Globalisation on the Indian Economy

Introduction

Recent events on the financial markets show how interdependent the world is. Common value should not be forbidden but what about common losses. Who should be responsible for them? Many blame globalisation. But what is globalisation and does the world have any other alternatives to develop? Should we return to the strategies of the past? Or should we continue to live in an age of essential economic revolution? The term globalisation generates constant debates and controversies. But most of those who talk about globalisation are not even aware of its fundamentals.

Globalisation is the one specific modality of international integration. Technology has definitely changed the way we live and also the ways in which the business is done. The countries by means of internet connection and enthusiastic workers can have access to unlimited jobs and industries. Let’s imagine a picture of a world where all limitations are disappearing. A world where there are no boundaries and where competition can come from anywhere. That’s the world where our future lies. To make this world a healthier place globalisation is going to play a very important role.

There are some people in developed world who believe that we must try to turn our back on this novel rapidly changing and integrated world. They also think that the chance to preserve one’s living standard is to make a fortress around one’s country, stop trading with other countries and depend only on own industries. But at present it is impossible to turn back the waves of globalisation but in doing so we can actually make ourselves worst off. So in my opinion, instead of fearing the future we should embrace it.

Globalisation and Structure of Indian Economy

Globalisation has been expressed beautifully through a poem by Canadian economist Gerald Helleiner- “The poor complain, they always do, but that is just idle chatter. Our system (globalisation) brings reward to all, at least to all who matter”.

Broadly speaking the term globalisation is an economic process. Even though it is modeled as a way of ‘bringing the world together’, globalisation is all about the business community breaking down the remaining barriers to the free flow of its capital around the world.

It fundamentally means opening up of any country economy system and its integration among the other economies of the world. It involves liberalism and implementation of economic liberalization policies and reforms to promote the progression of private sector. The word globalisation itself means something new is happening to the world. The world is becoming a “Flat” and experiencing global practices, values and technologies that are shaping people lives. For India, there are ample confusions about the costs and benefits of globalisation.

Data Source & Projection: VMW Analytic Services

Figure 1: Indian Economy since its Independence at Constant Prices (Projected up to FY 2012)India’s population has already crossed the billion mark; this fact is easy to read but much more difficult to absorb – one thousand million people, each of whom sees the world in a slightly or radically different way from the other. Since Indian independence in 1947, the economy of India has increased almost exponentially (Refer Fig. 1). From early 1990s, different governments have adopted inward – oriented development strategies i.e. the state encouraging an economy through self sufficiency and a dominant role in the economy via state planning. Forces of demand and supply were not allowed to play a key role in resource allocation.

After 1991 balance-of-payments crisis, where foreign currency reserves fell to $1 billion & inflation went high to 17%, India laid numbers of stabilization-cum-structural adjustment measures with widespread effects. The main aim was to remerge the Indian economy with the world economy by reducing barriers to trade and investment, and deregulation of a highly bureaucratized economy. The Foreign Direct Investment was also encouraged to reduce the country’s reliance on debt-creating capital inflows, simultaneously renovating India’s ancient technologies and advancing easily into global markets.

Figure 2: India GDP growth from 1991 – 2007Regardless of the unfinished reform agenda, India’s GDP growth (Refer Fig. 2) has increased >9% over the past 3 years, by an average of 5.8% annually during the period 1991-2004. It contributes nearly 2% to world GDP and around 1% to world exports of goods and services (Source: World Development Indicators). Consistent with excellent growth, per capita incomes were doubled from 1990 to 2007 and poverty dropped from 46% in 1986 to 36% in 2000. However, still poverty remains a grave problem.

Recently several economists and lobbyists have compared Indian economy with that of Chinese economy but India’s progress path has been significantly different from China’s. Indeed, it has been also very different from that followed earlier by Japan, Korea and the other Asian giants. Firstly, the recent economic rise in India is largely due to services rather than manufacturing sector. India has became a global player in several services such as IT and business process outsourcing, while its manufacturing sector keep suffering from low productivity. Secondly, the majority of India’s population still relies on agriculture for a living as compared with Asian countries and thirdly, India tried to remain closed to trade in comparison to other developing and emerging countries. Even FDI inflows have also ten folded in last two decades. It has been tripled since 2005 and in 2007 it was around $23 billion (Data Source: Government of India, Ministry of Finance, Economic survey). But India is not yet as present in the Central and Eastern Europe markets as China is. Its share in the European market was 0.7% (2006), almost unchanged from 1990s. However, China’s share in these markets has increased sharply from 1.3% in 1992 to 5.7% in 2006 (Data Source: OECD).

Indian economy has the potential and should make the efforts to move from good growth to rapid constant growth. The problem in India lies in the spurring productivity which is badly affected by the low education and poor health system and also by the petite openness of the Indian economy. India’s weak infrastructure has hurt the booming potential of Indian production. From undependable energy, lacking water supply to bad roads and train conditions, infrastructure shortages have created high business costs across the sectors (Source : OECD, 2007c).

Benefits and Costs of Globalisation on Indian Economy

Globalisation has been a classical process with ups and downs. Its growth has been largely led by the technological forces in the fields of transport and communication. The flow of trade has been frequent and there are lesser barriers for the people across the geographical boundaries. There are less tax barriers and fewer limitations on fund flows. India is no exception to globalisation. In year 1991, when India was neck-deep in financial deficit, very high inflation (around 17%), balance of payments crisis and low industrial production, the World Bank and the International Monetary Fund (IMF) bailed India out through significant loans with assistant Structural Adjustment Program (SAP). This led to Liberalisation, Privatisation and Globalisation.

Indian Economy has undergone many important reforms in the 1990’s. The LPG model has helped the Indian economy to grow rapidly and become internationally competitive. From early 1991, a new epoch has dawned for India and its huge population. This formidable phase of economic evolution has had a wonderful impact on the overall India’s economic development. All major sectors of the economy have improved dramatically and its effects over the last decade can hardly be ignored. Moreover, it has marked the dawn of the real integration of India’s economy into the World’s economy.

Globalisation has created employment & bought large investments to India. Indian economy has been on the rise at good rates for the past few years & many new prospects have opened up for India. It has highly benefited from economies of scale. The change in global barriers has permitted the companies to profit from the largest & cheapest labor market, raw material and technology. Foreign businesses have significantly augmented their investments in Indian industries. The salaries of industrial labor have improved largely; therefore, the lock outs and strikes have declined sharply as labor class is happy. Now day’s business market has no boundaries and companies can promote their products globally. This has helped the Indian companies to lay hand on global technologies which has certainly increased our living qualities standards. Indian Entrepreneur’s has become more aware about their competitors, recent trends and quality of products. The competition between the global companies can be seen in the improve quality of the brands and services to the customer.

Presently, we can talk about the story of two India’s: It has the best of times; it has the worst of times. There is bright prosperity, there is high poverty. We have stunning 5 star hotels and near by these big hotels homes without electricity. The following phrase is perfect to describe the situation in India “Globalisation gave us everything, globalisation gave us nothing”.

Although Rajiv Gandhi government, the sixth prime minister of India, introduced some economic reforms between 1985 -1989 but it was the Narasimha Rao government, ninth prime minister of India from 1991-1996, that gave a exact shape and started the novel economic reforms in India. Below are the highlights of some extreme benefits of globalisation on Indian Economy:

Figure 3: The sector wise contribution to Indian GDP (Source: MOSPI Statistics (Ministry of Statistics and Programme Implementation))

Gross Domestic Product (GDP) growth rate: The rate of increase of India’s real GDP was low during 1980-90 (5.6%) to 1993-2001 (7%). But in the last few years, the GDP annual growth rate in India has been remarkable i.e. 7.5% (2003-2004), 8.5% (2004-2005), 9% (2005-2006) and 9.2% (2006-2007). Present P.M. Dr. Manmohan Singh is certain to have a 10% increase in the GDP for 11th five year plan (2007 – 2012). In 2006-2007, the sectors contributing highest in GDP growth are Industry sector (26%); Service sector (55%) and Agriculture sector (19%) (Ref Fig. 3). The increase in GDP has in fact helped to increase the foreign exchange reserves from $39 billion (2000-01), $107 billion (2003-04), $145 billion (2005-06), $200 billion (2007-2008) to around $268 billion on 1st February 2011 (Source: IMF).

Figure 4: An overview of India’s top cities which contributed heavily in FDI equity inflows.

Foreign Direct Investment (FDI): Since early 2003, India’s FDI promotion board is officially run by government i.e. Ministries of Economic and Finance. Since then there have been drastic reforms in the rules and regulations of FDI in India. The FDI is now acknowledged as a key driver of development in the country. India is ranked 2nd in international FDI in year 2010 behind 1st ranked China and ahead of Brazil & Russia and it will continue to be in the top 5 destinations to draw global investors during 2010-12 (Source: World Investment Prospects Survey 2009-2012 by UNCTAD (United Nations Conference on Trade and Development)). India attracted cumulative FDI equity inflows of $122.68 billion from mid 2000 to end 2010, according to the data released by the Department of Industrial Policy and Promotion (DIPP). In October 2010, the FDI inflows were $1,392 million. The figure 4 shows India’s top cities and sectors

which attracted the highest FDI inflows in Jan 2008 (Source: DIPP India). The main attractive sectors have been information technology, telecom, services, healthcare and telecommunications. India controls almost 45% of the global outsourcing market with income more than $50 billion. Foreign shareholders are getting good returns in India. The possibility for FDI in India is endless. Foreign investors are offered fair packages of fiscal incentives for exports and industrial investments.

Imports and Exports: The general idea of the independence movement in India (year 1940s), led by great M. Gandhi, was based on the dislike for anything foreign, especially the one originating from Britain. The imported goods were burnt on regular basis and everyone believed that everything can be produced home. The belief was that we can be self reliant and self dependent and import of goods can bring the foreign dominance. In 2009, 7 decades later India is ranked 15th in world in terms of import volume and 22nd in the terms of export volume. In 2004 – 2005 our imports were $107 billion (Ref Table 1), a record increase of around 36% as compared to $79 billion in 2003 – 2004. The exports also jumped by 24% recording $79 billion as compared to $63 billion the previous fiscal. The oil imports increased by 19% and the import bill zoomed from $21 billion to $29 billion in two fiscal years. Other imports excluding oil were $77 billion in 2004 – 2005 that is 34% higher than $58 billion in 2003 – 2004.

Poverty: Though globalisation has drastically improved our living standards but still it doesn’t have the significant effect in improving the poverty. The 2005 World Bank estimation was that 41% of Indian population live below the international poverty line of $1.25 a day. The figure 5 shows the Indian population living below poverty line from 1973-2000. We can see that since 1973 -1974 (54.9%), Indian population living below the poverty line has improved a lot (26.1% in 1999-2000). Nevertheless, Indian government is still making lots of efforts to remove poverty in rural areas. It is trying to provide more facilities to the poorer. India government

Figure 5: Indian population below poverty line. (Source: Planning Commission of India) has still a long way to go to improve the poverty situation of India.

Other Benefits: Information Technology (IT) and outsourcing has been given a special status in the growth of Indian economy. The reason may be that the government desires to present India as a technologically advanced nation and to achieve this they must encourage the IT sector. The term special status means that the sector and global / local investors will get many special advantages from the government. Furthermore, the impact of the global economies has influenced the Indian education system over the last few years. Improved educational institutions, high technology colleges, developed schools are the fruits of globalisation. The colleges have implemented the urbanized teaching technologies so that students can be aware of the latest developments. India is in the 4th position in respect to market capitalization with $894 billion after the US ($17,000 billion), Japan ($4800 billion) and China ($1000billion). India will soon cross the trillion $ mark.

Even though we have not so far reached “the end of history” but globalisation has sure took us closer to “the end of geography”. The globalisation has not always been fair. The cash flow over the last two decades has been very unsymmetrical. For $1 of aid money to poor countries, the rich countries get $10. It has deepened the poverty and inequality. It has affected both the social and political stability among and within states. Capital rights are given more advantages over the labor rights. The trade and finance rule are unfair and this has had mixed effects on rich and poor countries. In India, the main casualties of globalisation are the poverty and the agriculture sector. Here are some costs which India paid because of globalisation:

Agriculture Sector: Agriculture has always been the strength of the Indian economy. It plays crucial part by not only in providing food to people, but also supplying of raw material to industries and to export trade. 60% of the Indian population works in agriculture sector and however its contribution in GDP is only 20.6%. India agricultural growth continued to drop down from 4.70% in 1991 to 1% in 2003 (Source: agricoop.nic.in/Agristatistics). The seeds are most important component for farmers. Before globalisation, Indian farmers got seeds from state government institutions. The states were producing their own seeds and they were maintaining the good quality and lower prices for seeds. Even the private seed quality was very good as the seed market was well regulated. But with globalisation, the seed market has been opened to global agribusinesses and more than half of the government processing units have been closed in 2003 due to IMF deregulation guidelines. This had hit the farmers very badly as due to open market the prices have raised sharply and bad quality seed has made its way to market. Moreover with the devaluation of Indian currency rupee in 1991, more and more farmers were attracted towards export and hence they started producing much more of cash crops like tobacco than traditional crops. Indian farmers are offered zero subsidiaries and very less help from government. The Indian government has taken no significant measures to negotiate with foreign companies to set up technologies for the farmer’s assistance. All these factors have led to decrease in the income of the farmers and have increased the rural debts. In 2000, the farmer suicides were registered to 12% of total suicides in the country.

Industry: The globalisation has raised a high competition between the foreign companies and domestic companies. As the foreign products being better, people prefer to buy them instead of Indian ones. This has reduced significantly the amount of profit for Indian companies. The new technology has reduced the requirement of labor and thus resulted in job losses. No doubt that the effects have been both positive as well as negative but the Indian government should make such economic policies related to industries that are beneficial and not harmful.

Human trafficking and increase in diseases like HIV are also the very high cost paid for globalisation. And the pity is that women’s and children’s are among the most exposed to it.

Conclusions

Globalisation has provided India the opportunity to grow substantially. Though through globalisation all the economies are linked together and crisis in one have drastic effect on the others and recent events have confirmed so. Though India sailed through the crisis without being too affected due to its balanced and resilient macro structures but it has surely given India a wake up call to focus on the challenges and opportunities to shape its developing economy. Nevertheless, globalisation has definitely helped India to become a better economy, improve and unleash it potential. It has the ability and skills to adapt and change according to the flow of global market. In my opinion, for the betterment and the bright future of India it is imperative that India should go out and face this “globalising” world. I am certain that India of 2025 will be a different place. It will be much more leading force in the world economy, than it was 25 years ago or even at the start of the 21st century.