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An Essay on Impact of Globalization on Indian Industrial & Financial Sector by Chafikhur Rahman Introduction: Globalization is the process of international integration arising from the interchange of world views, products, ideas, and other aspects of culture. Globalization describes the interplay across cultures of macro-social forces. These forces include religion, politics, and economics. Globalization can erode and universalize the characteristics of a local group. Advances in transportation and telecommunications infrastructure, including the rise of the Internet, are major factors in globalization, generating further interdependence of economic and cultural activities. There are two types of integration—negative and positive. Negative integration is the breaking down of trade barriers or protective barriers such as tariffs and quotas. Removal of barriers can be beneficial for a country if it allows for products that are important or essential to the economy. For example, by eliminating barriers, the costs of imported raw materials will go down and the supply will increase, making it cheaper to produce the final products for export (like electronics, car parts, and clothes). Positive integration on the other hand aims at standardizing international economic laws and policies. For example, a country which has its own policies on taxation trades with a country with its own set of policies on tariffs. Likewise, these countries have their own policies on tariffs. With positive integration (and the continuing growth of the influence of globalization), these countries will work on having similar or identical policies on tariffs.

Effects of Globalization: There are so many global events connected with globalization in Economy of a country. Following are the some changes effects by globalization. 1.  Improvement of International Trade. Because of globalization, the number of countries where products can be sold or purchased has increased dramatically. 2. Technological Progress. Because of the need to compete and be competitive globally, governments have upgraded their level of technology. 3. Increasing Influence of Multinational Companies. A company that has subsidiaries in various countries is called a multinational. Often, the head office is found in the country where the company was established. An example is a car company whose head office is based in Japan. This company has branches in different countries. While the head office controls the subsidiaries, the subsidiaries decide on production. The subsidiaries are tasked to increase the production and profits. They are able to do it because they have already penetrated the local markets. The rise of multinational corporations began after World War II. Large companies refer to the countries where their subsidiaries reside as host countries. Globalization has a lot to do with the rise of multinational corporations. 4.  Power of the WTO, IMF, and WB. According to experts, another effect of globalization is the strengthening power and influence of international institutions such as the World Trade Organization (WTO), International Monetary Fund (IMF), and World Bank (WB). 5.  Greater Mobility of Human Resources across Countries. Globalization allows countries to source their manpower in countries with cheap labor. For instance, the manpower shortages in Taiwan, South Korea, and Malaysia provide opportunities for labor exporting countries such as the Philippines to bring their human resources to those countries for employment. 6.  Greater Outsourcing of Business Processes to Other Countries. China, India, and the Philippines are tremendously benefiting from this trend of global business outsourcing. Global companies in the US and Europe take advantage of the cheaper labor and highly-skilled workers that countries like India and the Philippines can offer 7. Civil Society. An important trend in globalization is the increasing influence and broadening scope of the global civil society. Civil society often refers to NGOs (nongovernment organizations). There are institutions in a country that are established and run by citizens. The family, being an institution, is part of the society. In globalization, global civil society refers to organizations that advocate certain issue or cause.

Globalization and Indian Economy: Liberalization and Globalization of Indian Economy is a crisis driven response to un-precedent balance of payment crisis i.e. our foreign exchange reserves were adequate for only two weeks of imports. India had lost its credibility in the international market and no country was wishing to lend India a penny. The Government had to mortgage 40 tonnes of gold to Bank of England. The economy was in a shambles. Inflation had increased to seventeen percent. The rate of industrial growth had become negative. Trend of growth of GDP was reduced to less than 2%. When forces of globalization were strengthening, Indian economy went through wide ranging reforms in trade, industrial, monetary and fiscal sectors during the 1990s. As the Reserve Bank of India noted in its Report on Currency and Finance: 2002-03, the institution of structural reforms, the entire gamut of trade, exchange rate, industrial, foreign investment, fiscal and monetary policies began to be operated under the open economy macroeconomic framework. Furthermore, the pressure of globalization necessitated a careful monitoring of capital account transactions to ensure, besides sustainability of the country’s balance of payments, overall macroeconomic stability. The policy measures taken include progressive dismantling of trade restrictions, adoption of market-determined exchange rates, moving to current account convertibility and gradual liberalization of capital account. A move to a more open economy structure and the integration with the world markets necessitated changes in the strategy for fiscal and monetary policies. With globalization and liberalization, global economic activity and global growth have been influencing our country’s growth. Real GDP growth in India averaged 7.6 per cent per year during the Tenth Plan period of 2002-03 to 2006-07 – the fastest pace of economic expansion in any plan period upto that time. This higher average rate of growth may be contrasted with the rate of growth of 5.7 per cent per annum during the 1980s and 1990s. During 2006-07, Indian economy registered a robust growth of 9.4 per cent compared to 9 per cent in 2005-06. There was a significant rise in growth in per capita income as well. Per capita income grew at an annual average rate of 6.1 per cent per annum during the entire Tenth Plan period. During the last four years of the plan i.e. 2003-04 to 2006-07, per capita income registered an average growth rate of 7.1 per cent per annum, more than double that of 3.4 per cent per annum recorded during the 1980s and 1990s. Furthermore, the growth rate of per capita income accelerated to 8.4 per cent during 2006-07. Reflecting the sustained high growth over the past few years, the country’s share in the world GDP (measured in terms of purchasing power parity rates) improved from 4.3 per cent in 1991 and 5.4 per cent in 2000 to 6.3 per cent in 2006. An IMF report puts India as the world’s fourth largest economy (measured in terms of purchasing power parity) in 2006 after the U.S., China and Japan. However, at market exchange rates, India was the 13th largest economy during the same year. The acceleration in the growth of economic activity has been accompanied by a marked increase in domestic savings and investment which provided support to improvement in productivity and acceleration of economic activity. The domestic savings rate has continuously recorded an upward trend from 23.5 per cent of GDP in 2001-02 to 32.4 per cent in 2005-06. Likewise, the annual rate of investment increased from 22.9 per cent to 33.5 per cent during the same period. Available data for 2006-07 suggest continuation of these upward trends in domestic savings and capital formation.

Globalization and Indian Industrial Sector: The estimates of CSO reveal that real GDP growth originating from the industrial sector has shown marked improvement since liberalization of the economy. From an annual average growth of 5.7 per cent during the ten-year period of 1990—91 to 1999-2000, the industrial sector’s growth rose by 7.0 per cent per annum in the next seven years (2000-01 to 2006-07). The acceleration of the growth rate continued; there was significant improvement in the rate of growth of real GDP originating from the industrial sector  from 8.0 per cent in 2005-06 to 11.0 per cent in 2006-07, driven by strong manufacturing activity. The annual rate of growth in the latter was remarkable increasing from 9.1 per cent to 12.3 per cent during the same period. An analysis of the movements in the Index of Industrial Production (IIP), reveals that the industrial sector increased at an accelerated pace, rising to 11.5 per cent during 2006-07 as against 8.2 per cent in the preceding year. Manufacturing sector is the prime mover, contributing over 90 per cent to the industrial growth. At the two-digit classification level, 16 out of 17 manufacturing industry groups registered positive growth during the year 2006-07. The average annual growth of the manufacturing sector during the period 2004-08 is of the order of 9 per cent in line with the overall economic growth of the same order. Manufacturing is next only to services sector in regard to the growth achievement. Pharma sector is showing some signs of slowdown. The Pharma sector’s export growth is likely to be affected by the appreciation of the rupee. Capacity utilization of the industries in the year is estimated at nearly 82 per cent, contributing to higher investment activity. The acceleration of the manufacturing sector, particularly since 2003-04, has been helped by investor-friendly and sector-specific policies. In this connection, mention has to be made of modification of the definition of micro, small and medium enterprises, pruning down of the list of items reserved for exclusive manufacturing by the SSI sector, announcement of a new National Pharmaceutical Policy, public private partnership model in creation and maintenance of infrastructure, amendments to the Special Economic Zone (SEZ) Rules and reduction of customs duties across various items. In terms of user-based classification of the industrial sector, substantially accelerated growth was observed in respect of basic, capital and intermediate goods sectors. The production of capital goods remained buoyant recording a growth of 18.2 per cent in 2006-07 on the top of 15.8 per cent growth in the preceding year, indicative of sustained robust investment demand in the country. This marked expansion of the capital goods sector facilitated hefty capacity additions across a number of industries. As a large part of the growth in the manufacturing sector has essentially been confined to capital-intensive sub-sectors and as labour-intensive manufacturing sub-sectors have lagged behind, the organized manufacturing sector has not generated adequate employment. This outcome is a cause of concern. However, the unorganized manufacturing sector has continued to generate more employment. Although the mining and electricity sub-sectors of the industrial sector also registered higher growth during the year 2006-07, their growth continued to lag behind that of the manufacturing sector. Despite higher power generation, the country faces power shortage of about 10 per cent and a peaking shortage of over 13 per cent. It is reported that the peaking power shortage is as high as 25 per cent in some states. The infrastructure sector, with a weight of 26.7 per cent in the overall index of industrial production, continued to lag behind the overall industrial growth. However, there is some improvement during 2006-07. The Approach Paper to the Eleventh Five Year Plan (2007-12) admitted the absence in the country of world class infrastructure as also shortage of skilled manpower. The document recognizes these two as the most critical barriers to the growth of the manufacturing sector. In this context, reference has to be made to studies showing that urban infrastructure is a key element in the growth process, generating productivity gains. Such gains accrue in the form of savings in trade and transport costs and availability of skilled labour as a result of proximity to product and labour markets. Steps taken for strengthening the management of cities and other urban areas aimed at improving provision of water, transport, sanitation, health and educational facilities would lead to improvement in urban infrastructure facilities across the country. The extant infrastructure facilities, it is generally admitted, are woefully inadequate to meet the requirements for achieving the planned higher growth of the economy. The government’s high level committee on Infrastructure headed by the Prime Minister has estimated that a massive investment of Rs. 14,50,000 crore during the Eleventh Plan period would be required to develop infrastructure of global standards. To make this investment would call for public and private sector cooperation, public-private partnerships (PPPs) besides exclusive public sector investment and private sector investments. The Chairman of the Prime Minister’s Economic Advisory Council has very recently pointed out that the bottlenecks in the infrastructure may retard the growth of the overall economy in the Eleventh Plan period.

Globalization and Indian Service Sector: The services sector has been growing at a rapid pace since the liberalization of the Indian economy and with increased integration of the economy of the country with the global economy. The sector remained the mainstay of the economy contributing over 70 per cent to overall growth of the economy. The share of the services sector in the real GDP has been progressively increasing, reaching a peak of 61.8 per cent in 2006-07 according to the CSO’s revised National Income estimates. Real GDP growth originating from the services sector accelerated from an average of 7.1 per cent per annum during 1990-91 to 1999-2000 to an average annual rate of 8.6 per cent during the years 2000-01 to 2006-07 and to an average of 9.5 per cent during the Tenth Plan period 2002-03 to 2006-07. Particularly important is the acceleration in the growth of the sector from 10.0 per cent during 2004-05 to 11.0 per cent in 2006-07. The Reserve Bank of India notes that the services sector has grown at double digit rate during the three years 2004-05 to 2006-07 and emerged as the key driver of economic activity in the country. The Bank observes: “The sustained growth of the manufacturing activity, strong growth in tourism, improvement in the telecommunications, buoyancy in IT and BPO sectors, robust growth of the construction sector, acceleration in deposit and credit growth and opening up of the insurance sector have buoyed the services sector in recent years. The impressive performance of the services sector was attributable largely to the availability of skilled and cheap labour “Available information indicates a steady improvement in productivity growth in the services sector. An examination of the disaggregated data relating to the services sector shows that the two sub-sectors – trade, hotels and restaurants and trade, transport and communication – together have particularly shown accelerated growth in the last few years and emerged as providers of momentum to the growth of the economic activity in the country. Further, the information technology sector (IT) has also shown marked buoyancy showing sustained revenue growth and increased geographic penetration. This sector has continued to attract significant increase in investments from multinational corporations. The country’s exports of services are dominated in recent years by exports of software and other business services indicating global competitiveness and high skill intensity of Indian workforce. The share of India’s services exports in the world increased in the decade of 1995 and 2005 from 0.6 per cent to 2.2 per cent. Another notable feature of the services exports, besides shift in the trend level, is the reduced volatility. It is to be also noted that now the external sector accounts for 40 per cent of the country’s GDP.

Globalization and Indian Financial Markets: One of the key features of globalization is the significant increase in integration of global financial markets in recent years, posing important challenges to the conduct of domestic monetary policy. There are conflicting views in regard to the benefits and costs of global financial market integration. However, perceptive observers are of the view that the most important benefit of globalization is the imposition of market discipline on policy makers. There is a large body of opinion suggesting that globalization enhances prospects of economic growth and reduces market volatility. However, one has to reckon with the so-called contagion effect of this global financial environment. The global financial crisis of 1997 / 98 is one prime example. A second example is the recent sub-prime mortgage crisis in the U.S. market which has its effects on other countries. The adverse developments in the U.S. sub-prime market have been transmitted to other developed and emerging markets with almost no relation to domestic developments. The Indian stock market crisis in the third week of January – the so-called black Monday (as also on the next day) is ascribed to U.S. sub-prime crisis and the fear of subsequent slow down of the US economy, if not economic recession. This crisis has prompted many to question the validity of “decoupling” theory, the notion that Asian economies can shrug off an American recession. From the sentiment angle the coupling is real; there is, of course, inadequate evidence of the coupling from the business angle. Globalization exposes national economies to external shocks. The national economy tends to be exposed to the danger of global capital flows making the economy vulnerable to the consequences of such flows. Another disadvantage of globalization, particularly resulting from integration of financial markets, is the tendency for increased volatility in exchange rates with deleterious consequences on the real sector of the economy. The world economy is increasingly powered by countries, such as China and India, whose growth is far more energy and commodity – intensive than that of rich countries: This shift means that the usual relationship between America’s business cycle and commodity prices may change. Past American recessions have sent the prices of oil and other resources down. That may no longer be so.

Conclusion: Since the introduction of economic reforms, there has been a change in the growth rate of industrial production. The growth rate of capital goods industries has slowed down and consumer goods industries have been growing at a faster rate. The growth rate of the Intermediate goods sector has been fluctuating and that of the capital goods sector has reduced. The only sector registering good performance was the consumer goods sector (consumer non – durables grew faster than consumer durables – healthy development). According to the economic survey 1999-2000, several macroeconomic indicators showed  broad signs of recovery. We have studied the first generation and second generation economic reforms. What this brief paper has tried to emphasize is that correcting some distortions which have resuled during the process of implementing reforms and focusing on areas which have so far  been ignored in the reform process are very important

Bibiliography: 1.	International Labour Office (2004), a Fair Globalization; Creating Opportunities for All, World Commission on the Social Dimensions of Globalization, Geneva. 2.	“W.T.O. and Developing countries” - Surendra Bhandari 3.	“Lectures on Economic and Financial Sector reforms in India” – V.V. Redi 4.	“Economic Globalisation today” - Preeti Sampat 5.	“Globalization - the Imperial Thrust of Modernity” - Edited by Ninan Koshy. 6.	Reserve Bank of India, Annual Report, various issues 7.	Soros, G., (2004) On Globalization, Viva Books Private Ltd., New Delhi 8.	Stiglitz, J (2006), Making Globalization Work: The Next Step to Global Justice, Allen Lane, New York.