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Globalization Globalization is the process of removal of removal of restrictions on foreign trade, investment, innovations in innovations and communication systems. These changes have encouraged the nations to reduce the high levels of protection between countries and to adopt policies to liberalize their economies in order to increase their volume of trade. Globalization of the economy means integrating the economy with the rest of the world. This involves dismantling of high tariff walls (by reduction of import duties thereby facilitating the transition from the protected economy to an open economy, removal of non-tariff restrictions on trade such as exchange control and import licensing, quotas allowing foreign direct investment and foreign portfolio investment, allowing company to raise capital abroad and encouraging domestic companies to go beyond national boundaries). In the process of globalization national economies are integrated in several fundamental ways through, TRADE FINANCE PRODUCTION GROWING WEB OF GLOBAL TREATIES AND INSTITUTIONS Firms go global as part of their business strategy mainly because of three reasons: 1) They get access to more markets and customers 2) They can create better brand by way of expansion so that the acceptance at home market also increases 3) Because of the saturation point in the domestic business There are four primaries inter related factors that have driven globalization in recent past: 1) Increased international trade 2) Growth of multinational corporations 3) Internationalization of finance 4) Application of new technologies like computers and information technologies The macro factors that seem to underlie the trend towards greater globalization are: 1) The decline in the trade barriers to the free flow of goods, services and capital that has occurred 2) The dramatic change in the communications, information processing and transportation technologies GLOBALIZATION- PHASES AND INDICATORS There are three distinct stages of globalization: 1870-1914: First Wave of Globalization Globalization drivers during this period were: Falling transportation costs Lowering of tariff barriers Impact of the first wave of globalization was reflected on the following parameters: Export as a share of world income almost doubled Total labour flows nearly 10% of the world population Foreign capital stocks in developing countries increased to 32% from 9% of the national income Growth rate in per capita income of the world increased from 0.5% to 1.3% p.a 1945-1980: Second Wave of Globalization Globalization drivers during this period were: Lack of growth with protective policies in nationalism Reduction in transport costs Reduction of trade barriers and tariffs Second wave of globalization brought about a situation Overall trade doubled Economies of scale opportunities for many multinational corporations Greater inequality between developed and developing countries 1980 onwards: Third wave of Globalization This stage is distinctive mainly because of the two reasons: a) Large group of developing countries actively involved in global business b) International migration and capital movements which were negligible during second wave of globalization, have become substantial The impact of this wave is visible in terms of: Movement towards free Trade Creation of Global Labour Force Economic interdependence among countries Significant increase in cross-border investments Capital flows to developing countries increased over ten times Indian software industry serves the need of Europe and American Markets China leverages its cost-effective manufacturing to lead consumer goods Globalization of Financial Markets Interest rates, stock markets, currency values are all interconnected Significant and sustained growth in world GDP GLOBALIZATION INDICATORS: Four main economic flows that characterize globalization: Goods and services, e.g. exports plus imports as a proportion of national income or per capita of population Labor/people, e.g. net migration rates; inward or outward migration flows, weighted by population Capital, e.g. inward or outward direct investment as a proportion of national income or per head of population Technology, e.g. international research & development flows; proportion of populations (and rates of change thereof) using particular inventions (especially 'factor-neutral' technological advances such as the telephone, motorcar, broadband) The indicators tell us about the extent of Globalization. 1) FOREIGN DIRECT INVESTMENTS: Investment in real assets like factories, sales offices etc by foreign firms fall under the category of FDI. 2) FOREIGN PORTFOLIO INVESTMENTS: Foreign Equity investment has also accelerated globally. Portfolio Investment represents passive holdings of securities such as foreign stocks, bonds, or other financial assets, none of which entails active management or control of the securities' issuer by the investor; where such control exists, it is known as foreign direct investment. Some examples of portfolio investment are: Purchase of shares in a foreign company. Purchase of bonds issued by a foreign government. Acquisition of assets in a foreign country 3) TRADE The pace of world trade has accelerated at an average annual rate of 6-7 %. This is far beyond the expansion of the world GDP which has risen at an average of only 3.5% per year. 4) GLOBAL GOVERNANCE BY WTO: -Deepening economic integration -Reduction in import duty rates -Increasing co-operation between countries for foreign investment 5) BUSINESS RESTRUCTURING -Flexible Just-in-time production systems -Moving production closer to the consumer and securing access to the local market -Diversification of operations POLICY OF 1991 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. 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 were 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 km 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 are: -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 specially 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 Globalization in India had a favorable impact on the overall growth rate of the economy. This is major improvement given that India’s growth rate in the 1970’s was very low at 3% and GDP growth in countries like Brazil, Indonesia, Korea, and Mexico was more than twice that of India. Though India’s average annual growth rate almost doubled in the eighties to 5.9%, it was still lower than the growth rate in China, Korea and Indonesia. The pick up in GDP growth has helped improve India’s global position. Consequently India’s position in the global economy has improved from the 8th position in 1991 to 4th place in 2001; when GDP is calculated on a purchasing power parity basis. During 1991-92 the first year of Rao’s reforms program, The Indian economy grew by 0.9%only. However the Gross Domestic Product (GDP) growth accelerated to 5.3 % in 1992-93, and 6.2% 1993-94. A growth rate of above 8% was an achievement by the Indian economy during the year 2003-04. India’s GDP growth rate can be seen from the following graph since independence STRUCTURE OF ECONOMY (in %) Foreign Trade (Export- Import) India’s imports in 2004-05 stood at US$ 107 billion recording an increase of 35.62 percent compared with US$ 79 billion in the previous fiscal. Export also increased by 24 percent as compared to previous year. It stood at US $ 79 billion in 2004-05 compared with US $ 63 billion in the previous year. Oil imports zoomed by 19 percent with the import bill being US $ 29.08 billion against USD 20.59 billion in the corresponding period last year. Non-oil imports during 2004-05 are estimated at USD 77.036 billion, which is 33.62 percent higher than previous year's imports of US $ 57.651 billion in 2003-04. Thus we find that the economic reforms in the Indian economy initiated since July 1991 have led to fiscal consolidation, control of inflation to some extent, increase in foreign exchange reserve and greater foreign investment and technology towards India. This has helped the Indian economy to grow at a faster rate. Presently more than 100 of the 500 fortune companies have a presence in India as compared to 33 in China. 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 is impressive at 7.5% (2003-04), 8.5% (2004-05), 9% (2005-06) and 9.2% (2006-07). Prime Minister Manmohan Singh is confident of having a 10% 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 bn (2000-01), $ 107 bn (2003-04), $ 145 bn (2005-06) and $ 180 bn (in February 2007). It is expected that India will cross the $ 200 bn mark soon. The cumulative FDI inflows from 1991 to September 2006 were Rs.1, 81,566 crores (US $ 43.29 bn). The sectors attracting highest FDI inflows are: Electrical equipments including computer software and electronics (18 per cent), service sector (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% of the global outsourcing market with an estimated income of $ 50 bn. 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 bn after the US ($ 17,000 bn), Japan ($ 4800 bn) and China ($ 1000bn). 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). The combined wealth of the Indian billionaires marked an increase of 60 per cent from $ 106 bn in 2006 to $ 170 bn in 2007. The 40 Indian billionaires have assets worth about Rs. 7.50lakh 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% of the population and contributed 59% of the gross domestic product. However, by 2001 the population depending upon agriculture came to 58% whereas the share of agriculture in the GDP went down drastically to 24 per cent and further to 22% in 2006-07. This has resulted in a lowering the per capita income of the farmers and increasing the rural indebtedness. The number of rural landless families increased from 35 %in 1987 to 45 % in 1999, further to 55% 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%. The agricultural growth of 3.2% 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. FOREIGN DIRECT INVESTMENTS Pre 1991: Compared to most industrializing economies, India followed a fairly restrictive foreign private investment policy until 1991 – relying more on bilateral and multilateral loans with long maturities. Inward foreign direct investment (FDI, or foreign investment, or foreign capital hereafter) was perceived essentially as a means of acquiring industrial technology that was unavailable through licensing agreements and capital goods import. Technology imports were preferred to financial and technical collaborations. Even for technology licensing agreements, there were restrictions on the rates of royalty payment and technical fees. Development banks largely met the external financial needs for importing capital equipment. However, foreign investment was permitted in designated industries, subject to varying conditions on setting up joint ventures with domestic partners, local content clauses, export obligations, promotion of local R & D and so on – broadly similar to those followed in many rapidly industrializing Asian economies. Foreign Exchange and Regulation Act (FERA), 1974 stipulated foreign firms to have equity holding only up to 40 per cent, exemptions were at the government’s discretion. Setting up of branch plants was usually disallowed; foreign subsidiaries were induced to gradually dilute their equity holding to less than 40 per cent in the domestic capital market. The law also prohibited the use of foreign brands, but promoted hybrid domestic brands (Hero-Honda, for instance) Post 1991: All this changed since 1991. Foreign investment is now seen as a source of scarce capital, technology and managerial skills that were considered necessary in an open, competitive, world economy. India sought to consciously ‘benchmark’ its policies against those of the rapidly growing south-east Asian economies to attract a greater share of the world FDI inflows. Over the decade, India not only permitted foreign investment in almost all sectors of the economy (barring agriculture, and, until recently, real estate), but also allowed foreign portfolio investment – thus practically divorcing foreign investment from the erstwhile technology acquisition effort. Further, laws were changed to provide foreign firms the same standing as the domestic ones. Data on FDI: The actual FDI inflow is recorded under five broad heads: 1) Reserve Bank of India’s (RBI) automatic approval route for equity holding up to 51 per cent 2) Foreign Investment Board’s discretionary approval route for larger projects with equity holding greater than 51 per cent 3) acquisition of shares route (since 1996) 4) RBI’s non-resident Indian (NRI) schemes, and 5) external commercial borrowings FDI Approvals and Its Composition Approved FDI rose from about Rs 500 crore in 1992 to about Rs 55 thousand crore in 1997Cumulative approved foreign investment during 1991 and 2000, in dollar terms, is about $ 67bn – at an average exchange rate of Rs 40 to a dollar. A fifth of it is from the US. Mauritius is the second largest source; reportedly a conduit for many US based firms, as India has a tax avoidance treaty with it since 1982. In Asia, South Korea has emerged as a new source of foreign investment.10 A quarter of the approved FDI is for power generation followed by telecommunications (mobile phone firms) at 18.5 per cent, and electrical equipment (Mainly software) at 10 per cent. While the proportion of projects with investment up to Rs 5 crore is high, their share is less than 5 per cent in value.
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