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TRADE LIBERALISATION

TRADE LIBERALISATION AND PRODUCTIVITY


GROWTH : EVIDENCE FROM INDIAN
MANUFACTURING INDUSTRY

Project submitted to

Mr. XYZ

(Faculty: Corporate Law)

Project submitted by

(Economics, major)

Semester V

Roll no.

HIDAYATULLAH NATIONAL LAW UNIVERSITY


RAIPUR, C.G.
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TRADE LIBERALISATION

ACKNOWLEDGEMENT

I am highly elated to carry out my research on the topic, ‘Liberalisation, Privatisation and
Globalisation’. I would like to give my deepest regard to my course teacher Mr .XYZ, who held
me with his immense advice, direction and valuable assistance, which enabled me to march
ahead with this topic. I would like to thank my friends, who gave me their precious time for
guidance and helped me a lot in completing my project by giving their helpful suggestion and
assistance. I would like to thank my seniors for their valuable support. I would also like to thank
the library staff and computer lab staff of my university for their valuable support and kind
cooperation

Semester V

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CONTENT

1. INTRODUCTION…………………………………………………..…………………4

I. RESEARCH METHODOLOGY……………….6
II. OBJECTIVES……………………………………6

2. LIBERALISATION IMPACT UPON INDIA………………..….………………..….7


3. PRODUCTIVITY GROWTH IN AGRICULTURAL SET UP..…………..………6
4. CONCLUSION………………………………………….…………………………….13
5. BIBLIOGRAPHY AND WEBLIOGRAPHY…..…….…………………………….16

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INTRODUCTION

The term trade globalization can be used in different contexts. The general usages of the term
Globalization can be as follows:

1. Interactions and interdependence among countries.


2. Integration of world economy.
3. Deterritorisation1.

By synthesizing all the above views Globalization can be broadly defined as follows:

It refers to a process whereby there are social, cultural, technological exchanges across the
border. The term Globalization was first coined in 1980s. But even before this there were
interactions among nations. But in the modern days Globalization has touched all spheres of life
such as economy, education. Technology, cultural phenomenon, social aspects etc. The term
“global village” is also frequently used to highlight the significance of globalization. This term
signifies that revolution in electronic communication would unite the world.

LIBERALISATION:

It is an immediate effect of globalization. Liberalisation is commonly known as free trade. It


implies removal of restrictions and barriers to free trade. India has taken many efforts for
liberalisation which are as follows:

 New economic policy 19912.

Objectives of the new economic policy.

1. To achieve higher economic growth rate.


2. To reduce inflation
3. To rebuild foreign exchange reserves.

1
Al-Zuhair, M., 2008. Privatization Programs, Ownership Structures and Market Development: The Role of Country
Characteristics on Defining Corporate Governance Standards, Ann Arbor: ProQuest
2
Goyal, S., n.d. Privatization in India, [pdf], Available at: http://www.ilo.org/public/english/region/asro/bangk
ok/paper/privatize/chap3-1.pdf [Accessed 27 December 2012]

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 FEMA:

Foreign exchange Regulation Act 1973 was repealed and Foreign exchange Management Act
was passed. The enactment has incorporated clauses which have facilitated easy entry of MNCs.

I. Joint ventures with foreign companies. E.g.: TVS Suzuki.


II. Reduction of import tariffs.
III. Removal of export subsidies.
IV. Full convertibility of Rupee on current account.
V. Encouraging foreign direct investments.3

The effect of liberalisation is that the companies of developing countries are facing a tough
competition from powerful corporations of developed countries. The local communities are
exploited by multinational companies on account of removal of regulations governing the
activities of MNCs.4

3
Guriev, S. and Megginson, W., 2005. Privatization: What have we learnt?, ABCDE Conference, St. Petersburg,
January, 2005.
4
Lokyo, S., 2012. Privatization Study, LWVSJC, February 18, 2012.

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.OBJECTIVES

1. To have a detailed study of the Liberalisation in India

2. To analyze the impact of Manufacturing Productivity Growth reforms on India.

3. To discuss the scope of privatization of various sectors.

4. To criticize the current model of implementation of privatization by Government

RESEARCH METHODOLOGY

The method of research adopted for the project is the analytical and descriptive method.

The texts that were used for the project include articles, research papers and news given in
various websites as well as online journals

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LIBERALISATION IMPACT UPON INDIA


Indian has been facing grave economic crisis and external pressure for foreign exchange, while
there was an internal debt trap which continued from 1986 onwards backed by severe liquidity
crisis. We were almost on the brink of defaulting international arena when Narasimha Rao’s
Government took over in June 1991. This must have created panic in the minds of NRIs who
took away deposits amounting to about 1.4 billion US dollars5.

The country landed in the grip of internal and external debt traps. The foreign exchange crisis
was stimulated by long-term and short-term foreign debts, short-term foreign debts when a
country’s repayments capacity is inadequate, are just like sudden death traps in relation to
economy. No more foreign borrowings were possible. The country’s monetary system,
particularly the foreign exchange situation, was in a very disastrous footing Dr. Manmohan
Singh, the then Union Finance Minister (also an economist) had a great task to introduce ways
and means for the recovery of the ailing monetary system. Changing of exchange rate structure
was, therefore, the first weapon in his hands.

When globalisation has become the order of the day, nations have adopted the path of
liberalisation. India could not isolate itself from this trend. It was, therefore, appropriate on the
part of Government of India to institute and implement a strategy for economic liberalisation.

The LPG model of development which was introduced in 1991 by the then Finance Minister Dr.
Manmohan Singh with a big bang was intended to charter a new strategy with emphasis on
liberalisation, privatisation and globalisation. (LPG) Several major changes at the domestic level
were introduced. Firstly, areas hitherto reserved for the public sector were opened to private
sector.6 The Government intended to transfer the loss-making units to the private sector, but it
failed because there were no takers for them. Instead, the Government started disinvestment of
the highly profit-making PSUs and the proceeds were used to reduce fiscal deficits. Thus, due to
various social constraints the Government could not carry forward its programme of
privatization, though it did succeed in liberalizing the economy to the private sector in both
domestic and foreign areas.

5
G. S. Batra, Emerging trend in Globalisation, Liberalisation and privatization (edited) 17-36, 2001.
6
“Economec Reforms in India – Lessons from current Experience” Southern Economist vol, 44, No.4, July 1, 2005

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Secondly, by permitting the private sector to set up individual units without taking a licence, the
Government removed certain shackles which were holding back or delaying the process of
private investment.

Thirdly, by abolishing the threshold limit of assets in respect of MRTP companies and dominant
undertakings, the Government freed the business houses to undertake investment without any
ceiling being prescribed by the MRTP Commission. Obviously, considerations of promoting
growth were more dominant with the Government and such issues as concentration of economic
power were assigned a back seat.

Fourthly, with a view to facilitate direct foreign investment, the Government decided to grant
approval for direct foreign investment upto 51 percent in high priority areas. The Government
could also consider proposals involving more than 51 percent equity, but such proposals would
require prior clearance of the Government. No permission was required for hiring foreign
technicians, foreign testing of indigenously developed technologies, etc. 7

Fifthly, chronically sick public sector enterprises were referred to the Board for Industrial and
Financial Reconstruction (BIFR) for the formulation of revival/ rehabilitation schemes. A social
security mechanism was introduced to protect the interests of workers likely to be affected by
such rehabilitation packages.

Sixthly, to improve the performance of public sector enterprises, greater autonomy was given to
PSU managements and the Boards of public sector companies were made more professional.
Lastly, the economy was opened to other countries to encourage more exports. To facilitate the
import, of foreign capital and technology and other allied imports, reduction in import duties and
other barriers were brought about. LPG Model of development emphasises a bigger role for the
private sector. It envisages a much larger quantum of foreign direct investment to supplement
our growth process. It aims at a strategy of export led growth as against import substitution
practised earlier, It aims at reducing the role of the State significantly and thus abandons
planning fundamentalism in favour of a more liberal and market driven pattern of development.
Critics have pointed out certain fundamental weaknesses of the LPG Model of Development.

7
Datt Ruddar and Sundharam K.P.S., Indian Economy, S, Chand and Company Ltd. New Delhi 2008

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Indian economy is a dynamic economy that is showing tremendous potential of growth.


Globalization, liberalization and privatization are the key strategic mandates for economic
policies.

Market oriented reforms are sustainable and are gaining acceptance with resistance to
privatization going down due to the benefits like enhanced efficiency through target oriented
management and disposition of public funds into social and physical infrastructure of the
country. Privatization has shown great outcomes in the development of sectors like banking,
insurance, telecom, power, civil aviation etc. However, the lobbying in domestic circuits was
enfeebled by the surprising reversal of the Indian economy in present time. Indian economy
registered an average growth of 8.5 per cent in the past four years and it is evidence enough to
highlight the potential of privatization and its need and likelihoods of privatization.

However, it is disheartening to acknowledge that India is not a very alluring destination for
foreign investors. Bureaucracy, red tapism, political hiccups, corruption are also prominent
hindrances in the development of India that offers ample of skilled and cheap labor and
inadequate capital. In spite of all the hurdles, it is a viable to expect higher rate of returns as
compared to capital intensive industrialized countries. With more liberal reforms in the making,
future of privatization seems to be bright and a salubrious flow of foreign investment and even
development of domestic private players to take charge of the struggling PSUs and turn them
around.8

Over the time, Indian policy makers have shed their inhibitions about privatization and have
formulated liberal reforms to divest the huge capital investment in PSUs and enhance the
efficiency and profit generation of the state owned enterprises. Sectors that showed tremendous
success after privatization are insurance, banking, civil aviation, telecom, power etc. However,
complete privatization is still a far-fetched dream. In most of the liberalized sectors, government
control is still evident and there is more of delegation or joint ventures between public and
private sector are functional like Maruti Suzuki etc.

8
Young, R., 2005. On Privatization- Competitive Sourcing in State Government, IPSPR E Journal, May 2005:
Institute of Public Service and Policy Research, University of South Carolina.

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PRODUCTIVITY GROWTH IN
AGRICULTURAL SET UP

Trade liberalisation affecting Indian agriculture began in the early 1990s, with the progressive
reduction or removal of trade restrictions of various types. The rupee devaluation of mid 1991
was followed by the removal of export subsidies on agricultural commodities such as tea and
coffee, and subsequent reduction of various other export subsidies. The process accelerated from
the late 1990s, in tune with WTO agreements, and involved liberalisation of export controls,
liberalisation of quantitative controls on imports and decontrol of domestic trade. Quantitative
restrictions on imports and export restrictions on groundnut oil, agricultural seeds, wheat and
wheat products, butter, rice and pulses, were all removed from April 2000. Almost all
agricultural products are now allowed to be freely exported as per current trade policy.9

This has been associated not only with the removal of quota control on imports, but the reduction
of import tariffs, except in certain cases (such as soya bean) where the tariff levels have reached
the bound levels. In any case, the optimism surrounding the signing of the Uruguay Round
agreement was such that for a range of important agricultural commodities, including rice wheat
and oilseeds, the Indian trade negotiators had declared zero rates of tariff binding. After world
trade prices of various crops started crashing from 1996 onwards, the Government of India was
forced to renegotiate the bound tariff levels for as many as 15 agricultural items.

This meant that even as the uncertainties related to international price movements became more
directly significant for farmers, progressive trade liberalisation and tariff reduction in these
commodities made their market relations more problematic. Government policy did not adjust in
ways that would make the transition easier or less volatile even in price terms. Thus, there was
no evidence of any co-ordination between domestic price policy and the policies regarding
external trade and tariffs. For example, an automatic and transparent policy of variable tariffs on
both agricultural imports and exports linked to the deviation of spot international prices from

9
Patnaik, Utsa (2004) The republic of hunger, available on www.macroscan.org

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their long-run desired domestic trends, would have been extremely useful at least in protecting
farmers from sudden surges of low-priced imports, and consumers from export price surges.
Such a policy would prevent delayed reactions to international price changes which allow
unncessarily large private imports. It would therefore have allowed for some degree of price
stability for both producers and consumers, which is important specially in dominantly rural
economies like that of India.

In the absence of such minimal protection, Indian farmers had to operate in a highly uncertain
and volatile international environment, effectively competing against highly subsidised large
producers in the developed countries, whose average level of subsidy amounted to many times
the total domestic cost of production for many crops. Also, the volatility of such prices – for
example in cotton – has created uncertain and often misleading signals for farmers who respond
by changing cropping patterns. It has directly affected cultivators of oilseeds such as soya bean
and groundnut farmers due to palm oil imports. While there has been some diversification in
crop production, the downside of this has been the reduction of production of traditional staple
foodgrains and declining food consumption in rural areas.10

Meanwhile, other government policies had direct and indirect effects upon agriculture. The most
significant related to the efforts at reducing subsidies which affected both agricultural producers
and consumers, and the reduction of public expenditure which would have benefited cultivation.
Thus, both food and fertiliser subsidies were sought to be reduced over this period. However,
both of these strategies, which involved raising the prices for consumers of both food and
fertilisers, had undesirable and even counter-productive effects, leading to the paradoxical results
of reducing consumption and simultaneously increasing subsidies!

In consequence, domestic support to Indian farmers was sharply negative through the 1990s for
most crops, and negligible in non-crop-specific terms.

The impact of trade liberalisation on farmers’ welfare works through various channels such as
volatile prices, problems in imports and exports, impact on livelihood and other employment
opportunities, etc. For farmers, perhaps the single most adverse effect has been the combination

10
Mathur, Archana S and Arvinder S. Sachdeva (2005) “Customs tariff structure in India”, Economics and Political
Weekly, February 5.

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of low prices and output volatility for cash crops. While output volatility increased especially
with new seeds and other inputs, the prices of most non-foodgrain crops weakened, and some
prices, such as those of cotton and oilseeds, plummeted for prolonged periods. This reflected not
only domestic demand conditions but also the growing role played by international prices
consequent upon greater integration with world markets in this sector. These features in turn
were associated with growing material distress among cultivators. 11

In a closed economy, lower output is normally accompanied by some price increase. Therefore,
coincidence of lower production with lower terms of trade was very rare until recently. The
pattern of lower prices accompanying relatively lower output reflected the effect of the growing
integration of Indian agriculture with world markets, resulting from trade liberalisation. As both
exports and imports of agricultural products were progressively freed, international price
movements were more closely reflected in domestic trends. The stagnation or decline in the
international prices of many agricultural commodities from 1996 onwards meant that their prices
in India also fell, despite local declines in production. This was not always because of actual
imports into the country: the point about openness is that the possibility of imports or exports can
be enough to affect domestic prices at the margin. 12

11
http://www.cesmadrid.es/documentos/sem200601_m d02_in.pdf [Accessed 27 December 2012]
12
Raghunathan, V., 2006. Leave Behind the Monopoly Mindset, Times of India, February 17, 2006.

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CONCLUSION

Globalization refers to the universal phenomenon of technological, economic, and cultural


change, as brought about by expanding facilities for intercommunication and interdependency
between traditionally different cultures. The 1991 policy statement brought a major shift in India
from controlled policy to liberal one. Imports/Exports were made free from most of the
restrictions.13

The next one and half decade of Indian experience is a story of perpetual increase of growth
emanating from strong policy overture and unleashed potential of entrepreneurship. Innovation,
ability to take risk and coping up with the need of the globalised world is the driving force of
today’s Indian economy. Indian automobile industry has also evolved in a similar fashion to
cater the rising consumer demand in the country and eventually has started satisfying global
customers.

The Indian automotive industry is one of the world’s fastest growing automotive industries
growing at a Compounded Annual Growth Rate (CAGR) of approximately 17 per cent over the
last five years. It is now the eleventh largest manufacturer of passenger cars, fourth largest
manufacturer of commercial vehicles and the second largest manufacturer of two-wheelers in the
world. It now produces 13 times more cars than it did 20 years ago (World Bank, 2005). . India
is among the top 10 countries to design, develop and mass produce its own car. The automotive
industry in India has thus undergone a transition from a few auto manufacturers, virtually
nonexistent auto components makers and low quality auto ancillary producers to the big league
of global auto manufacturers, competitive component manufacturers and emerging ancillary
producers. 14

13
http://www.cid.harvard.edu/archive/india/pdfs/530.pdf
14
Jain, R., Raghuram, G. and Gangwar, R., 2007.Airport Privatization in India: Lessons from the bidding Process in
Delhi and Mumbai, Working Paper No. 2007- 05-01, Research and Publications, Indian Institute of Management,
Ahmedabad.

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Some studies have revealed that earlier the Indian automotive industry was not competitive
enough for the global market due to inferior quality, lower labour productivity and high cost of
raw materials in India (Prodoshnath et al, 2006). However, globalisation, like the other markets
has made the automotive market very competitive and brought the profit margins to a very low
level. Component suppliers are the strength of the emerging automobile industry. Indian
automobile component industry is relatively labour intensive by global standards and is in a
transition stage as a low cost base for exporting labour intensive products (Saripalle, 2005). It is
transforming itself from a low volume, fragmented market into an internationally competitive
industry having advantage in skill oriented labour intensive components. Indian component
suppliers have displayed a growing capability to cater to the engineering and production needs of
the some of the world's biggest auto companies as many of the automobile majors are now
outsourcing several components from India. The manufacturing costs in India are 25 to 30
percent lower than its western counterparts. Despite its growth, the share of Indian exports in
global auto component market is very small.15 The dynamics of the industry is undergoing a
tremendous restructuring and tierisation. The various technological and non-technological
innovations have been brought in by the industry to capitalize on the opportunities.

Following the de-licensing by the government of the auto industry in 1993, the automobile
industry witnessed rapid transformations with the entry of many global players into India in the
1990s, making the domestic market increasingly competitive. Hyundai has succeeded in
emerging as the second most important car manufacturer after Maruti Udyog Ltd. (MUL)3 in a
very short period. The arrival of these MNEs has boosted the components sector. The situation is
accentuated due to liberalization of investment and import regime. Hyundai has set up a 100
percent subsidiary firm (its largest investment outside South Korea) in 1998. It initially brought
about 14 South Korean component suppliers to the Hyundai plant, to supply components that are
not available in Chennai. Hyundai has about 70 major component suppliers; of these, only 14 are
Korean joint 23 ventures and the rest are mainly Tamil Nadu-based firms.16 Previously, Suzuki
also set up several JV suppliers around Maruti factory in Gurgaon who used to receive advice
from Suzuki in absorbing new technology and improving production efficiency. With the
liberalization of policies and high growth of domestic demand, several other MNCs such as

15
http://www.unescap.org/pdd/Debt/docs/regionalwshop/9_india_doc.pdf
16
India's Economic Crisis: Nature and Remedies by Bakul H Dholakia

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Toyota, Honda, Ford etc. have also entered Indian market. Some of them have full production
facility and some still imports major components and assemble them here. As the import duties
on used vehicles and new ‘completely built units’ (CBU) remained very high (100% and 60%
respectively), companies find setting up production facility or importing cars in ‘completely
knocked down’ (CKD) forms and having an assembly plant in India is more cost effective.
Tariffs on components have come down from 35% in 2001-02 to mere 10% in 2008-09 with the
possibility of going down further in near future. This has not only increased the production
possibilities of cars but also fueled international trade of components. Export and import of
components have experienced almost similar growth pattern since 2000 (Nag et al, 2007)4. The
change of policy infused new life to the component sectors as many OEMs are increasingly
buying from domestic component manufacturers. Efficiency of Indian ancillary sector has also
given them the opportunity to export or in other ways help them increasingly get integrated to
global supply chain of automobile industry. Though in comparison to countries like China and
Thailand, India is far behind, the catching up is worth studying. In this context, the study
proposes to analyse the changing pattern of supply chain in Indian automobile sector vis-à-vis
trade liberlisation. How far regional trade agreements can potentially help the component sector
to get integrated with other countries will also be studied. To understand the dynamics of the
sector, Indian automobile policy and market structure has been briefly touched upon. The study
is based on the inputs from company surveys, interviews with nodal persons in the companies
and site visits as well. The choice of the companies is quite heterogeneous in nature which
includes among others OEMs, JVs and MNCs on one hand and Tier 1 suppliers and SMEs who
are in the ancillary sector on the other. Discussion with the policy makers of both Govt and think
tanks were carried out to bring out a conclusive dimension to the study.17

17
Indian Economy: Progress and Prospects by Deepak Mohanty

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BIBLIOGRAPHY & WEBLIOGRAPHY


1. Ahmad, F., 2011. Privatization : A View at Developing Countries, Degree Thesis,
International Business, Arcada
2. Gouri, G., 1996. Privatization and Public Sector Enterprises in India: Analysis of Impact
of a Non Policy, Economic and Political Weekly, 31(48), Pp. 63-74
3. Goyal, S., n.d. Privatization in India, [pdf], Available at:
http://www.ilo.org/public/english/region/asro/bangkok/paper/privatize/chap3-1.pdf
4. Guriev, S. and Megginson, W., 2005. Privatization: What have we learnt?, ABCDE
Conference, St. Petersburg, January, 2005.
5. Jain, R., Raghuram, G. and Gangwar, R., 2007.Airport Privatization in India: Lessons
from the bidding Process in Delhi and Mumbai, Working Paper No. 2007- 05-01,
Research and Publications, Indian Institute of Management, Ahmedabad.
6. Malik, V., 2003. Disinvestments in India: Needed Change in Mindset, Interfaces,
Vikalpa, 28(3), Pp. 57-63.
7. G. S. Batra, Emerging trend in Globalisation, Liberalisation and privatization (edited) 17-
36, 2001.
8. “Economec Reforms in India – Lessons from current Experience” Southern Economist
vol, 44, No.4, July 1, 2005
9. Datt Ruddar and Sundharam K.P.S., Indian Economy, S, Chand and Company Ltd. New
Delhi 2008
10. Raghunathan, V., 2006. Leave Behind the Monopoly Mindset, Times of India, February
17, 2006.
11. http://www.cesmadrid.es/documentos/sem200601_m d02_in.pdf [Accessed 27 December
2012]
12. Star, P., 1988. The Meaning of Privatization, Yale Law & Policy Review, 6(1), Pp.6-41.
13. Srinivasan, T., 2003. Indian Economy: Current Problems and Future Prospects, ICFAI
Journal of Applied Economics, 2003, Pp.1- 24

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