3 Liberalisation and Globalisation

Liberalisation and Globalisation

In order to overcome the foreign exchange crisis and to speed up economic development, the Government of India announced a new industrial policy in July 1991. The Industrial Policy, 1991 seeks to liberate the industry from the shackles of licensing, to encourage foreign private participation in the industrial development and to drastically reduce the role of public sector.

The main objectives of the Industrial Policy 1991 are as follows:

(i) To liberalise the industry from licensing and other controls.

(ii) To increase competitiveness of industries.

(iii) To ensure running of public sector enterprises on business lines so as to reduce their losses.

(iv) To ensure rapid industrial development in a competitive environment.

(v) To ensure support to the small sector.

(vi) To provide greater incentives for industrialisation of backward areas.

Thus, the new industrial policy aims at encouraging private enterprise and initiative. Economic Liberalisation, privatisation of public enterprises and Globalisation are the salient features of this policy.

Concept of Liberalisation

The term`liberalisation’ means allowing greater freedom to entrepreneurs to take economic decisions on the basis of market forces of demand and supply. It involves liberating the industry and trade from all unnecessary controls and restrictions, (e.g., licences, quotas, permits, etc.) and removing all impediments in their growth. Liberalisation results in reduction in the role of government and increase in the role of market forces. It creates a market oriented economy which is free from restrictions on production levels and import export of goods and services.

Features of Liberalisation

The main indicators of economic Liberalisation are as under:.

• Freedom to produce and distribute goods and services.
• Freedom to decide the scale of business activities, i.e., no restrictions on expansion or reduction of the size of business.
• Freedom to fix the prices of goods and services.
• Removal of restrictions on the movement of goods and services.
• Removal of unnecessary controls over the economy.
• Reduction in tax rates. The major objectives of economic liberalisation in India are as follows:
• To consolidate the past gains.
• To strengthen the growth impulses in the economy.
• To increase productivity and efficiency in industry.
• To increase the competitive strength of Indian industry.
• To make use of global resources for the country’s progress.

India’s Experience with Liberalisation

The major Policy changes introduced under Liberalisation can be summed up as follows:

1. Deregulation of Industries. The new economic policy has abolished industrial licensing for all industries except six strategic industries. All other industries are now permitted to establish new units and expand without acquiring any license. They are free to decide the scale and level of production. The Indian economy has become free from the shackles of the licence permit quota Raj.

2. Dereservation of Industries. The number of industries reserved for the public sector has been reduced from 18 to 4. Private sector is allowed to start and operate units in all areas except from areas of strategic importance. These are defence production, atomic energy, railway transport and minerals used in automatic energy. Under the liberalized economic environment, the public sector is expected to become competitive and growth oriented.

3. Public Sector Reforms. The following policy measures have been taken regarding the public sector:

1. Henceforth the public sector would operate only in the areas of strategic importance for the country.
2. Budgetary support to public sector will be withdrawn (except where it is absolutely unavoidable) as so as to increase operating efficiency of public sector enterprises.
3. The government would disinvest a part of its share holdings in selected public enterprises in favour of general public.
4. The chronically sick and loss-making units in public sector would be referred to the Board for Industrial and Financial Reconstruction (BIFR) for necessary action. All possible efforts would be made for the revival of sick units.
5. Closure program for sick units which cannot be revived would ensure adequate compensation, redeployment or retraining of workers. The funds for retraining and rehabilitation would be provided from the National renewal Fund.

4. Foreign Capital and Technology. Foreign direct investment norms have been considerable liberalized. Now 100% foreign equity is permitted in several areas, e.g., electricity generation, oil refining, ports, harbours, telecommunications, etc. In other areas the ratio of foreign equity can be between 51 and 74 % . Automatic permission is given to foreign technology agreements and high priority industries. Automatic approval for import of capital goods is also available where in foreign equity is arranged dealings in foreign exchange have been liberalized.

5. Freedom for Expansion and Mergers of business undertakings. Earlier strict control was exercised on establishment of new undertakings, expansion of existing undertakings and mergers and amalgamations under the Monopolies and Restrictive Trade Practices (MRTP) Act. Act was repealed to ensure our freedom to business firms.

6. Financial Sector Reforms. Has been deregulation of banks and the capital market. The capital issues (Control) Act, 1947 has been repealed. Private sector banks insurance companies and mutual funds were permitted.

Positive Impact/Benefits of Liberalisation

The Government’s policy of economic liberalization has resulted in the following benefits:

1. Indian economy has grown more rapidly. The rate of growth in Gross Domestic Product(GDP) has increased from 4 % to 9-10% per annum.
2. Industrial productivity as well as agricultural output have increased sharply due to introduction of advanced technology. There has also been diversification of industrial production.
3. Exports in real terms have increased significantly. Share of manufactured products in exports has risen over the years.
4. There has been a tremendous growth in the service sector. Exports of services has contributed to the country’s exchange earnings in a big way.
5. Foreign exchange reserves have increased sharply. As a result trade deficit and balance of payment deficit have considerably narrowed down. There has been sharp decline in the country’s dependence on foreign loans.
6. The inflow of foreign direct investment has increased phenomenally. A large number of multinational corporations have invested huge amount in different industries in India. They have brought in foreign capital and advanced technology into the country.
7. Indian companies have setup joint ventures and acquired firms in foreign countries. They are becoming global corporations.
8. Increased economic activity in various sectors has created huge employment opportunities. The proportion of population living below the poverty line has declined from 40 % to 25%.
9. The availability of imported products has forced the domestic producers to improve the quality of their products. Consumers now have a wider choice and no longer face shortage of goods.
10. Industrial relations have shown great recovery. Industrial disputes have declined to about one third.

Negative Impact/Failures of Liberalisation

Some people criticise economic reforms due to the following failures:

1. Domestic industries have suffered due to international competition. A large number of small scale units have been forced to close down in the face of growing competition from powerful multinational corporations.
2. Foreign direct investment in the country has been lower than the targets fixed from time to time. It is mere 0.25% of global inflows.
3. Liberalisation has altered the industrial structure in favour of goods consumed by rich sections of the society. These sections have benefited from inflation.
4. Dumping of goods from abroad at cheaper rates has discouraged further investments. As a result growth in some important sectors of Indian industry has slowed down.
5. The Country’s technological base is being undermined due to decline in the public sector. Capacity utilisation and market share of public sector enterprises have declined.
6. Demand for capital goods has been sluggish and industrial sickness is on the rise.
7. Indian economy has become more sensitive to ups and downs abroad. Indian rupee in terms of foreign currency has become volatile.
8. Rates of savings and investments are stagnant for many years. Exports are not growing as per expectations.
9. Mass retrenchment due to closure of industrial units and technology upgradation is causing social unrest.
10. Public sector units are losing markets and their capacity utilisation has declined.

Concept of Globalisation

According to International Monetary Fund (IMF), globalisation means”the growing economic interdependence of countries world wide through increasing volume and variety of cross – border transactions in goods and services and of international capital flows and also through the more rapid and widespread diffusion of technology.”

Globalisation refers to the process of increasing economic integration and growing economic interdependence between nations. It means integration of different economies of the world into one global economy thereby reducing the economic gap between different countries.This is achieved by removing all restrictions on the movement of goods, services, capital, labour and technology between nations. Globalisation leads to an increased level of interaction and interdependence among different countries. There are flow of goods, services, technology, management practices and culture across national boundaries. From a country’s view point, globalisation means integration of the domestic economy of a country with the world economy.

In brief, globalisation implies being able to manufacture in the most cost-effective way possible anywhere in the world, being able to procure raw materials and management resources from the cheapest source anywhere in the world, and having the entire world as one market. The global corporations of today conduct their operations worldwide as if the entire world were a single entity. Globalisation also implies emergence of a world innovation can arise anywhere in the world.

Features of Globalisation

The main features of globalisation are given below:

(i) Reduction of trade barriers so as to ensure free flow of goods and services across national frontiers.

(ii) Creation of an environment in which free flow of capital can take place among nations.

(iii) Creation of an environment which permits free flow of technology between nations.

(iv) Creation of an environment in which free movement of labour can take place in different countries of the world.

(v) Creation of a global mechanism for the settlement of economic disputes between various countries.

Rationale / Advantages of Globalisation

The main benefits of globalisation are as follows:

1. Increase in Competitive Strength. Globalisation will expose domestic industry in developing countries to foreign competition. They will be under pressure to improve efficiency and quality and reduce costs. Under a protective regime industries lose the urge to improve efficiency and quality. Globalisation will help to improve the competitive strength and economic growth of developing nations.
2. Access to Advanced Technology. For a developing country like India, globalisation provides access to new technology. Indian companies can acquire sophisticate technology through outright purchase or through joint ventures and other arrangements.
3. Access to Foreign Investment. Globalisation has attracted the much needed foreign capital towards developing countries like India. Foreign multinationals have invested billions of dollars in India. In addition, foreign institutional investors have brought in huge funds in stock markets in India.
4. Reduction in Cost of Production. In a globalised environment, companies can secure cheaper sources of raw materials and labour. For example, several foreign companies have setup BPOs and call centres in India due to lower cost of labour. Sometimes, a company may carry out its entire manufacturing in a foreign country to minimise cost of production.
5. Growth and Expansion. When the domestic market is not large enough to absorb the entire production, domestic companies can expand and grow by entering foreign markets. Japanese firms flooded the US markets with automobiles and electronics because of this reason. Companies from USA, Europe and other developed regions are increasing their presence in Asia due to growing population and increasing income levels in Asian countries.
6. Higher volume of Trade. Due to globalisation, each country can specialse in the production of goods and services in which it has a comparative advantage. It can export it’s surplus output and import necessary items freely from other nations. This will lead not only to a phenomenal increase in the world trade but also to better allocation and utilisation of resources in each country.
7. Consumer Welfare. Better quality and low priced goods and services will become available to consumers. This along with a wider choice in consumption will help improve standards of living of people in developing countries. Over a period of time, the proportion of people below the poverty line will go down. Consumers also get access to products manufactured in any part of the world.
8. Other Benefits. Globalisation also offers some off benefits. It helps in the professionalisation of management. Globalisation brings people of different races and ethnic backgrounds closer. It helps to promote mutual cooperation and World peace.

Criticism (Disadvantages) of Globalisation

Globalisation has been criticized due to the following reasons:

1. Threat to Domestic Industry. Globalisation leads to increasing role of foreign companies in the domestic economy of a country. This is likely to hamper the growth of domestic companies. Small and medium firms in a developing country like India are not in a position to compete with giant firms of developed nations.

2. Unemployment. Globalisation brings about raid technological changes. Advanced technology might create unemployment problems, particularly in a developing country.

3. Threat to Democracy. Globalisation requires very fast movement of capital and labour across national frontiers. These increase the pressure for conceptual and structural readjustments to the breaking point. The social and human costs of globalisation may put the social fabric of a democracy in danger.

4. Economic Instability. Globalisation leads to a tremendous redistribution of economic power. Such redistribution will translate into a redistribution of political power. The change is likely to have a destabilising effect.

5. Disregard of National Interest. A developing economy might become excessively dependent on global corporations. This may not be in the national interest.

India’s Experience With Globalisation

In Industrial Policy 1991 aimsa to globalise the Indian economy through reforms in foreign trade policy, such as abolition of import licensing, convertibility of rupee, market determination of foreign exchanges rates, etc. These policy reforms are explained below:

1. Imports Liberalisation. Quantitative restrictions such as import licenses and quotas have been phased out. Under the new foreign trade policy most imports have been put under Open General License (OGL) list, wherein automatic permission is granted to import goods. Now import license is necessary for very few items. Qualitative restrictions on a large number of export items have been removed. Several items of import have been decanalised.

2. Rationalisation of Traffic Structure. The structure and patterns of custom duties levied on import of different commodities (known as tariff structure) had become very complex over the years. Since 1991 the peak tarrif has been reduced substantially the tariff structure has been rationalised. These reforms in trade policy seek to make Indian goods competitive in the world market. Cheaper import of raw materials will help to reduce cost of production and improve quality. Low cost and high quality products will enable Indian exporters to compete with foreign goods and thereby increase the country’s export.

3. Reforms in Foreign Exchange Management. Before 1991, Government of India exercised strict control over foreign exchange. Under the Foreign Exchange Regulation Act (FERA) all Indian exporters had to surrender their foreign exchange earnings to the Reserve Bank of India. They were given in return Indian rupee at a fixed exchange rate. In 1999 the Government abolished FERA and enacted Foreign Exchange Management Act (FEMA) to promote foreign trade. Under the new exchange management system, value of the rupee is determined by market forces of demand and supply. Exporters are free to sell their foreign currency in the open market and the importers can freely but it from the open market. Thus, Indian rupee has been made freely convertible so as to boost the country’s exports.

4. Reforms in Foreign Direct Investment (FDI). Now 100% foreign equity is allowed in many industries. In other cases, the upper limit for foreign investment has been raised from 40% to 74%. Automatic permission is given to foreign technology agreements in High priority industries. Imports of capital goods also gets automatic approval in case the foreign exchange required for such import is received through foreign equity.

5. Capital Market Reforms. The major reforms in the capital market are as follows:

(i) The Capital Issues (Control Act,1947) has been repealed. Indian companies faced bureaucratic delays in issue of securities due to this Act.

(ii) Listing of companies on stock exchanges has been liberalized.

(iii) The role of Foreign Institutional Investors (FIIs) om Indian stock exchanges has increased tremendously due to Liberalisation of foreign portfolio inflows.

(iv) Private mutual funds (both Indian and Foreign) have been permitted to Operate thereby ending the monopoly of UTI.

(v) The Securities Exchange Board of India (SEBI) has become the regulator of capital markets.

(vi) Guidelines have been issued for the floating of Euro issues by Indian companies. Several Indian companies have raised capital in foreign markets by issuing Global Depositary Receipts (GDRs) and American Depositary Receipts (ADRs). Their securities have been listed on foreign stock exchanges.

Response of Indian Companies to Globalisation

Indian economy (now known as Indian Inc.) is becoming global as can be judged from the following trends:

(i) Multinational corporations are entering India in a big way. Some of them are taking over Indian companies, while others are entering into joint ventures with Indian firms.

(ii) Indian companies are improving their competitive strength through improvements in Technology, quality, management and customer service.

(iii) Indian corporates are increasing their exports. Many of them are acquiring companies in foreign countries.

(iv) Stock market indices (like sensex) in India are moving in line with fluctuations in similar indices abroad.

(v) Business travellers now account for a major proportion of overseas visitors. Therefore airlines are operating more flights to and from India.

(vi) Developing countries under the leadership of India are standing against the advanced nations in international trade negotiations of the World Trade Organisation (WTO).

SUMMARY

1. Liberalisation means granting greater freedom to economic agents to make their own decisions.

2. Economic reforms in India since 1991 have had both positive and negative effects.

3. Globalisation means integration of different economics of the world.

4. Globalisation enables the developing nations to have access to foreign capital and technology, to boost exports, to improve domestic industry, to reduce poverty and to generate employment.

5. Globalisation may expose domestic industry to international competition, create social pressures and economic fluctuations.

6. Globalisation has not delivered the `expected’ benefits to Indian economy.

What is Liberalisation and Globalisation? What do you meant by liberalisation and Globalisation?