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Impact of Globalisation on Developing Countries and India

Impact of Globalisation on Developing Countries and India


by Chandrasekaran Balakrishnan

Chandrasekaran Balakrishnan for The 2004 Moffatt Prize in Economics

Introduction:

Globalisation is the new buzzword that has come to dominate the world since the nineties of
the last century with the end of the cold war and the break-up of the former Soviet Union and
the global trend towards the rolling ball. The frontiers of the state with increased reliance on
the market economy and renewed faith in the private capital and resources, a process of
structural adjustment spurred by the studies and influences of the World Bank and other
International organisations have started in many of the developing countries. Also
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. But globalisation has also thrown up new challenges like 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. 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

Definition:

Globalised World - What does it mean?

Does it mean the fast movement of people which results in greater interaction?

Does it mean that because of IT revolution people can be in touch with each other in any part
of the world?

Does it mean trade and economy of each country is open in Non-Intrusive way so that all
varieties are available to consumer of his choice?

Does it mean that mankind has achieved emancipation to a level of where we can say it means
a social, economic and political globalisation?

Though the precise definition of globalisation is still unavailable a few definitions worth
viewing, 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,

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goods, capital, data and ideas but also infections, diseases and pollution

Impact on India:

India opened up the economy in the early nineties following a major crisis that led by a foreign
exchange crunch that dragged the economy close to defaulting on loans. The response was a slew of
Domestic and external sector policy measures partly prompted by the immediate needs and partly
by the demand of the multilateral organisations. The new policy regime radically pushed forward in
favour of amore open and market oriented economy.

Major measures initiated as a part of the liberalisation and globalisation strategy in the early
nineties included scrapping of the industrial licensing regime, reduction in the number of areas
reserved for the public sector, amendment of the monopolies and the restrictive trade practices act,
start of the privatisation programme, reduction in tariff rates and change over to market determined
exchange rates.

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 sharply over the decade from a weighted average of 72.5% in
1991-92 to 24.6 in 1996-97.Though tariff rates went up slowly in the late nineties it touched 35.1%
in 2001-02. India is committed to reduced tariff rates. 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

The liberalisation of the domestic economy and the increasing integration of India with the global
economy have helped step up GDP growth rates, which picked up from 5.6% in 1990-91 to a peak
level of 77.8% in 1996-97. Growth rates have slowed down since the country has still bee able to
achieve 5-6% growth rate in three of the last six years. Though growth rates has slumped to the
lowest level 4.3% in 2002-03 mainly because of the worst droughts in two decades the growth rates
are expected to go up close to 70% in 2003-04. A Global comparison shows that India is now the
fastest growing just after China.

This is major improvement given that India is growth rate in the 1970's was very low at 3% and
GDP growth in countries like Brazil, Indonesia, Korea, and Mexico was more than twice that of
India. Though India's average annual growth rate almost doubled in the eighties to 5.9% it was still
lower than the growth rate in China, Korea and Indonesia. The pick up in GDP growth has helped
improve India's global position. Consequently India's position in the global economy has improved
from the 8th position in 1991 to 4th place in 2001. When GDP is calculated on a purchasing power
parity basis.

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Globalisation and Poverty:

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.

But the proportion of the world population living in poverty has been steadily declining and since
1980 the absolute number of poor people has stopped rising and appears to have fallen in recent
years despite strong population growth in poor countries. If the proportion living in poverty had not
fallen since 1987 alone a further 215million people would be living in extreme poverty today.

India has to concentrate on five important areas or things to follow to achieve this goal. The areas
like technological entrepreneurship, new business openings for small and medium enterprises,
importance of quality management, new prospects in rural areas and privatisation of financial
institutions. 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. After implementing the new economic policy the role of
villages got its own significance because of its unique outlook and branding methods. 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.

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 will do
it. In fact it 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.

GDP Growth rate:

The Indian economy is passing through a difficult phase caused by several unfavourable domestic
and external developments; Domestic output and Demand conditions were adversely affected by
poor performance in agriculture in the past two years. The global economy experienced an overall
deceleration and recorded an output growth of 2.4% during the past year growth in real GDP in
2001-02 was 5.4% as per the Economic Survey in 2000-01. The performance in the first quarter of
the financial year is5.8% and second quarter is 6.1%.

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Export and Import:

India's Export and Import in the year 2001-02 was to the extent of 32,572 and 38,362
million respectively. Many Indian companies have started becoming 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 fro nearly 5 to 10% of the countries total agricultural exports.

Where does Indian stand in terms of Global Integration?

India clearly lags in globalisation. Number of countries have a clear lead among them China, large
part of east and far east Asia and eastern Europe. Lets look at a few indicators how much we lag.

•Over the past decade FDI flows into India have averaged around 0.5% of GDP against
5% for China 5.5% for Brazil. Whereas FDI inflows into China now exceeds US $
50 billion annually. It is only US $ 4billion in the case of India

•Consider global trade - India's share of world merchandise exports increased from .05%
to .07% over the pat 20 years. Over the same period China's share has tripled to
almost 4%.

•India's share of global trade is similar to that of the Philippines an economy 6 times
smaller according to IMF estimates. India under trades by 70-80% given its size,
proximity to markets and labour cost advantages.

•It is interesting to note the remark made last year by Mr. Bimal Jalan, Governor of RBI.
Despite all the talk, we are now where ever close being globalised in terms of any
commonly used indicator of globalisation. In fact we are one of the least globalised
among the major countries - however we look at it.

•As Amartya Sen and many other have pointed out that 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. This goes
without saying 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.

Consequences:

The implications of globalisation for a national economy are many. Globalisation has intensified
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interdependence and competition between economies in the world market. This is reflected in
Interdependence in regard to trading in goods and services and in movement of capital. As a result
domestic economic developments are not determined entirely by domestic policies and market
conditions. Rather, they are influenced by both domestic and international policies and economic
conditions. It is thus clear that a globalising economy, while formulating and evaluating its domestic
policy cannot afford to ignore the possible actions and reactions of policies and developments in the rest
of the world. This constrained the policy option available to the government which implies loss of policy
autonomy to some extent, in decision-making at the national level.

References:

1. Globalisation and Poverty: Centre for International Economics, Australia.


2. WIDER ANNUAL LECTURE 6: Winners and Losers over two centuries of Globalisation: Jeffery G.
Williamson.

3. Globalisation Trend and Issues - T.K.Velayudham, Page 3, 66.


4. Globalisation and India -Lecture : Prof .Sagar Jain, University of N.Carolina.
5. Repositioning India in the Globalised World - Lecture : V.N.Rai.
6. Globalisation and India's Business prospectives - Lecture - Ravi Kastia.
7. "Globalisation and Liberalisation" Prospects of New World Order - Dr.A.K.Ojha, Third Concept - An
International Journal of Ideas, Aug 2002.

8. The Indian and Global Business - Jan 2004, Page 30.


9. Globalisation: Imperatives, Challenges and the Strategies, Page 39.

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Globalization and Its Impact on India
India can be classified as a developing country. It has grown steadily over the
last decade or so to become the 18Th largest economy in the world (as in Total
GDP). It has a population over a billion, with more than 30% of its people living
under the poverty line.

Over the years it has become one of the fastest growing economies in the
world. Promotion of economic growth and development.

The Indian government is highly focused on bringing changes to the economy


and promotes high economic growth. Realizing the potential of the world
market and foreign investors the government has set up numerous policies,
which promote investment and provide incentives for foreign and local
investors.

The Fiscal budget for the year 2001/02 was released around mid February; this
brought in new policies and changes including: There are tax exemptions for
15 years for units in infrastructure and the core sectors (not specified).

This tax exemption will attract more investors to invest their funds in
infrastructure and core sectors, promoting economic growth and benefiting
many other businesses and consumers through flow on effects of improved
infrastructure. There will also be high employment (of skilled and unskilled
labor) and better living standards, which contributes to economic development.

Venture capital made simpler. This will allow small businesses to get started
quicker and easier,and “made simpler- is likely to suggest the cut down of red
tape to allow easy access into the market. This contributes to economic growth
and creates employment and greater competition and consumer choice (as a
result of increasing number of businesses). It will also attract higher direct
foreign investment, which is a great benefit for the nation especially at trouble
periods.

Long term capital gains tax capped at 10% for all. This would mean more
people would invest in shares, which encourages businesses to expand and
employment would increase. The value of the businesses will also increase
because shareholders are likely to prefer capital gains overtime rather than
instant returns (dividends). The businesses can now invest the profits to
increase its value. This will of course contribute to the economy.

IT is given special status. The reason for this is because the Indian government
wants to promote it-s nation a as a technological advanced nation and in order
to do this they must stimulate the IT sector. The “special status- means the
sector and investors (willing to invest in the sector) will receive many benefits
and incentives from the government to do so.

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Tax-free status for bonds targeted at housing development activities. This will
not only lead to higher investment in property development, it will also lead to
overall economic development because housing development activities include
housing middle to lower class people, by providing them a better environment
to live in the standards of living are dramatically improving.

10% surcharge on income tax. This may seem a peculiar decision but the
government is trying to increase it-s tax base, which it can then distribute back
to the public through infrastructure development, educational programs and
housing developments.

There has also been tariff deductions to attract foreign investment and
competition. This will have the effect of improving the competitive nature of
import competing industries, and an over all growth in efficiency and output.

Promoting the economy to foreign investors:

Foreign investment policies

Majority foreign equity allowed in several sectors … allowing for easier access
for overseas investors to own and manage businesses in India.

Foreign investment of up to 51% in 35 high priority areas is eligible for


automatic approval, provided by the RBI. These incentives allow foreigners to
invest and therefore provide an inflow of funds into the nation, promoting
economic growth and development.

Goods of foreign brand names and trademarks for sale are allowed. This shows
that the Indian government has realized the needs for it to become a globally
integrated nation.

Foreign companies are permitted to open branches in India - businesses that set
up in India will make good use of the resources available, this includes
employment and use of local materials. This will boost economic growth and
development as funds are injected into the economy.

Local industry incentives

The Indian government has created many incentives for domestic investors.
Ensuring that the incentives comply with the economic philosophy of the
government.

Tax-free status for the first five years for power projects, businesses involved in
exports, units in free trade zones, infrastructure development and new
industries.

Tax deductions of up to 100 per cent on export profits. New industrial


undertakings will receive a 30 per cent tax deduction on net income.

Further Economic Development the Indian government has taken greater


concern in the welfare of its people. It has set up Second National Commission
on labor to protect millions of workers. Ensuring they are not exploited through

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low wages, unreasonable expectations# etc. This has the effect of improving
wage levels, and living standards among the people.

The government also uses a proportion of its expenditure on education, health,


water supply, sanitation, housing, slum development, social welfare, nutrient,
rural employment# etc. This ensures the people living below the poverty line
(over 30% of the urban population) will receive enough benefits for them to
enjoy a reasonable living standard and the future generation is given many
incentives to shift away from the poverty stricken areas to become financially
stable.

The government has also ensured increased availability of health care which
has lead to an improvement in the living standards (improved death rate, birth
rate…etc).

Example: Infant mortality rate has improved from 129/1000 in 1971 to 80 in


1994.

Impact of Globalization

The significant decline in the GDP of a number of East Asian countries,


continuing recession in Japan, lack of capital growth in developing countries,
unsustainable fiscal weakness in South American countries and volatility of
capital and Foreign exchange markets in developed nations were a number of
causes in world economic down turn in the year of 1998-99. All these factors
had major impacts on India, hence the name the impacts of Globalization on
India. These impacts include:

Inflation rose sharply during 1998-99. It reached a height of 8.8 per cent in
September 98 it dropped steeply in January 1999. This rise in inflation was
caused by numerous problems; one of them was the dramatic increase in some
agricultural commodities.

Deceleration in the growth of India-s exports continued, as growth was negative


for the first 9 months of 1998.

??The current account deficit fell from 1.6per cent of the GDP in 1997-98 to 1.4
per cent of the GDP in 1998-99.

There has also been a deceleration in private inflows, which lead to a lower than
expected net capital inflows between 1998-99.

Manufacturing growth as a part of the GDP fell to 7.7 per cent in 1996-97 from
the previous year-s level of 15 per cent. And it fell slightly to 6.8 per cent in
1997-98.

The above impacts show how closely integrated India with the global economy,
many production decisions and government policies must comply with the
global market situation in order for India to continue as a fast growing economy.

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Positive effects of Globalization

Prior to The 80s when the Indian government undertook major reforms to relax
restrictions on foreign trade and investment it suffer from a very low GNP
growth rate of below 3.5%, but as a result of opening up to the global market
GNP growth is averaged at 5-6% per year.

Indian Businesses are able to find new markets overseas to sell their products
to, they will have the advantage of cheap resources such as labor.

Entrepreneurs from foreign nations are also able to make efficient use of these
resources when they set up business in India. This of course leading to greater
employment levels, greater output and overall economic development and
growth. Average real wages of unskilled labour has increased, which will lead to
an increase in the standard of living.

There have been signs of improvements in living standards in the general


population a s a result of economic growth and globalization. Poverty ratio has
declined dramatically from 56.4% of the rural population in 1973-74 to 37.3% in
1994. The urban poverty ratio has also fallen significantly form 49% in 73-74 to
32.4 in 1993-94. These are all results of job creation and developments
undertaken by the government and private institutions.

Due to the reduction in barrier import competing businesses have become more
competitive leading to greater efficiency and better-priced and quality goods.

Due to Globalization developing nations such as India become more


‘modernized- as new technology and industries can quickly be adopted.

Due to Globalization exports have risen dramatically leading to economic


growth.
An indirect result of Globalization is the improvement in infrastructure.
Additional employment
opportunities of 29.74 million jobs were created between Jan 94 to March 97.
Negative effects of Globalization

Globalization has lead to environmental damage in India (as with many


developing nations).Due to large-scale industrialization urban slums have
formed, air and water pollution has dramatically increased. Multinational firms
have exploited resources belonging to the country and lead to land degradation.
Delhi for example is the 4Th most polluted city in the world.

Though foreign investment will promote economic development in the short


term, the profits earned from the business venture move out of the country.
There is also a possibility that at times of recession investors (in portfolio
investment) may withdraw their funds causing further
problems.

Domestic resources such as labor maybe exploited my large production based


firms. These firms may also abuse natural resources and use them inefficiently.

Domestic producer being overpowered my overseas giants, who already have


competitive advantages over the domestic producers, and have more funds to
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invest. This will lead to the
closure of many domestic owner firms.

Statistics

These statistics reflect the impact of the Asian financial crises on India, and it-s
overall performance between 1996-98. Gross domestic product for example
has fallen due to low aggregate demand, while Gross Domestic Investment has
increased due to higher incentive to invest surplus funds.

1997, 1998, 1999

• GDP Growth (%) 8 6.1 6.2


• Exports (as % of GDP) 10.9 11 10.7
• Imports (as % of GDP) 14.1 13.8 14.2
• Gross Domestic Investment (% of GDP) 25.6 23.6 29
• Savings and investment 1996 - 97 1997 - 98
• Gross domestic savings 24.4 23.1
• Gross domestic investment 25.7 24.8
The slump in savings and investment is once again due to the impacts of the
Asian financial crises.
Sectors real growth rates 1997-98, 1998-99
• Agriculture -1.0 5.3
• Industry 5.9 4.7
• Manufacturing construction 6.8 5.7
• Mining 4.1 2
• Services 8.2 6.7
Agriculture continues to be a major growth point as it is a major part of exports.
Inflation 2000, 2001, JAN
• 3.6% 8.2%

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