The last decade has witnessed much talk about glogalization, economic liberalization and economic integration of the Indian economy with the world economy. Specially after the completion of Uruguay Round of trade negotiations in April 1994 and the establishment of the World Trade Organization in January 1995, many issues have been raised regarding India’s participation in world trade in future, its integration with the world economy and the likely cost and benefits from the integration.
Meaning of Globalization
Globalization, in brief, is a process of increasing economic integration and growing economic interdependence between countries in the world economy. It is a relative softening up of economic and trade barriers across the countries so as to facilitate a free inter-flow of capital technology, people, goods and services. Eventually globalization would mean being able to manufacture in the most cost-effective way anywhere in the world. It means being able to procure raw materials and labour and drawing management resources from the cheapest source anywhere in the world.
Globalization intends to integrate the Indian economy with the world economy. Globalization is considered to be an important element in the reforms package. It has four parameters:
- Reduction of trade barriers to permit free-flow of goods and services across national frontiers.
- Creation of an environment in which free flow of capital can take place.
- Creation of an environment permitting free flow of technology among nation-states.
- Creation of an environment in which free movement of labour can take place in different countries of the world.
Merits
- It is argued that globalization of UDCs will improve the allocative efficiency of resources, reduce the capital output ratio and increase labour productivity, help to develop the export spheres and export culture, increase the inflow of capital and updated technology into the country, increase the degree of competition, and give a boost to the average growth rate of economy.
- It will help to restructure the production and trade pattern in capital-scarce, labour-abundant economy in favour of labour-intensive goods and techniques.
- Foreign capital will be attracted and with its entry, updated technology will also enter the coutnry.
- With the entry of foreign competition and the removal of import traiff barriers, domestic industry will be subject to price reducing and quality improving effects in the domestic economy.
- It is believed that the main effect of integration will be felt in the industrial and related sectors and cheaper and high quality consumer goods will be manufactured at home. As a result, employment opportunites would go up.
- It is also believed that the efficiency of banking and financial sectors will improve, as there will be competition from to foreign and foreign banks.
Demerits
- The globalization process is in essence a tremendous redistribution of economic power at the world level which will increasingly translate into a redistribution of political power.
- One study reveals that in the globalizing world the economies of the world are ironically moving away from one another more than coming together.
- With the lightening speed at which globalization is taking place, it is increasing the pressure on economies for structural and conceptual readjustments to a breaking point.
- It is beocming hard for the countries to ask their public to go through the pains and uncertainties of structural adjustment for the sake of benefits yet to come.
Measures towards globalization
To pursue the objective of globalization, the following measures have been taken:
Convertibility of Rupee: Economy of any country is to make its currency fully convertible i.e. allow it to determine its own exchange rate in the international market without any official intervention . As a frist step towards full convertibility of Rupee, Rupee was devalued against major currencies in 1991. This was followed by introduction of dual exchange rate system in 1992-93 and full convertibility of the Rupee on trade account in 1993-94. India achieved full convertibility on current account in August 1994. Current account convertibility means freedom to buy or sell foreign exchange for the following transaction
1. All payments due in connection with foreign trade, other current business, including services and normal short-term banking and credit facilities.
2. Payments due as interest on loans and as net income from other investments.
3. Payments of moderate amount of ‘amortization of loans or for depreciation of direct investment.
4. Moderate remittances of family living expenses.
Certain steps towards full convertibility on capital account have also been taken like authorized dealers have been allowed to borrow/invest abroad upto 15% of their unimpaired Tier1 capital, they have been delegated powers to release exchange for opening of offices abroad, banks fulfilling certain criteria have been permitted to import gold for resale in India and so on. Full convertibility of capital account in India will still take many more years.
Import liberalization: As per the recommendation of the World Bank, free trade of all items excepts negative list of imports and exports has been allowed. In addition, import duties on a wide range of capital commodities have been drastically cut down. The peak rate of custom duty has been brought down from 150 per cent in early 90’s to jsut 30 per cent in 2001-02 budget. Tariffs on imports of raw materials and manufactured intermediates have also been reduced.
In addition to the phased reduction of import duties, India, as a member of World Trade Organization (WTO) had also committed itself to the phasing out of quantitative restrictions over a six year period beginning 1997. This period has been further reduced following the rulings of the Dispute Settlement Body of the WTO against India on an appeal made by the U.S.A. Since Aprill 2001, the quantitative restrictions have been totally removed. Moreover, as a part of the Agreement on Trade Rates Intellectual Property Rights (TRIPs), the Patents (Amendments) Act 1999 was passed in 1999 to provide for Exclusive Marketing Rights (EMRs).
Opening the economy of foreign capital: The Government has taken a number of measures to encourage foreign capital to integrate the Indian economy with the global economy. Many facilities and incentives have been offered to the foreign investors and Non-Resident Indians in the new economic policy. The FDI floodgates have been opened. Foreign Direct Investment upto 26%, 49%, 51%m 74% and even upto 100% has been allowed in different industries. These include drugs and pharmaceuticals, hotels and tourism, airport, electricity generation, oil refineries, construction and maintenance of roads, rope-ways, ports, hydro-equipment and many more. Even defence and insurance sectors have been partially opened.
Many other measures have also been announced from time to time. For instance, foreign companies have been allowed to use thier trademarks in India and carry on any activity of trading, commercial or industrial nature; repatriation of profits by foreign companiess has been allowed, foreign companies (other than banking companies) wanting to borrow money or accept deposits are now allowed to do so without taking the permission of the RBI, foreign companies can deal in immovable property in India, restrictions on transfer of shares from on non-resident to another non-resident have been removed, reputed Foreign Institutional Investors (FII) have been allowed to invest in Indian capital market subject to certain conditions, etc. All these initiatives are supposed to integrate the Indian economy with the world economy.
Effect of Globalization on Indian Economy
The process of globalization initiated in 1991 and far reaching changes in industrial and other politicies have led to considerable changes. The following achievements have been claimed especially on the external front:
1. Our foreign currency reserves which had fallen to barely one billion dollars in June, 91 rose substantially maintained at around this level.
2. Exports now finance over 90 per cent of imports, compared to only 60 per cent in the latter half of the eighties.
3. Contrary to what many feared, the exchange rate for the rupee has remained almost steady despite the introduction of full convertibility of rupee.
4. International confidence in India has been resotred. This is indicated by swelling foreign direct and portfolio investment.
5. Certain benefits of globalization have accrued to the Indian consumer in the form of a larger variety of consumer goods, imporved quality of goods and in some cases and reduced prices of consumer durable.
In brief we can say that a new thrust on international business has merged recently although business transcending national boundaries has always been there is the past. Of late, there has been a growing realisation among countries of the significance of economics of markets and inter-national competition. India is no exception. It has also embraced globalization. Globalization broadly implies free movement of goods and services and people across the countries. The global corporations of today conduct their operations world-wide as if the whole world were a single entity. Globalization has throws certain opportunites for India like it can raise capital from the world market, it can become a premier production centre and it can attract foreign investors etc. After globalization, India is beginning to shed it insularity and trying to become a global giant.
