DR.

RAM MANOHAR LOHIYA NATIONAL

LAW UNIVERSITY

SOCIOLOGY

PROJECT ON :
IMPACT OF GLOBALISATION ON THE INDIAN ECONOMY

SUBMITTED TO: SUBMITTED BY:

MR. SANJAY SINGH SONAKSHI BANERJEE

ASST. PROFESSOR ROLL NO. : 142

DR.RMLNLU B.A. LL.B. (HONS.)
 ABSTRACT
The growing integration of economies and societies around the world, has been one of the
most hotly debated topics in international economics over the past few years. Rapid growth
and poverty reduction in China, India, and other countries that were poor 20 years ago, has
been a positive aspect of Liberalization Privatization and Globalization (LPG). But
Globalization has also generated significant international opposition over concerns that it has
increased inequality and environmental degradation. There is a need to study the impact of
globalization on developing countries from the viewpoint of inward foreign direct
investment. Attention should also be focused on the role which some developing countries,
particularly from parts of Asia and Latin America, are playing as initiators of globalization
through their own MNCs. India opened up the economy in the early nineties following a
major crisis that led by a foreign exchange crunch that dragged the economy close to
defaulting on loans. The response was a slew of Domestic and external sector policy
measures partly prompted by the immediate needs and partly by the demand of the
multilateral organizations. The new policy regime radically pushed forward in favour of a
more open and market oriented economy. This paper explores the contours of the on-going
process of globalization, liberalization and privatization. Throughout this paper, there is an
underlying focus on the impact of LPG on Indian economy. It also comments on impact of
LPG on India.

INTRODUCTION
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,
inernationalisation of financial markets, growing importance of MNC’s 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 labour. 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 MNC’s 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
GLOBALIZATION)
Indian economy was in deep crisis in July 1991, when foreign currency reserves had
plummeted to almost a 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 aboard that called for a complete overhauling of our economic policies and
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 undertaking 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 25kms 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 liberalise the FDI regime, inter alias, include
opening up of sectors such as Insurance (upto 26%) development of integrated
townships (upto 100%) defence industry (upto 26%) tea plantation (upto100%)
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; opining up B2B e-commerce3; Internet service
provides (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.
 Severs restrictions on short-term debt allowing external commercial borrowings
based on external debt sustainability.
 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
The implications of globalization for a national economy are many. Globalization has
intensified interdependence and competition between economies in the world market. These
economic reforms have yielded the following significant benefits; Globalization in India had
a favourable 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 pickup 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 Rao1s 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 India.

STRUCTURE OF THE ECONOMY

Due to globalization not only the GDP has increased but also the direction of growth in the
sectors has also been changed. Earlier the maximum part of the GDP in the economy was
generated from the primary sector but now the service industry’s devotion the maximum part
of the GDP. The services sector remains the growth driver of the economy with a
contribution of more than 57 per cent of GDP. India is ranked 18th among the world`s
leading exporters of services with a share of 1.3 per cent in world exports. The services sector
is expected to benefit from the on going liberalization of the foreign investment regime into
the sector. Software and the ITES-BPO sector recorded an exponential growth in recent
years.

FOREIGN TRADE (EXPORT- IMPORT)

India’s imports in 2004-05 stood at US$ 107 billion recording increases 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.

MERITS OF GLOBALIZATION
Following can be summed up as the merits of globalization:

 Since there is an International Market, there is a wider range to choose from, for
companies and consumers.
 Increase in flow of resources from developed countries to developing countries, which
can help the developing countries in economic reconstruction.
 Greater and faster flow of information between countries and greater cultural
interaction has helped to overcome cultural barriers.

DEMERITS OF GLOBALIZATION
Following can be pointed out as the demerits of globalization:

 The outsourcing of jobs to developing countries, has led to a decrease in job

opportunities in the developed countries.
 There is an underlying threat of multinational corporations with immense power
ruling the globe.
 For smaller developing nations at the receiving end, it could indirectly lead to a subtle
form of colonization.

A COMPARISON WITH OTHER DEVELOPING COUNTRIES

 Consider global trade – India’s share of world merchandise exports increased from .
05% to .07% over the past 20 years. Over the same period China’s share has tripled to
almost 4%.
 India’s share of global trade is similar to that of the Philippines and economy 6 times
smaller according to IMF estimates.
 Over the past decade FDI flows into India have averaged around 0.5% of GDP against
5% for China and 5.5% for Brazil. FDI inflows to China now exceed US $ 50 billion
annually. It is only US $ 4 billion in the case of India.

INDIAN ECONOMY: FUTURE CHALLENGES

 Sustaining the growth momentum and achieving an annual average growth of 9- 10%
in the next five years.
 Simplifying procedures and relaxing entry barriers for business activities and
Providing investor friendly laws and tax system.
 Checking the growth of population; India is the second highest populated country in
the world after China. However in terms of density India exceeds China as India’s
land area is almost half of China’s total land. Due to a high population growth, GNI
per capita remains very poor. It was only $ 2880 in 2003 (World Bank figures).
 Boosting agricultural growth through diversification and development of agro
processing.
 Expanding industry fast, by at least 10% per year to integrate not only the surplus
labour in agriculture but also the unprecedented number of women and teenagers
joining the labour force every year.
 Developing world-class infrastructure for sustaining growth in all the sectors of the
economy.
 Allowing foreign investment in more areas.
 Effecting fiscal consolidation and eliminating the revenue deficit through revenue
enhancement as expenditure management.
 Some regard globalization as the spread of western culture and influence at the
expense of local culture. Protecting domestic culture is also a challenge.
 Global corporations are responsible for global warming, the depletion of natural
resources, and the production of harmful chemicals and the destruction of organic
agriculture.
 The government should reduce its budget deficit through proper pricing mechanisms
and better direction of subsidies. It should develop infrastructure with what Finance
 Minister P Chidambaram of India called “ruthless efficiency” and reduce bureaucracy
by streamlining government procedures to make them more transparent and effective.
 Empowering the population through universal education and health care, India must
maximize the benefits of its youthful demographics and turn itself into the knowledge
hub of the world though the application of information and communications
technology (ICT) in all aspects of Indian life although, the government is committed
to furthering economic reforms an developing basic infrastructure to improve lives of
the rural poor and boost economic performance. Government had reduced its controls
on foreign trade and investment in some areas and has indicated more liberalization in
civil aviation, telecom and insurance sector in the future.

CONCLUSION
The lesion of recent experience is that a country must carefully choose a combination of
policies that best enables it to take the opportunity – while avoiding the pitfalls. For over a
century the United States has been the largest economy in the world but major developments
have taken place in the world economy since them, leading to the shift of focus from the US
and the rich countries of Europe to the two Asian giants- India and China. Economics experts
and various studies conducted across the globe envisage India and China to rule the world in
the 21st Century. India, which is now the fourth largest economy in terms of purchasing
power parity, may overtake Japan and becomes third major economic power within 10 years.

BIBLIOGRAPHY
1. Government of India, Planning Commission, 1992. English five year Plan, 1992-97 New
Delhi. And Tenth Five Year, plan 2002-07.

2. Jalan, Bimal 1996. India’s Economic Policy: Preparing for the Twenty-First Century.
Penguin Books, New Delhi.

3. Michael Porter. 2001. Competitive advantage of Nation.

4. United Nations- UNCTAD, World Investment report.

5. World Bank, World Bank Indicators.

6. Indian Government, Economic survey, 2002-03-04-05.

7. Reserve Bank of India Annual Report-2004-05 13. The Indian Economic Summit Report-
2005.