GLOBALIZATION AND INDIA

Prepared By: Ashutosh Vats & Shaifali Dixit

What is Globalization?
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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 does not only include opening up of world trade, development of advanced means of communication, internationalisation of financial markets, growing importance of MNCs, 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 open 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 been 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

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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 sector, amendment of the MRTP act, start of the privatisation programme reduction in tariff rates and change over to market determined exchange rates.

Impact.. Contd
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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
Indias position in the global economy has improved from the 8th position in 1991 to 4th place in 2001 (PPP basis)
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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 1970s at 3% GDP India still behind growth in countries like Brazil, Indonesia, Korea and Mexico was more than twice that of India.

Globalization 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.

Rising GDP growth

% average annual GDP growth

1900 1950 1950 1980 1980 2002 2002 2006

1.0 3.5 6.0 8.0

Sources: 1900-1990: Angus Maddison (1995), Monitoring the World Economy, 19902000:Census of India (2001), 2000-2005 Finance Ministry

Middle class is exploding

% Million People

1980 2000 2010

8 22 32

65 220 368

Source: The Consuming Class, National Council of Applied Economic Research, 2002

Productivity is rising
30% to 40% of GDP growth is due to rising productivity

Demographic trend points to sharp increases in input factors

Demographic Split 1,600 1,400 1,200 1,000 800 600 400 200 0
1.5 bn 1.1 bn

54% 46%

0-25 yrs

800 420 2005 2025

25 + yrs

Labor Force

Labor Force will double in the next 20 years

Demographic trend points to sharp increases in input factors

Age Dependency
80% 60% 40% 20% 0% 1980's 2002 2025 China 2002 72% 62% <50 % 45%

Savings Rate
50% 40% 30% 20% 10% 0% 1980's 2002 2025 China 2002 17% 24% 35+% 42%

Higher savings and investment rate will translate into higher GDP growth

India has a vibrant private space

100 Indian Companies have market cap of US$ 1 billion 1000 Indian Companies have received foreign institutional investment 125 Fortune 500 companies have R&D bases in India 390 Fortune 500 companies have outsourced software development to India. 2% bad loans in Indian banks (vs ~ 20% in China) 80% credit goes to private sector (vs~10% in China)

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
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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 Bushs 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

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Indias 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.

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 effectivelyalso 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.

India got democracy before capitalism and this has made all the difference