Globalisation and Indian Economy

           

            Globalisation: Interconnectedness between countries i.e unification and integration of domestic economy with world economy through trade, capital and technology.

®     MNCs have been a major force in the globalisation process connecting distant regions of the world. In fact, many of the top MNCs have wealth exceeding the entire budgets of the developing country governments.

           

            MNCs: Multinational Corporations are companies that own or controls production in more than one nation.

            Examples Indian MNCs:

            (1) Infosys: Computer Software                                                                 

            (2) Tata Consultancy Service (TCS): Computer Software

            (3) Tata Motors: Automobile                                                                       

            (4) Mahindra and Mahindra: Automobile

            (5) Hero Motor Corps: Two Wheeler

            (6) Sundaram fasteners: Engineering Components (nuts and bolts)

            (7) Ranbaxy: (medicines)

            (8) Asian Paints :(paints)

            Examples of foreign MNCS:

             (1) Microsoft: Computer Software US based                                            

            (2) PepsiCo:  Beverage US based

            (3) Nokia: Cellular Finland based                                                                

            (4) Sony: Electronics Japan based

            (5) Samsung: Electronics South Korea based

            (6) Skoda: Automobile Czech Republic based

®     Till 1950s production in countries was organized within countries (closed economy).

Factors affecting Globalisation:

            (1) rapid improvements in technology i.e satellite, internet, mobile, fax etc.

            (2) liberalization of trade

            (3) investment policies and, pressures from international organisations such as the WTO.

Liberalisation of Economy:

            Removing barriers or restrictions set by the government is what is known as liberalisation. In other words reducing government interference and encouraging Privatisation.

Privatisation of Economy

            1. Allow private sector to run.

            2. Give private sector all relaxation in rules and regulation. Jet Airways, Kingfisher in domestic Airways, Aircell and Tata Indicom in communication sector are some examples.

Steps taken:

            1. Number of industries reserved for public sector reduced from 17 to 3. These are Railways, Atomic Energy, and Arms and ammunition.

            2. FDI (Foreign Direct Investment) was allowed in a wide range of sectors such as Iron and Steel, Electricity. Air Transport, insurance etc.

            3. Private sector freed from:

            (i) Stiff process of licensing

            (ii) Permission to import

            (iii) Regulation of price

            4.  Many of the public sectors were sold to the private sector.

           

®        Note: Rajeev Gandhi govt. initiated liberalization policy in 1980s. In 1991 the government of P. V. Narasimha Rao and his finance minister Manmohan Singh started breakthrough reforms to bring liberalization. Trade barriers removed.

Reasons for liberalization

            (1) Fiscal Deficiet: Government expenditure more than income due to subsidies

            (2) In 1991 our foreign exchange reserve was only 1 billion dollar of Import.  India started having balance of payments problems since 1985, and by the end of 1990, it was in a serious economic crisis. A Balance of Payments crisis in 1991 pushed the country to near bankruptcy.

            (3) GDP growth was standstill, no industrial growth

            (4) Our Gold was put to security to foreign countries for money to save India. Gold reserve was empty

           

®         The fruits of liberalization reached their peak in 2007, with India recording its highest GDP growth rate of 9%. With this, India became the second fastest growing major economy in the world, next only to China.

WTO (World Trade Organization)

®     World Trade Organisation (WTO) is an organisation whose aim is to liberalise international trade. Started at the initiative of the developed countries,

®     WTO establishes rules regarding international trade, and sees that these rules are obeyed.

®     159 countries of the world are currently members of the WTO (2013).

Interlinking production across countries

®        MNCs set up factories and offices for production across countries by investing in assets such as land, building, machines and other equipment which is called foreign investment.

®        At times, MNCs set up production jointly with some of the local companies of these countries.

            Example 1:  Cargill Foods, a very large American MNC, has bought over smaller Indian companies such as Parakh Foods (dealing in edible oil). Cargill is now the largest producer of edible oil in India, with a capacity to make 5 million pouches daily.

            Advantage

            1. additional investment e.g new machines

            2. arrival of latest technology

            Example 2: Ford Motors, an American company, is one of the world’s largest automobile manufacturers with production spread over 26 countries of the world. Ford Motors came to India in 1995 and spent Rs. 1700 crore to set up a large plant near Chennai. This was done in collaboration with Mahindra and Mahindra, a major Indian manufacturer of jeeps and trucks.

Cost cutting by MNCs

®        Set up factories in regions of cheap labour India- good destination

            Reason: High skilled engineers and English speaking cheap youth. 50- 60% cost saving

Import quota

®        Countries put import duties and put restriction on amount of import to prevent completion for local companies. WTO wanted to abolish import quota.

Export Quota

®        To protect local consumers from shortage of essential items.Restrict on export

Call centres

®        MNCs heir BPO (Business Processing Outsourcing) i.e is call centers which are equipped with telecom facilities and access to Internet to provide information and support to customers abroad worldwide

Impact of globalization in India

Favourable

            1. Greater and wider choice before consumers particularly the well-off sections in the urban areas, who now enjoy improved quality and lower prices for several products.

            2. Flow of investment in industries such as cell phones, automobiles, electronics, soft drinks, fast food or services such as banking in urban areas.

            3. In new industries and service sector, new jobs have been created.

            4. Local companies supplying raw materials, etc. to MNCs have prospered.

            5. Arrival of new technology: several of the top Indian Companies have invested in newer technology and production methods and raised their production standards.

            6. Improvement in infrastructure

Unfavourable

            1. There is an underlying threat of multinational corporations with immense power ruling the country.

            2. Exploitation of cheap labour in lieu of low wages. Labour laws are not properly implemented. Faced with growing competition, most employers these days prefer to employ workers ‘flexibly’. This means that workers’ jobs are no longer secure.

            3. Tough competition to indigenous industries due to removal of restrictions on imports, many small producers and workers have suffered as a result of the rising competition. Example: 70 to 80 per cent of the toy shops have replaced Indian toys with Chinese toys due to removal of trade barriers.

            4. Developed countries farmer can sell their agricultural products in developing countries at lower price as their cost of production is low due to subsidies received from their mother countries. This will adversely affect the farmer of developing countries.