Globalization in India

Human being have travelled, traded and interacted across borders and great distances for thousands of years. Globalization is the term ascribed to the interaction of economics and societies all over the world. Globalization involves technological, economic, political and cultural exchanges made possible largely by advances in communication, transportation and infrastructure. Globalization bring people are the world more choices and opportunities and can have a significant impact in developing countries such as India. India has made a substantial amount of progress in the last two decades in terms of its economic development. Development is a qualitative measure of progress in an economy and closely linked with globalization. It refers to development and adoption of new technologies, transition from agriculture-based to industry-based economy and general improvement in living standards. Although in some cases, globalization has not held true to benefit in India’s development, it has undoubtedly improved overall economic growth and living standards since 1990. This paper will explore the following question: how has social and economic development in India been affected by the implementation of the structural adjustment program (SAP) and its policies over the past twenty years? It will examine the effects of the SAP; more specifically how its policies have benefited social and economic development. Through the exploration of foreign direct investment (FDI), I will examine how direct investment in India by other nations has allowed for growth in trade and industry and greater employment opportunities. Because the SAP has had both positive and negative effect on economic development in India, I have an opportunity to determine whether the benefits outweigh the detriments, and to discuss how the modernization theory has affected the type of policies and economic structures India has adopted.

After independence in 1947, Jawaharlal Nehru, India’s first prime minister introduced a system of industrial licensing, know as the “license raj” to control the pace and pattern of industrial development across the country. The license raj resulted from India’s decision to have a planned economy where the sate controlled all aspects of the economy granted licenses to a select few (wiki). Nehru’s advisors, which included a small group of Stalinist economists lent by the Soviet Union, advised Nehru to put this act into place in order to construct a modernized, heavy industry sector that would traverse India from its massive amount of poverty . The intent of State control over industrial development by means of licensing was to accelerate industrialization and economic growth and to reduce regional disparities in income and wealth . In 1956, following the introduction of the act, all industries fell into one of three categories: those that the state exclusively responsible for, those that were to be progressively state-owned and those left to private enterprise. However, virtually every heavy industry was included in the first two categories. Under the license raj, a license was required to establish a new factory, carry on business in an existing unlicensed factory, significantly an existing factory’s capacity, start a new product line and change location. The policies made it very difficult for new industries to enter the economy as there were indetermined waiting periods for applications to be processed. Producers were also uncertain whether they would receive approval on their license applications. The government rejected 35% of applicants between 1959 and 1960. The government also required businesses to get approval to lay off workers and shut down. When a business was losing money, the government would prevent them from shutting down in hopes that production would once again reach the levels it was at before decreasing rates began to set in. One can imagine how chaotic and unproductive a business would be under such conditions (6.50). By the 1970s it was blatantly obvious that industrial licensing had failed to bring about the rapid industrial development that was anticipated in the 1950s . It was in 1990 that the Indian government realized they were near bankruptcy. It could not meet its external debt obligations, foreign-exchange reserves were at a meager US 2.2 billion and the money supply was going to last less than two weeks. The only viable option was to completely restructure the economy and receive help of a balance of payments from the International Monetary Fund (IMF).

In 1991, India faced an unprecedented balance of payments crisis. For a decade prior to 1991, the government had borrowed heavily to support an economic strategy that relied on expansionary public spending to finance growth. During the period from 1980 to 1991 India’s external debt tripled to 70 billion . This did not leave the government with many options. Had the fiscal deficits been financed by printing notes, prices would have shot up dramatically; alternatively if the deficits were met through domestic loans, the interest rates would have skyrocketed and created a catastrophic fall in private investments. The government relied on what seemed the only realistic option, recourse to massive foreign loans. In 1991, the new government led by Prime Minister Narasimha Rao and his finance minister Manmohan Singh launched India’s first comprehensive economic policy reform program. The World Bank and IMF supported the reform program with a 500 million dollar structural adjustment plan. The government went to the IMF because they could not meet their external debt obligations .The economic crisis occurred because of a combination of factors including the economic collapse of the Soviet group of countries that had significant consequences for India’s trade. A burgeoning fiscal deficit, a large international debt, a foreign-exchange shortage and the Gulf War were also important factors that contributed to the crisis . One of the most important contributors was the Gulf War. Merchandise and the invisible trade balances worsened significantly with the skyrocketing of oil prices, sanction on Iraq and decline in the inflow of remittances all affected India’s import bill . When the IMF took over, the program of stabilization and structural adjustment placed great importance on ideological issues such as immediate opening of the economy to imports, removing restriction on foreign investments and a drastic reduction in direct tax rates. After 1991, India gradually removed bans and quantitative restrictions on many goods . The structural adjustment program had two main objectives: to assist India in addressing its immediate balance of payments crisis and to support a broad set of policy reforms aimed at liberalizing the Indian economy and opening it up to more competition both from within and abroad. The Indian government echoed the standard IMF rationale of stabilization, adjustment and liberalization . The key to improving the nation was liberalization of multiple sectors of the Indian economy. The program’s goal was to create a workable balance between economic necessity and the realities of India’s political economy .Economic reforms bore the unmistakable stamp of the Washington Consensus, introduced by John Williamson in 1989, and characterized by emphasis on both macroeconomic stabilization and structural adjustment. It described a set of ten policies that Williamson considered should be part of a standard reform package guiding crisis-wrecked developing countries. The consensus promotes initiatives such as fiscal policy discipline, tax reform and trade liberalization among other recommendations. India announced a macro-stabilization program designed to tackle the balance of payments problems and ensure longer-term budgetary viability . Within weeks of announcing the reform package, the government devalued the rupee by 23%, raised interest rates and revised the 1991-92 union budget, making sharp cuts in subsidies and transfers to public enterprise. Over the next six months it abolished the complex system of industrial and import licensing, liberalized trade policy and introduced measures to strengthen capital markets and institutions . Additional policies addressed a reduction in fiscal deficit through expenditure compression, tax reforms, privatization signals to public-sector undertakings to operate on commercial principles and granting a large measure of autonomy to the Reserve Bank of India for maintaining the country’s internal-cum-external balance . The majority of these policies were enacted in one of three different ways. First, there was a transition into a system of market driver exchange rate with current account convertibility of the rupee. Second, select India corporations received permission to raise funds from the international markets and finally, the encouragement of capital inflows by way of foreign institutional investment (FII), foreign direct investment (FDI) and nonresident Indian deposits . Once these policies were in place, the results would lead to a higher and more sustainable growth trajectory with emphasis on labor-intensive industries, thinning out of protected and resource-guzzling industries and survival or creation of globally efficient sectors of production. This would lead to an acceleration of export growth, increased employment and reduction of poverty .

These policies, which reflect portions of the Washington Consensus, also related to the modernization theory. The modernization theory explains how by incorporation internal factors along with assistance from more developed countries, traditional or developing countries can be brought to development in the same manner . The United States of America is a well-developed country. As India’s policies reflected those of the Washington Consensus, it is permissible to believe that India may have incorporated some of these policies in hopes of one day reaching the level of development the United States as currently obtained.

With the exception of perhaps the years immediately following India’s independence, never before has there been as much optimism about the Indian economy as in the last two decades . The SAP produced immediate reforms following the crisis in 1991. In the first year there was an initial decline in the GDP, however growth resumed to 5% in 1993-94 and 6.3% in 1994-95. By 1995, India moved from a regime that banned private investment in major economic sectors to one whose openness to foreign investment is as liberal as in most other Asian countries . Increase in public consumption and investment expenditure, significant cutbacks in income tax rates, exclusion of financial assets from the ambit of wealth tax and reduction in effective rates of capital gains tax have all provided a direct or indirect boost to the economy and has helped industries and services register significant growth after the crisis year . One of the most successful areas of the reforms was India’s ability to attract FDI, even more specifically FDI in the IT-sector of the economy. Within five years of reforms, FDI increased almost sevenfold over projection . There was a major spurt in India’s software export. Exports rose from 747 million in 1995 to 4.015 million in 1999 . The IT industry’s contribution to the GDP has increased from approximately 1.4% in 1998-99 to more than 3% in 2003-04, totaling an annual growth rate of 42.4% . Indian firms have made a number of acquisitions abroad and as a result attracted countries to invest in India, resulting in the ratio of FDI from India to India being 0.61. Today the private sector has became an active participant in the telecommunications sector . There has also been a significant improvement in the average export intensity of the Indian private sector increasing from about 8% in 1991 to 25% in 2007. This has enabled globalization to take place in India’s economy (8.6). Because of the greater expansion of globalization, FDI in India has allowed for increased participation in international markets. Greater participation, specifically in international markets for IT services creates more employment as businesses expand. Economic growth has increased the stands the standard of living for the citizens of India.

India is one of the fastest growing economies in the world today and is regarded as a knowledge powerhouse well on its way to becoming an important player in the international technological arena . Increases in India’s economic growth performance resulted from the process of economic liberalization set into motion in 1991. The policies implemented have contributed to India’s growth of 6+ % an average since 1992-92 . More programmers from India provide IT support to international firms for software development and maintenance, back-office operations, medical data transcription and transmission as well as telemarketing . The abundant supply of labor, low wages, cheap satellite communications and the internet have been instrumental in the decision of foreign firms to establish operations in India . The volume of India’s software exports was 2.7 billion in 1998-99, over 4 billion in 1999-2000, 6.2 billion in 2000-01 and exceeding 8 billion in 2001-02 . There are some concerns regarding the continued growth of the Indian economy. If the IT sector becomes a powerhouse, there is apprehension because the global situation has been changing over the past few years. The downtown of the US stock market that causes concern seeing as so much of India’s exports end up in North America . A reduction in imports could potentially cause a fall in production that would likely result in the layoff of employees, which would effectively over time reduce the economic and social sectors of society. When implementing the structural adjustment program, major fallout of the IMF’s conditionality was the steep rise in interest rates to curb fiscal deficits and dampen effective demand. The real interest rate on working capital loans was 2-3% in the eighties and 8-10% in the nineties . There have also been many positive developments. A reduction has occurred in external indebtedness and current account deficit from 28.7% and 3.1% to 22.3% and 0.5%. An increase in foreign exchange reserves from USD 5.8 billion to USD 42.2 billion and a fall in debt service payments as a proportion of current receipts from 35.3 to 17.1 percent . From 1992-97 not only was the average GDP growth at the highest India had ever achieved over a five year period, the period was also marked by a strengthening of government finances with a downward trend in revenue, fiscal and primary deficits . Although India’s initial export boom was in and continues to be in IT-based services, manufacturing exports are also growing very rapidly, and it is likely to play a significant role in the Indian economy in future years . The SAP has not always benefited the Indian economy, and at times may have hindered it. Nevertheless, when comparing the economy post and prior to the implementation of the SAP, it is clear that the expansion of exports, an active role in international markets and greater employment opportunities have proven to be more beneficial than harmful to the Indian economy.

Social development in India has improved through the initiatives of the SAP. The life expectancy at birth since 2003 is sixty-three years of age and the adult literacy rate of people fifteen years and over was 57% in 2000 but grew to 65% in 2001 . Employment in the organized sector, which includes all public and private sector establishments engaging at least ten employees increased from 22.9 to 26.7 million from 1981-91 and continued to expand to 28.1 million in 1999 (11.69). Furthermore, due to an increase in employment opportunities the number of people living below the poverty line has decreased from 54.9% in 1973-83 to 36.0 in 1993-94 and 23.2% in 1999-2000 . Currently, half a million people are employed in the IT sector and it is predicted that this number will grow to three million by 2015 . Although living conditions have improved for a large number of Indian citizens, a key deficiency in the nation’s growth process has been the failures of the conventional industry to pull workers out of agriculture into gainful employment as approximately 60% of workers still remain in agriculture. Poor irrigation facilities have left Indian agriculture highly dependent on the monsoon season, which contributes, to the magnified amplitude of fluctuations in the farmers’ incomes. After registering three consecutive years of high growth over 1992-95, averaging a hefty 2.1%, agriculture has fared poorly since then, with its average growth from 1995-2001 slumping to a dismal 1.05% and displaying considerable ups and downs from one year to another . Coastal states of western and southern India, regions with high urbanization rates will continue to grow at a faster rate than the northern and central states of India. However, economic reform and public-sector investments can improve conditions in India’s relatively laggard northern and central states . By introducing more urbanized methods of employment, workers will have a more reliable source of income, alleviating the number of people currently living below the poverty line. Even though India still has work to do in its agricultural sector the social conditions have improved immensely compared to what they were prior to the SAP. The performance of the economy in spheres of poverty alleviation has decreased from 36% in 1993-94 to 26.1% in 1999-2000 . The modern global economy is introducing new ideas on how to organize and govern the market so that social development will continue to increase, with hopes of one-day diminishing poverty in India completely.

Over the past two decades, India has been able to establish itself as a knowledge powerhouse and has attained the status as one of the world’s fastest growing economies. This is a result of the implementation of the SAP in 1991. More specifically a result of India opening its markets to international trade and expanding the role of globalization, India has been able to develop the economic and social sectors of society. The license Raj is obsolete because its policies caused India to enter a financial crisis in 1991. Although there has been some economic and social downfall since the SAP, the benefits certainly outweigh the costs. Overall, since the enacting of the SAP initiatives, development in India has flourished rather than declined.

While India has shown great improvement as a nation, there is still more to accomplish. For the matters of basic need and development, India still has a long way to go. Over the last few decades, inequality has been rising, regional disparities have been growing and although there has been a decrease in numbers of poverty and illiteracy, they remain high. However, there could be a reverse in these trends. An understanding of the role of culture and collective beliefs in the life of a nation can help analysts and policymakers design appropriate economic policies . A key step is to improve basic infrastructure as well as health and education systems so that the vast rural populations can take part in more rapid economic growth. Trade liberalization must proceed apace with all tariffs, reducing to 15% in the next three years. This is necessary to reallocate production toward labor-intensive products in which India has comparative advantage, and it will be salutary for poverty reduction . With the execution of the SAP, India’s leaders have acquired the organizational ability to share and exchange knowledge and to combine each with other kinds of knowledge to employ it where it is needed. If India continues to be open to new advancements and policies, it will soon be one of the world’s leading economies.

The concept of globalization is spreading very rapidly throughout the world today. It is evident that over the past two decades India has become more globalized and developed. In 1947, Indian Prime Minister Nehru enacted the “license raj”. Under this act, the economy was centrally planned and the government oversaw every business. Following the crisis in 1991, a new set of policies was initiated. These policies allowed India to exhibit greater participation in global markets and completely restructure their economy in order to better the life of the nations citizens. Through increased FDI and the growth of the IT-sector of the economy, India will continue to grow and develop both economically and socially.