sandy globalization

8/14/2019 Sandy Globalization

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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 toliberalize 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 marketalso 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


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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


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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 percapita 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 ofsecurities 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:
http://en.wikipedia.org/wiki/Goodshttp://en.wikipedia.org/wiki/Serviceshttp://en.wikipedia.org/wiki/Exporthttp://en.wikipedia.org/wiki/Importhttp://en.wikipedia.org/wiki/Laborhttp://en.wikipedia.org/wiki/Peoplehttp://en.wikipedia.org/wiki/Human_migrationhttp://en.wikipedia.org/wiki/Capital_(economics)http://en.wikipedia.org/wiki/Technologyhttp://en.wikipedia.org/wiki/Securitieshttp://en.wikipedia.org/wiki/Stockhttp://en.wikipedia.org/wiki/Bond_(finance)http://en.wikipedia.org/wiki/Assetshttp://en.wikipedia.org/wiki/Investmenthttp://en.wikipedia.org/wiki/Foreign_direct_investmenthttp://en.wikipedia.org/wiki/Goodshttp://en.wikipedia.org/wiki/Goodshttp://en.wikipedia.org/wiki/Serviceshttp://en.wikipedia.org/wiki/Serviceshttp://en.wikipedia.org/wiki/Serviceshttp://en.wikipedia.org/wiki/Exporthttp://en.wikipedia.org/wiki/Exporthttp://en.wikipedia.org/wiki/Exporthttp://en.wikipedia.org/wiki/Importhttp://en.wikipedia.org/wiki/Importhttp://en.wikipedia.org/wiki/Importhttp://en.wikipedia.org/wiki/Laborhttp://en.wikipedia.org/wiki/Laborhttp://en.wikipedia.org/wiki/Laborhttp://en.wikipedia.org/wiki/Peoplehttp://en.wikipedia.org/wiki/Peoplehttp://en.wikipedia.org/wiki/Peoplehttp://en.wikipedia.org/wiki/Human_migrationhttp://en.wikipedia.org/wiki/Human_migrationhttp://en.wikipedia.org/wiki/Human_migrationhttp://en.wikipedia.org/wiki/Capital_(economics)http://en.wikipedia.org/wiki/Capital_(economics)http://en.wikipedia.org/wiki/Capital_(economics)http://en.wikipedia.org/wiki/Technologyhttp://en.wikipedia.org/wiki/Technologyhttp://en.wikipedia.org/wiki/Technologyhttp://en.wikipedia.org/wiki/Securitieshttp://en.wikipedia.org/wiki/Securitieshttp://en.wikipedia.org/wiki/Securitieshttp://en.wikipedia.org/wiki/Stockhttp://en.wikipedia.org/wiki/Stockhttp://en.wikipedia.org/wiki/Stockhttp://en.wikipedia.org/wiki/Bond_(finance)http://en.wikipedia.org/wiki/Bond_(finance)http://en.wikipedia.org/wiki/Bond_(finance)http://en.wikipedia.org/wiki/Assetshttp://en.wikipedia.org/wiki/Assetshttp://en.wikipedia.org/wiki/Assetshttp://en.wikipedia.org/wiki/Investmenthttp://en.wikipedia.org/wiki/Investmenthttp://en.wikipedia.org/wiki/Investmenthttp://en.wikipedia.org/wiki/Foreign_direct_investmenthttp://en.wikipedia.org/wiki/Foreign_direct_investmenthttp://en.wikipedia.org/wiki/Foreign_direct_investmenthttp://en.wikipedia.org/wiki/Goods


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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 1991Indian 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


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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


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The removal of quantitative restrictions on imports.

The reduction of the peak customs tarifffrom 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 Indias growth rate in the 1970s was very low at 3% and GDP

growth in countries like Brazil, Indonesia, Korea, and Mexico was more than twice that of India.

Though Indias 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 Indias global position. Consequently Indias 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 Raos 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. Indias GDP growth rate can be seen from the following graph since independence


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STRUCTURE OF ECONOMY (in %)


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Foreign Trade (Export- Import)

Indias 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.


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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


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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%.


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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

governments 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


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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 Indias (RBI) automatic approval route for equity holding up

to 51 per cent

2) Foreign Investment Boards discretionary approval route for larger projects

with equity holding greater than 51 per cent

3) acquisition of shares route (since 1996)

4) RBIs 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


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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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