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Globalisation | Economic Processes | Economics


In this article we will discuss about:- 1. Meaning of Globalisation 2. India’s Move towards Globalisation 3. Consequences.

Meaning of Globalisation:

The term ‘globalisation’ in common parlance, means the integration of the economy of each country with the global or world economy. It is the resurrection of age-old classical principle of laissez faire in the fields of international exchange of goods, services and capital. According to Jagdish Bhagwati, the word ‘globalisation’ has many connotations from viewpoints of trade, direct investment and immigration of capital flows.

In more specific terms, globalisation requires the reduction in import tariffs, substitution of quantitative restrictions with import tariffs and subsequent elimination thereof, removal of restrictions on the flow of private investments, dismantling of regime of export incentives, regulation of exports through market-determined exchange rates, removal of exchange controls, provision of facilities for free flow of investment with assurance of intellectual property rights.


The essence of globalisation is the increasing degree of openness in respect of international trade, international investment and international finance. In other words, globalisation is the process of transformation of the world into a single integrated economic unit. In a global economy, all the barriers on the flow of trade in goods and services and investment across the national frontiers are removed.

According to P.F. Drucker, a global or transnational economy has the following main features:

(i) The money flows rather than trade in goods and services shape a transnational economy. The monetary and fiscal policies in various economies react to developments in money and capital markets and they do not shape those developments.

(ii) The management in such an economy emerges as the decisive factor of production. The factors like labour and capital have secondary importance.


(iii) The goal in the transnational economy is not the maximisation of profits but the market maximisation.

(iv) International trade becomes increasingly a function of investment.

(v) There is a shift in the decision-making power from the national state to the region such as European Union, NAFTA, and ASEAN etc.

(vi) There is genuine integration of money, credit and investment flows world over knowing no national boundaries.


(vii) There is rapidly growing pervasiveness of multinational corporations that treat the whole world as a single market for production and marketing of goods and services.

India’s Move towards Globalisation:

During the 1990’s, India witnessed economic crisis of frightening magnitude on account of several factors such as relative low growth rate of exports, decline in foreign remittances, and lesser inflow of concessional credit, Gulf war and the consequent steep rise in oil import bill and withdrawal of funds by NRI’s.

The current account deficit in international payments mounted upto Rs. 17,369 crore in 1990-91. By June, 1991, the foreign exchange reserves had dwindled down to Rs. 110 crore barely sufficient to meet import requirements of just two weeks. In such a difficult economic situation, India had to accept in 1991, the stabilisation and structural adjustment programme under mounting pressure from the IMF and the World Bank.

This programme involved the reduction in fiscal deficit, reduction in the rate of increase of money supply, liberalisation in the domestic field through relaxation of controls on production, investment, prices etc. and resource allocation through market directions, liberalisation in the field of foreign economic policy involving reduction in controls upon the international flows of goods, services, capital and technical assistance with the object of ultimate complete dismantling of those controls.

Thus the economic crisis in 1990 and 1991 had driven India to follow the policy of globalisation under the pressure of IMF and World Bank.

In the direction of globalisation, India adopted the following steps after 1990-91:

(i) Liberalisation of Imports:

India has made since 1991, a steady progress in the elimination of quantitative restrictions, licensing and discretionary controls over imports. There has been delicensing of imports of capital goods, raw materials and components, substantial reduction in tariff restrictions on imports and reclassification of tariff categories with the object of their steamlining and simplification.

A number of items of import were removed from the negative/restricted list and have been permitted free for imports in the EXIM Policy 1992-97. The government has been removing the import items from the negative list in a phased manner. For instance, 20 items were removed from this list in 1997. Similarly 42 items were removed from the negative/restricted list in 1996-97. The


EXIM policy 1992-97 shifted several importable items to the list of items which could be imported under the Special Import Licence (SIL) Scheme. In 1996- 97, as many as 164 items were shifted to SIL list. This policy of liberalising imports is being carried forward over the last two decades.

(ii) Reduction in Tariffs:

The strategy of trade reforms included also the reduction in import tariffs. For instance, the tariff rates were slashed from 255 percent to 150 percent ad valorem on 35 import items. In the budget of 1993-94, the maximum rates of tariff on most of the Items, with a few exceptions were reduced from 110 percent to 85 percent ad valorem.

The tariff rates were reduced upto 40 percent ad valorem on a large number of items of imports in the budget of 1997-98. India has made commitment to the WTO to bring down the ceiling limit of tariff rates to 40 percent in case of finished goods and to 25 percent in case of intermediate goods, machinery and equipment by the year 2005.


The Union Budget 2002-03 announced a reduction in peak customs duty from 35 percent to 30 percent. It was also indicated that there will be reductions/rationalization in these duties into only two slabs of 10 percent (for raw material, intermediate products and components) and 20 percent (for final products) by 2004-05. During 2008-10 period, the peak duty rates on all manufactures, were retained at 10 percent. In 2014-15 budget, basic customs duty was reduced in chemicals, petro-chemicals, electronic hardware’s, renewable energy equipments, HIV/AIDS drugs and diagnostic kit.

(iii) Relaxation of Quantitative Restrictions:

In connection with the liberalisation of imports, India could retain the non-tariff quantitative restrictions on imports of 2300 items on the ground of BOP situation. India was obliged to phase out such restrictions over a period of 6 years (1997-2003) through consultation with India’s trading partners. The process of relaxation & non- tariff barriers has been still continuing.

(iv) Trade Related Intellectual Property Rights (TRIPS):


Under the WTO agreement, India was required to amend the domestic patent laws to honour the international trade related intellectual property rights. In order to meet this obligation, a bill was introduced to amend the domestic patent law during 1998 winter session of the Parliament.

It was followed up by a Presidential Ordinance on January 6, 1998 bringing the domestic legislation in conformity with our obligations under Article 70.8 and 70.9 of the TRIPS Agreement. This ordinance provided Exclusive Marketing Rights (EMR) to foreign companies in the fields of pharmaceuticals and agricultural chemicals upto the year 2005 pending the adoption of product patent laws in India.

(v) Trade Related Investment Measures (TRIMs):

In making an advance towards globalisation, the Government of India has recognised that no discrimination will be made in the application of economic policies against the foreign investors. No restrictions will be placed upon the foreign investors in respect of participation in equity, remittance of profits and the repatriation of capital.


In this regard India originally notified its intention to eliminate restraints on foreign investments by January 1, 2000. Under the Information Technology Agreement (ITA), it was accepted that tariffs would be brought down to zero on 95 lines by the year 2000, on 4 tariff lines by 2003, on 2 tariff lines by 2004 and on the remaining 116 tariff lines in the year 2005.

(vi) Greater Opening to the Foreign Capital:

A very essential element of globalisation policy in India has been to facilitate an easy inflow of foreign capital in the economy In order to ensure integration of Indian economy with the global economy, several concessions and facilities have been extended to the foreign investors and NRI’s.

In 1991, the government specified a list of high priority industries in which equity participation of foreign investors even to the extent of 51 percent could be permitted without prior approval of the government. By 1996, the number of such industries had increased upto 48.

In addition, the companies which come within the purview of Foreign Exchange Regulation Act (FERA) have been given facilities to make use of their trademarks, to make borrowings or to accept deposits and to purchase immovable property. The transfer of shares between NRI’s has also been permitted. The NRI’s have been permitted to hold equity upto 100 percent in the areas of export houses, business houses, star business houses, export- oriented units, sick industrial units, hotels, hospitals etc.

Since the beginning of 2000, the efforts are afoot to liberalise further to make way for larger inflow of foreign investments. These measures include the ending of state monopoly in insurance sector, opening up of banking and manufacturing industries to competition and disinvestment in public sector enterprises. There are increasing stakes for foreign investors in such areas as chemicals and chemical products, generation and distribution of power, construction, transport, storage, advertising, mining, oil exploration, insurance, health-care, electronics and information technology.

The portfolio investments in general and borrowing from multilateral institutions in particular have remained somewhat cramped on account of the alarming fiscal deficit. In this regard the government has to come out with a package of credible measures including the widening of tax base, reduction in subsidies, disinvestment programme in public sector and the general downsizing of the bureaucracy.

Consequences of Globalisation:

The process of globalisation has remained a matter of continuing controversy through the 1990’s. The intensity of this controversy got sharpened after the Mexican Crisis, East Asian Crisis and global recession in 2007-09. In what way globalisation has affected the Indian economy, can be fully assessed only after the next decade or so.

The Indian economy is presently passing through a critical stage of transition from a highly controlled economy to the market-oriented economy. An imperfect evaluation of the effects of globalisation alone can be possible in a developing country like India because it is difficult to separate the effects of globalisaition from the effects of on­going process of economic development. Some of the economic developments in this regard were positive, while the others were negative.

Positive Effects:

The positive effects of the process of globalisation are mentioned below:

(i) Enlargement of Exports:

The proportion of exports to GDP was just 6.2 percent in 1990- 91. The adoption of EXIM Policy of 1992-97 with its stress upon trade liberalization led to a sustained rise in the proportion of exports to GDP upto 8.9 percent in 1995-96. During 1996-97 and 1997-98, this proportion declined partly due to industrial recession within the country and partly due to the East Asian Crisis. The annual growth rate of exports was -1.5 percent in 1991-92. It followed a fluctuating pattern during the 1990’s. The lowest growth rate of exports was —5.1 percent in 1998-99.

During the 2002-2008 period, the growth rate of exports steadily increased. It was 28.9 percent in 2007-08. A sharp fall in growth rate of exports to 13.6 percent and -3.5 percent occurred in 2008-09 and 2009-10 respectively due to global recession. However, there was substantial rise in exports by 21.8 percent in 2011-12. Subsequently growth rate of exports declined. It was only 4.7 percent in 2013-14.

(ii) Expansion in Imports:

The inevitable effect of import liberalisation was the expansion in imports of the country. The growth rate of imports stood at 14.4 percent in 1990-91. The imports declined by 24.5 percent in 1991-92 on account of serious BOP situation in the country. Subsequently imports rose sharply. In 1994-95, the growth rate of imports touched the peak level of 34.3 percent, followed by growth of imports in 1995-96 at the rate of 21.6 percent.

There was deceleration of imports during 1996-99 period. The deceleration of imports resulted from weak domestic demand, slowdown of industrial activity and softening of international oil prices. After 2002-03, the imports have registered a high growth rate of over 24 percent. The peak rate of growth of imports was 42.7 percent in 2004-05. In 2011-12 it stood at 32.3 percent. The growth rate of imports fells down to 8.3 percent in 2013-14.

(iii) Rise in Degree of Self-Reliance:

The self- reliance as measured by the coverage of imports by exports improved from 66.2 percent in 1990-91 to 84.8 percent in 1993-94. Although this ratio declined in the subsequent years and reached the level of 67.8 percent in 1999-00, yet it rose again and was 78.0 percent in 2001-02. Between 2007-08 to 2009-10, this ratio declined to 60 percent. Between 2010-11 to 2013-14, this ratio stood at 65.1 percent.

(iv) Improvement in BOP Situation:

India passed through extremely critical BOP situation in 1990 and 1991 necessitating the adoption of trade liberalisation and structural readjustment programme. The net effect of trade and other reforms did have very conducive effect upon the BOP situation. In 1996-97 and 1997-98, India’s BOP withstood fairly well the turbulence in the international economic and financial markets. The BOP situation was manageable even during 2000-08.

In 2008-09 country had a negative overall balance of the amount of-20.08 billion US dollars owing to the global economic recession. The BOP of the country made a turnaround in 2009-10, when it stood at 13.44 billion US dollar. The overall balance of the country was 15.51 billion US dollar in 2013-14.

(v) Relatively Greater Stability of Exchange Rate of Rupee:

In view of difficult BOP situation in 1990 and 1991, India had to permit depreciation of rupee against the five principal currencies of the world in July, 1991 by about 22 percent in two phases. Subsequently, steps were initiated in the direction of partial convertibility of rupee. Since July, 1993 relatively greater degree of stability of rupee against the U.S. dollar was noticed.

However in 1997-98, the exchange rate of rupee against the U.S. dollar came under downward pressure on account of nervous reactions to the East Asian Currency turmoil and political uncertainty at home. Between 2003-2007 rupee appreciated vis-o- vis US dollar by 12.5 percent. In 2008-09, the international currency turmoil led to sharp appreciation of rupee by 28 percent and it put severe strain on Indian exports.

There is however, a sharp slide in rupee against dollar to the extent of 24 percent in 2010-11. The annual average depreciation of rupee against dollar in 2013-14 was 10.1 percent.

(vi) Inflow of Capital:

The trade and capital market reforms during the 1990’s have enhanced the confidence of the foreign investors in the potential of India. There has been a highly significant increase in the inflow of both FDI and portfolio investment. The FDI had stood at $ 129 million in 1991-92 but by 1997-98 it had surged upto $ 3.6 billion. Between 1991-92 and 1994-95, the portfolio investment rose from $ 4 million in 1991-92 to the peak level of $ 3.3 billion in 1996-97.

Subsequently, there was a declining trend in both direct and portfolio investments owing to slowing down of the momentum of structural adjustment, East Asian currency turmoil, enhanced market-risk perception and depression conditions in the domestic capital market. In 2008-09, foreign direct investment reached the peak level of $ 19.8 billion. The FDI flow, however, declined to US $ 18.8 billion in 2009-10 due to global recession.

The net FDI flow into India, subsequently increased. It stood at US $ 21.56 billion in 2013-14. The downward trend in portfolio investment continued. It stood at the peak level of $ 44.96 billion in 2007-08. But subsequently it went on falling. It stood at a low level of US $ 4.82 billion in 2013-14.

(vii) Improvement in External Debt Position:

All the major indicators of external indebtedness of India have shown improvement over time. The ratio of external debt to GDP declined from 30.4 percent in 1991 to 23.5 percent in 2013-14. The proportion of short term debt to the total debt, however, increased from 10.2 percent in 1991 to 20.2 percent in 2013-14.

Such a development is worrisome for the Indian economy. It reminds of disastrous situations experienced by Mexico and East Asian countries. The debt servicing payments as a ratio of current receipts has also declined considerably from 35.3 percent in 1990-91 to 5.9 percent in 2013-14. This is a favourable development.

(viii) Better Exchange Reserve Position:

India was faced with very precarious position related to foreign exchange reserves in 1990 and 1991. In the subsequent years, there has been steady improvement in the reserve position. In March 2004, India’s foreign exchange reserves stood at a comfortable level of $ 113 billion. In 2013-14, they had touched the level of $ 304.2 billion.

Negative Effects:

The policy of globalisation is viewed with much concern and scepticism in some quarters not only in India but over almost entire developing world. The critics of globalisation have pointed out several negative consequences of it.

They are:

(i) Increase in Deficit on Current Account:

Even if it is recognised that the process of globalisation and trade liberalisation brought about a rapid increase in exports, yet there has been an adverse development in the form of increased deficit both in respect of trade balance and current account balance.

Between 1991-92 and 2007-08, the ratio of deficit in trade balance of the India to its GDP declined from -10 percent to -8.6 percent. The ratio of deficit in the balance of current account to the GDP also fell from -3.0 percent to -2.8 percent over the same period. This ratio of current account deficit to GDP stood at -1.13 percent in 2013-14.

(ii) Sluggish Rise in FDI:

Although the inflow of FDI in India rose from $ 3.56 billion in 1997-98 periods to $ 18.8 billion in 2009-10 period, yet the share of India in the investment flow to developing countries was on an average less than 1.7 percent. In contrast, share of China in the flow of FDI to developing countries during this period was above 30 percent per annum. Similarly FDI flow to Indonesia, Malaysia, Singapore, Thailand and Hong Kong was much larger than that to India.

(iii) Decline in Portfolio Investment:

It is true that the portfolio investment increased rapidly between 1991-92 and 1994-95. In subsequent years, however, there has been a declining trend of the inflow of portfolio investment. This decline has resulted from a decline in flows of both foreign institutional investments and Euro-equities. The decline in portfolio investment got intensified in 1998-99 on account of a large outflow of foreign institutional investment.

There has been also a decline in net foreign institutional investment as a proportion of portfolio investment in the country. The ratio of portfolio investment to GDP continued to decline in India between 2003-2004 and 2006-2007 from 1.9 percent to 0.7 percent and declined further to 0.3 percent in 2013-14

(iv) Down Grading in Investment Rating:

The approvals of external commercial borrowings (ECB) have declined from $ 8.58 billion in 1996-97 to $ 2.65 billion in 2001-02. It has resulted from a general increase in the risk-premium for emerging market borrowers, rise in the forward premia and downgrading by international credit rating agencies.

Since early 1997, the persistently large fiscal deficits and deteriorating external environments have contributed in the downgrading of this country in the investment rating. The change in investment rating is partly a clever device employed by developed countries to arm-twist the developing countries for extracting more concessions.

(v) Destructive Effect of Unequal Competition:

The 19th century philosophy of laissez faire and its new incarnation of globalisation are both based upon the assumptions that, all the countries are at the same level of development and the market system ensures the optimum allocation of resources. Such assumptions actually are not true. In fact, the industrial and commercial units in India are pygmies relative to large multi-national corporations. In this unequal competition, sooner or later the small units are likely to be swallowed up by the large units.

(vi) Dominance of MNC’s:

Globalisation is not any goldmine discovered by the politicians and captains of industries in the poor countries like India. The Director-General of World Trade Organisation had declared that they had been writing a constitution of the global economy.

In fact they have been writing a constitution for the largest multi-national corporation to rule the world. The world-wide trends towards the mergers, take-overs and co-partnerships involving more than 51 percent participation in equities on the part of MNC’s is a continuing bid to rule the world.

Dr. Henry Kissinger commented in the wake of Asian Economic crisis, “I am disturbed by the tendency to treat the Asian economic crisis as another opportunity to acquire control of Asian companies’ assets cheaply and to reconstitute them on the American model. This is courting long term disaster.”

Even a strong votary, of capitalism like J.K. Galbraith wrote in Dissent, “The push for competition, deregulation, privatization and open capital markets has undermined economic prospects for many millions of the world’s poorest people. It is, therefore, not merely a naive but also a misguided crusade. To the extent that it undermines the stable provision of daily bread, it is dangerous to the safety and stability of the world, including ourselves.”

In the long run, the competitive wooing of MNC’s by the LDC’s threatens the national sovereignty.

(vii) Negative Effect on Wages and Employment:

A much flaunted benefit of globalisation and increased flow of foreign investment has been an improvement in wage-employment opportunities in the capital-recipient country. The reality has already started dawning in this respect.

According to UNCTAD, the net impact of foreign investment upon the domestic workers may be negative on account of several factors such as decline in real wages after liberalisation and globalisation, lower wages paid to workers in developing countries relative to wages paid to workers in developed countries for the same level of productivity, limited direct employment by MNC’s, piece-wage paid in labour-intensive sectors and off-setting effect of foreign investment on employment in domestic companies.

(viii) Reverse Capital Flow:

The developing countries have launched upon globalisation drive for the fundamental reason of obtaining foreign capital for achieving a higher rate of growth. In the case of India, this expectation has not got materialised. During 1994-99 period, India got assistance from World Bank/IMF combine to the tune of $ 2.64 billion, but the debt servicing of India in that period amounted to $ 4.70 billion. There was a net outflow of capital to the extent of $ 2.06 billion.

In 1997 and 1998 when the East Asian countries had been passing through the most serious crisis, there was a large scale outflow of capital compounding the difficulties of those countries. The net outflow of portfolio investment from India in 2008-09 was of the order of 11.34 billion dollar. The outgoing foreign direct investment from India amounted to $ 29.34 billion in 2013-14.

The large scale brain drain is another form of reverse capital flow from the LDC’s. The other capital-receiving developing countries, sooner or later, may also suffer from the similar situations of capital outflow placing them in very desperate conditions.

(ix) Doubtful Efficacy for Poverty Alleviation:

The basic concern of the developing world including India has been with high incidence of poverty. They have been embracing globalisation in the hope that it will help remove poverty. The flooding of domestic market with cheap consumer products and relentless exploitation of natural resources, destructive impact on domestic industries, low levels of wages, limited scope of expanding employment potential and mounting foreign debt burden belie the expectation of removal of poverty.

The free working market system, promoted by the World Bank, IMF and WTO has been associated invariably with instability rather than stability and growth.

(x) Increase in Economic Disparities:

The structural reforms initiated by World Bank/IMF combine and globalisation forced by developed world is bound to make the rich of the world richer and accentuate the impoverishment of the poor.

(xi) Inflationary Bias:

The adoption of policies related to privatisation, liberalisation and globalisation have a strong inflationary bias particularly in the context of inflation-sensitive, excessively populated and consumerism-infected economies of the countries like India. The low rate of inflation during the last few years was more of the manifestation of recessionary conditions rather than any significant increase in productivity.

The expansionary money and credit policies coupled with slashing of subsidies in some critical sectors and recurrent increase in administered prices have greatly intensified inflationary pressures in the last two years.

Globalisation can, no doubt, confer some benefits but the risks involved cannot also be lightly dismissed. The Mexican and East Asian crises and world economic recession of 2007-09 have resulted in a grudging admission by IMF of the failure of its policies. But the mirage of prosperity of the poor countries through globalisation is being pursued by the politicians and captains of industry and commerce with an unprecedented exuberance as if the magic wand of globalisation will work wonder of every sort.

The Reserve Bank of India has already patted itself for not embarking upon full capital account convertibility, lest country would have been hit much harder by the East Asian Crisis. But how long, any country can protect itself from international economic crises, when all defensive mechanisms are being discarded.

The noises of protest have already started appearing at different world meets from the U.N. General Assembly to WTO meet at Seattle and to G-77 meet at Havana and in the streets of the USA and several European countries like Greece, Italy and Spain.

The developed countries, in collaboration with World Bank, IMF and WTO, have treated the LDC’s like the dumb, driven cattle. The globalisation has been presented to them as an inevitable route to progress. Willingly or unwillingly, this line of thinking has been accepted by most of the countries as the gospel truth. Perhaps this cup of hemlock has to be drunk by the poor of the world for the greater glory of the shapers of new millennium, unless they move with a greater degree of caution.

The United Nations had pledged to work urgently for the establishment of new international economic order based on equity, sovereign equality, common interest and co-operation among all the states. What has emerged on the horizon is a system which is heartless, wicked, unjust, exploitative and immoral. A much more human approach is required to create a new international economic order (NIEO) which the poor of the world have been dreaming of since ages.

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