2001)
$65bn 2005 $129.2 bn Forex reserves Jan 2005
Many Indian companies respectable players in the International scene.
Agriculture exports account for about 13 to 18% of total annual of
annual export of the country.
In 2000-01 Agricultural products valued at more than US $ 6million
were exported from the country 23% of which was contributed by the
marine products alone.
Marine products in recent years have emerged as the single largest
contributor to the total agricultural export from the country accounting
for over one fifth of the total agricultural exports.
Cereals (mostly basmati rice and non-basmati rice), oil seeds, tea and
coffee are the other prominent products each of which accounts for
nearly 5 to 10% of the countries total agricultural exports.
Whither India in Global Integration?
India clearly lags in globalisation behind China, large part of
East and Far east Asia and eastern Europe.
 Over the past decade FDI flows into India have averaged
around 0.5% of GDP against 5% for China 5.5% for Brazil.
FDI inflows into China now exceeds US $ 50 billion
annually vs $4 bn
 Consider global trade – India’s share of world merchandise
exports increased from .05% to .07% over the pat 20 years vs
China’s share Which has tripled to almost 4%.
 India’s share of global trade is similar to that of the Philippines
economy 6 times smaller according to IMF estimates.
•India under trades by 70-80% given its size, proximity to
markets and labour cost advantages.
 Amartya Sen’s View
India, as a geographical, politico-cultural entity has been
interacting with the outside world throughout history and
still continues to do so.

It has to adapt, assimilate and contribute, even as we move

into what is called a globalised world which is
distinguished from previous eras from by faster travel and
communication, greater trade linkages, denting of political
and economic sovereignty and greater acceptance of
democracy as a way of life.
 Key Public Policies.. RBI Gov

1. In the external sector, particularly in the management

of capital account and exchange rate, contributed to
growth, provided resilience to shocks and an overall
stability.
Thus, India will continue with pragmatic, cautious and
gradual approach in this regard, subject to improvements
in fiscal arena and the progress in strengthening the
domestic financial sector.

2. The management of financial sector has been oriented

towards gradual rebalancing between efficiency and
stability and the changing shares of public and private
ownership. Higher Market Orientation is key
3. There is advantage in continuing the progress in public
debt management keeping structural aspects in view.
 Key Public Policies.. RBI Gov
4. Significant liberalisation of external trade has
Taken place smoothly, which has imparted competitive
efficiency to the domestic sector almost upto the
global best standards in many of the sectors.

5. The importance of power, airports and seaports

(apart from tourism, which has significant
employment potential) but there is need for
implementation at a pace significantly faster
than we have ever witnessed in any sector so far.

6. Need to improve both productivity and output

in the agriculture
7. improvements in institutional infrastructure in
matters relating to administrative, judicial and
other systems of governance are important.
Key Public Policies.. RBI Gov

8. Quantity and quality of water, education

and health care infrastructure
9. Regional inequalities in growth. The demonstration
effect of a few high-performing States must spur
the other States, in the medium term,
to compete for better governance and economic
performance.
10. Finally, enhanced investment activity, particularly
in the infrastructure area, would necessitate higher
domestic savings, especially in the public sector
coupled with efficient financial intermediation.
In addition, foreign savings need to be attracted
and absorbed
 Indian Financial System
•India's stock of financial assets, reflecting the degree of monetization
in an economy and its supply of intermediated capital, is just one-sixt
the size of China's
•Whereas China accounts for more than 4 percent of the world's
financial assets, India holds less than 1 percent.

•This difference is only partially explained by the size of the two

economies. India's financial depth, a measure comparing a country's
financial stock with its GDP, is just 137 percent—far below China's
323 percent.
•In the decade to 2003, India's financial stock increased by 12 percent
annually—higher than the world average but still well below China's
growth rate of 14.5 percent.
•If these trends hold, by 2010 China will have a financial stock of
$14 trillion, thus consolidating its position as a significant player
in the global capital market. India, however, will remain a minor playe
 Indian Financial System
•Size isn't everything, of course; a financial system's efficiency
in allocating capital is equally important.
•On this measure, India would appear to have some advantages
Nearly two-thirds of China's financial stock is held in bank
deposits, compared with less than half of India's total .
• But Chinese banks have a dubious lending history, and
estimates of nonperforming loans range from 25 percent to
60 percent of the value of all outstanding loans.2
•In India, nonperforming loans are estimated at around
15 to 20 percent of the total.
 India Vs China Economy
Still, though India's equity markets and banking system are
slightly more efficient than China's, there is an enormous gap
between the amount of intermediated capital available to each
nation.
Even if China's bank deposits were discounted by 25 percent to
reflect the country's nonperforming loans, its financial stock
would still be more than $4 trillion—nearly five times as large as
India's.
(One could argue that since India's $200 billion government deb
t is not an instrument to transfer capital from savers to borrowers,
it should be excluded from consideration. Doing so would reduce
India's financial stock to just $700 billion.)
India Vs China .. Contd

The bottom line is that India simply has a lot less

money circulating
in its financial system than one would expect, given
the size of its economy. One reason is its national
savings rate, which, though respectable, is only half of
China's rate of 40 percent.
Foreign capital inflows could compensate for India's
lack of domestic capital, but unfortunately they widen
the gap: in 2003 foreign direct investment in China
equaled 3.7 percent of GDP, but just 0.9 percent in
India.3
 India Vs China Investment
As a result, India's economy has been less able to finance investment
and accumulate physical capital (which includes infrastructure,
machinery, and buildings).

In 2002, the country's investment in physical capital was 23 percent

of GDP, compared with 40 percent for China. This factor may explain
why China has invested more in heavy industry and manufacturing,
while India has had success in the less capital-intensive business-
service-outsourcing sector.
 The Opportunity
•India has ample opportunities to develop its financial system further
The current round of reforms, which allow pension funds to invest
more in equities, will help spur market growth, as will the continued
privatization of state-owned enterprises.

•Opening more parts of the economy to investment from foreign

corporations and from expatriates
—something China has done very effectively—also holds potential.

•India has made remarkable economic progress since opening its

economy in 1991. To continue that growth, it must now focus on
developing its financial system
 Performance of India's
External Sector

•Foreign Exchange Reserves excluding gold and

SDR stood at US$ 129.72 billion on Jan 8, 2005.
•During early 2004-05, the rupee ended a continuous
24 months (May 2002- April 2004) run of appreciating
against US dollar and started weakening from May 2004
onwards.
• But it again started appreciating against US$
from September 2004. against all other major
currencies Re appreciated in April 2004.
•From May- July it weakened and then again gained
in August. During Oct- Dec 2004, Re depreciated
against the Euro, pound sterling and Yen.
•Since, Jan 2005, it is appreciating against all currencies.