Liberalisation and Globalisation

Liberalisation and Globalisation

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

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

• To liberalize the industry from licensing and other controls.
• To increase the competitiveness of industries.
• To ensure the running of public sector enterprises on business lines so as to reduce their losses.
• To ensure rapid industrial development in a competitive environment.
• To ensure support to the small sector.
• To provide greater incentives for the industrialization of backward areas.

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

Concept of Liberalisation

The term liberalization 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., licenses, quotas, permits, etc.) and removing all impediments to their growth. Liberalization results in a reduction in the role of government and an increase in the role of market forces. It creates a market-oriented economy that is free from restrictions on production levels and the import and 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 liberalization in India are as follows:
• To consolidate the past gains.
• To strengthen the growth impulses in the economy.
• To increase productivity and efficiency in the industry.
• To increase the competitive strength of the 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 license permit quota Raj.
2. Dereservation of Industries: The number of industries reserved for the public sector has been reduced from 18 to 4. The private sector is allowed to start and operate units in all areas except areas of strategic importance. These are defense 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: Henceforth the public sector would operate only in the areas of strategic importance for the country.
   • Budgetary support to the public sector will be withdrawn (except where it is absolutely unavoidable) as so as to increase the operating efficiency of public sector enterprises.
   • The government would disinvest a part of its shareholdings in selected public enterprises in favor of the general public.
   • The chronically sick and loss-making units in the 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.
   • A closure program for sick units that cannot be revived would ensure adequate compensation, redeployment, or retraining of workers. The funds for retraining and rehabilitation would be provided by the National Renewal Fund.
4. Foreign Capital and Technology: Foreign direct investment norms have been considerably liberalized. Now 100% foreign equity is permitted in several areas, e.g., electricity generation, oil refining, ports, harbors, 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 the import of capital goods is also available where foreign equity is arranged and dealings in foreign exchange have been liberalized.
5. Freedom for Expansion and Mergers of business undertakings: Earlier strict control was exercised on the 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, of 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. The 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 the introduction of advanced technology. There has also been the diversification of industrial production.
3. Exports in real terms have increased significantly. The share of manufactured products in exports has risen over the years.
4. There has been tremendous growth in the service sector. Exports of services have 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 a 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 a huge amount in different industries in India. They have brought foreign capital and advanced technology into the country.
7. Indian companies have set up 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 the population living below the poverty line has declined from 40 % to 25%.
9. The availability of imported products has forced domestic producers to improve the quality of their products. Consumers now have a wider choice and no longer face a 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 criticize 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 a mere 0.25% of global inflows.
3. Liberalization has altered the industrial structure in favor of goods consumed by rich sections of 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 a decline in the public sector. Capacity utilization 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. The 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 the closure of industrial units and technology upgradation is causing social unrest.
10. Public sector units are losing markets and their capacity utilization has declined.

Concept of Globalisation

According to International Monetary Fund (IMF), globalization means” the growing economic interdependence of countries worldwide 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.”

Globalization refers to the process of increasing economic integration and growing economic interdependence between nations. It means the 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, labor, and technology between nations. Globalization leads to an increased level of interaction and interdependence among different countries. There is flow of goods, services, technology, management practices, and culture across national boundaries. From a country’s viewpoint, globalization means the integration of the domestic economy of a country with the world economy.

In brief, globalization 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. Globalization also implies the emergence of a world innovation that can arise anywhere in the world.

Features of Globalisation

The main features of globalization are given below:

1. Reduction of trade barriers so as to ensure the free flow of goods and services across national frontiers.
2. Creation of an environment in which free flow of capital can take place among nations.
3. Creation of an environment that permits the free flow of technology between nations.
4. Creation of an environment in which free movement of labor can take place in different countries of the world.
5. Creation of a global mechanism for the settlement of economic disputes between various countries.

Rationale / Advantages of Globalisation

The main benefits of globalization are as follows:

1. Increase in Competitive Strength: Globalization will expose domestic industries 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. Globalization will help to improve the competitive strength and economic growth of developing nations.
2. Access to Advanced Technology: For a developing country like India, globalization provides access to new technology. Indian companies can acquire sophisticated technology through outright purchases or through joint ventures and other arrangements.
3. Access to Foreign Investment: Globalisation has attracted much-needed foreign capital to 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 globalized environment, companies can secure cheaper sources of raw materials and labor. For example, several foreign companies have set up BPOs and call centers in India due to the lower cost of labor. Sometimes, a company may carry out its entire manufacturing in a foreign country to minimize the 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 the USA, Europe, and other developed regions are increasing their presence in Asia due to the growing population and increasing income levels in Asian countries.
6. Higher volume of Trade: Due to globalization, each country can specialize in the production of goods and services in which it has a comparative advantage. It can export its surplus output and import necessary items freely from other nations. This will lead not only to a phenomenal increase in world trade but also to better allocation and utilization 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 the 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 professionalization of management. Globalization brings people of different races and ethnic backgrounds closer. It helps to promote mutual cooperation and World peace.

Criticism (Disadvantages) of Globalisation

Globalization has been criticized due to the following reasons:

1. Threat to Domestic Industry: Globalisation leads to the 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 rapid 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 labor across national frontiers. These increase the pressure for conceptual and structural readjustments to the breaking point. The social and human costs of globalization may put the social fabric of 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 destabilizing 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

Industrial Policy 1991 aims to globalize the Indian economy through reforms in foreign trade policy, such as the abolition of import licensing, convertibility of the rupee, market determination of foreign exchange 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 decimalized.
2. Rationalization of Traffic Structure: The structure and patterns of custom duties levied on the import of different commodities (known as tariff structure) had become very complex over the years. Since 1991 the peak tariff has been reduced substantially the tariff structure has been rationalized. These reforms in trade policy seek to make Indian goods competitive in the world market. Cheaper import of raw materials will help to reduce the 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, the 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 an 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, the 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 buy it from the open market. Thus, the 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 get 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:

• The Capital Issues (Control Act,1947) has been repealed. Indian companies faced bureaucratic delays in the issue of securities due to this Act.
• The listing of companies on stock exchanges has been liberalized.
• (iii) The role of Foreign Institutional Investors (FIIs) on Indian stock exchanges has increased tremendously due to the Liberalisation of foreign portfolio inflows.
• Private mutual funds (both Indian and Foreign) have been permitted to Operate thereby ending the monopoly of UTI.
• The Securities Exchange Board of India (SEBI) has become the regulator of capital markets.
• 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.

Company	Foreign Ownership%
Bharti Tele-Ventures	46.74
Cipla	43.40
Dr. Reddy Laboratories	45.76
HDFC	76.46
HDFC Bank	45.83
ICICI Bank	69.65
Infosys Technologies	49.20
Satyam Computer Services	65.98
Ownership Dates on September 30, 2004

Year	Net in Flows (Rs. Crore)
2006-07	30,841
2007-08	66,179
2008-09	45,811
2009-10	1,42,658
2010-11	1,46,438

Response of Indian Companies to Globalisation

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

1. 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.
2. Indian companies are improving their competitive strength through improvements in Technology, quality, management,, and customer service.
3. Indian corporates are increasing their exports. Many of them are acquiring companies in foreign countries.
4. Stock market indices (like Sensex) in India are moving in line with fluctuations in similar indices abroad.
5. Business travelers now account for a major proportion of overseas visitors. Therefore airlines are operating more flights to and from India.
6. 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. Liberalization 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. Globalization means the integration of different economies of the world.
4. Globalization enables developing nations to have access to foreign capital and technology, boost exports, improve the domestic industry, reduce poverty, and generate employment.
5. Globalization may expose the domestic industry to international competition, and create social pressures and economic fluctuations.
6. Globalization has not delivered the `expected’ benefits to the Indian economy.