ICAI Notes 7.3 - Globalisation | Business Economics for CA Foundation PDF Download

Learning Objectives

• understand the meaning of globalisation.
• know the pros and cons of globalisation.
• know the measures taken by Indian government towards globalisation.
• understand how globalisation has affected the Indian economy.

3.0 MEANING OF GLOBALISATION 

Globalisation means integrating the domestic economy with the world economy. It is a process which draws countries out of their insulation and makes them join rest of the world in its march towards a new world economic order. It involves increasing interaction among national economic systems, more integrated financial markets, economies of trade, higher factor mobility, free flow of technology and spread of knowledge throughout the world.

In the Indian context, it implies opening up of the economy to foreign direct investment by providing requisites facilities, removing administrative and other constraints, allowing Indian companies to enter into joint ventures and foreign collaborations, bringing down quantitative and non-quantitative restrictions to trade, diluting the role of public sector and encouraging privatisation and so on. Beginning haltingly in 1980s, globalisation got the real thrust from the new economic policy of 1991 and it was further pushed forward by the coming up of the World Trade Organisation (WTO). Globalisation would eventually mean being able to manufacture in the most cost effective way anywhere in the world. It aims at integrating the world into one global village. As a result of globalisation efforts taken by India we find all types of goods available here. For example, Lee Cooper Shoes, Reebok-T shirts, Rayban sunglasses, Coca-Cola and Pepsi, Armani’s shirt, INTEL’s Pentium etc. have flooded the Indian market. 

3.1 CASES FOR GLOBALISATION

(1) It is argued that globalisation of under developed countries will improve the allocative efficiency of resources, reduce the capital output ratio and increase labour productivity, help to develop the export spheres and export culture, increase the inflow of capital and updated technology into the country, increase the degree of competition, and give a boost to the average growth rate of the economy.

(2) It will help to restructure the production and trade pattern in a capital-scarce, labourabundant economy in favour of labour-intensive goods and techniques.

(3) Foreign capital will be attracted and with its entry, updated technology will also enter the country.

(4) With the entry of foreign competition and the removal of import tariff barriers, domestic industry will be subject to price reducing and quality improving effects in the domestic economy.

(5) It is believed that the main effect of integration will be felt in the industrial and related sectors. At result cheaper and high quality consumer goods will be manufactured at home. Besides, employment opportunities would also go up.

(6) It is also believed that the efficiency of banking and financial sectors will improve, as there will be competition from foreign capital and foreign banks.

3.2 CASES AGAINST GLOBALISATION

(1) The globalisation process is in essence a tremendous redistribution of economic power at the world level which will increasingly translate into a redistribution of political power.

(2) One study reveals that in the globalising world the economies of the world are ironically moving away from one another more than coming together.

(3) With the lightening speed at which globalisation is taking place, it is increasing the pressure on economies for structural and conceptual readjustments to a breaking point.

(4) It is becoming hard for the countries to ask their public to go through the pains and uncertainties of structural adjustment for the sake of benefits yet to come.

(5) Globalisation is helping more the developed economies than the developing economies. Like in India, it is argued that it is true that letting in Cokes and Pepsis have led to opening doors for INTEL, AMD and CISCO, but the sum total of their investment has been very less in relation to their investment abroad. None of the multinationals has set up manufacturing plants in India or signed any technology transfer agreement with any Indian company.

3.3 MEASURES TOWARDS GLOBALISATION

To pursue the objective of globalisation, the following measures have been taken:

(i) Convertibility of Rupee: The most important measure for integrating the economy of any country is to make its currency fully convertible i.e., allow it to determine its own exchange rate in the international market without any official intervention. As a first step towards full convertibility of rupee, rupee was devalued against major currencies in 1991. This was followed by introduction of dual exchange rate system in 1992-93 and full convertibility of the rupee on trade account in 1993-94. India achieved full convertibility on current account in August, 1994. Current account convertibility means freedom to buy or sell foreign exchange for the following transactions

(i) all payments due in connection with foreign trade, other current account business, including services and normal short term banking and credit facilities,

(ii) payment due as interest on loans and as net income from other investments

(iii) payments of moderate amount of amortisation of loans or for depreciation of direct investment and

(iv) moderate remittances for family living expenses.

Certain steps towards full convertibility on capital account have also been taken like authorised dealers have been allowed to invest abroad their unimpaired Tier1 capital, they have been delegated powers to release exchange for opening of offices abroad, banks fulfilling certain criteria have been permitted to import gold for resale in India. Resident individuals and listed companies have been permitted to invest in overseas companies listed on a recognised stock exchange (subject to certain conditions), limit on bank’s investment from/in overseas markets has been raised, Indian companies are allowed to access ADR/GDR markets through an automatic route, Indian companies with a proven track record are allowed to invest up to 100% of their net worth in a foreign entity, ADs (Authorised Dealers) are allowed to issue international credit cards, NRIs are allowed to remit up to U.S. $1 million per calendar year out of their Non-resident ordinary accounts/ sale proceeds of assets and so on. Committee on fuller capital Account convertibility (Tarapore Committee II) has chalked out a road map for capital account convertibility. Strong macro economic framework, strong financial systems and prudent regulatory framework are the preconditions for capital convertibility. A Five year time framework (2007-2011) has been given for full convertibility on capital account.

(ii) Import liberalisation: As per the recommendation of the World Bank, free trade of all items except negative list of imports and exports has been allowed. In addition, import duties on a wide range of capital commodities have been drastically cut down. The peak rate of custom duty (on non-agricultural goods) has been brought down from 150 per cent in early 90’s to just 10 per cent in 2007-08 budget. Tariffs on imports of raw materials and manufactured intermediates have also been reduced. In addition to the phased reduction of import duties, India, being member of World Trade Organisation (WTO) has since April 2001, totally removed the quantitative restrictions on foreign trade. Moreover, as a part of the Agreement on Trade Related Intellectual Property Rights (TRIPs), the Patents (Amendments) Act, 1999, was passed in 1999 to provide for Exclusive Marketing Rights (EMRs).

(iii) Opening the economy to foreign capital: The government has taken a number of measures to encourage foreign capital in India. Many facilities and incentives have been offered to the foreign investors and Non-Resident Indians in the new economic policy. The Foreign Direct Investment floodgates have been opened. Foreign Direct Investment up to 26%, 49%, 51%, 74% and even up to 100% has been allowed in different industries. These include drugs and pharmaceuticals, hotels and tourism, airport, electricity generation, oil refineries, construction and maintenance of roads, rope-ways, ports, hydro-equipment and many more. Even defence and insurance sectors have been partially opened.

Many other measures have also been announced from time to time. For instance, foreign companies have been allowed to use their trademarks in India and carry on any activity of a trading, commercial or industrial nature; repatriation of profits by foreign companies has been allowed, foreign companies (other than banking companies) wanting to borrow money or accept deposits are now allowed to do so without taking the permission of the RBI, foreign companies can deal in immovable property in India, restrictions on transfer of shares from one non-resident to another non-resident have been removed, reputed Foreign Institutional Investors (FIIs) have been allowed to invest in Indian capital market subject to certain conditions, etc. All these initiatives are supposed to integrate the Indian economy with the world economy.

3.4 EFFECT OF GLOBALISATION ON INDIAN ECONOMY 

The process of globalisation initiated in 1991 and far reaching changes in industrial and other policies have led to considerable changes. The following achievements have been claimed especially on the external front:

(i) India’s share in the world exports which had fallen 0.53 per cent in 1991 from 1.78 per cent in 1950, has shown reversed trends and has improved to 1 per cent in 2005 and further to 1.1 per cent in 2007 and 2008.

(ii) Our foreign currency reserves which had fallen to barely one billion U.S. dollars in June, 1991 rose substantially to about 310 billion U.S. dollars at March, 2008 and but declined to U.S. $ 252 billion at end March 2009.

(iii) Exporters are responding well to sweeping reforms in exchange rate and trade policies. This would be clear from the fact that as against a fall in the dollar value of exports by 1.5 per cent in 1991-92, export grew in the range of 18-21 per cent per annum during 1993-96. However, export growth slowed down during 1996-2002. The annual average growth rate during this period was around 8 per cent. Since 2002-03, however, exports have picked up once again. The average growth of export has been more than 20 per cent per annum since 2002-03.

(iv) Exports now finance nearly 65 per cent of imports, compared to only 60 per cent in the latter half of the eighties.

(v) The current account deficit was over 3 per cent of GDP in 1990-91. It had fallen to less than 1 per cent in 2000-01. During 2001-04 we even had surplus in current account ranging between 0.7-2.3 per cent of GDP. In 2004-05, 2005-06, 2006-07, 2007-08 we again had current account deficit of (-) 0.4, (-) 1.1 per cent, (-) 1 per cent and (-) 1.5 per cent respectively.

(vi) At the time of crisis, our external debt was rising at the rate of $8 billion a year. After that its growth has been arrested. From 1996-2006, it grew only by about $3 billion per year. Since 2006, however its growth has picked up again.

(vii) Contrary to what many feared, the exchange rate for the rupee has remained almost steady despite the introduction of full convertibility of rupee.

(viii) International confidence in India has been restored. This is indicated by swelling foreign direct and portfolio investment. FDIs were just 155 million dollars in 1991. They increased to around U.S. $ 8.9 billion dollars in 2005-06 and further to U.S. $ 23 dollars in 2006-07 and further to U.S. $ 34.4 billion in 2007-08.

(ix) Certain benefits of globalisation have accrued to the Indian consumer in the form of larger variety of consumer goods, improved quality of goods and in some cases and reduced prices of consumer durable.

(x) Markets have started responding to the movements abroad. A fluctuation in U.S. market or U.K. market has started affecting Indian market. Unlike before, the SENSEX and other stock market indices now move in line with fluctuations in similar indices in other parts of the globe.

(xi) The rating agencies, which rate investment risks in countries for global investors, have upgraded India’s rating.

(xii) Programmes of quality management and research and development are systematically conducted by corporate sector.

(xiii) More and more companies are opening branch offices/subsidiaries in other countries and making their presence felt. Asian Paints, Tatas, Sundaram Fasteners, Ranbaxy, Dr. Reddy’s Laboratories, Infosys etc. are examples of Indian companies operating abroad.

The critics, however, point out the country’s business houses were no doubt offered opportunities to enter foreign markets. But the superior economic and financial clout of the multinational corporations was so great, that these opportunities could hardly be availed of in the face of their competition. The competition was not among equal but between the financially strong corporations and the economically weak Indian corporates. Thus, while the multi-national corporations of Europe and the U.S. entered India in a big way with foreign exchange resources used for investments in financial markets, a few large Indian corporates could enter a few foreign countries and raise capital abroad at relatively low cost.

It is also pointed out that globalisation policy is not a free lunch. Globalised economies or outwardly oriented economies tend to perform well during a period of dynamism and high growth in the world economy whereas they are prone to severe dislocation and collapse during a downturn in international economic activity. On the contrary, internal oriented economies are likely to be less damaged by the slow down in world trade.

3.5 MAIN ORGANISATIONS FOR FACILITATING GLOBALISATION 

There are many international organisations which have facilitated the process of Globalisation. We shall study three main organisations here. These are International Monetary Fund (IMF), the World Bank and the World Trade Organisation (WTO).

3.5.0 The International Monetary Fund 

The International Monetary Fund (IMF) was organised in 1946 and commenced its operation in March, 1947. It was set up with the following main objectives:

(i) the elimination or reduction of existing exchange controls;

(ii) the establishment and maintenance of currency convertibility with stable exchange rate;

(iii) the widest extension of multilateral trade and payments.

(iv) the solving of short-term balance of payments problems faced by its member nations.

The Fund is an autonomous organisation affiliated to the UNO. Starting from the initial membership of 31 countries at the time of inception, the Fund now has a membership of 186 countries. It is financed by the participating countries, with each country’s contribution fixed in terms of quotas according to the relative importance of its prevailing national income and international trade. The quotas of all the countries taken together constitute the total financial resources of the Fund. Moreover, the contributed quota of a country determines its borrowing rights and voting strength.

Functions of the IMF:

The following are major functions of the IMF:

(i) It functions as a short-term credit institution.

(ii) It provides machinery for the orderly adjustment of exchange rates.

(iii) It is a reservoir of the currencies of all the member nations who can borrow the currency of other nations.

(iv) It is a sort of lending institution in foreign exchange. However, it grants loans for financing current transactions only and not capital transactions.

(v) It also provides machinery for altering sometimes the par value of currency of a member country.

(vi) It also provides machinery for international consultations.

(vii) It monitors economic and financial developments of its members and provides policy advice aimed at crisis preventions.

3.5.1 The World Bank 

The International Bank for Reconstruction and Development (IBRD) more popularly known as the World Bank was formed as a part of the deliberations at Bretton Woods in 1945. The World Bank was floated in order to give loan to members’ countries, initially for the reconstruction of their (world) war-ravaged economies, and later for the development of the economies of the poorer member countries. The World Bank provides its member countries (186 in numbers) long term investment loan on reasonable terms. By far the bulk of the World Bank loans have been for financing specific projects. In recent years, it has also been engaged in giving structural adjustment loans to the heavily indebted countries. The World Bank is an inter-governmental institution, corporate in form, whose capital stock is entirely owned by its member governments. The World Bank Group consists of, apart from the World Bank itself, the International Development Association (IDA), the International Finance Corporation (IFC), and the Multi-lateral Investment Guarantee Agency (MIGA) and the International Centre for Settlement of Investment Disputes (ICSID).

The International Development Association (IDA) is the part of the World Bank that helps the world’s poorest countries. Established in 1960, IDA aims to reduce poverty by providing interestfree credits and grants for programs that boost economic growth, reduce inequalities and improve people’s living conditions. IDA is also called soft lending arm of the World Bank since it gives interest free loans to the poor countries. IDA complements the World Bank’s other lending arm–the International Bank for Reconstruction and Development (IBRD)–which serves middle-income countries with capital investment and advisory services. IFC provides investments and advisory services to build the private sector in developing countries. Created in 1988, MIGA helps encourage foreign investment in developing countries by providing guarantees to foreign investors against loss caused by non commercial risks.

ICSID was founded in 1966. It is an autonomous body which facilitates the settlement of disputes between foreign investors and their host countries.

Objectives of the World Bank 

The World Bank works in 186 countries with the primary focus of helping the poorest people and the poorest countries. It emphasises the need for -

• Investing in the people, particularly through basic health and education.
• Focusing on social development.
• Protecting the environment.
• Supporting and encouraging private business development.
• Promoting reforms to create a stable macro-economic environment, conducive to investment and long-term planning.

Functions of the World Bank:  The main functions of the World Bank are:

(i) To help its member countries in the reconstruction and developmental of their territories by facilitating the investment of capital for productive purposes.

(ii) To encourage private foreign investment and credit by providing guarantee of repayment of the private investors. If private capital is not forthcoming at reasonable terms, to make loans for productive purposes out of its own resources or funds borrowed by it.

(iii) To promote the long-term balanced growth of international trade and the maintenance of equilibrium in balance of payments of its member countries.

3.5.2 The World Trade Organisation

As told before, it was the World Trade Organisation which gave a real push to the process of globalisation. The World Trade Organisation (WTO) came into existence on 1st January, 1995. The WTO is a powerful body which broadly aims at making the whole world a big village where there is free flow of goods and services and where there are no barriers to trade. It is the only global international organisation which deals with the rules of trade between nations. At its heart are the WTO agreements, negotiated and signed by the bulk of the world’s trading nations and ratified in their parliaments.

Features of WTO 

• The WTO is the main organ of implementing the Multilateral Trade Agreements. 
• The WTO is global in its membership. Its present membership is 153 countries and with many other considering accession. 
• It is the forum for negotiations among its member. In this forum, the member-nations discuss issues related to the Multilateral Trade Agreements (MTAs) and associated legal instruments. It is also the forum for negotiations on terms of the Plurilateral Trade Agreements (PTAs). In fact, it is the third economic pillar of world-wide dimensions along with the IMF and the World Bank. 
• It has a far wider scope than its predecessor GATT, bringing into the multilateral trade system, for the first time, trade in service, intellectual property protection and investment. 
• It is a full-fledged international organisation in its own right. 
• It administers a unified package of agreements to which all members are committed.
• The decision-making under the WTO is carried out by consensus. Where a consensus is not arrived at the issue shall be decided by voting. Each member has one vote.
• The WTO has legal personality. Members shall endow it with such legal capacity, privileges and immunities as are necessary for the exercise of its functions.
• The representatives of the members and all officials of the WTO enjoy International privileges and immunities.

Functions of WTO: The WTO has the following functions:

1. The WTO facilitates the implementation, administration and operation of world trade agreements.
2. The WTO provides the forum for trade negotiations among its member countries.
3. The WTO handles trade disputes.
4. The WTO monitors national trade policies.
5. It provides technical assistance and training to developing countries.
6. With a view to achieving greater coherence in global economic policy making, the WTO co-operates, as appropriate, with the IMF and IBRD and its affiliated agencies.

SUMMARY

A new thrust on international business has emerged recently although business transcending national boundaries has always been there in the past. Of late, there has been a growing realisation among countries of the significance of economics of markets and international competition. India is no exception. It has also embraced globalisation. Globalisation broadly implies free movement of goods and services and people across the countries. The global corporations of today conduct their operations world-wide as if the whole world were a single entity. Globalisation has thrown certain opportunities for India like it can raise capital from the world market, it can become a premier production centre and it can attract foreign investors etc. After globalisation, India is beginning to shed its insularity and trying to become a global giant. There are many international organisations which have facilitated the process of globalisation. Chief among them are the IMF, the IBRD and the WTO.