Introduction 006

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Introduction

Indian economy had experienced major policy changes in early 1990s. The new economic reform, popularly known as,

Liberalization, Privatization and Globalization (LPG model) aimed at making the Indian economy as fastest growing

economy and globally competitive. The series of reforms undertaken with respect to industrial sector, trade as well as financial

sector aimed at making the economy more efficient.

With the onset of reforms to liberalize the Indian economy in July of 1991, a new chapter has dawned for India and her billion plus

population. This period of economic transition has had a tremendous impact on the overall economic development of almost all

major sectors of the economy, and its effects over the last decade can hardly be overlooked. Besides, it also marks the advent of the

real integration of the Indian economy into the global economy.

This era of reforms has also ushered in a remarkable change in the Indian mindset, as it deviates from the traditional values heldsince Independence in 1947, such as self reliance and socialistic policies of economic development, which mainly due to the inward

looking restrictive form of governance, resulted in the isolation, overall backwardness and inefficiency of the economy, amongst a

host of other problems. This, despite the fact that India has always had the potential to be on the fast track to prosperity.

Now that India is in the process of restructuring her economy, with aspirations of elevating herself from her present desolate

position in the world, the need to speed up her economic development is even more imperative. And having witnessed the positive

role that Foreign Direct Investment (FDI) has played in the rapid economic growth of most of the Southeast Asian countries and

most notably China, India has embarked on an ambitious plan to emulate the successes of her neighbors to the east and is trying

to sell herself as a safe and profitable destination for FDI.

Globalization has many meanings depending on the context and on the person who is talking about. Though the precise definition

of globalization is still unavailable a few definitions are worth viewing, Guy Brainbant: says that the process of globalization not

only includes opening up of world trade, development of advanced means of communication, internationalization 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. The term globalization refers to the integration of economies of the

world through uninhibited trade and financial flows, as also through mutual exchange of technology and knowledge. Ideally, it

also contains free inter-country movement of labor. In context to India, this implies opening up the economy to foreign direct

investment by providing facilities to foreign companies to invest in different fields of economic activity in India, removing

constraints and obstacles to the entry of MNCs in India, allowing Indian companies to enter into foreign collaborations and also

encouraging them to set up joint ventures abroad; carrying out massive import liberalization programs by switching over from

quantitative restrictions to tariffs and import duties, therefore globalization has been identified with the policy reforms of 1991 in

India.

The Important Reform Measures (Step Towards liberalization privatization and Globalization)



Indian economy was in deep crisis in July 1991, when foreign currency reserves had plummeted to almost $1 billion; Inflation had

roared to an annual rate of 17 percent; fiscal deficit was very high and had become unsustainable; foreign investors and NRIs had

lost confidence in Indian Economy. Capital was flying out of the country and we were close to defaulting on loans. Along with

these bottlenecks at home, many unforeseeable changes swept the economies of nations in Western and Eastern Europe, South

East Asia, Latin America and elsewhere, around the same time. These were the economic compulsions at home and abroad that

called for a complete overhauling of our economic policies and programs. Major measures initiated as a part of the liberalization

and globalization strategy in the early nineties included the following:

Devaluation: The first step towards globalization was taken with the announcement of the devaluation of Indian currency by 18-

19 percent against major currencies in the international foreign exchange market. In fact, this measure was taken in order to

resolve the BOP crisis

Disinvestment -In order to make the process of globalization smooth, privatization and liberalization policies are moving along

as well. Under the privatization scheme, most of the public sector undertakings have been/ are being sold to

private sector

Dismantling of The Industrial Licensing Regime At present, only six industries are under compulsory licensing mainly on

accounting of environmental safety and strategic considerations. A significantly amended locational policy in tune with the

liberalized licensing policy is in place. No industrial approval is required from the government for locations not falling within 25

kms of the periphery of cities having a population of more than one million.

Allowing Foreign Direct Investment (FDI) across a wide spectrum of industries and encouraging non-debt flows. The

Department has put in place a liberal and transparent foreign investment regime where most activities are opened to foreign

investment on automatic route without any limit on the extent of foreign ownership. Some of the recent initiatives taken to further

liberalize the FDI regime, inter alias, include opening up of sectors such as Insurance (upto 26%); development of integrated

townships (upto 100%); defense industry (upto 26%); tea plantation (upto 100% subject to divestment of 26% within five years to

FDI); enhancement of FDI limits in private sector banking, allowing FDI up to 100% under the automatic route for most

manufacturing activities in SEZs; opening up B2B e-commerce; Internet Service Providers (ISPs) without Gateways; electronic

mail and voice mail to 100% foreign investment subject to 26% divestment condition; etc. The Department has also strengthened

investment facilitation measures through Foreign Investment Implementation Authority (FIIA).

Non Resident Indian Scheme the general policy and facilities for foreign direct investment as available to foreign investors/

Companies are fully applicable to NRIs as well. In addition, Government has extended some concessions especially for NRIs and

overseas corporate bodies having more than 60% stake by NRIs

Throwing Open Industries Reserved For The Public Sector to Private Participation. Now there are only three

industries reserved for the public sector



Abolition of the (MRTP) Act, which necessitated prior approval for capacity expansion

The removal of quantitative restrictions on imports.

The reduction of the peak customs tariff from over 300 per cent prior to the 30 per cent rate that applies now.

Wide-ranging financial sector reforms in the banking, capital markets, and insurance sectors, including the deregulation of

interest rates, strong regulation and supervisory systems, and the introduction of foreign/private sector competition.

Impact of Globalization of Indian Economy

The novel Tale of Two Cities of Charles Dickens begins with a piquant description of the contradictions of the times: It was the best

of times, it was the worst of times; it was the age of wisdom, it was the age of foolishness; it was the epoch of belief, it was the

epoch of incredulity; we had everything before us, we had nothing before us

At the present, we can also say about the tale of two Indias: We have the best of times; we have the worst of times. There is

sparkling prosperity, there is stinking poverty. We have dazzling five star hotels side by side with darkened ill-starred hovels. We

have everything by globalization, we have nothing by globalization.

Though some economic reforms were introduced by the Rajiv Gandhi government (1985-89), it was the Narasimha Rao

Government that gave a definite shape and start to the new economic reforms of globalization in India. Presenting the 1991-92

Budget, Finance Minister Manmohan Singh said: After four decades of planning for industrialization, we have now reached a stage

where we should welcome, rather fear, foreign investment. Direct foreign investment would provide access to capital, technology

and market.

In the Memorandum of Economic Policies dated August 27, 1991 to the IMF, the Finance Minister submitted in the concluding

paragraph: The Government of India believes that the policies set forth in the Memorandum are adequate to achieve the objectives

of the program, but will take any additional measures appropriate for this purpose. In addition, the Government will consult with

the Fund on the adoption of any measures that may be appropriate in accordance with the policies of the Fund on such

consultations.

The Government of India affirmed to implement the economic reforms in consultation with the international bank and in

accordance of its policies. Successive coalition governments from 1996 to 2004, led by the Janata Dal and BJP, adopted faithfully

the economic policy of liberalization. With Manmohan Singh returned to power as the Prime Minister in 2004, the economic

policy initiated by him has become the lodestar of the fiscal outlook of the government.



The Bright Side of Globalization

The rate of growth of the Gross Domestic Product of India has been on the increase from 5.6 per cent during 1980-90 to seven

per cent in the 1993-2001 period. In the last four years, the annual growth rate of the GDP was impressive at 7.5

per cent (2003-04), 8.5 per cent (2004-05), nine per cent (2005-06) and 9.2 per cent (2006-07). Prime Minister

Manmohan Singh is confident of having a 10 per cent growth in the GDP in the Eleventh Five Year Plan period.

The foreign exchange reserves (as at the end of the financial year) were $ 39 billion (2000-01), $ 107 billion

(2003-04), $ 145 billion (2005-06) and $ 180 billion (in February 2007). It is expected that India will cross the

$ 200 billion mark soon.

The cumulative FDI inflows from 1991 to September 2006 were Rs.1, 81,566 crores (US $ 43.29 billion). The

sectors attracting highest FDI inflows are electrical equipments including computer software and electronics (18 per cent), servicesector (13 per cent), telecommunications (10 per cent), transportation industry (nine per cent), etc. In the inflow of FDI, India has

surpassed South Korea to become the fourth largest recipient.

India controls at the present 45 per cent of the global outsourcing market with an estimated income of $ 50

billion.

In respect of market capitalization (which takes into account the market value of a quoted company by multiplying its

current share price by the number of shares in issue), India is in the fourth position with $ 894 billion after the US ($

17,000 billion), Japan ($ 4800 billion) and China ($ 1000). India is expected to soon cross the trillion dollar mark.

As per the Forbes list for 2007, the number of billionaires of India has risen to 40 (from 36 last year) more than

those of Japan (24), China (17), France (14) and Italy (14) this year. A press report was jubilant: This is the richest year for

India. The combined wealth of the Indian billionaires marked an increase of 60 per cent from $ 106 billion in 2006 to $ 170

billion in 2007. The 40 Indian billionaires have assets worth about Rs. 7.50 lakh crores whereas the cumulative

investment in the 91 Public Sector Undertakings by the Central Government of India is Rs. 3.93 lakh crores

only.

The Dark Side of Globalization

On the other side of the medal, there is a long list of the worst of the times, the foremost casualty being the agriculture sector .

Agriculture has been and still remains the backbone of the Indian economy. It plays a vital role not only in providing

food and nutrition to the people, but also in the supply of raw material to industries and to export trade. In 1951, agriculture

provided employment to 72 per cent of the population and contributed 59 per cent of the gross domestic

product. However, by 2001 the population depending upon agriculture came to 58 per cent whereas the share



of agriculture in the GDP went down drastically to 24 per cent and further to 22 per cent in 2006-07. This has

resulted in a lowering the per capita income of the farmers and increasing the rural indebtedness.

The agricultural growth of 3.2 per cent observed from 1980 to 1997 decelerated to two per cent subsequently. The Approach to the

Eleventh Five Year Plan released in December 2006 stated that the growth rate of agricultural GDP including forestry and fishing

is likely to be below two per cent in the Tenth Plan period.

The reasons for the deceleration of the growth of agriculture are given in the Economic Survey 2006-07: Low investment,

imbalance in fertilizer use, low seeds replacement rate, a distorted incentive system and lo post-harvest value addition continued

to be a drag on the sectors performance. With more than half the population directly depending on this sector, low agricultural

growth has serious implications for the inclusiveness of growth.

The number of rural landless families increased from 35 per cent in 1987 to 45 per cent in 1999, further to 55 per cent in 2005. The farmers are destined to die of starvation or suicide. Replying to the Short Duration

Discussion on Import of Wheat and Agrarian Distress on May 18, 2006, Agriculture Minister Sharad Pawar

informed the Rajya Sabha that roughly 1, 00,000 farmers committed suicide during the period 1993-2003

mainly due to indebtedness.

In his interview to The Indian Express on November 15, 2005, Sharad Pawar said: The farming community has been ignored in

this country and especially so over the last eight to ten years. The total investment in the agriculture sector is going down. In the

last few years, the average budgetary provision from the Indian Government for irrigation is less than 0.35

percent.

During the post-reform period, India has been shining brilliantly with a growing number of billionaires. Nobody has taken note of

the sufferings of the family members of those unfortunate hundred thousand farmers.

Further, the proportion of people depending in India on agriculture is about 60 % whereas the same for the UK is 2

%, USA 2 %and Japan 3 %. The developed countries, having a low proportion of population in agriculture, have readily

adopted globalization which favors more the growth of the manufacturing and service sectors.

About the plight of agriculture in developing countries, Nobel Prize-winning economist Joseph Stiglitz said: Trade

agreements now forbid most subsidies excepted for agricultural goods. This depresses incomes of those

farmers in the developing countries who do not get subsidies. And since 70 per cent of those in the developing

countries depend directly or indirectly on agriculture, this means that the incomes of the developing countries

are depressed. But by whatever standard one uses, todays international trading regime is unfair to

developing countries.



He also pointed out: The average European cow gets a subsidy of $ 2 a day (the World Bank measure of

poverty); more than half the people in the developing world live on less than that. It appears that it is better to

be a cow in Europe than to be a poor person in a developing country.

Demoting Agriculture

The Economic Survey reports released till 1991 contained the Chapters in the following order: (1) Introduction, (2) Agricultural

Production, (3) Industrial Performance and Policies, (4) Infrastructure, (5) Human Resources, (6) Prices, Price Policy and Public

Distribution System, (7) Fiscal Policy and Government Budget, (8) Monetary and Credit Developments, (9) The External Sector

and (10) Problems and Prospects.

In the Economic Survey 1991-92, Finance Minister Manmohan Singh recast the Chapters in the following order: (1) Introduction,

(2) Public Finance, (3) Money and Credit, (4) Prices and Distribution, (5) Balance of Payments, (6) Industry, (7) Agriculture, (8)Infrastructure and (9) Social Sectors.

It is not known as to why the Finance Minister demoted the importance of agriculture that has about 90 per cent population from

the second place to the seventh in the annual Economic Survey of the country. In a way does it symbolize the low importance

deliberately given to the growth of the agriculture sector in the scheme of globalization?

Strategy of Globalization

In the Report (2006) East Asian Renaissance, World Bank Advisor Dr Indermit Gill stated: Cities are at the core of a development

strategy based on international integration, investment and innovation. East Asia is witnessing the largest rural-to-urban shift of

population in history. Two million new urban dwellers are expected in East Asian cities every month for the next 20 years. This

will mean planning for and building dynamic, connected cities that are linked both domestically and to the outside world so that

economic growth continues and social cohesion is strengthened.

The market economy seems to be more concerned with the growth of consumerism to attract the high income groups who are

mostly in the cities in the developing countries. Rural economy and the agricultural sector were out of focus in the strategy of globalization.

Growth of UnemploymentPoverty



The proportion of the unemployed to the total labor force has been increasing from 2.62 per cent (1993-94) to 2.78 per cent (1999-

2000) and 3.06 per cent (2004-05). In absolute figures, the number of unemployed had been in those years 9.02 million, 10.51

million and 13.10 million respectively. (Economic Survey 2006-07, Table 10.4)

In reply to a question, the Minister for Labor and Employment informed the Lok Sabha on March 19, 2007, that the enrolment of

the unemployed in the Employment Exchanges in 2006-07 was 79 lakhs against the average of 58 lakhs in the past ten years.

About the impact of globalization, in particular on the development of India, the ILO Report (2004) stated: In

India, there had been winners and losers. The lives of the educated and the rich had been enriched by globalization. The

information technology (IT) sector was a particular beneficiary. But the benefits had not yet reached the majority, and new

risks had cropped up for the losersthe socially deprived and the rural poor. Significant numbers of non-perennial poor, who had

worked hard to escape poverty, were finding their gains reversed. Power was shifting from elected local institutions to

unaccountable trans-national bodies. Western perceptions, which dominated the globe media, were not aligned with local

perspectives; they encouraged consumerism in the midst of extreme poverty and posed a threat to cultural and linguistic

diversity.

Social Services

About the quality of education given to children, the Approach to the Eleventh Five Year Plan stated: A recent study has found that

38 per cent of the children who have completed four years of schooling cannot read a small paragraph with short sentences meant

to be read by a student of Class II. About 55 per cent of such children cannot divide a three digit number by a one digit number.

These are indicators of serious learning problems which must be addressed.

The Approach paper added further: Universalisation of education will not suffice in the knowledge economy. A person with a mere

eight years of schooling will be as disadvantaged in a knowledge economy by ICT as an illiterate person in modern industry an

services.

The less said about the achievements in health the better. The Approach to the Eleventh Plan concedes that progress

implementing the objectives of health have been slow. The Report gave the particulars of the rates of infant mortality (per

1000 live births) for India as 60 against Sri Lanka (13), China (30) and Vietnam (19). The rate of maternal

mortality (per 1, 00,000 deliveries) of India is 407 against Sri Lanka (92), China (56) and Vietnam (130).

Growth of Slum Capitals



In his 2007-08 Budget Speech, Finance Minister Chidambaram put forth a proposal to promote Mumbai as a world class

financial centre and to make financial services the next growth engine of India.

Of its 13 million population, Mumbai city has 54 per cent in slums. It is estimated that 100 to 300 new families come to

Mumbai every day and most land up in a slum colony. Prof R. N. Sharma of the Tata Institute of Social Science says that Mumbai

is disintegrating into slums. From being known as the slum capital of India and the biggest slum of Asia, Mumbai is all set to

become the slum capital of the world.

The population of Delhi is about 14 million of which nearly 45 per cent population lives in slums, unauthorized colonies, JJ

clusters and undeveloped rural parts. During dry weather these slum dwellers use open areas around their units for defecation and

the entire human waste generated from the slums along with the additional wastewater from their households is discharged

untreated into the river Yamuna.

The cumulative FDI inflows (until September 2006) to the New Delhi region was of Rs. 27,369 crores and to Mumbai Rs. 24,545

crores. The two spots of New Delhi and Mumbai received 46 per cent of the total FDI inflows into India.

The FDI inflows have in no way assisted in improving the health and environment conditions of the people. On

the other hand, the financial capital of India and the political capital of India are set to become the topmost slum cities of the

world.

Victims of Globalization

IN his Making Globalization Work, Nobel Laureate Stiglitz wrote: Trade liberalizationopening up markets to the free flow of goods

and services was supposed to lead to growth. The evidence is at best mixed. Part of the reason that international trade agreements

have been so unsuccessful in promoting growth in poor countries is that they were often unbalanced. The advanced industrial

countries were allowed to levy tariffs on goods produced by developing countries that were, on average, four times higher that

those on goods produced by other advanced industrial countries.

In his foreword to The Dynamics and Impact of Globalization by Dr. M. V. Louis Anthuvan, Justice V. R. Krishna Iyer pointed outpithily: The New World Order is the product of what is now familiarly described as globalization, liberalization and privatization.

The weaker sectors like the Asian and African countries are victims, whose economic welfare is slavery, at the disposal of the

White world. When World War II came to a close, commercial conquest and trade triumph became the major goal of the United

States and the other giant trade powers. Indeed, these mighty countries and companies even made world hunger as Big Business.

The poorer countries with natural resources have been made banana republics and cucumber vassals.



The Human Development Report 2006 recorded: Globalization has given rise to a protracted debate over the precise direction of

trends in global income distribution. What is sometimes lost sight of is the sheer depth of inequalityand the associated potential

for greater equity to accelerate poverty reduction. Measured in the 2000 purchasing power parity (PPP) terms, the gap between

the incomes of the poorest 20 per cent of the worlds population and the $ 1 a day poverty line amounts to about $ 300

billion. That figure appears large, but it is less than two per cent of the income of the worlds wealthiest 10 per cent.

To make Globalization Work

Under the phenomenal growth of information technology which has shrunk space and time and reduced the cost of moving

information, goods and capital across the globe, the globalization has brought unprecedented opportunities for human

development for all, in developing as well as developed countries. Under the commercial marketing forces, globalization has been

used more to promote economic growth to yield profits to some countries and to some groups within a country.

India should pay immediate attention to ensure rapid development in education, health, water and sanitation, labor and

employment so that under time-bound programmes the targets are completed without delay. A strong foundation of human

development of all people is essential for the social, political and economic development of the country.

Though at present India appears to be dominant in some fields of development as in IT-ITES, this prosperity may be challenged by

other competing countries which are equipping themselves with better standards of higher education. As detailed earlier, our

progress in education has been slow and superficial, without depth and quality, to compete the international

standards.

The government should take immediate steps to increase agricultural production and create additional employment opportunities

in the rural parts, to reduce the growing inequality between urban and rural areas and to decentralize powers and resources to the

panchayati raj institutions for implementing all works of rural development. Steps should be taken for early linking of the rivers,

especially in the south-bound ones, for supply of the much-needed water for irrigation.

It should be remembered that without a sustainable and productive growth of the agricultural sector, the

other types of development in any sphere will be unstable and illusory. Despite the concerted development in

manufacturing and service sectors, despite the remarkable inflow and overflow of foreign reserves,

agriculture is still the largest industry providing employment to about 60 per cent of the workforce in the

country.

Mere growth of the GDP and others at the macro level in billions does not solve the chronic poverty and backward level of living

norms of the people at the micro level. The growth should be sustainable with human development and decent employment

potential. The welfare of a country does not percolate from the top, but should be built upon development from the bottom.

Acknowledgement:



I would like to express profound gratitude to Dr. S. L. Kale and Head Prof. Dr. C. K. Goyal for giving encouragement and

guidance to work on Impact of Globalization on Indian Economy An Overview . Also I would like to express thanks to Mr. Balwant

Salunke, Mr. Keshav Anand, Mr. Dashrath Sharma, Mr. Rahul Joshi and Mr. Ankur Jain.

References:

Globalisation and Poverty: Centre for International Economics, Australia.

Globalisation Trend and Issues T.K.Velayudham,

Globalisation and India Lecture: Prof .Sagar Jain, University of N.Carolina.

Repositioning India in the Globalised World Lecture: V.N.Rai.

Globalization of Indian economy by Era Sezhiyan

Globalisation and Indias Business prospectives Lecture Ravi Kastia.

Globalisation and Liberalisation Prospects of New World Order Dr.A.K.Ojha, Third Concept An International Journal of Ideas,

Aug 2002.

Globalisation: Imperatives, Challenges and the Strategies.

Globalization and its Meaning

Broadly speaking, the term ‘globalization’ meansintegration of economies and societies through cross countryflows of information, ideas, technologies, goods, services,capital, finance and people. Cross border integration canhave several dimensions – cultural, social, political and

economic. In fact, some people fear cultural and socialintegration even more than economic integration. The fear of “cultural hegemony” haunts many. Limiting ourselves toeconomic integration, one can see this happen through thethree channels of (a) trade in goods and services, (b)movement of capital and (c) flow of finance. Besides, thereis also the channel through movement of people.



Historical Development

Globalization has been a historical process with ebbsand flows. During the Pre-World War I period of 1870 to1914, there was rapid integration of the economies in termsof trade flows, movement of capital and migration of people.The growth of globalization was mainly led by thetechnological forces in the fields of transport andcommunication. There were less barriers to flow of tradeand people across the geographical boundaries. Indeedthere were no passports and visa requirements and very fewnon-tariff barriers and restrictions on fund flows. The pace of globalization, however, decelerated between the First and

the Second World War. The inter-war period witnessed theerection of various barriers to restrict free movement of goods and services. Most economies thought that theycould thrive better under high protective walls. After WorldWar II, all the leading countries resolved not to repeat themistakes they had committed previously by opting for isolation. Although after 1945, there was a drive toincreased integration, it took a long time to reach the Pre-World War I level. In terms of percentage of exports andimports to total output, the US could reach the pre-WorldWar level of 11 per cent only around 1970. Most of thedeveloping countries which gained Independence from thecolonial rule in the immediate Post-World War II periodfollowed an import substitution industrialization regime. TheSoviet bloc countries were also shielded from the process of global economic integration. However, times have changed.In the last two decades, the process of globalization hasproceeded with greater vigour. The former Soviet bloccountries are getting integrated with the global economy.

More and more developing countries are turning towardsoutward oriented policy of growth. Yet, studies point out thattrade and capital markets are no more globalized today thanthey were at the end of the 19 th century. Nevertheless, thereare more concerns about globalization now than beforebecause of the nature and speed of transformation. What isstriking in the current episode is not only the rapid pace but



also the enormous impact of new information technologieson market integration, efficiency and industrial organization.Globalization of financial markets has far outpaced theintegration of product markets.

Gains from Globalization

The gains from globalization can be analyzed in thecontext of the three types of channels of economicglobalization identified earlier.

Trade in Goods and Services

According to the standard theory, international trade

leads to allocation of resources that is consistent withcomparative advantage. This results in specialization whichenhances productivity. It is accepted that international trade,in general, is beneficial and that restrictive trade practicesimpede growth. That is the reason why many of theemerging economies, which originally depended on a growthmodel of import substitution, have moved over to a policy of outward orientation. However, in relation to trade in goodsand services, there is one major concern. Emergingeconomies will reap the benefits of international trade only if they reach the full potential of their resource availability.This will probably require time. That is why internationaltrade agreements make exceptions by allowing longer timeto developing economies in terms of reduction in tariff andnon-tariff barriers. “Special and differentiated treatment”, asit is very often called has become an accepted principle.

Movement of Capital

Capital flows across countries have played an importantrole in enhancing the production base. This was very muchtrue in 19th and 20th centuries. Capital mobility enables thetotal savings of the world to be distributed among countrieswhich have the highest investment potential. Under thesecircumstances, one country’s growth is not constrained by itsown domestic savings. The inflow of foreign capital has



played a significant role in the development in the recentperiod of the East Asian countries. The current accountdeficit of some of these countries had exceeded 5 per centof the GDP in most of the period when growth was rapid.Capital flows can take either the form of foreign directinvestment or portfolio investment. For developing countriesthe preferred alternative is foreign direct investment.Portfolio investment does not directly lead to expansion of productive capacity. It may do so, however, at one stepremoved. Portfolio investment can be volatile particularly intimes of loss of confidence. That is why countries want toput restrictions on portfolio investment. However, in an opensystem such restrictions cannot work easily.

Financial Flows

The rapid development of the capital market has beenone of the important features of the current process of globalization. While the growth in capital and foreignexchange markets have facilitated the transfer of resourcesacross borders, the gross turnover in foreign exchangemarkets has been extremely large. It is estimated that thegross turnover is around $ 1.5 trillion per day worldwide(Frankel, 2000). This is of the order of hundred timesgreater than the volume of trade in goods and services.Currency trade has become an end in itself. The expansionin foreign exchange markets and capital markets is anecessary pre-requisite for international transfer of capital.However, the volatility in the foreign exchange market andthe ease with which funds can be withdrawn from countrieshave created often times panic situations. The most recentexample of this was the East Asian crisis. Contagion of financial crises is a worrying phenomenon. When one

country faces a crisis, it affects others. It is not as if financialcrises are solely caused by foreign exchange traders. Whatthe financial markets tend to do is to exaggerateweaknesses. Herd instinct is not uncommon in financialmarkets. When an economy becomes more open to capitaland financial flows, there is even greater compulsion toensure that factors relating to macro-economic stability are



not ignored. This is a lesson all developing countries haveto learn from East Asian crisis. As one commentator aptlysaid “The trigger was sentiment, but vulnerability was due tofundamentals”.

Concerns and Fears

On the impact of globalization, there are two major concerns. These may be described as even fears. Under each major concern there are many related anxieties. Thefirst major concern is that globalization leads to a moreiniquitous distribution of income among countries and withincountries. The second fear is that globalization leads to lossof national sovereignty and that countries are finding it

increasingly difficult to follow independent domestic policies.These two issues have to be addressed both theoreticallyand empirically.

The argument that globalization leads to inequality isbased on the premise that since globalization emphasizesefficiency, gains will accrue to countries which are favourablyendowed with natural and human resources. Advancedcountries have had a head start over the other countries byat least three centuries. The technological base of thesecountries is not only wide but highly sophisticated. Whiletrade benefits all countries, greater gains accrue to theindustrially advanced countries. This is the reason why evenin the present trade agreements, a case has been built upfor special and differential treatment in relation to developingcountries. By and large, this treatment provides for longer transition periods in relation to adjustment. However, thereare two changes with respect to international trade whichmay work to the advantage of the developing countries.

First, for a variety of reasons, the industrially advancedcountries are vacating certain areas of production. Thesecan be filled in by developing countries. A good example of this is what the East Asian countries did in the 1970s and1980s. Second, international trade is no longer determinedby the distribution of natural resources. With the advent of information technology, the role of human resources has



emerged as more important. Specialized human skills willbecome the determining factor in the coming decades.Productive activities are becoming “knowledge intensive”rather than “resource intensive”. While there is a dividebetween developing and the advanced countries even in thisarea – some people call it the digital divide - it is a gap whichcan be bridged. A globalized economy with increasedspecialization can lead to improved productivity and faster growth. What will be required is a balancing mechanism toensure that the handicaps of the developing countries areovercome.

Apart from the possible iniquitous distribution of incomeamong countries, it has also been argued that globalization

leads to widening income gaps within the countries as well.This can happen both in the developed and developingeconomies. The argument is the same as was advanced inrelation to iniquitous distribution among countries.Globalization may benefit even within a country those whohave the skills and the technology. The higher growth rateachieved by an economy can be at the expense of decliningincomes of people who may be rendered redundant. In thiscontext, it has to be noted that while globalization mayaccelerate the process of technology substitution indeveloping economies, these countries even withoutglobalization will face the problem associated with movingfrom lower to higher technology. If the growth rate of theeconomy accelerates sufficiently, then part of the resourcescan be diverted by the state to modernize and re-equippeople who may be affected by the process of technology upgradation.

The second concern relates to the loss of autonomy in

the pursuit of economic policies. In a highly integrated worldeconomy, it is true that one country cannot pursue policieswhich are not in consonance with the worldwide trends.Capital and technology are fluid and they will move wherethe benefits are greater. As the nations come together whether it be in the political, social or economic arena, somesacrifice of sovereignty is inevitable. The constraints of a



globalised economic system on the pursuit of domesticpolicies have to be recognised. However, it need not resultin the abdication of domestic objectives.

Another fear associated with globalization is insecurityand volatility. When countries are inter-related strongly, asmall spark can start a large conflagration. Panic and fear spread fast. The downside to globalization essentiallyemphasizes the need to create countervailing forces in theform of institutions and policies at the international level.Global governance cannot be pushed to the periphery, asintegration gathers speed.

Empirical evidence on the impact of globalization on

inequality is not very clear. The share in aggregate worldexports and in world output of the developing countries hasbeen increasing. In aggregate world exports, the share of developing countries increased from 20.6 per cent in 1988-90 to 29.9 per cent in 2000. Similarly the share in aggregateworld output of developing countries has increased from17.9 per cent in 1988-90 to 40.4 per cent in 2000. Thegrowth rate of the developing countries both in terms of GDPand per capita GDP has been higher than those of theindustrial countries. These growth rates have been in facthigher in the 1990s than in the 1980s. All these data do notindicate that the developing countries as a group havesuffered in the process of globalization. In fact, there havebeen substantial gains. But within developing countries,Africa has not done well and some of the South Asiancountries have done better only in the 1990s. While thegrowth rate in per capita income of the developing countriesin the 1990s is nearly two times higher than that of industrialized countries, in absolute terms the gap in per

capita income has widened. As for income distribution withinthe countries, it is difficult to judge whether globalization isthe primary factor responsible for any deterioration in thedistribution of income. We have had considerablecontroversies in our country on what happened to thepoverty ratio in the second half of 1990s. Most analystseven for India would agree that the poverty ratio has



declined in the 1990s. Differences may exist as to what rateat which this has fallen. Nevertheless, whether it is in Indiaor any other country, it is very difficult to trace the changes inthe distribution of income within the countries directly toglobalization.

India’s Stance

What should be India’s attitude in this environment of growing globalization? At the outset it must be mentionedthat opting out of globalization is not a viable choice. Thereare at present 149 members in the World TradeOrganisation (WTO). Some 25 countries are waiting to jointhe WTO. China has recently been admitted as a member.

What is needed is to evolve an appropriate framework towrest maximum benefits out of international trade andinvestment. This framework should include (a) makingexplicit the list of demands that India would like to make onthe multilateral trade system, and (b) steps that India shouldtake to realize the full potential from globalization.

Demands on the Trading System

Without being exhaustive, the demands of thedeveloping countries on the multilateral trading systemshould include (1) establishing symmetry as between themovement of capital and natural persons, (2) delinkingenvironmental standards and labour related considerationsfrom trade negotiations, (3) zero tariffs in industrializedcountries on labour intensive exports of developingcountries, (4) adequate protection to genetic or biologicalmaterial and traditional knowledge of developing countries,(5) prohibition of

unilateral trade action and extra territorial application of national laws and regulations, and (6) effective restraint onindustrialized countries in initiating anti-dumping andcountervailing action against exports from developingcountries.



The purpose of the new trading system must be toensure “free and fair” trade among countries. The emphasisso far has been on “free” rather than “fair” trade. It is in thiscontext that the rich industrially advanced countries have anobligation. They have often indulged in “double speak”.While requiring developing countries to dismantle barriersand join the main stream of international trade, they havebeen raising significant tariff and non-tariff barriers on tradefrom developing countries. Very often, this has been theconsequence of heavy lobbying in the advanced countries toprotect ‘labour’. Although average tariffs in the UnitedStates, Canada, European Union and Japan – the so calledQuad countries – range from only 4.3 per cent in Japan to8.3 per cent in Canada, their tariff and trade barriers remain

much higher on many products exported by developingcountries. Major agricultural food products such as meat,sugar and dairy products attract tariff rates exceeding 100per cent. Fruits and vegetables such as bananas are hit witha 180 per cent tariff by the European Union, once theyexceed quotas. The tariffs collected by the US on $ 2 billionworth of imports from Bangladesh are higher than thoseimposed on imports worth $ 30 billion from France. In fact,these trade barriers impose a serious burden on thedeveloping countries. It is important that if the rich countrieswant a trading system that is truly fair, they should comeforward to reduce the trade barriers and subsidies thatprevent the products of developing countries from reachingtheir markets. Otherwise the pleas of these countries for acompetitive system will sound hollow.

To some extent, conflicts among countries on tradematters are endemic. Until recently, agriculture was a major bone of contention between U.S. and E.U. countries.

Frictions are also bound to arise among developingcountries as well. When import tariffs on edible oil wereincreased in India, the most severe protest came fromMalaysia which was a major exporter of Palm Oil.Entrepreneurs in India complain of cheaper imports fromChina. In the export of rice, a major competitor of India isThailand. If development is accepted as the major objective



of trade as the Doha declaration proclaimed, it should bepossible to work out a trading arrangement that is beneficialto all countries.

There have been protracted negotiations at WTO inreforming the trade system. Admittedly, the tariff and non-tariff barriers are coming down. However, there areapprehensions that the concerns of developing countries arenot being addressed adequately. Looked at from this angle,the recent Hong Kong Ministerial is a modest success.Despite reservations, we must acknowledge that it is a stepforward. Domestic support to agriculture by developedcountries constitutes a major stumbling block to third worldtrade expansion. However, India’s stand in relation to

agriculture has been `defensive’. We are not a major player in the world agricultural market. The impact of what hasbeen accepted in relation to Non-Agricultural Market Accessand services will vary from country to country. Despite somecontrarian opinion, the gain to India from services can besignificant. However, the Hong Kong Ministerial is only abroad statement of intentions. Much will depend upon howthese ideas are translated into concrete actions.

Actions by IndiaThe second set of measures that should form part of

the action plan must relate to strengthening India’s positionin international trade. India has many strengths, whichseveral developing countries lack. In that sense, India isdifferent and is in a stronger position to gain frominternational trade and investment. India’s rise to the top of the IT industry in the world is a reflection of the abundanceof skilled manpower in our country. It is, therefore, in India’s

interest to ensure that there is a greater freedom of movement of skilled manpower. At the same time, weshould attempt to take all efforts to ensure that we continueto remain a frontline country in the area of skilled manpower.India can attract greater foreign investment, if we canaccelerate our growth with stability. Stability, in this context,means reasonable balance on the fiscal and external



accounts. We must maintain a competitive environmentdomestically so that we can take full advantage of wider market access. We must make good use of the extendedtime given to developing countries to dismantle tradebarriers. Wherever legislations are required to protectsectors like agriculture, they need to be enacted quickly. Infact, we had taken a long time to pass the Protection of PlantVarieties and Farmers’ Rights Act. We must also be activein ensuring that our firms make effective use of the newpatent rights. South Korea has been able to file in recentyears as many as 5000 patent applications in the UnitedStates whereas in 1986, the country filed only 162. Chinahas also been very active in this area. We need a trulyactive agency in India to encourage Indian firms to file patent

applications. In effect, we must build the complementaryinstitutions necessary for maximizing the benefits frominternational trade and investment.

Changes in the foreign trade and foreign investmentpolicies have altered the environment in which Indianindustries have to operate. The path of transition is, nodoubt, difficult. A greater integration of the Indian economywith the rest of the world is unavoidable. It is important thatIndian industry be forward looking and get organized tocompete with the rest of the world at levels of tariff comparable to those of other developing countries.Obviously, the Indian Government should be alert to ensurethat Indian industries are not the victims of unfair tradepractices. The safeguards available in the WTO agreementmust be fully utilized to protect the interests of Indianindustries.

Indian industry has a right to demand that the macro

economic policy environment should be conducive to rapideconomic growth. The configuration of policy decisions in therecent period has been attempting to do that. It is, however,time for Indian industrial units to recognize that thechallenges of the new century demand greater action at theenterprise level. They have to learn to swim in thetempestuous waters of competition and away from the



protected waters of the swimming pools. India is no longer acountry producing goods and services for the domesticmarket alone. Indian firms are becoming and have tobecome global players. At the minimum, they must be ableto meet global competition. The search for identifying newcompetitive advantages must begin earnestly. India’sascendancy in Information Technology (IT) is only partly bydesign. However, it must be said to the credit of policymakers that once the potential in this area was discovered,the policy environment became strongly industry friendly.

Over a wide spectrum of activities, India’s advantage,actual and that which can be realized in a short span of timemust be drawn up. Of course, in a number of cases, it will

require building plants on a global scale. But, this need notnecessarily be so in all cases. In fact the advent of IT ismodifying the industrial structure. The revolution intelecommunications and IT is simultaneously creating ahuge single market economy, while making the parts smaller and more powerful. What we need today is a road map for the Indian industry. It must delineate the path differentindustries must take to achieve productivity and efficiencylevels comparable to the best in the world.

Globalization, in a fundamental sense, is not a newphenomenon. Its roots extend farther and deeper than thevisible part of the plant. It is as old as history, starting withthe great migrations of people across the great landmasses.Only recent developments in computer and communicationtechnologies have accelerated the process of integration,with geographic distances becoming less of a factor. Is this'end of geography' a boon or a bane? Borders have becomeporous and the sky is open. With modern technologies

which do not recognize geography, it is not possible to holdback ideas either in the political, economic or culturalspheres. Each country must prepare itself to meet the newchallenges so that it is not being bypassed by this hugewave of technological and institutional changes.



Nothing is an unmixed blessing. Globalization in itspresent form though spurred by far reaching technologicalchanges is not a pure technological phenomenon. It hasmany dimensions including ideological. To deal with thisphenomenon, we must understand the gains and losses, thebenefits as well as dangers. To be forewarned, as thesaying goes, is to be forearmed. But we should not throwthe baby with bath water. We should also resist thetemptation to blame globalization for all our failures. Mostoften, as the poet said, the fault is in ourselves.

Risks of an open economy are well known. We mustnot, nevertheless, miss the opportunities that the globalsystem can offer. As an eminent critic put it, the world

cannot marginalize India. But India, if it chooses, canmarginalize itself. We must guard ourselves against thisdanger. More than many other developing countries, India isin a position to wrest significant gains from globalization.However, we must voice our concerns and in cooperationwith other developing countries modify the internationaltrading arrangements to take care of the special needs of such countries. At the same time, we must identify andstrengthen our comparative advantages. It is this two-foldapproach which will enable us to meet the challenges of globalization which may be the defining characteristic of thenew millennium.

The key to India’s growth lies in improving productivityand efficiency. This has to permeate all walks of our life.Contrary to the general impression, the natural resources of our country are not large. India accounts for 16.7 per cent of world’s population whereas it has only 2.0 per cent of world’sland area. While China’s population is 30 per cent higher

than that of India’s, it has a land area which is three timesthat of India. In fact, from the point of view of long-rangesustainability, the need for greater efficiency in themanagement of natural resources like land, water andminerals has become urgent. In a capital-scarce economylike ours, efficient utilization of our capacity becomes evenmore critical. For all of these things to happen, we need



well-trained and highly skilled people. In the world of today,competition in any field is competition in knowledge. That iswhy we need to build institutions of excellence. I am,therefore, happy that the Ahmedabad ManagementAssociation, besides other functions, is also focusing onexcellence in education. Increased productivity flowing fromimproved skills is the real answer to globalisation.

The Effects of Globalization

The advancement in technology and various inventions in the past century have brought about a major change in

the world today, the biggest being the integration of societies. Thanks to technology, we can now communicate

with people from all around the world with great ease. The internet has also allowed us to transfer huge amounts

of data to a place half way around the world in a matter of seconds. The various means transportation are a lot

faster and we can now travel half way around the world within a day. This has led to globalization, where

different economies, societies and cultures of the world are integrated through a global network.

Globalization has affected the world in many different ways. Here are few of the effects of globalization.

The effects of Globalization on Industry – Globalization has lead to the rise of worldwide markets where

countries now have better access to foreign products. Industrially developed countries can now import raw

materials required for production of various consumer products. These products can then be exported to different

countries. We have seen a great increase in movement of material goods between and inside national boundaries.

The world has seen a rapid growth of international trade within the last fifty years, and the numbers are still

growing.

The effects of globalization on the Financial Market – Different economies of the world have greater access to

funds since they now have better access to external borrowings. Trade in national currencies increased

dramatically in the recent past to support the increasing levels of trade and investment.



The effects of globalization economically – The idea of free trade has been around ever since the early 18th

century. Since then on, we have seen the growth of a global common market, allowing the freedom of exchange

of goods and capital. Lowered restrictions on foreign direct investment have allowed corporations to set up

factories in places where the cost of production is the lowest. This has increased the number of job opportunities

in underdeveloped countries.

Effects on Health Policy – Health on a global scale becomes a commodity. Health structures are now being

privatized since the government feels that the private institutions have a better standard of providing services and

are more efficient at what they do. At first the global health policy maker was the United Nations. This has now

shifted to financial institutions, leading to an increase in privatization in the health structure.

Globalization has brought about diversity in the products and services in many countries, and has led to a lot of

growth. It is a growing phenomenon where different societies are becoming similar in the way the function and

behave.

History of Globalization – How it came about

Globalization is an international, global amalgamation of individual national economic, technological, socio

cultural and political forces into a unified and single society. It has changed the world outlook into a more liberal

or neoliberal sense. Globalization seems like a recent concept but has taken five centuries and five stages to

develop to what we assume it to be today.

Fifteenth century Europe marked the rise of global power. The Portuguese prince Henry the navigator sent his

captain out to explore the world and make profits of whatever they conquered. Soon the rest of Europe followed

suit using their developed arms and weaponry and religion to subjugate the rest of the people. However there was

constant struggle at home to gain political power and hence the first stage proved to be short lived and ended

abruptly with Britain rising as the victor at waterloo. The military superiority in Portugal, Spain, the Netherlands,

Britain and France continued to be challenged and the need to develop military technology and equipment was

given most importance. This development formed the basis for the industrial revolution. The constant warfare

created feeling of nationality and the genesis of a nation state.

With colonization and the British hegemony sophisticated methods of transport and communications seemed

necessary. It was important that the earnings and happenings of the British colonies across the seas were known

at home. Steam powered railways and ships fit rightly into these spaces. Postal services and the system of

telegraph were elaborated and introduced.

Mass industrialization and the industrial revolution caused the phasing out of the old system of control over

military forces and gave rise to the new method of thought. Control over industrial development by the national

government of governmentally oriented firms supposed to pose a stronger hold. Sadly, this led to internal conflict

and freedom struggles with colonized sated trying to expel the British from their nation. Plenty of wars were

fought and in 1914 when some sort of peace and order was reached, there arose new world hegemony – America.

America offered it aid to all the non communist countries.



Jet planes, satellite communication and computers intensified the communication systems across the globe.

Along with this development went an ideological campaign by the private, increasingly corporate sector, and

consequent privatization and liberalization of markets, all generally weakening the nation state.

Since the 1990’s the Americans have been trying to use military might and warfare to keep the world politics

under its control. That has been a key cause of the spread of terrorism and anti – America/ globalization feelings.

Paradoxically, terror has now become a global phenomenon and the world has an integrated outlook on such

activities. Here we see America facilitating globalization in an indirect approach.

It can only be estimated which country will rise to hegemony after America’s bout is done with. However there

is no one single unified opinion about that as yet!

What is Globalization?

Globalization is a difficult term to describe. This is probably because there are so many aspects to it. The

simplest definition of globalization according to me is the spreading and homogenizing of cultures. For

those that have read H.G.Wells science fiction novel ‘The Time Machine’ where an inventor travels

thousands of years into the future only to discover that humans have evolved to look similar. The same

thing is slowly happening today.

It would appear that globalization is an inevitable process. It is more of a side effect of the human evolution

process. Ever since man was born or created he has been on the move. The reasons were basic survival and

we still move for some of the same reasons even today. As humans developed and their understanding of

their surrounding and nature improved they began to settle down. This to development of culture, religions

and societies. As they got more comfortable the need to move was eliminated. It was replaced by the need

for more space to expand and inhabit. This led to the development of weapons, armies and navies and war.

This was also a kind of globalization because the conquerors then imposed their culture and religion on

their new subjects. The best example of this is the Roman Empire. It built temples and encouraged the

people of from the newly conquered territories to convert and follow their ways. Once the emperor

Constantine declared Christianity and made it the official religion it began to spread and soon became one

of the most prominent religions.

The pace of globalization only improved with an improvement in the means of transportation. This mean t

we could travel farther and more safely. This led to discovery of new territories like Africa, Australia and

the Americas. Here too the conquerors imposed their cultures and today only a few pockets of the original

inhabitants and their cultures survive.



Globalization is not all bad though. It has reduced poverty worldwide. It has allowed the sharing of

technology, wealth and understanding among nations (the societies of today). This in turn has promoted

world peace as understanding between nations increased. It has raised the life expectancy of humans. It has

opened the world to better understanding and communication among people. Teenagers and young adults

now communicate with people from all over the world. Movies and TV shows is probably the best example

of globalization. People from various countries either buy or download movies and shows and watch them

even though the stories depict stories and places that are now part of their daily lives.

Some information on globalization

With the help of modern technology the world has become a smaller place. People from all over world can

communicate with each other easily and efficiently. This integration among the different countries across the

globe is known as globalization. Globalization can be of different types social, cultural, economic, technological,

biological, etc. with the growth of modern technology in this era people have come closer and have begun to

understand the different cultures of the people living in other countries. Through globalization communication

between the people living across the globe has increased to a great extent.

Internet has played a vital role in bringing the people together. With the help of internet communication has

become cheap and people can gather information and connect with people living in any corner of the world. One

of the most important aspects of the internet is e-marketing. With the help of e-marketing consumers can buy

goods being sold all over the world and manufacturers can make their product available for everyone worldwide.

Internet is known as one of the key reasons for which globalization has increased.

Language is one of the most important means of communication. When people speak the same languagecommunication becomes easier and effortless. English is a language spoken by most of the population on the

entire globe. There are a number of language translators on the internet that can help you learn and understand

the language of your choice. People respond well to someone who speaks the same language as them. With the

considerable growth in globalization people have to learn to embrace it with open arms. Industries have

flourished to a great extent as entrepreneurs from different countries have come together to boost their profits.

Due to globalization the rich are becoming richer and the poor are becoming poorer.

Globalization had also increased the competition among different countries. People are striving to make their

countries better and richer. With globalization there are chances that the developed countries will take over the

developing and underdeveloped countries. It is better to take up measures to meet the needs of everyone in order

to live peaceful and comfortable life. Some people are finding it difficult to cop up with globalization. With the

proper us of modern technology communication can be made more easier and there will be more integration of

different countries in the world. Globalization exists and there are predictions that the earth will become smaller

and smaller as people start coming closer and closer.

Historical Review of Global/Indian Economic Environment



We all know that any national story is often a tale of turning points. When a catastrophe takes place, the mindset of a nation changes and it decides the course its of destiny. If August 15,

1947 marked the Indian Independence - from political slavery to colonial power, then I think the

August of 1991 could be marked as the beginning of Indian Economic Freedom.

Many of us are alive to see the historical realities of the rise and fall of nations. We realise

that itis those who had the ability to innovate have always won the day. If you look at the history of

human civilisation, we see that those who had the ability to innovate, may be a war horse,may

2

be a cannon or may be a steam engine, have won the day. In that sense, Modern Indian

history, Iam afraid, is a story of missed opportunities of the various waves of industrial revolution that

took place in the 18th century. I think in the 17th century, it was Sir Thomas Row, who I believe

said that James I was looking like a ruler of a provincial hamlet as compared to Jehangir in

Indiaand as per data now available from Madison, you will be surprised that in the year 1700 that

India’s share in the world production was 22.6 %. The other super power at that time was

Chinaand its share was better than India at 23.1%. The US had no prominent share in world trade.

In1880, China’s share has gone up to 32.4 %, while India’s share began to come down to 15.7

%

while the USA emerged with a share of just 1.8 %. So India’s share that time was larger than

theUSA and then there is a progressive deterioration in our share till 1995. The latest data,

consistent with Madison is that China as account for 11 %, India is less than 5 % and USA 21%.

We had in 1700 a proportion of global production, which was larger than the USA’s share of global production today. I want to impress upon your mind that this globalisation concept is

not

new to India. In fact the point I want to underscore right now is that Indian share in the

world's production was as large as the USA at a time when India was a highly globalised nation. This

isnot an accident and this should be an eye opener to many those who have fears and

apprehensions about the way we are globalising now. Note that we were at our best in the

comity of nations when we were fully globalised and when we closed ourselves, where did

westand, when we had a crisis in 1991? 15 % of the world population, 7.5 % of the world’s land

and what was our share of contribution to the world trade? It was less than half a per cent.

Indian Economy-Post 1991

The most important thing that happened in 1991 is that we started increasingly integratinginto

the world economy. India certainly will be not left out in the way side in the industrial

revolution



of our time. Sure enough Indian is already in the forefront of Information Technology whichis

beginning to change our lives so dramatically.

Globalisation, of course, is as much as an opportunity as it is a challenge.

First and foremost, an opportunity of specialising in areas of comparative advantage and thus

achieving the benefits of skill especially as there is now increasingly the possibility of

gradualaccess to world’s best technology determined by commercial terms of trade rather than

patronising the terms of aid. Throughout 1970s/1980s, there was a debate on the appropriatetransfer of technology from the West and today we have a situation that we boast of

developing

technology in the world - sometimes we do it here in India or sometimes in the Silicon

Valley.This is the change that has taken place. In fact, I was reminded of a small incident and this is

likewhat we have in India. One American wanted to know the exact address of his friend in

Silicon

Valley which is dominated by Indians. Few Indians who were sitting in the Coffee House.One of them said that all foreigners stay at the other end of the road. In America,

especially

at Silicon Valley, the Americans are now foreigners. He further stated that it was our

dream

to turn Konkan Area into California. Now exactly the picture has changed Now California

might change to Konkan. These are the changes of time and I think we should fully

understand this process.

A major turning point came in India in 1991 when we all recall that for the first time we had

asituation where the Indian economy was almost a marginalised one. Our people had forgotten

about the glories of the Indian economy, foreign exchange reserves dwindled to a level of less

than one billion dollars and the nation was on the verge of bankruptcy. We were very closeon

the brink of default and that was the time when finally changes started taking place in a

positive

manner. Economic reforms started taking place in a big way. If you look at the Indianeconomic

reforms, you can think of two distinct facets - technically we call them micro economicstabilisation and structural adjustments. Micro economic stabilisation is basically meant to

stabilise the economy, whereas structural advantage essentially involved re-structuring of the

3

whole economy and that process is divided into three core areas - i) liberalisation ii) privatisation

and iii) globalisation. These three are popularly known as LPG. Although LPG (LiquidPetroleum Gas) is explosive this LPG combination has been a welcome sign.

Now essentially what is LPG?

During the last thirty years we had adopted economic strategy of planned growth. This policy

continued up to 1991 in which the State had to play a major role. Over a period of time, the



whole entrepreneurial abilities of a people were tied down to the myriad of all controls with aset

of regulations and licenses - so much so that the Indian economy was called a “License Raj”.

When you want to produce something, you needs a licence, to increase production you needs

a

licence, to re-allocate your resources, you needed a licence - every decision was taken by the

Babus (Bureaucrats)) rather than the entrepreneurs themselves. And to these myriads of controls

and regulations, the entire productive potential was tied down. Liberalisation basically meantunleashing the productive potential of people in terms of reducing the kind of constraints

imposed over a period of time upon the entrepreneurs. This is the true meaning of

liberalisation.

Over a period of time in the 1950-60s when the private sector was not developed enough, itwas

only to be expected that the Government would need to come in a big way and take a lead inthe

industry as a producer. But in the spate of enthusiasm, I think, we overdid it so much so that

by1991 we were boasting of PSUs commanding heights in the Indian economy over the private

sector. It turned out that, if you looked at the total investment made. is above Rs.4,00,000

crorein the Public Sector Undertakings, Rs.2,50,000 crores for the State level Public Sector

Undertakings and what is the rate of return that the country has given on this, it is really2.5%. So

we had to face a very strange situation in 1991 where the Government was borrowing from

the

market at the rate of 14 % and was investing where the rate of return was only 2.5 %. But this just could not go on. This was a sure recipe for disaster and indeed it did strike us. No matter

you think how special you are, you are not immune from the basic laws of economics and wewere made to realise that in terms of a crisis which started in 1991. And it was from then

onwards that we started changing our policies and have now come a long way.

Successes and Failures before 1991

But this does not mean that we have totally failed before 1991. We achieved a lot of things

before 1991. There were successes as well as failures. On the whole however there are a few

good things that we had achieved. First of all, the industrial production base was widened.We

succeeded in developing a pool of technically trained manpower on a scale, which has no parallel

in the world. We certainly can take pride in the opportunities availed for us for higher

education

which we have created in terms of IITs and IIMs. You will recall that I have heard our students in

USA saying I did not get admission to the IIT , that is why I have came here. This is the kindof qualitative change that has taken place in the outlook of the people. That if we don’t get

admission to the IIT, at least we can get to universities aboard.While there are very remarkable achievements in terms of foundation, I think what happened

was

that the economy was not able to achieve a higher level of efficiency and the Public Sector



Undertakings example is very obvious. And whose money is it? It is all your money and if they are going to get a return of 2.5 %, there is no reason to pump in more money in such

activities. That is why we have to come back and change and we also realised that just theGovernment’s intervention in economic theory was justified because of the failure of the

market.

But we also saw that just as markets fail, there is also failure on the part of the Government.

Soto correct market failure, you have the Government but when the Government fails you have

to bring in the market. Therefore, we have to have a combination of intervention plus free flow

of

market forces and I think these kind of things that are emerging.

The most striking example - is that of the finance sector. If you look at the finance sector after

nationalisation in 1969 and 1980, there was enormous branch expansion but with thisexpansion,

4

we also needed to raise low interest loans for the Government to finance its fiscal deficitwhich

was growing at a rapid pace and when finally we had to have a regime of administrative

interestrates, a regime of directed credit and allied schemes which finally began eating into the

efficiency of banking system . So we are now increasingly realising that it is not only thescale of

financial system that matters, but it is also efficiency which is necessary for better economic

growth.

What have we achieved in terms of reforms?

These reforms as I have said had two factors - micro economic stability and structural

adjustment. Last year, the RBI produced a Report on Currency and Finance, which I stronglyrecommend to the students to have a deep look at it. That is the only document where we

havetaken comprehensive and objective assessment as to see what are our failures and what are

our

achievements in terms of ten years of economic reforms. To my mind, there are two very

major achievements of reforms and I am going to talk about achievements as well as failures and

howwe will be proceeding from here onwards. The most important achievement, I think, of 12/13

years of reforms is the degree of resilience that India’s economy has earned. Just look at what

has

happened in the last few months, the Indian economy has been subject to a series of shocks - both domestic as well as external. First and foremost, after 14 years, we have unprecedented

drought - a major drought two years back and in Western Maharashtra, the drought continuedfor

three years in a row. Our food grain production which was growing, crashed from 212million

tonnes to 183 million tonnes and this has been a major setback. This was the first shock. The



second shock was the Kargil war and border tensions. The third domestic shock wassanctions

imposed by others on us - post pokharan. We all remember these incidents. The externalshocks

were even bigger. First and foremost blow from the external side was the synchronised global

slowdown. Typically, if you see after the 2nd World War the kind of pattern that was involved

inthe world economy. At least, one of the three big nations, i.e., the US, Euro Area and Japan

havetaken upon themselves the responsibility of keeping the momentum of growth. If two of them

fail, the third will come forward to maintain the momentum of world economy. In the last ten

years, the Japanese economy has been going down the drain. So the responsibility primarily

fallson the USA and the Euro Area. After the longest expansion recorded in the economic history

of the USA, started slowing down in 2001/2002. Now it was the responsibility of the Euro area

to

keep up the momentum of the world economy but it failed. The European growth has beenless

than 1 %, in some areas it is even 0 % and in some, it is negative which means that we have

hadthis unprecedented situation that all the three powers which have been keeping the

momentum of growth of world economy at large, all of them went down. No matter how much you criticise

the

USA, you have to recognise that if US catches cold, many small countries catch pneumonia.

Whether you like it or not, this is a matter of fact. When these three slow down, this shouldhave

had a major effect on all the developing countries. It did have very serious effect on all of them

but it did not have any effect on India. Now this is symptomatic of the resilience that I wastalking about.

Another shock is the sharp increase in prices of oil in the international market When was last

time there was crisis in the international markets that we did not have economic crisis at

home? Never. In 1974, the first world oil crisis, in 1975 we had a crisis in India. The second shock

wasin 1979 when the oil prices shoot up, India had the crisis in 1980/81 and we had to go the

IMF

with a begging bowl. In 1991 due to the major Gulf War and the Iraq-Iran War situation

again oil prices shot up and in 1991 we had the biggest crisis at home. Every time in the past whenever

oil prices have shot up, India has had to face crisis. This time the world oil prices shot up, you

andme did not even notice. This is not automatic, this is not natural.

Please understand this is symptomatic of the kind of resilience that Indian economy has

earned



over the years and I think that is the most important of the achievement of our reforms. Let us5

look at the sectoral achievements we had achieved .in our performance ? After 30 years of independence, we started our planning economic growth in 1951. If you look at the first 30

years,

1951-1980, what is the growth rate of India ? The real GDP growth of India was at 3.5 %.

Whichever way you take an average, it comes to 3.5 %, so much so that this rate of growthhas

been called the Indian Rate growth or the Hindu Growth Rate. So this 3.5% rate of growthhas

almost become an endemic with India’s economic performance. Now if you are going at the

rate

of 3.5 %, if your population is growing at 2.2 %, it means that your per capita income isgrowing

at the rate of just 1.3 % per year. If your rate of growth is growing at 1.3 % it would havetaken

57 years for you to simply double your per capita income. In the recent past, South Korea

coulddouble its per capita income in 11 years. At the rate at which we were growing, we would

have

taken 57 years. So obviously that is not acceptable you have to therefore rethink about thedevelopmental strategy. In the 1980s the growth rate tried to accelerate but that was not

sustainable and let to a crisis in 1991. What has happened in the last 10 years, from1992/2002?

In these ten years, the overall real GDP growth is more than 6% and the population growth

rate

came down to below 2 %. which means that in the last 10 years, the average works out a littleless than 6 % which means 4 % per capita growth per year , which is very remarkable by way

of probable heights in the world, next only to China. So 4% growth would mean that in the last

16/17 years we could double the per capita income. This is the pace we need to maintain. Sothe

first achievement of this reform is that we are on high growth profile.

This also means that we have made a very major dent in poverty alleviation. What have we

achieved and where do we need to go? If you look at our performance, there are technical problems about the numbers and the debates are on one can say as a rule of thumb that before

thereforms the proportion of population below poverty line was about 36 % and today that ratio

has

come down to 26 %. This is quite an impressive achievement at a time when the population is

growing, if you can reduce the proportion of population below the poverty line by as much as10

%, it is indeed a remarkable contribution. In absolute terms it means that more than 100million

people have been pushed above the poverty line. Now this is certainly an achievement thatwe

should be proud of. But there is certainly no room for complacency because the flip side of

this





We have demonstrated that we had acquired the high amount of foreign exchange reserves ata

time when our external debt has actually gone down as a proportion of GDP. In fact, the ratioof

our external debt to the GDP is as low as it is now and the World Bank, for your kind

information, has re-classified India. Earlier we were told, India is a highly indebted country

in thefirst twelve years and now there is a positive change and now we are among the least

indebtedcountries in the world. So you cannot say that the reserves, you have acquired or accumulated

are

reserve because you have borrowed. So that argument falls flat. Then there was the argument

about arbitrage that a large number of people are bringing money, this is hot money and itwill go

back at any time. Look at the numbers. Our policy has been to encourage non-debt creatingflows

and the cleverest thing that we have done is that the short term debt as a ratio to the total debt

has been systematically brought down so that the roll-over problem did not arise . We learnedthis well before others did. Our short-term debt as a ratio to the total debt today is 4%.

Thailand

and South Korea did not understand this and so therefore in 1997 there was a major crisis inEast

Asia and these countries went down very fast because a large number of their debt were shortterm so the moment creditors decided not to allow roll-over, these countries were in trouble.

We did not face that kind of vulnerability. It is a matter of a conscious policy decisions; we

have

systematically brought down the ratio of short-term debt to the total debt.So the new argument which has been made is that what is the use of all this Foreign

Exchange

Reserves? There is a lot of debate going on. One view is that they are only for the rich

people. Nonsense! First of all they say these are not being used. You know nothing can be far from

the

truth. It is like this. It is like an insurance. You would not argue that it is better to die in order

toget the benefit of the insurance . But this is a cost that you have to incur and that is the cost

weare incurring. You see, the opportunity costs. Just think what would have happened if we

would

not have such a large foreign exchange reserve - then an attack on our currency would have

been common and we would not have been able to defend. The fact that you have such alarge

reserve and it means that nobody can dare attack on Indian currency. It is no wonder thatIndian

currency has been so remarkably stable. So we were paying the cost of our insurance. We areglad we have come out of this with benefits. India and China are the only two countries

which

came out relatively unscathed from the Asian crisis and it is because this kind of policy to



maintain the reserve. We should not forget that fact. The other argument is that how it is theRBI

is sitting over all these reserves and not using it for the benefit of the country. Now pleaseunderstand that when the RBI absorbs foreign exchange, we put out the liquidity in the

system,

which can be used for consumption, or investment or what you have. So there is no question

of fresh use of this. You know, this is an accounting thing that you have to understand that when

entries received in our books, when the foreign exchange accrues to our country, wesimultaneously put out in Rupee counterpart which are there in the system. That is why the

system is flush with funds today.

In the early 1970s, remember there was a debate in India and other countries as to whether

weshould go for export promotion or import substitution. All the Asian countries opted for

export promotion while we opted for import substitution and I think that was a very costly mistake

we

had committed. I can certainly say, because in the name of protecting the domestic industry,we

7

created a whole range of controls, all kinds of restrictions, barriers to trade to protect theIndian

consumer. We were really and actually protecting the big producers because they did nothave to

face any competition, they did not have to perform so it was not for the ultimate consumer.

This

was a very clever strategy. If you had some connections with the Government, what wouldyou

do if you are a cement producer and have a capacity for producing two million tonnes andyou

want to earn money. The easiest way was not to produce more but to apply and get a newlicence

not for producing more but preventing others from producing and thus creating an artificial

shortage to get higher prices for the same quantity and quality produced. So you get all kinds

of money. So this is what had happened in the Soviet Union and other countries and therefore

thecause of production processes of private enterprises was killed. We came out of that and now

we

are ready to take on the world.

The lesson that we learned is that controls do not really work. When we had the severest of the

controls, please understand, a lot of money was going out. You close the doors, then it willgo

out through the window. If you open the doors, the money will come in and will stay in. Thisis a

strangely ironical thing but it is a fact. If you close the doors, the money, which was got to go

out, will be going any way. Every year five billion dollars worth of money was going abroad



through the hawaala routes. Now we have opened it in a very calibrated, gradual and wellthought out manner. The result is, there is so much confidence now, that the same money that

was going out stays in because we kept the options open, and besides, money is coming inand is

choosing to stay in. In 1991, the dream was to have ten billion dollar worth of foreign

exchange,

now every year we add 20/25 billion dollars to our reserve.Our real challenge is now to cope with this flood of money that is coming in. Opulence also

creates problems and they are all kinds of them. This large amount of money, for example,has a

bearing on the monetary policy of the RBI. When we take large amount of foreign exchange,

we

have to put Indian liquidity and have to suck it back because if we did not do that, inflationwill

go out of hand and everybody, especially the poor, will be hurt. In fact, inflation is the mostvigorous form of taxation, which hurts the poor most. We understand this and what we did is

that

that we sucked back liquidity the so called sterilisation process - though there are serious problems, limits to sterilisation right now in India.

So that is where we are now and we have remarkable strides in globalisation. If you look at

theshare of exports and imports and the ratio to the GDP in 1991/2 it was less than one-fifth.

Todayit is something like a two fifth of GDP. This is a remarkable penetration that we have

achieved.

Similar is the case of services. If you look at exports of goods from India in the last 10 years,

-the decadal figures like minerals by 230%, leather goods (112%), chemicals (634%),

agricultureand allied sectors (146%), engineering (326%), garment and textiles (245%), other

manufacturing (167%). Regarding Two wheelers automobiles, last year alone 55 % exportsof

automobiles. In 2003 we exported - could we have imagined that we would be exporting

cars ?

72,000 cars, which represent a growth of 69 % in one year and if all goes well, next year wewould be exporting something, like 1,50,000 cars per year . This is something, which is

positiveis happening. Two wheelers last year we exported to the tune of 1,63,000 which represents a

of

growth 50 %. There is similar growth not only in automobiles but spectacular growth in

autocomponentstoo.

Everybody knows about the IT services. Now we have almost reached soft ware exportstarget to

7.6 billion dollars in 2001/2 It is growing at an average rate of 46 % per year.We all know of call centres, data base production , financial accounting , foreign connectivity

in



the field of insurance, medical transcription, database production, financial accounting etc.There

is a whole range of services where India is making very major breakthrough. There was a talk that while China is becoming a manufacturing hub; India is nothing but a hub for services. It

is

not true, India is not lagging behind in manufacturing and the examples that I had narrated

8shows that we are doing exceedingly well and we will continue to offer the services. I want to

give you some examples of services where India is being used as a venue for services production

at the Global level. At the global level in banking, we have a number of foreign banks

coming to

India, e.g ., HSBC, CitiBank, Standard Chartered, ABN-Amro; in Insurance, GE, AIG,Alliance,

Aviva, Metlife , in IT, Yahoo, Sun Micro Systems, Oracle, Amazon; in communications,ATT;

in Engineering Ford, Bechtel, Beck, Cemens, GE, in business services, airlines like Swissair,

British Air, American Express. The World Bank has the second largest office, outside USA,in

India. Do we know we are coming also a “preferred back office”. We are also emerging as a

“preferred destination” for global investment because of our strong growth outlook. We havenew co-relation with global perspectives, we are therefore providing ideal opportunity for

diversification. We have very sophisticated security infra structure in equities,equityderivatives,

debt-instruments. We have sound law accounting firms and all this augurs very well

for our future and a lot of companies abroad, multi nationals have increased their R & D

facilitiesin India. For example, GE’s 1600 staff, of which I am happy to say that 31 are Ph.Ds and 44

aremasters. There is a major change taking place in front of our eyes into the private and public

sector partnerships with Telecom, Roads ,Ports, all these sectors are doing extremely welland

what is happening there augurs very well for the future. Remember for the first time of the

Indian

history, the President and the Prime Minister started talking about, India becoming a super power. Never before.

Conclusion

Reforms started in India in 1991. If you look at these changes that are taking place. for the

first

time the President and the Prime Minister of India say India becoming a super power, which

isalso not an accident. A major firm - Goldeman Sachs - has come out with a report in which it

states that by 2050 India will be the 3rd largest country in the world. This is not stated by our people but is stated by a foreign firm. We in the RBI took a close look at this report, analysed

itthreadbare and discussed it and judged that we need not have to wait till 2050 but it can

happen



well before the year 2030 or 2025. There are many reasons, some of them are mentioned toyou

by me but there is a very unusual strange reason, I want to highlight to you. This is comingas

a gift of God, you can say because this is some thing of a demographic transition through

which

our country is going right now. Let me explain this argument. For any country at the beginning,

there is a large proportion of young people and when these get matured, the proportion of old people becomes largest. Between these two extremes, there is a time when the proportion of

productive population to the total population is the maximum. So this is a Bell shaped

graph.

So at the beginning the proportion of young people to the total is very large, after maturitythe

proportion of old people to the total will be the maximum, somewhere in between the productive

population between the age group 18 to 60 would be maximum. All countries of the world -

especially industrial countries have reached their peak and they are down. East Asian tigershave

reached their peak and are down. Only two important countries who have not reached their

peak,and you need not offer any cigars for getting me right -those countries are India and China.

This means that India is expected to reach its peak of productive population to the total population being maximum in 2018 whereas China is expected to reach its peak one year

later

i.e. in 2019. This means that your proportion of productive population to the total is at the

peak and that is the time when your saving rate is maximum. Your productivity as a nation is

maximum and therefore this is time when you are best suited to achieve the highest possiblegrowth rate. This by all means is not automatic. What does this mean for India? It means

thatas we go towards 2018 where we have God smiling at us because productive population of

young

can be maximum, savings of the country could be maximum, which can easily be translated

intoan unprecedented increasing growth rate, if we have a right kind of policy, mixed with

9implemented at that particular period. It is an enabling provision, these things do not happen

automatically but that would be an opportunity for us to realise our potential. Remember as I

told

you that many years we were stuck to the low-level equilibrium trap and we could not think to

achieve a growth rate of higher than 3.5 %. In 1993/94/95 , for the first time in our history,we

have 7 % growth in a row. 3 years in a row, 7 % plus growth rate, the first time in our historythat

was the time when we opened our eyes and we realised. Actually we can think of a much

higher



growth rate. We can think higher in terms of doing better. Earlier, having a target of 8 %growth

rate was unbelievable, and we are routinely assuming that we will be having under the 10th

Plan,

a growth rate of 8 %. This is what is the difference. This is what is going to guide us from

now

on till 2018. This is a time when our productivity will be maximum, productive populationcan

be maximum, saving can be maximum and we can have highest possible growth and give aserious dent to the poverty situation. This is what we should be. We have one more

advantage,

particularly vis-a-vis China after we reach the peak we will go down slowly but there will be

4/5years before 2018 and another 4 and 5 years after 2018. So these eight years period is the

mostfertile period in terms of productivity. Whereas in China’s case, it will reach its peak i.e., one

year after us, their curve suddenly crashes because of their “one child” policy that was

adopted by China some 30 years ago. This is not going to haunt us. We can achieve highest possible

growth rate and solve our problems and emerge as an economic super power, as all our

dreamsare playing a role in the comity of nations that we will be able to do it in 20 years if we could

stay on course and develop policy combination, which would help rather than impede. If wedo

not take advantage of all these opportunities, then we would mean to be most unfortunate.

Documents

Introduction 006