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Globalisation & The Indian Economy
"As consumers in today's world, some of us have a wide choice of goods and services before us. In a matter of years, our markets have been transformed!"
1.0Introduction
Integration of production and integration of markets is a key idea behind understanding the process of globalisation and its impact. Globalisation has been facilitated by several factors. Three of these have been highlighted: rapid improvements in technology, liberalisation of trade and investment policies and, pressures from international organisations such as the WTO. Improvement in technology is a fascinating area for students and you may, with a few directions, encourage them to do their own explorations. International negotiations under WTO and the uneven balances in power are interesting subjects that can be covered in a discussion mode rather than as lectures.
2.0Production across countries
Until the middle of the twentieth century, production was largely organised within countries. What crossed the boundaries of these countries were raw material, food stuff and finished products. Colonies such as India exported raw materials and food stuff and imported finished goods. Trade was the main channel connecting distant countries. This was before large companies called multinational corporations (MNCs) emerged on the scene.
3.0Multi-National Company
- MNC is a company that owns or controls production in more than one country.
- MNCs set up offices and factories for production in regions where they can get cheap labour and other resources. This is done so that the cost of production is low and the MNCs can earn greater profits.
4.0Spreading of production by an MNC
A large MNC, producing industrial equipment, designs its products in research centres in the United States, and then has the components manufactured in China. These are then shipped to Mexico and Eastern Europe where the products are assembled, and the finished products are sold all over the world. Meanwhile, the company's customer care is carried out through call centres located in India.
In this example the MNC is not only selling its finished products globally, but more important, the goods and services are produced globally. As a result, production is organised in increasingly complex ways. The production process is divided into small parts and spread out across the globe. In the above example, China provides the advantage of being a cheap manufacturing location. Mexico and Eastern Europe are useful for their closeness to the markets in the US and Europe. India has highly skilled engineers who can understand the technical aspects of production. It also has educated English speaking youth who can provide customer care services. And all this probably can mean 50-60 per cent cost-savings for the MNC! The advantage of spreading out production across the borders to the multinationals can be truly immense.
5.0Interlinking production across countries
- In general, MNCs set up production where it is close to the markets; where there is skilled and unskilled labour available at low costs; and where the availability of other factors of production is assured. In addition, MNCs might look for government policies that look after their interests.
- The money that is spent to buy assets such as land, building, machines and other equipment is called investment. Investment made by MNCs is called foreign investment. Any investment is made with the hope that these assets will earn profits.
- At times, MNCs set up production jointly with some of the local companies of these countries. The benefit to the local company of such joint production is two-fold.
- First, MNCs can provide money for additional investments, like buying new machines for faster production.
- Second, MNCs might bring with them the latest technology for production.
- But the most common route for MNC investments is to buy up local companies and then to expand production. MNCs with huge wealth can quite easily do so.
- Example - Cargill Foods, a very large American MNC, has bought over smaller Indian companies such as Parakh Foods. Parakh Foods had built a large marketing network in various parts of India, where its brand was well-reputed. Also, Parakh Foods had four oil refineries, whose control has now shifted to Cargill. Cargill is now the largest producer of edible oil in India, with a capacity to make 5 million pouches daily!
- In fact, many of the top MNCs have wealth exceeding the entire budgets of the developing country governments. With such enormous wealth, imagine the power and influence of these MNCs!
- There's another way in which MNCs control production - Large MNCs in developed countries place orders for production with small producers. Garments, footwear, sports items are examples of industries where production is carried out by a large number of small producers around the world. The products are supplied to the MNCs, which then sell these under their own brand names to the customers. These large MNCs have tremendous power to determine price, quality, delivery, and labour conditions for these distant producers.
- Thus, we see that there are a variety of ways in which the MNCs are spreading their production and interacting with local producers in various countries across the globe.
- By setting up partnerships with local companies, by using the local companies for supplies, by closely competing with the local companies or buying them up, MNCs are exerting a strong influence on production at these distant locations.
- As a result, production in these widely dispersed locations is getting interlinked.
Ford Motors, an American company, is one of the world's largest automobile manufacturers with production spread over 26 countries of the world. Ford Motors came to India in 1995 and spent Rs. 1700 crore to set up a large plant near Chennai. This was done in collaboration with Mahindra and Mahindra, a major Indian manufacturer of jeeps and trucks. By the year 2017, Ford Motors was selling 88,000 cars in the Indian markets, while another 1,81,000 cars were exported from India to South Africa, Mexico, Brazil and United States of America. The company wants to develop Ford India as a component supplying base for its other plants across the globe.
6.0Foreign trade and integration of markets
For a long time, foreign trade has been the main channel connecting countries. In history you would have read about the trade routes connecting India and South Asia to markets both in the East and West and the extensive trade that took place along these routes.
Also, you would remember that it was trading interests which attracted various trading companies such as the East India Company to India. What then is the basic function of foreign trade? To put it simply, foreign trade creates an opportunity for the producers to reach beyond the domestic markets, i.e., markets of their own countries.
Producers can sell their produce not only in markets located within the country but can also compete in markets located in other countries of the world. Similarly, for the buyers, import of goods produced in another country is one way of expanding the choice of goods beyond what is domestically produced.
In general, with the opening of trade, goods travel from one market to another. Choice of goods in the markets rises. Prices of similar goods in the two markets tend to become equal. Producers in the two countries now closely compete against each other even though they are separated by thousands of miles! Foreign trade thus results in connecting the markets or integration of markets in different countries.
7.0Chinese Toys in India
Chinese manufacturers learn of an opportunity to export toys to India, where toys are sold at a high price. They start exporting plastic toys to India. Buyers in India now have the option of choosing between Indian and the Chinese toys. Because of the cheaper prices and new designs, Chinese toys become more popular in the Indian markets. Within a year, 70 to 80 per cent of the toy shops have replaced Indian toys with Chinese toys. Toys are now cheaper in the Indian markets than earlier.
As a result of trade, Chinese toys come into the Indian markets. In the competition between Indian and Chinese toys, Chinese toys prove better. Indian buyers have a greater choice of toys and at lower prices. For the Chinese toy makers, this provides an opportunity to expand business. The opposite is true for Indian toy makers. They face losses, as their toys are selling much less.
8.0Globalisation
In the past two to three decades, more and more MNCs have been looking for locations around the world which would be cheap for their production. Foreign investment by MNCs in these countries has been rising. At the same time, foreign trade between countries has been rising rapidly. A large part of the foreign trade is also controlled by MNCs. For instance, the car manufacturing plant of Ford Motors in India not only produces cars for the Indian markets, but it also exports cars to other developing countries and exports car components for its many factories around the world.
MNCs are playing a major role in the globalisation process. More and more goods and services, investments and technology are moving between countries. Most regions of the world are in closer contact with each other than a few decades back.
Besides the movements of goods, services, investments and technology, there is one more way in which the countries can be connected. This is through the movement of people between countries. People usually move from one country to another in search of better income, better jobs or better education. In the past few decades, however, there has not been much increase in the movement of people between countries due to various restrictions.
Factors that have enabled Globalisation
Containers for transport of goods
Goods are placed in containers that can be loaded intact onto ships, railways, planes and trucks. containers have led to huge reduction import handling costs and increased the speed with which exports can reach markets. Similarly, the cost of air transport has fallen. This has enabled much greater volumes of goods being transported by airlines.
Technology
- Rapid improvement in technology has been one of the major factors that has stimulated the globalisation process. For instance, the past fifty years have seen several improvements in transportation technology. This has made much faster delivery of goods across long distances possible at lower costs.
- Even more remarkable have been the developments in information and communication technology. In recent times, technology in the areas of telecommunications, computers, Internet has been changing rapidly.
- Telecommunication facilities (tele- graph, telephone including mobile phones, fax) are used to contact one another around the world, to access information instantly, and to communicate from remote areas.
- This has been facilitated by satellite communication devices. As you would be aware, computers have now entered almost every field of activity.
Using IT in Globalisation
A news magazine published for London readers is to be designed and printed in Delhi. The text of the magazine is sent through Internet to the Delhi office. The designers in the Delhi office get orders on how to design the magazine from the office in London using telecommunication facilities. The designing is done on a computer. After printing, the magazines are sent by air to London. Even the payment of money for designing and printing from a bank in London to a bank in Delhi is done instantly through the Internet (e-banking)!
9.0Liberalisation of foreign trade and foreign investment policy
- Let us return to the example of imports of Chinese toys in India. Suppose the Indian government puts a tax on import of toys. What would happen? Those who wish to import these toys would have to pay tax on this. Because of the tax, buyers will have to pay a higher price on imported toys.
- Chinese toys will no longer be as cheap in the Indian markets and imports from China will automatically reduce. Indian toymakers will prosper. Tax on imports is an example of trade barrier.
- It is called a barrier because some restriction has been set up. Governments can use trade barriers to increase or decrease (regulate) foreign trade and to decide what kinds of goods and how much of each, should come into the country.
- The Indian government, after Independence, had put barriers to foreign trade and foreign investment. This was considered necessary to protect the producers within the country from foreign competition.
- Industries were just coming up in the 1950 s and 1960 s, and competition from imports at that stage would not have allowed these industries to come up.
- Thus, India allowed imports of only essential items such as machinery, fertilisers, petroleum etc.
- Note that all developed countries, during the early stages of development, have given protection to domestic producers through a variety of means.
Liberalisation
- Starting around 1991, some far reaching changes in policy were made in India. The government decided that the time had come for Indian producers to compete with producers around the globe.
- It felt that competition would improve the performance of producers within the country since they would have to improve their quality. This decision was supported by powerful international organisations.
- Thus, barriers on foreign trade and foreign investment were removed to a large extent. This meant that goods could be imported and exported easily, and also foreign companies could set up factories and offices here.
- Removing barriers or restrictions set by the government is what is known as liberalisation. With liberalisation of trade, businesses are allowed to make decisions freely about what they wish to import or export.
- The government imposes much less restrictions than before and is therefore said to be more liberal.
10.0World Trade Organisation
- We have seen that the liberalisation of foreign trade and investment in India was supported by some very powerful international organisations.
- These organisations say that all barriers to foreign trade and investment are harmful. There should be no barriers. Trade between countries should be free'. All countries in the world should liberalise their policies.
- World Trade Organisation (WTO) is one such organisation whose aim is to liberalise international trade. Started at the initiative of the developed countries, WTO establishes rules regarding international trade, and sees that these rules are obeyed.
- Nearly 164 countries of the world are currently members of the WTO.
- Though WTO is supposed to allow free trade for all, in practice, it is seen that the developed countries have unfairly retained trade barriers.
- On the other hand, WTO rules have forced the developing countries to remove trade barriers. An example of this is the current debate on trade in agricultural products.
11.0Debate on Trade Practices
The agriculture sector provides the bulk of employment and a significant portion of the GDP in India. Compare this to a developed country such as the US with the share of agriculture in GDP at and its share in total employment a tiny . And yet this very small percentage of people who are engaged in agriculture in the US receive massive sums of money from the US government for production and for exports to other countries. Due to this massive money that they receive, US farmers can sell the farm products at abnormally low prices. The surplus farm products are sold in other country markets at low prices, adversely affecting farmers in these countries.
Developing countries are, therefore, asking the developed country governments, "We have reduced trade barriers as per WTO rules. But you have ignored the rules of WTO and have continued to pay your farmers vast sums of money. You have asked our governments to stop supporting our farmers, but you are doing so yourselves. Is this free and fair trade?
12.0Impact of Globalisation in India
Globalisation and greater competition among producers - both local and foreign producers - has been of advantage to consumers, particularly the well-off sections in the urban areas. There is greater choice before these consumers who now enjoy improved quality and lower prices for several products. As a result, these people today, enjoy much higher standards of living than was possible earlier. Among producers and workers, the impact of globalisation has not been uniform.
Positive Impacts
Firstly, MNCs have increased their investments in India over the past 20 years, which means investing in India has been beneficial for them. MNCs have been interested in industries such as cell phones, automobiles, electronics, soft drinks, fast food or services such as banking in urban areas. These products have a large number of well-off buyers. In these industries and services, new jobs have been created. Also, local companies supplying raw materials, etc. to these industries have prospered.
Steps to attract Foreign Investment
In recent years, the central and state governments in India are taking special steps to attract foreign companies to invest in India. Industrial zones, called Special Economic Zones (SEZs), are being set up. SEZs are to have world class facilities: electricity, water, roads, transport, storage, recreational and educational facilities. Companies who set up production units in the SEZs do not have to pay taxes for an initial period of five years. Government has also allowed flexibility in the labour laws to attract foreign investment. In the recent years, the government has allowed companies to ignore many of these. Instead of hiring workers on a regular basis, companies hire workers 'flexibly' for short periods when there is intense pressure of work. This is done to reduce the cost of labour for the company. However, still not satisfied, foreign companies are demanding more flexibility in labour laws.
Secondly, several of the top Indian companies have been able to benefit from the increased competition. They have invested in newer technology and production methods and raised their production standards. Some have gained from successful collaborations with foreign companies. Moreover, globalisation has enabled some large Indian companies to emerge as multinationals themselves! Tata Motors (automobiles), Infosys (IT), Ranbaxy (medicines), Asian Paints (paints), Sundaram Fasteners (nuts and bolts) are some Indian companies which are spreading their operations worldwide.
Globalisation has also created new opportunities for companies providing services, particularly those involving IT. The Indian company producing a magazine for the London based company and call centres are some examples. Besides, a host of services such as data entry, accounting, administrative tasks, engineering are now being done cheaply in countries such as India and are exported to the developed countries.
Negative Impacts
Small producers: Compete or perish - For a large number of small producers and workers globalisation has posed major challenges.
Competition and Uncertain Employment: Globalisation and the pressure of competition have substantially changed the lives of workers. Faced with growing competition, most employers these days prefer to employ workers 'flexibly'. This means that workers' jobs are no longer secure.
The workers in the garment export industry in India are having to bear the pressure of competition.
Large MNCs in the garment industry in Europe and America order their products from Indian exporters. These large MNCs with worldwide network look for the cheapest goods to maximise their profits. To get these large orders, Indian garment exporters try hard to cut their own costs. As cost of raw materials cannot be reduced, exporters try to cut labour costs.
Where earlier a factory used to employ workers on a permanent basis, now they employ workers only on a temporary basis so that they do not have to pay workers for the whole year.
Workers also have to put in very long working hours and work night shifts on a regular basis during the peak season. Wages are low and workers are forced to work overtime to make both ends meet.
While this competition among the garment exporters has allowed the MNCs to make large profits, workers are denied their fair share of benefits brought about by globalisation.
The conditions of work and the hardships of the workers described above have become common to many industrial units and services in India. Most workers, today, are employed in the unorganised sector. Moreover, increasingly conditions of work in the organised sector have come to resemble the unorganised sector. Workers in the organised sector no longer get the protection and benefits that they enjoyed earlier.
13.0The struggle for a fair Globalisation
People with education, skill and wealth have made the best use of the new opportunities. On the other hand, there are many people who have not shared the benefits. Since globalisation is now a reality, the question is how to make globalisation 'fairer'? Fair globalisation would create opportunities for all, and also ensure that the benefits of globalisation are shared better.
14.0Role of Government
- Government should prepare such policies that must protect the interest not only of the rich and the powerful, but of all the people in the country.
- Government can ensure that labour laws are properly implemented, and the workers get their rights.
- Government can reserve some items exclusively for small scale and local producers.
- If necessary, the government can use trade and investment barriers like quota system, imports duties, etc.
- It can negotiate at the WTO for fairer rules. It can also align with other developing countries with similar interests to fight against the domination of developed countries in the WTO.
- In the past few years, massive campaigns and representation by people's organisations have influenced important decisions relating to trade and investments at the WTO. This has demonstrated that people also can play an important role in the struggle for fair globalisation.
15.0Summing Up
- Globalisation is the process of rapid integration of countries. This is happening through greater foreign trade and foreign investment. MNCs are playing a major role in the globalisation process. More and more MNCs are looking for locations around the world that are cheap for their production. As a result, production is being organised in complex ways.
- Technology, particularly IT, has played a big role in organising production across countries. In addition, liberalisation of trade and investment has facilitated globalisation by removing barriers to trade and investment. At the inter- national level, WTO has put pressure on developing countries to liberalise trade and investment.
- While globalisation has benefited well-off consumers and also producers with skill, education and wealth, many small producers and workers have suffered as a result of the rising competition. Fair globalisation would create opportunities for all and also ensure that the benefits of globalisation are shared better.
16.0Glossary
- Partnerships - Partnership or a partnership is a relationship in which two or more people, organizations, or countries work together as partners.
- Restrictions - A law or rule that limits or controls something.
- Foreign investment - Foreign investment is an investment made by a company or an individual in one country into business interests located in another country.
- Trade barriers - A trade barrier refers to any regulation or policy that restricts international trade, especially tariffs, quotas, licences etc.
- Collaborations - The act of working together with other people or organizations to create or achieve something.
17.0MIND MAP