Today, it is generally said that it is an era of globalization. But, what is meant by the term ‘globalization’? Globalization can be defined as a process associated with increasing openness, growing economic independence, and promoting economic
integration in the world economy. In other words, it is an integration of various economies of the world with each other. After going through this lesson, you will be able to understand the Globalization Policy in India.
Globalization Strategies in India
Globalization in India was the third step under the New Economic Reforms of 1991. It is an extension of the liberalization and privatization policies. To open up the Indian economy to the world economy, various steps were taken. The following are some of the important strategies followed by India in the direction of globalization.
Globalization Strategies in India #1
Encouragement to foreign capital investment: With the aim of encouraging foreign capital investment, the following steps were taken.
- The equity limit of foreign capital was initially raised from 40% to 51% which was further raised to 100%.
- Foreign Direct Investment up to 100% was also allowed in high-priority industries.
- Foreign capital investment of up to 100% was allowed in the export houses.
- Special Economic Zones (SEZs) were set up for the promotion of exports. The industries in the SEZ’s were provided with infrastructure facilities such as electricity, roads, transport, storage, etc.
- Foreign Exchange Management Act (FEMA) was introduced with the view of attracting higher foreign investment.
Globalization Strategies in India #2
Partial convertibility of rupee: Under the reforms, partial convertibility of the rupee was also allowed. Partial convertibility implies that for the purpose of international transactions, the foreign currency could be bought or sold at a market-determined price. This convertibility can be used only for transactions involving the import and export of goods and services, remittances to the family, and interest or dividend payments on investment. However, as the name partial convertibility suggests, this convertibility was not applicable for capital transactions.
Globalization Strategies in India #3
Removal of barriers: With globalization, the various barriers to trade such as tariffs on imports and exports, custom duties and import quotas, etc. were reduced considerably. This was done in consideration of the WTO recommendations while benefiting India at an international level.
Globalization Strategies in India #4
Facilitation of international trade: With the formation of WTO, the trade in goods as well as in services was encouraged. All the restrictions that were earlier imposed on trade were removed, except for some specific goods. Open competition was encouraged in the trade market.
Globalization and Outsourcing in India
Outsourcing refers to a system of hiring business services from foreign countries to penetrate into the local market. In other words, the domestic country offers various business services to foreign companies. The services which are usually outsourced are legal services, IT, security, teaching, etc. Nowadays, India is emerging as a favorite destination for outsourcing industries. The following advantages qualify India to be an important spot for outsourcing by various MNCs.
Easy availability of cheap labor: Wage rates commanded by the labor in India are much lower as compared to that commanded by the labor having an equal level of qualification in the developed countries. Thus, MNCs find it economically feasible to outsource their business in India.
Reasonable degree of skills: Indians have a fairly reasonable degree of skills and techniques. Hence, they need a low training period and thus, a low cost of training.
International worthiness: India has fair international worthiness and also credibility. This enhances the faith of the foreign investors in India.
Virgin market: India has a virgin market for produced goods and services. This not only helps the MNCs to explore the wide domestic market of India but also conquer the international market as the cost of production in India is relatively cheaper.
Stable political environment: The democratic political environment in India provides a stable and secured environment for the MNCs to expand and grow.
Favorable government policies: The most important point that makes India the most favorite spot for outsourcing is the favorable government and tax policies. In order to attract increasing FDI, the Indian government offers various concessions to MNCs in the form of tax holidays, low rates of tax, easy tax policies, etc. All these policies enable the MNCs to retain a major portion of their earnings in the form of savings that they can invest to grow and expand their business.
Lack of competitors: The most important advantage for the MNCs in India is that they don’t face stiff competition from the Indian domestic industries. This almost enables them to enjoy a monopoly status in the Indian markets.
Reasonable degree of infrastructural investment: Indian government has invested heavily in the past two decades in the infrastructural sector. Various steps have been taken for connecting remote and rural areas to metropolitan and other major cities. This has not only reduced the cost of production of the MNCs but also helped them operate efficiently and effectively.
Cheap and abundant availability of raw materials: India is well enriched in natural resources. This ensures cheap availability of raw material and an undisturbed and perennial supply of raw materials to the MNC’s.
Benefits of Outsourcing to India
Today India is seen as a hub of outsourcing activities. The outsourcing industry has provided India with many benefits. The following are some of the major benefits provided by the outsourcing industry to India.
Employment: For a developing country such as India, employment generation is an important objective and outsourcing proves to be a boon for creating more employment opportunities. It leads to the generation of newer and higher-paying jobs.
Exchange of technical know-how: Outsourcing enables the exchange of ideas and technical know-how of sophisticated and advanced technology from developed countries to India.
International worthiness: Outsourcing to India also enhances India’s international worthiness and credibility. This increases the inflow of investment to India.
Encourages other sectors: Outsourcing not only benefits the service sector but also affects other related sectors such as industrial and agricultural sectors through various backward and forward linkages.
Contributes to human capital formation: Outsourcing helps in the development and formation of human capital by training and imparting them with advanced skills and thereby, increasing their future scope and suitability for high-ranked jobs.
Better standard of living and eradication of poverty: By creating more and higher-paying jobs, outsourcing improves the standard and quality of living of the people in developing countries. It also helps in reducing poverty.
Greater infrastructural investment: Outsourcing to India requires better quality infrastructure. This leads to the modernization of the economy and larger investment by the government to develop quality infrastructure and develop quality human capital.
However, outsourcing has gained opposition from developed countries. Developed countries argue that outsourcing leads to the outflow of investments and funds from the developed countries to the less developed countries. Also, they believe that MNCs contribute more to the development of the host country than the home country. Further, outsourcing reduces the employment generation in developed countries as the same jobs can be done in the less developed countries at relatively cheaper wages. Similarly, it is argued that outsourcing leads to job insecurity in developed countries.
Formation of WTO
World Trade Organisation (WTO) was formed in the year 1995 to promote the access of free trade across all the member nations. This organization was formed by replacing the already existing General Agreement on Trade and Tariffs (GATT). The basic objective of WTO was to promote good trade relations among different countries of the world. WTO also helps in establishing interlinkages among the different countries of the world.
Moreover, this organization also helps in establishing a framework for negotiating and formalizing the trade agreements among the different countries of the world. Free trade among different nations of the world is facilitated through a reduction in tariff and non-tariff barriers.
Further, in order to accelerate the social and economic development of the developing nations of the world, it was necessary to integrate their economies with the economies of the developed nations of the world. Thus, the setting up of WTO was a major step in the developmental path of the world economy.
Benefits of WTO
Some of the benefits for an economy as a member of WTO (World Trade Organisation) are as follows.
Provides equal opportunities to all: WTO provides equal opportunities to all its member countries to trade in the international market. With all countries having equal access to growth, being a member of WTO was a major benefit for any economy of the world.
Avenues for greater export: It provides its member countries with a wider scope to produce at a large scale and to cater to the needs of people across international boundaries. This provides ample scope to utilize world resources optimally and greater market access. Accordingly, the share of a country’s trade in international trade increases.
Removal of barriers: WTO advocates for the removal of tariff and non-tariff barriers, thereby, promoting healthier and fairer competition among different producers of different countries. The removal of barriers assures greater penetration of exports to developed countries, thereby, directly boosting a country’s exports. Moreover, the countries of similar economic conditions (say Asian countries), on attaining membership of WTO, can raise a united voice to safeguard their common interests.
Safeguards common interests: The countries having similar economic conditions, being members of WTO can raise their voice to safeguard their common interests.
WTO and Indian Economy
As a member of WTO, India has also benefited from the trade front. India is expected to benefit From WTO on the following grounds.
- As a member of WTO, India is expected to gain in terms of rising in income. India is expected to add 3.5 to 7 billion US dollars annually as a result of the rise in the volume of trade.
- The exports of traditional items of India, particularly textile and clothing are expected to experience a boost.
- With the reduction in the quantitative restrictions, the agricultural exports of India are likely to increase.
- WTO has resulted in a greater discipline in world trade. This creates a secure and predictable environment for international trading.
Economic reforms refer to a set of tools and policies initiated in an economy in order to facilitate the process of growth and development. After going through this lesson, you will understand the Economic Reforms in India