Globalisation and the Indian Economy

Globalisation is the process of rapid integration of countries through greater foreign trade and foreign investment.

• Countries become increasingly connected through production, trade and investment.
• Multinational corporations (MNCs) play a major role in this process.
• Technology and liberalisation have made these connections faster and wider.

Production is no longer confined to one country. Different stages of production can be located in different countries.

• An MNC may design a product in one country, manufacture components in another, assemble them elsewhere and provide customer support from India.
• Companies choose locations according to cost, skills, resources and access to markets.
• This creates a globally organised production process.

An MNC is a company that owns or controls production in more than one nation.

• MNCs set up offices and factories in different countries.
• They look for locations where labour and other resources are available at relatively low cost.
• Their objective is generally to reduce production costs and increase profits.

MNCs choose locations that provide advantages for production and distribution.

• Cheap skilled and unskilled labour can lower costs.
• Proximity to markets reduces distribution difficulties.
• Availability of other factors of production and favourable government policies can attract investment.
• Skilled workers and specialised services can make a location particularly attractive.

MNCs may divide production into small stages and spread those stages across different countries.

• Different countries specialise in the stage they can perform efficiently.
• This allows MNCs to combine cost advantages, skills and market access.
• The result is an increasingly complex international production network.

Investment made by MNCs in assets such as land, buildings, machines and equipment in another country is called foreign investment.

• Investment is made with the expectation that assets will earn profits.
• Foreign investment can create production capacity and link local companies with global markets.
• MNCs may invest directly or acquire existing local businesses.

MNCs sometimes produce jointly with local companies in the host country.

• The local company can receive additional investment for machines and expansion.
• The MNC may bring newer technology and production methods.
• The local company may gain access to wider markets and global production networks.

A common route for MNC investment is to buy existing local companies and expand production.

• MNCs with large financial resources can acquire established firms.
• The acquired company may already have brands, factories, distribution networks or skilled workers.
• The MNC can then expand production using these existing strengths.

MNCs may place orders with small producers in different countries and sell the finished goods under their own brands.

• Garments, footwear and sports items are examples.
• Small producers receive orders but may have limited bargaining power.
• MNCs can control specifications, quality, prices and delivery conditions through their large buying power.

Rapid improvements in information and communication technology have made global production much easier.

• Telecommunications connect offices and workers across countries.
• Computers and the Internet allow rapid transfer of information.
• E-mail, online communication and e-banking make international services possible at very low cost.
• IT has helped spread production of services across countries.

IT allows services to be produced in one country for customers or companies in another.

• A London magazine can be designed and printed in Delhi using Internet and telecommunications.
• Data entry, accounting, administrative work and engineering services can be provided from countries such as India.
• Call centres are another important example.

A trade barrier is a restriction imposed by the government on foreign trade.

• Taxes on imports raise the price of imported goods.
• Quotas restrict the quantity of goods that can be imported.
• Trade barriers can protect domestic producers from foreign competition.
• Governments can use them to regulate what and how much enters the country.

After Independence, India used barriers to foreign trade and investment to protect newly developing domestic industries.

• Indian industries in the 1950s and 1960s were still developing.
• Unrestricted import competition could have made it difficult for domestic industries to grow.
• Imports were therefore restricted largely to essential items such as machinery, fertilisers and petroleum.

Liberalisation means removing or reducing government restrictions on foreign trade and foreign investment.

• From around 1991, India made major policy changes.
• Trade and investment barriers were removed to a large extent.
• Businesses received greater freedom to import and export.
• Foreign companies were allowed greater opportunities to set up production in India.

The government wanted Indian producers to face international competition and improve their quality and efficiency.

• Greater competition was expected to encourage domestic producers to improve performance.
• Powerful international organisations supported liberalisation.
• Imports and exports became easier and foreign companies could establish factories and offices in India.

The WTO is an international organisation whose stated aim is to liberalise international trade.

• It establishes rules regarding international trade.
• It seeks to ensure that member countries follow agreed trade rules.
• The chapter notes that developing countries have often faced pressure to remove trade barriers while developed countries have retained protection in some areas.

The chapter highlights the debate over whether international trade is genuinely free and fair.

• Developing countries such as India reduced trade barriers under WTO rules.
• Developed countries have continued to support some of their producers, especially farmers.
• Such support can allow products to be sold at unusually low prices and affect farmers in other countries.

Globalisation and greater competition have benefited consumers, especially well-off urban consumers.

• Consumers have greater choice of products.
• Competition can improve quality.
• Prices of several products have fallen.
• Consumers with greater purchasing power have benefited most.

The impact on producers has not been uniform.

• Some large Indian companies have benefited from competition.
• They have adopted newer technology, improved production methods and raised standards.
• Some have collaborated with foreign companies.
• Some large Indian firms have themselves become MNCs.

Globalisation has enabled some large Indian companies to expand operations internationally.

• Examples in the chapter include Tata Motors, Infosys, Ranbaxy, Asian Paints and Sundaram Fasteners.
• Such firms can invest abroad, access new markets and operate production or services internationally.

Many small producers have faced intense competition from imported goods and large MNC-linked production networks.

• Industries such as batteries, capacitors, plastics, toys, tyres, dairy products and vegetable oil have faced pressure.
• Some units have closed and workers have lost jobs.
• Small producers need infrastructure, modern technology and affordable credit to compete better.

Governments have created Special Economic Zones to attract foreign investment and promote production.

• SEZs are intended to provide world-class infrastructure such as electricity, water, roads, transport and storage.
• Companies setting up production units in SEZs receive certain tax benefits for an initial period.
• SEZs are designed to make locations attractive to investors.

Companies often seek flexibility in employment so that they can adjust the workforce according to production needs.

• Workers may be employed temporarily instead of permanently.
• This can reduce labour costs for companies.
• For workers, flexibility can mean less job security, lower benefits and uncertain income.

Competition in global garment markets has placed pressure on Indian exporters and workers.

• MNC buyers seek low-cost products.
• Indian exporters try to reduce costs, especially labour costs.
• Workers may face temporary employment, long working hours, low wages and overtime.
• The chapter uses Sushila's experience to show that benefits of globalisation are not shared equally.

Fair globalisation would create opportunities for all and ensure that the benefits are shared more widely.

• The government can ensure labour laws are properly implemented.
• It can support small producers until they become competitive.
• It can negotiate for fairer rules at the WTO and work with other developing countries.
• People's organisations can influence decisions relating to trade and investment.