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8/9/2019 Globalization of Indian Economy
1/16
Globalization of Indian Economy
By: Sahil Shroff
SIMSR 2009-2011MMS - A
8/9/2019 Globalization of Indian Economy
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Reasons for Globalization
Indias Growth performance between 1960 1980
had been very disappointing compared to other
East Asian countries - 3.5% per annum against a
target of 5%.
Isolation.
Overall Backwardness.
Inefficiency of economy.
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Reasons for the problems
Rigidly controlled environment.
Extensive government control over private sector
activity.
High levels of protection to encourage domestic
production(self-relaince).
Restrictive approach to foreign investment.
Lower trade openness.
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Globalization Process
Globalization of Indian economy took place in
early 1990s
Liberalization towards Trade
Movement to a flexible exchange rate
Gradual depreciation Tariff reduction
Liberalization towards FDI
In the 1990s FDI was welcome and also actively soughtout in various sectors
FDI involved setting up new capacities, and portfolio
investment
Buying equities in existing companies through the stock
market
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Globalization Process
Privatization
Change in perception of public sector.
Exclusive public sectors like steel, petroleum,
telecommunication was thrown open to private sector.
India did not hand over management control, but insteadprovided minority stakes in the public sector enterprises
up for sale.
Profit-making public sector enterprises were not
privatized.
Reforms in various sectors including finance and
infrastructure
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Reasons for Financial Reform
Dismal levels of operational and allocation
efficiency in the banking system
Low profitability
High and growing non performing assets
Low capital base Administered interest rate structure
Cross subsidization in lending rates
Poor quality of loan assets
Excessive focus on quantitative achievements
Total neglect of returns and earnings
Lack of capital adequacy measures
Bad debts
Poor customer service
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Reasons for Financial Reform
Genuine need for banks to undertake substantial
restructuring additional capitalization to preserve
their solvency
Development of new types of financial instruments
Technological changes
Expanding capital markets
Competition from overseas banks
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Financial Reforms
Reforms aimed at :
1. Enhancing the productivity and efficiency of the
economy as a whole
2. Increasing international competitiveness
3. Moving away from central allocation of resources insome key sectors and instead allocating according to
market forces
4. Improving the allocating and functional efficiency of the
financial system
5. Developing a diversified competitive financial system to
support the development and growth of the real sector
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Financial Reforms
Objectives
1. Modifications in the policy framework
2. Improvement in the financial health and competitive
capabilities
3. Building financial infrastructures
4. Up gradation of the level of managerial competence and
the quality of human resources
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Financial Reforms
Reforms in the Banking Sector
Deregulation of interest rates
Flexibility to determine cost at which to raise money and
lend it out
Liberalization in controls over bank credit allocation
Different lending rates for different credit limits
Introduction of prudential norms
Income recognition Asset clarification
Provision for bad and doubtful debts
Capital Adequacy
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Financial Reforms
Improved Supervisory standards Board for Financial Supervision(BFS) was setup in 1994
Introduction of new system of Off-site monitoring and
Surveillance System(OSMOS)
CAMELS and CACS for rating of banks to help identify
special needs for supervisory attention
Liberalization of entry for private banks Existing banks are allowed to expand their operations
New private banks are permitted to establish themselves
Introduction of minority private share holding in
public banks Reduction of public ownership to minimum holding of 51%
Foreign institutions are permitted to own up to 20% equity
in domestic markets
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Financial Reforms
Reforms in the Capital Market
Elimination of government control over the issue of
capita
Establishment of an independent regulator for the
securities market
Opening the mutual fund sector for private mutual funds
Reforms in Insurance
Opening the sector to new private sector insurers but
with a cap of 26% in foreign equity
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Effects of the Financial Reforms
Liberalization of the banking system has notdestabilized it.
Robustness of the system helped India during the
East Asian crisis in that it escaped the contagion
Level of NPAs of the public sector banks havedropped substantially during the reform period
Better accounting system and financial
supervision
Entry of private banks leading to healthycompetition
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Outcomes of Globalization
The Good
GDP growth improved significantly
1960 -1980 Growth = 3.5%
1980 -1991 Growth = 5.4%
1992 -2005 Growth = 6.3%
Poverty as conventionally measured declined
In 1983 45% population was below the poverty line
In 1993 36% population was below the poverty line
In 1999 26% population was below the poverty line
Robust increase in real wages
In the reform period real wages increased by 42%
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Outcomes of Globalization
The Bad
Growth achievements were less than expected
Targets of 7% and 8% for the years 1992 -1996 and 2002
2007 respectively not achieved
Benefits of growth were not seen to be evenly distributed
among different states
Some states accelerated much more than others
The most poorest and populated states actually decelarated
in growth
Marginal increase in Employment
Shrinkage of employment in public sector did not lead toincreased employment in private sector
Rural areas did not share adequately in growth as
agriculture decelerated significantly
Agricultural GDP growth slowed down from 3.6% between
1980 1996 to 2% between 1997 -2004
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Future of Indian Economy post globalization
India has transitioned from a relatively closed to amore open economy fairing well
The macroeconomic environment is more
responsive to growth
India has increased its savings and investmentrates steadily
FDI has risen from virtually nothing to 1% of GDP
with a distinct possibility of raising to 2-3% of
GDP Investor interest is increasing and 200 out of the
fortune 500 companies are now operating in India
Indian businessman have confidently started
investing abroad