Ingredients of Globalisation of Indian Economy

Let us make an in-depth study of the Ingredients of Globalisation of Indian Economy.

Globalisation refers to the closer integration of the world economy resulting from the channels of increased international trade, investment, finance and multi-country production networks of MNCs.

In 1991, a new era of Indian economic history began.

She started her journey in 1951 with a mixed economy model characterised by the coexistence of both public and private sectors with government controls and regulation directed to various economic activities.

The means chosen to energies India’s economy was planning. Performance during these first forty years of planning is not altogether happy. The country witnessed an unprecedented balance of payments crisis leading to a classic debt trap. Finding no other alternative, she had to pledge gold in foreign banks in lieu of loans. In order to rescue the economy, the IMF asked ‘shock therapy’ strategy of wholesale reform. India then, following the IMF’s advice, adopted a market-based regime by initiating a macroeconomic stabilisation and adjustment programme. These are called New Economic Policies.

The essential ingredients of globalisation or the so-called India’s New Economic Policies are:

(i) Privatisation of the public sector,

(ii) Dismantling of bureaucratic controls and regulations, and

(iii) Opening up and the closer integration of the Indian economy with the world economy through deregulation of trade and finance, etc.

i. Privatisation of the Public Sector:

Most public sector undertakings (PSUs) in India are reported to be running at a huge loss. How long public sector industries in India should bear losses and stand as a liability? Against the backdrop of the failure of public sector enterprises (PSEs) and success of the private sector industries, the Indian reform strategy envisaged privatisation of these public sector industries in 1991.

The term ‘privatisation’ is used in different senses. In India, privatisation is sought to be achieved through two measures: (i) the disinvestment of the government’s equity (ownership) in PSEs, and (ii) the opening up of hitherto closed areas to private participation.

The issue of privatisation has come to the forefront because of poor performance of PSUs, and the consequent huge fiscal deficit. One specific step that has been taken to reduce the deficit was privatisation, through an act of disinvestment, i.e., selling of public sector equity to mutual funds, financial institutions and the private sector including foreign firms (up to 49 p.c.) equity.

ii. Dismanding of Controls and Regulations:

Before 1991, our industrial and trade policies were mostly controlled and regulated by the government. The system witnessed plethora of bureaucratic controls and rigidities. The area of industrial policy reform was characterised by the virtual dismantling of the industrial licensing. Portfolio investment has now been opened to foreign institutional investors.

The limit of foreign equity holding has been raised from 40 p.c. to 51 p.c. Today, FERA (Foreign Exchange Regulation Act) companies are now treated at par with domestic investors. In fact, some great hurdles relating to direct foreign investment have been greatly simplified. The result is the emergence of the MNCs in India and a significant flow of investment funds and technology and management practices from abroad.

India’s trade regime is now characterised by lesser controls and regulations. For most cases, import restrictions have been dismantled. Tariff levels have been reduced substantially. Removal of quantitative controls and reduction in customs tariffs are the hallmarks of import liberalisation.

The process of external economic liberalisation, especially with respect to finance, has provided the domestic private sector with the opportunity to access credit abroad directly. The essence of these policy measures suggests that India has entered a global portfolio regime.

The Government of India devalued currency in 1991 to make exports more competitive and imports more expensive. The most significant change that was made was the floatation of exchange rate to a market-determined rate. In the Union Budget for 1992-93, a revolutionary provision of partial convertibility of rupee was made under which 60 p.c. of the foreign exchange earnings were to be surrendered at a market- determined rate.

The 1993-94 Budget went a step forward and introduced full convertibility of rupee on trade account (i.e., with respect to import and export of merchandise). The Union Budget for 1994-95 made rupee fully convertible on current account. Instead of ‘administered rate of exchange’, an element of market has been injected in the exchange rate determination.

iii. Deregulation of Trade and Finance:

Reform in the financial sector aimed at strengthening banks and at deregulating capital markets with the objective of financing investment in the private sector and at attracting foreign portfolio capital. As far as the reform packages are concerned, foreign institutional investors are allowed to invest in the capital market. Interest rates in the domestic capital market have been deregulated.

In addition, the government has done away with the quantitative restrictions on a wide range of imports. The process of import liberalisation which began in 1991 is now complete as far as quantitative restrictions (QRs) are concerned. The removal of Q Rs on 715 items in 2001-02 EXIM policy has opened the gates for free flow of imports. The peak rate of customs duty has been reduced to 10 p.c.

All these reform measures have brought intense public debate in this country. However, reform measures have not been coming with great speed. Further, market principles that are operating in India are neither free nor perfect. In addition, the space vacated by the ‘state’ cannot be taken by the ‘market’.

On the other hand, one cannot back out from this on-going reform process; it is unstoppable and irreversible. Reform measures must take all these elements into account so that the goal of social justice is not bypassed.