Check Your Progress 2 Globalization and

Development in India
Note: a) Answer the following questions in about 50 words.
b) Check your answer with possible answers given at the end of the unit.
1) Has Globalization been accompanied by convergence between countries?
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2) What is the unevenness in the growth and trade performance of developing
countries under Globalization?

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4.8 GLOBALIZATION AND INDIAN

DEVELOPMENT
India’s entry into the globalization process was somewhat later than that of most
developing countries. It was only with the liberalization measures initiated from
1991 onwards. Though there was some liberalization in the 1980s too it was
relatively limited and was accompanied by other policy measures that were
uncharacteristic of the globalization era. Trade and FDI liberalization in the 1980s
was fairly selective and much of the extensive system of Government controls
survived till 1991. The opening up to volatile capital flows in (Foreign Institutional
Investment) happened only in the 1990s. So did the restraint on public expenditure,
the rapid growth of which was a characteristic feature of the decade of the 1980s.

India’s development experience prior to 1991 had not been one of spectacular
successes but rather of extremely slow progress. Conditions had improved
somewhat compared to the state of affairs during the colonial era but the vast
mass of India’s populace had remained deprived of even the most basic needs.
GDP and per capita GDP growth rates after independence had been significantly
higher than in the first 50 years of the 20th century. But the incomes, food and
nutrition intake, health status, levels of education, housing conditions, etc. of the
average Indian were still exceptionally poor in 1991. The majority of Indians
still lived in rural areas and the majority of the workforce was dependent on
agriculture for its livelihood. Did participation in the globalization process bring
about significant changes in this picture, and if so, of what kind?
According to Goldman’s “Sach Economic Research Report on Global Economies”
released in 2007, India has the following advantages compared with other
economies.
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Development Initiatives and i) India will challenge the Global Economic Order in the next 15 years.
Planning
ii) By 2050 it will be the second largest economy after China overtaking USA.
iii) India is the fourth largest GDP in the world in terms of purchasing power.
iv) India is the third fastest growing economy in the world after China and
Vietnam.
v) Received 4.5 billion as FDI.
vi) Service sector contributes around 55 percent of GDP. The share of agriculture
is around if percent and manufacture in 16 percent in 2005-06. This is a
character of a development.
vii) Expected GDP growth rate is 10 percent shortly.
viii) India has $262 billion as Foreign Exchange Reserve as on today. India had
just $1 billion as foreign exchange reserve when it opened its economy in
the year 1991.

4.8.1 Export and Import

As regards its level of integration into the global economy, the standard indicators
of this have clearly exhibited an upward trend since 1991, even if the heights
attained by them so far are not as high as in other countries. The levels of India’s
imports and exports of goods and services as a ratio of its GDP has increased
sharply implying that a much larger part of the economy is involved in cross-
border transactions.

Table 4: India’s External Trade as a Percentage of GDP

Year Merchandise Exports Merchandise Imports Services

Oil Non-oil Total Oil Non-oil Total Exports Imports

1990-91 0.16 5.55 5.72 1.90 5.68 7.58 1.43 1.12
1997-98 0.09 8.43 8.52 1.99 8.11 10.10 2.30 1.97
2002-03 0.51 9.89 10.39 3.48 8.63 12.11 4.09 3.37
2007-08 2.42 11.47 13.89 6.79 14.64 21.43 7.66 4.46

Source: RBI, Handbook of Statistics on the Indian Economy

In goods trade, import levels have tended to increase more than exports and
India’s share in world exports still remains very low. Despite the growth of
newer exports different from the items like textiles and garments, leather products,
and diamonds which traditionally dominated Indian exports, India’s merchandise
trade deficit has ballooned in periods of relatively higher growth and in 2008-09
stood at nearly 10% of India’s GDP. Not all of this has been on account of oil
imports, since the non-oil deficit alone in 2007-08 was 3.17% of GDP, larger
than the aggregate deficit to GDP ratio at the time of the 1991 foreign exchange
crisis. The trend in India’s merchandise trade essentially reflects the fact that the
manufacturing sector in the country in general has not been very competitive in
the world market. Poor infrastructure and low productivity have meant that costs
of industrial production in India tend to be high even with extremely low wages.
India has however done relatively better in services exports, primarily in IT and
IT-enabled services in which India has become the most important exporter amongst
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developing countries. The ratio of services exports to total merchandise and Globalization and
Development in India
service exports in the Indian case (36%) is significantly higher than the world
average of around 20%.

Capital flows into India have also increased significantly after liberalization,
though even here it has been a relatively more attractive developing country
destination for portfolio flows than for FDI. It is because of these capital inflows
that India managed to accumulate large foreign exchange reserves even though in
most years its foreign currency expenditures have exceeded its earnings. While
India has escaped any major currency crisis, exchange rate instability has been a
problem. There have been periods of both sharp appreciation as well as
depreciation of the rupee. Of late, there is also an increasing trend of Indian
private capital being investing abroad mainly by companies but also by mutual
funds.

4.8.2 Growth and its Composition

As regards the growth of aggregate output, as indicated earlier, Indian growth
after 1975 was faster than in the two and a half decades before that. This transition
of India to a higher growth path actually happened around 1980, which was
however at least a decade before its own real participation in globalization began.
Between 1950 and 1980, India’s GDP growth rate averaged around 3-3.5% while
after 1980 it was around 5.5-6%. In other words, the acceleration in growth pre-
dates the extensive liberalization of the 1990s subsequent to which the trend was
simply maintained with no significant further acceleration. A spurt in growth
since 2002-03 from when GDP growth rates reached the 8-9% level has been
presumed to mark a further upward shift in India’s growth trend. However, the
recent slowing down after the global economic crisis has put a question mark on
this. From the viewpoint of development however, more important than the rates
of growth has been the nature of growth under globalization.

Macro Economic Performance in Post 1990 Years

Year Real GDP Growth Year Real GDP Growth
1991 .96 1999 6.5
1992 2.3 2000 6.1
1993 1.5 2001 4.0
1994 5.9 2002 6.2
1995 7.3 2003 5.5
1996 7.3 2004 8.0
1997 7.8
1998 6.5
Source: Kulkarni,KG “Effect of Globalization on India’s economic Growth”, www.reser
chindia.org/effectsofglobalizationon india.doc.

India’s growth in recent times has been dominated by the services sector, which
has been the fastest growing sector and contributed the major part of the increase
in output. This reflects the facts that in both domestic and external demand, the
proportion of services has been increasing. Industrial growth has tended to fluctuate
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Development Initiatives and as it used to in the past too and the industrial sector’s share in output has tended
Planning
to stagnate at a level far below that indicating complete industrialization of a
country. The agricultural sector on the other hand has been the worst affected
with agricultural growth rates being on an average lower than in the pre-
liberalization era. In fact it is now officially acknowledged that India experienced
an agrarian crisis since the mid-1990s. The main factors behind this have been
the relative compression of rural development expenditures, the squeezing out of
the agricultural sector in bank credit, and the increased exposure of the agricultural
sector to volatility in global prices. These are the factors behind the spate of
farmer suicides in India which continues unabated. This growth pattern marked
by a robust growth of services at one end, a distressed agriculture on the other,
and unstable industry in between, both produces as well as reflects what has
come to be called “non-inclusive” growth.

4.8.3 Employment
The rapidly growing services sector in India has proved incapable of generating
significant employment. In fact, just about a quarter of India’s workforce is
employed in this sector which accounts for over 55% of India’s Net Domestic
Product. Agriculture, whose share in Net Domestic Product has fallen below
20% still employs 57% of the workforce but simply cannot absorb any more.
Industrial employment too has grown slowly. Within the industrial sector,
employment in the organized sector has been falling and it is in unorganized
industry that the incremental industrial workforce has been absorbed.

One implication of all of these has been that employment growth in India has
been extremely slow in the post-liberalization period, which is a matter of concern
particularly since there was already an existing backlog of unemployment.
Employment growth has been particularly poor in the more rapidly growing
segments of the economy. Thus while the organized sector has steadily increased
its share in output from about 36% in 1991 to 43% by 2007-08, employment in
that sector after initially increasing slowly fell after the late 1990s (Table 5) so
that in 2006 it was the same as in 1991 even though the total labour-force had
grown in between. In 1993-94, when the labour-force in India was 334 million,
only 27.4 million or 8.1% were employed in the organized sector. By 2004-05,
the labour-force in India had increased by another 85 million to reach a level of
nearly 420 million. Organized sector employment over the same period however
fell by nearly a million to 26.5 million which was just 6.4% of the labour-force.
A large part of the decline in organized sector employment has been on account
of the fall in public sector employment, but even private sector employment growth
has been very insignificant.

Table 5: Organized Sector Employment (in Lakhs)

Sector 1991 1998 2006
Public Sector 190.58 194.18 181.88
Private Sector 76.77 87.48 88.05
Total 267.35 281.66 269.93
Source: Economic Survey

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The implication of this is that the large majority of Indians either cannot find Globalization and
Development in India
work or have to find low-income employment in the less dynamic segments of the
economy. In 2004-05, nearly 34.74 million or 8.28% of the labour force was
unemployed (on a Current Daily Status Basis), up from 20.27 million or 6.06%
in 1993-94. However, in the absence of any social security mechanism, people in
India cannot afford to remain unemployed for long and the sheer requirement of
survival forces them into a variety of extremely low-paying work in the
unorganized sector. But even the fortunate few entering the organized sector are
not necessarily finding high-wage work. While some segments of the white-collar
organized sector workforce have come to enjoy extremely high salaries after
liberalization, this is not the case for everybody employed in that sector. In fact
real wages of even the organized sector industrial workers have tended to stagnate
after liberalization.

4.8.4 Poverty and Inequality

As per official estimates by the Planning Commission, poverty in India has come
down after liberalization. What this means is that the proportion of the population
with income levels below a stipulated poverty line has come down. This statement
however needs to be further qualified in a number of ways.

Firstly, the pace of poverty reduction in the post-liberalization period has been
slower than before. Thus, in the fourteen year period between 1973-74 and 1987-
88, the proportion of those below the poverty line in the total population came
down by 16 percentage points from 54.9% to 38.9%. In the longer seventeen year
period since then, the reduction was to a smaller extent of 12.4 percentage points.

Table 6: Poverty Ratios and Number of Poor in India

1973-74 1977-78 1983 1987-88 1993-94 2004-05
Rural (%) 56.4 53.1 45.7 39.1 37.3 28.3
Urban (%) 49 45.2 40.8 38.2 32.4 25.7
All India 54.9 51.3 44.5 38.9 36 27.5
Number (Million) 321 329 323 307 320 302
Source: Economic Survey

Secondly, the poverty line is a fixed one that does not change with the level of the
per capita income. The only adjustment that is made over time is for the increase
in prices. The poverty line today is therefore no different than it was in 1973-74,
when real per capita income in India was a third of its current level, and the
poverty ratio is therefore only a measure of the population below some absolute
level of income. A reduction of poverty therefore can be accompanied by an
increasing gap between the top and the bottom sections of the population.

Thirdly, the poverty line in India is pegged at a very low level and some consider
destitution line to be a more appropriate description for it. In 2004-05, the all-
India poverty line for rural areas was Rs. 356.30 per capita per month and Rs.
538.60 for urban areas. The significance of this lies in the fact that there may be
very large variations in the income levels of even those above this line and one
cannot treat them all as non-poor. Indeed, the National Commission on Enterprises
in the Unorganized Sector (NCEUS) estimated that while 27% of the Indian
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Development Initiatives and population in 2004-05 was below the official poverty line, as many as 77% of
Planning
people lived on less than Rs. 20 a day.

Fourthly, the poverty line was first arrived at using a minimum nutrition norm – it
was fixed at the minimum income-level at which the consumption of food was
found to be adequate for meeting that norm. Since then however, consumption
patterns have changed and the nutrition-intake associated with the same level of
real income (income adjusted for price changes) is lower. It has therefore been
argued by some that if a poverty line for today was to be constructed on the basis
of the same nutritional norm, it would be higher than the official poverty line and
more than 70% of the population would be below it. In fact, the average
expenditure by Indians on foodgrains in the recent past, when the economy was
growing at its fastest ever rates, was not only lower than it was at the begininning
of the 1990s and way back in the early 1960s in some years it was at a level
comparable to what it was during the two successive droughts in the mid-1960s
(Figure 1). The expenditure story is also supported by the data on per capita
availability of foodgrains which averaged 461.08 grams per day in 1961-65,
480.26 in 1987-91, and just 442.16 grams in 2003-07. These would be amongst
the lowest levels of food consumption in the world.

Figure 1: Per Capita Expenditure on Foodgrains at 1999-00 prices (Values in

Rupees)
Source: Computed from CSO, National Accounts Statistics, 2009 and Back Series

All the above point towards the undisputed fact that income inequalities in India
have grown sharply after 1991. Inequalities can however increase even when
everyone experiences rising incomes but the pace of increase of the richer sections
is greater. The nature of non-inclusive Indian growth under liberalization has
however been one where the large majority which in any case had low incomes
has experienced stagnating incomes while a small well-off minority has moved
ahead rapidly by cornering the bulk of the benefits of growth. It is this pattern of
distribution of the benefits of growth that explains the pattern of demand growth
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in India. In a country where food intake levels and the penetration of manufactured Globalization and
Development in India
consumer goods are very low, with a general increase in incomes one should see
an absolute rise in expenditure on food and also a rise in the share of expenditure
on manufactured goods before the consumption pattern shifts towards services.
That we are witnessing instead not the first two but only a rising share of services
in Indian consumption demand has to reflect the fact that income increases are
concentrated at the upper end of the income distribution spectrum, where the
demand for food and manufactured consumption goods are relatively saturated.

4.8.5 Growth of Private Sector

Moreover, the problem is not merely one of increasing inter-personal inequality.
A significant part of the recent high growth of the Indian economy has been based
on the rapid growth of the private corporate sector. This is indicated by the rapid
rise in its share in GDP of the savings of the private corporate sector – that part
of the profits of companies which is not paid out either as taxes or as dividends
(Figure 2). It has grown many times faster than aggregate GDP – as compared to
a 71% rise in the nominal value of the latter between 2003-04 and 2007-08,
corporate savings increased by over 250%!Consequently, the share of corporate
savings in GDP has more than doubled, from just above 4% in 2003-04 to 8.4%
in 2007-08. Income-tax data on the other hand indicate that total private corporate
taxable profits in 2007-08 touched nearly 14% of GDP, and over 50% of this
was accounted for by less than 200 companies.

Figure 2: Gross Savings of the Private Corporate Sector (Joint-Stock Companies)

as a Percentage of GDP at Market Prices

Source: Central Statistical Organisation, National Accounts Statistics, 2009 and Back Series

Not only are the incomes of very few linked to corporate growth, this period also
witnessed unbalanced growth of incomes within the corporate sector. As Figure
3 starkly brings out the profits of private corporate sector companies have been
growing much more rapidly than the wages and salaries being paid by them to
their employees (the figure is based on a sample of companies which account for
70-80% of the corporate sector). From a level where profits before taxes were
less than half the value of wages and salaries 2001-02, they have climbed in the 75
Development Initiatives and short space of a few years to become nearly double. Underlying this is the
Planning
combination of the corporate sector holding employment at relatively low levels
even while expanding output and the low wages and salaries of many employees
even in the corporate sector.

Figure 3: Ratio of Profit Before Tax (PAT) and Profit After Tax (PAT) to Wages and
Salaries in Private Sector Companies

4.8.6 Growing Rural-Urban Divide

Another dimension of growing inequality in India has been the growing divide
between urban and rural India. Per capita incomes in rural India, where more
than 70% of the population still resides, have always been significantly lower
than in urban India. But a very sharp decline in this ratio happened immediately
after liberalization.

Table 7: Share of Rural India in Population and Net Domestic Product and
Rural/Urban Per Capita NDP
Share (%) of Rural India in: Rural Per Capita NDP
Year Population NDP as % of Urban
1970-71 80.22 62.35 40.88
1980-81 76.88 58.91 43.11
1993-94 73.51 54.27 42.76
1999-00 72.53 48.3 35.39
Source: CSO, National Accounts Statistics

The relative decline of the rural sector also exhibits itself in the sharp decline in
the ratio of per capita consumption expenditure in rural India relative to urban
levels (Figure 4). The average Indian living in the countryside now consumes
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just about half of what his/her urban counterpart consumes, as compared to over Globalization and
Development in India
70% in 1977-78.

Figure 4: Average Per Capita Expenditure: Rural India as a Percentage of Urban

India.

Source: NSSO Report No. 508: Levels and Patterns of Consumer Expenditure, 2004-05

4.8.7 Public Expenditure Stagnation

At the root of many of the problems confronting Indian development has been the
inability to increase public expenditure levels, a direct consequence of the
globalization of the Indian economy. As shown in Table 8, the ratio of public
expenditure to GDP, which was in any case amongst the lowest in the world, has
stagnated at levels attained before liberalization. In fact even during the recent
period of very high growth, the period in which tax receipts to GDP ratios were
the best, rather than an expansion of expenditure what one saw was a reduction of
the fiscal deficit – to which the Government had committed itself through the
FRBM Act.

Table 8: Receipts and Expenditure of Central and State Governments as a

Percentage of GDP

Year Total Revenue Tax Receipts Expenditure

Receipts
1990-91 18.6 15.4 28.7
1997-98 17.8 14.3 25.8
2002-03 18.8 15 28.9
2007-08 22.3 18.5 27.9
Source: Economic Survey

One implication of the restraint on public expenditure has been that investment in
the development of the country’s infrastructure, including rural infrastructure, has
suffered. This in turn has had adverse consequences for agriculture and rural
development, industrial growth, the competitiveness of the Indian economy, and
employment. Social sectors like health and education have also been badly hit.
Even as public expenditure on these has stagnated, people have to spend more
out of their own pockets for health and education services (Table 9).
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Development Initiatives and Table 9: Government and Private Expenditure on Health and Education as
Planning
a Percentage of GDP
Government Expenditure Private Final Consumption
(Central & State Governments) Expenditure

Year Health Education Total Health Education Total

1990-91 1.2 3.1 4.30 1.68 1.11 2.79
1997-98 1.1 2.8 3.90 1.95 1.11 3.06
2002-03 1.24 2.74 3.98 3.31 1.39 4.69
2007-08 1.41 2.87 4.28 3.22 1.33 4.55
Source: Economic Survey and CSO, National Accounts Statistics

4.8.8 The Indian Experience with Globalization: Growth sans

Development?
How should then one describe India’s experience with Globalization? India does
not appear to belong to that group of developing countries where the pace of
aggregate growth has been adversely affected by globalization. Yet, even with its
significantly higher growth performance it has like other developing countries
found it difficult to address its formidable development challenge as this growth
has not positively touched the lives of the majority of Indians. It is this duality
that underlies the controversy about the impact of globalization on India. Those
who emphasize that growth is a necessary and condition for eliminating
backwardness and believe growth has automatic trickle-down effects highlight
the growth performance of India under liberalization. Others point out the limited
impact of this growth on general well-being. This divide is deeper than might
first appear. That Indian growth under liberalization has not been inclusive in
nature is now officially accepted and transforming that is often highlighted as a
major policy objective. The question however is, can the growth that has happened
and its lack of inclusiveness be separated from each other? If the government has
to keep taxes very low and restrict its spending, then it may be able to do precious
little to change the economic outcomes spontaneously emerging except by enticing
private capital. But if it is to depend on profit oriented domestic and foreign
private capital to deliver growth by enticing it to invest, and keep Indian financial
markets attractive to foreign portfolio investors, then it has to keep its taxes and
expenditure low, and instead offer further concessions. This is a vicious circle
from which escape is very difficult unless the policy space is enlarged and used
to alter the pattern of growth. That however may not be possible without some
restraints on the extent of integration with the global economy.

In this session you read about the globalization and its impact on various
indicators of development and now answer the questions given in the Check Your
Progress-3.
Check Your Progress 3
Note: a) Answer the following questions in about 50 words.
b) Check your answer with possible answers given at the end of the unit.
1) What is the asymmetry between the shares of India’s organized sector in
output and employment?
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