Globalization and

UNIT 4 GLOBALIZATION AND Development in India

DEVELOPMENT IN INDIA

Structure
4.1 Introduction
4.2 Globalization – Meaning and Perspectives
4.3 Dimensions of Globalization
4.3.1 Globalization of Financial Markets
4.3.2 Globalization of Goods and Services
4.3.3 Globalization of Production
4.4 The Incompleteness and Imperfections in Globalization
4.5 Globalization and the Role of the State in the Economy
4.6 Unevenness in Development and Globalization
4.7 Globalization and Development: The International Experience
4.8 Globalization and Indian Development
4.8.1 Export and Import
4.8.2 Growth and its Composition
4.8.3 Employment
4.8.4 Poverty and Inequality
4.8.5 Growth of Private Corporate Sector
4.8.6 Growing Rural-Urban Divide
4.8.7 Public Expenditure Stagnation
4.8.8 The Indian Experience with Globalization: Growth and Development
4.9 Let Us Sum Up
4.10 References and Suggested Readings
4.11 Check Your Progress – Possible Answers

4.1 INTRODUCTION
Globalization is one of the defining features of the contemporary world, shaping
in a major way the economic trajectories of all nations. Many of these nations
including India are at the same time confronted with a massive challenge of
development and improvement of the general standards of living of their people.
How does the globalization process enable or constrain the meeting of this
challenge is therefore one of the very important questions of our time.
After reading this unit you will be able to:
• Understand what is meant by the term economic globalization.
• Develop a sense of its impact on the world and specifically on developing
countries.
• Become familiar with some of the key issues arising out of the Indian
experience with Globalization.

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Development Initiatives and
Planning 4.2 GLOBALIZATION – MEANING AND
PERSPECTIVES
Globalization, or more precisely economic globalization, is an expression used
both to describe a process as well as any phase of the world economy characterized
by that process. Broadly speaking in the former sense Globalization is usually
used to depict a process of increased integration between the economies of
different countries that make up the world. This integration is said to involve the
increasing movement of products, capital and labour, and of technology, across
the political borders of countries. The extensive development of such integration
is seen to be a characteristic feature of world history since the mid-1970s. The
period since 1973 is therefore considered the age of Globalization. While this is
the most common view, some consider the entire post-World War II period to be
included under Globalization. It has also however been argued that contemporary
Globalization is the second coming of that process, and the half-century or more
preceding the outbreak of the First World War (1914) was also characterized by
an increased economic integration in the world. In this unit however we shall
refer to the process unfolding in the world since the 1970s, and particularly from
the early 1990s, as Globalization.

The facilitating factor of the globalization process has been the increasing openness
of the economies of the world to cross-border flows, meaning the replacement of
controls and regulation by governments of such flows by their liberalization.
The degrees to which goods and services produced in any country are allowed to
be sold in another depend on the extent to which these are permitted by the
governments of the two concerned countries. Similarly the extents to which
nationals of either country are allowed to move the capital owned by them to the
other or to work in them depend on what is permitted by their respective
governments. Based on economic, political and other considerations, States can
and do restrict or permit such cross-border economic interaction. The greater is
the extent of restriction the more closed an economy would be. Correspondingly
it becomes a more open economy the freer is cross-border economic interaction
from government control and regulation.
Completely closed and completely open economies are at two extremes and in
reality it is impossible to find instances of either of them. Cross border flows of
products, capital, labour, and technology, do not necessarily require complete
openness of the economies between whom such flows occur. International
transactions of these kinds took place even before the advent of the era of
Globalization. The scales of these transactions also depend on a host of other
factors and not merely on the degree of openness of the participating economies.
Thus for instance, under the impact of the current global crisis, world trade has
contracted in the last year without any change in the degree of openness of
economies. On the other hand, the high growth of the world economy in the post-
Second World War period generated an expansion of the volume of world
merchandise trade at a faster rate than has been the case subsequently under
globalization and more open economies. Between 1950 and 1973, the rate of
growth of world trade was 8.2 per cent per annum while from 1974 to 2007 it
was 5 per cent per annum.
From the viewpoint of any individual country, the degree of its closeness or
56 openness is not without significance. Changes in this degree are accompanied by
qualitative changes in the nature of mutual interaction between that economy and Globalization and
Development in India
the rest of the world. When economies are relatively more closed, they tend to
have more of an autonomous dynamic of their own. In such circumstances many
of the more important rocesses related to the movement of any country’s economy
over time are national in nature – taking place within the boundaries of that
country. As the economy however becomes more open, the influence of external
factors in shaping its course tends to increase and its autonomy tends to decline.

Increasing integration of the world’s economies however means more than simply
the increasing influence of external factors on all economies. When a single country
unilaterally becomes more open, it changes its situation significantly but that
change does not have an equally significant impact on the global context confronting
individual countries. But when all or most countries simultaneously become more
open, they also through that transform this global context. If increasing openness
is generalized, that is all or most countries lower barriers to cross-border flows,
then the different national economies that constitute the world economy become
bound more closely together as the field for processes that take place at the
international plane - that is, the world economy as a whole is their arena. This
kind of integration is the distinctive feature associated with globalization which
therefore represents more than the mere existence of international economic
transactions on a large scale. Apart from the increasing openness of the world’s
economies, improvements in transport and communication technology are usually
highlighted as important facilitators of this integration.

4.3 DIMENSIONS OF GLOBALIZATION

Globalization is an adjective attached to many things and encompasses more than
mere economic globalization. Even however the increasing economic integration
of the world’s economies under Globalization has many layers and dimensions to
it. In each of these powerful subsets of economic actors whose activities have a
global reach, transnational or multinational firms play a central role. Three such
important ‘globalizations’ can be said to be contained within contemporary
globalization.

4.3.1 Globalization of Financial Markets

The first is the globalization of financial markets, which has become more marked
since the early 1990s and is considered by many to be the distinctive feature of
contemporary globalization. The capital flows taking place in the world are of
two kinds which are distinguished by their purpose and economic significance.
One kind of capital is portfolio capital which seeks profit through investments in
financial assets. Financial assets – like loans, equity shares of companies, or
government bonds - represent claims on the entities that use them for the purposes
of raising funds. Such assets can be acquired from the issuing entity at the time
they are issued (primary) or in many cases also through purchase from an existing
holder (secondary), both of which involve transactions in financial markets. Profits
from holding financial assets can take either the form of receiving from their
issuers payments (like interest, dividend) against the temporary transfer of funds,
or by their sale at a higher price than that at which they are acquired (capital
gains). The era of globalization has been associated with extremely large volumes
of portfolio capital, running into billions of dollars, moving freely across the
world in search of profitable investments in the financial markets of different
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Development Initiatives and countries. The conduits for this movement are financial firms – banks and other
Planning
institutions, with a global reach. Capital account and financial sector liberalization
have created the conditions for this globalization which involves primarily the
cross-border movement of speculative short-term capital seeking quick and large
profits. Increasingly, portfolio investments have taken the forms of holding
marketable financial assets which can be quickly bought and sold, thereby enabling
such capital to enter and exit from countries very quickly. They are therefore
referred to as ‘hot money’ and their flows are characterized by a high degree of
volatility.

Portfolio capital flows are distinct from the other component of international
capital flows, namely foreign direct investment (FDI), and are also are not strongly
linked to the latter. FDI essentially involves investment in real assets where
profits are earned by producing goods and services for sale. Its conduits are non-
financial transnational or multinational firms. FDI may take the form of companies
located in some country holding equity shares in their affiliates in other countries.
The purpose of such holding however is to control and manage the real assets of
that affiliate and not to profit from the sale of these shares at a higher price. FDI
is therefore typically guided by long-term considerations and therefore does not
move in and out of countries as rapidly as portfolio capital. There is however
one kind of capital which shares the features of both portfolio capital and FDI,
and is generally included in the latter. This is private equity capital where
investments are associated with the exercise of control over the real assets of
companies but with the relatively short-term objective of increasing the value of
their shares before they are sold. Under globalization, the volumes of cross
border portfolio capital flows have been considerably greater than FDI flows. In
addition, an increasingly larger part of FDI flows consist of private equity flows
which are more akin to speculative flows than regular FDI flows.

4.3.2 Globalization of Goods and Services

The second component of Globalization is the globalization of markets for goods
and services - the tendency of moving in the direction of a single worldwide
market supplied by a common set of firms. Transnational firms of course play a
leading role in this, but trade and FDI play different roles in different categories
of products. In the case of products that cannot be traded across countries (non-
tradables) which include a large segment of services, FDI drives the process of
market integration. Through such FDI, transnational firms have spread themselves
across the world as sellers of products. Thus Vodafone is a provider of telecom
services in Europe as well as in India. However, in case of tradables the location
of production and sale of a product can be different, and the lowering of trade
barriers only makes this more possible. Sony can therefore sell televisions in the
Indian market which are produced by its plants say in China. Cross-border trade
flows thus have a much greater role to play in the market integration process of
tradables, in which are included most manufactured products. The FDI associated
with this integration is somewhat different from that of non-tradables, and
primarily takes place in the quest for the lowest-cost locations of production. A
US transnational firm may therefore invest in building plants in China because it
finds that relocating from the US to China would lower the cost of the products it
can sell in the US itself, and also because it can use the same facility to competitively
cater to the Chinese and Indian markets.

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4.3.3 Globalization of Production Globalization and
Development in India
Complementing and overlapping with the globalization of markets is the third
important dimension of globalization, the globalization of production. The entire
process through which any product is produced is divisible into a number of
stages or parts which are or can be physically separated. These may be vertically
or horizontally linked to each other. The production of its engine and the assembly
of a car are vertically linked to each other, the former having to necessarily
precede the latter. The cleaning of the factory where these activities are being
undertaken is not similarly vertically linked, but nevertheless is an essential but
separable activity. Many of these different stages or parts may be undertaken
within one firm – thus for instance an automobile company could produce its own
engines and also have its own cleaners. Others may be undertaken by other firms
thereby involving transactions between firms. Thus the automobile company may
purchase the glass used in its automobiles from another firm and it could also
hire a cleaning firm to clean the factory. Such transactions between firms may be
of an arm’s length variety – where the purchasing and selling firms have no stable
relationship with each other and do not coordinate their activities. Such arms
length transactions are possible in cases where the products being purchased are
of some standard readily available kind of which there are many buyers. Thus,
the automobile company may simply purchase the bulbs used in its factory from
the market without having to coordinate matters with the bulb-producing firms.
But when it needs engines made to its particular specifications, it cannot hope to
similarly purchase them from the market – either it has to produce them itself or
has to contract some other specific firm (s) to supply these in the requisite quantity.
In the latter case, no supply will be forthcoming without prior coordination
between the transacting firms. Around the automobile firm of our example therefore
can emerge a coordinated network of activities and firms involved in one or the
other way in the production of automobiles. The automobile firm may not be
producing everything, but its position is nevertheless crucial in the entire process
of coordination so that it stands at the apex of the network. The globalization of
production refers to the emergence of such networks straddling a number of
different countries.

Globalization of production can involve the spread of different activities

undertaken within the same firm amongst different countries, giving rise to cross-
border but intra-firm transactions. A television company therefore could produce
picture tubes in one country, other components in another, cabinets in a third, and
assemble the final product in a fourth country. Alternatively, it could procure the
production of tubes, components, and cabinets from firms producing in three
different countries, and assemble the final product in the fourth. These would
result in inter-firm cross-border transactions. In either case, because of the different
locations of these stages, a certain volume of trade –exports and imports- would
occur independent of the export and import of the final product. The tubes,
components, and cabinets would all have to cross borders before the final product
can be assembled. In this way, global production networks have contributed to
the increase in the ratio of world trade to world production. Not all intra-firm or
inter-firm transactions within a network may however necessarily involve cross-
border movement.

The twin tendencies of “outsourcing” and “off shoring” by transnational firms

associated with globalization have been important mediums through which global
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Development Initiatives and networks of production have emerged. Outsourcing refers to the transfer of
Planning
activities originally undertaken within the firm to other firms in exchange for a
payment. Off shoring on the other hand refers to the transfer of activities from an
original location to another country. Often the two can go together – for example
when a US firm transfers its self-operated call centre services catering to its US
customers to an Indian firm operating in India. However, off shoring and
outsourcing can happen independently too. The motivating factors behind both
for the firm concerned are risk and cost reduction.

The increasing openness of the world’s economies under globalization has clearly
facilitated the globalization of production. Transnational firms which have been
the key drivers of this process and occupy the apex positions in such networks
were both pushed and pulled, by the heightened competitive pressures and the
greater freedom of operation across the world respectively, to refashion their
strategies in this direction.

4.4 THE INCOMPLETENESS AND

IMPERFECTIONS IN GLOBALIZATION
Globalization, as described above, does involve increased integration within the
world economy such that one can talk of the global economy as being much more
than a sum of the individual economies constituting it. Yet one must not make the
mistake of assuming that globalization is the conversion of the world into a single
economy whereby political borders between nations become entirely irrelevant.
The world economy is a fundamentally different entity from national economies
and is not equivalent to a gigantic closed national economy even if the movement
of capital and commodities within it is completely open. As it happens, even the
degree of restrictions on cross-border flows is uneven across different kinds of
flows. The movement of people and labour across countries is for instance far
more restricted than it is within countries. Even between business firms there are
variations in their ability to operate globally. Similarly, each national economy
has its own currency, which along with other assets denominated in that currency,
serve as money or the means of payment within the sphere of the national economy.
Flows across countries however involve the exchange of one nation’s money for
another in foreign exchange markets. Further, even though there is no world money
deriving its sanction as a means of payment from a world government, international
transactions do require an international means of payment. This is particularly
because the flows between any two countries, and even between one country and
the rest of the world, do not always balance. This means that one or a few of the
world’s money, those that have a general acceptability as a means of payment,
have to serve the function of international money.
No matter what the levels of flows within a country, one unit of that country’s
currency always remains equal to every other unit. But such stability does not
characterize the ratios at which currencies exchange for each other (exchange-
rates). The levels of cross-border flows themselves influence these values, and
at the same time are influenced by them. If in the normal course, the inflows into
any country of foreign currency from exports and capital imports exceed the
outflows related to imports and capital exports, the value of the country’s currency
would tend to appreciate – because of the surplus in the supply of foreign currency
its price would fall. If the inflows are less than outflows, the opposite would
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happen and the country’s currency would tend to depreciate. However, these Globalization and
Development in India
changes in the exchange rate would firstly alter the foreign currency price of the
country’s exports and the domestic currency price of its imports – depreciation
would reduce the export prices and increase the import prices while an
appreciation would have the opposite effect. These changes then could impact on
the levels of exports and imports by influencing the demand for them. In addition,
changes in the exchange rate also alter the relative values of assets whose values
are denominated in different currencies. Actual or expected changes in a country’s
exchange rate could thus induce portfolio capital inflows or outflows. Because
of these, the very process which draws the different national economies together,
namely the freeing of cross-border flows, simultaneously emphasizes their division
through its inevitable impact on the ratios in which different national currencies
exchange for each other. Indeed, because of the existence of large ‘hot money’
flows which can flow in and out of countries very quickly, exchange-rate instability
has been a recurrent phenomenon associated with Globalization which has resulted
in serious economic crises in many a country – the East Asian crisis of 1997
being a prime example.

Underlying many of the differences between national economies and the global
economy is one very important difference – associated with a single national
economy is a single State whereas the global economy is spread across territories
under the jurisdiction of many different nation states. When increased integration
of the global economy accompanies the division of the world into different nation
states, it also produces a peculiar consequence for the relationship between the
State and the economy. Normally, the more closed an individual economy is the
greater is the relative ability of its state to control, regulate, and direct economic
activity. This is because most of the economic activity and their associated
processes, and the individuals and entities involved within them, fall within the
area of direct jurisdiction of the State. This proposition would also hold for an
integrated global economy if there was a single world state since the global
economy does not transact with anyone or anything outside it. But with an
integrated global economy and multiple states, the ability of each State to intervene
in the economy in fact gets circumscribed by virtue of the fact that each has only a
limited jurisdiction. These different nation states could, by coordinating between
themselves, try to approximate a single world government but that is never easy
given that their individual imperatives may not always coincide and they could
even have conflicting interests.

4.5 GLOBALIZATION AND THE ROLE OF THE

STATE IN THE ECONOMY
The implication of the above is that once a State chooses to open up its economy
it necessarily accepts some limitations on its ability to intervene in the economy,
a shrinking of its policy space. More precisely, the State is compelled to act in
certain ways and constrained to do so in other ways. Under contemporary
Globalization, these restrictions or imperatives manifest themselves in a number
of specific ways that are related to the mobility of capital and economic activity
within the global economy. Participation in the process of globalization necessarily
requires adherence to certain rules of the game. A country for example cannot
maintain its tax rates at levels much higher than those prevailing elsewhere in the
world because then economic activity would tend to migrate out of that country.
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Development Initiatives and Competition between countries in attracting economic activities to their economies
Planning
therefore tends to generalize low tax rates (often coupled with tax concessions)
across the world, constraining the ability of States to generate resources for
financing their expenditures. Similar imperatives also operate in other areas like
for instance labour regulations.

The problem of exchange rate instability associated with volatile portfolio capital
flows also tends to make state economic policy prisoner to maintaining the “state
of confidence”. If those who bring in this capital into any country feel insecure
about the returns on the assets held by them and suddenly withdraw their capital
from that country, the consequent sharp depreciation of the country’s currency
can have crippling effects on its economy. States therefore become disinclined to
take any policy measures that make financial investors nervous and tend towards
policy measures that inspire confidence in them. In general this works in the
direction of conservatism in policy - curbing the State’s ability to regulate and
discipline private capital and pushing it towards measures that would promote
private profit. To give some examples of how this process works – any significant
increase in the corporate income-tax rate in a country is likely to produce an
adverse reaction in its stock-market and with falling share prices foreign portfolio
investors would be likely to withdraw their capital from that country and its
stock-market. This would reinforce the tendency for decline in the stock-market
and give rise to depreciation in the country’s currency. The latter in turn would
on its own induce flight of capital. The net result would be a self-reinforcing or
cumulative process of falling value of shares and currency depreciation. In order
to avoid these eventualities, the Government would tend to avoid any such
increases in corporate income tax rates. But it might be inclined to do the opposite
- reduce corporate tax rates - when stock-markets are down for other reasons.

One of the important general implications of exposure of countries to volatile

capital flows is that it makes the maintenance of a low taxes and low public
expenditure policy framework the norm adhered to by most governments. If
governments cannot mobilize significant resources through taxes then the only
way they can sustain large expenditures is by incurring deficits in their budgets.
An excess of public expenditures over revenues, what goes by the name of the
fiscal deficit, however makes financial investors nervous. In particular it generates
expectations that prices of products in that economy will rise rapidly (inflation)
and the exchange rate would depreciate. A rise in prices in any economy at a
faster rate than in the rest of the world means that the prices of products produced
in that country would rise even relative to the prices of the same products produced
elsewhere. This could induce buyers in that country to switch to foreign currency
using imports and for foreign currency earning exports to fall. The important
thing however is not whether this would eventually happen or not. The expectation
that this will happen is sufficient to make it actually happen much before the
effects of a fiscal deficit show up. In order to avoid generation of such expectations
governments become committed to a conservative fiscal policy which would
limit the fiscal deficit.

Public expenditure however plays an important role in any economy and its
development process. A significant part of the necessary development of a country’s
physical infrastructure is dependent on public investment because such
development does not provide profitable opportunities for private investment.
Similarly, there are many important social services like health and education
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which need to be publicly provided if all segments of the population are to have Globalization and
Development in India
reasonable access to them. Such general access of the population to these services
is also important from the purely economic point of view because their health
and education status also impacts significantly on the productivity of a country’s
workforce. Fiscal policy, involving both taxation and expenditure, is an important
instrument of redistribution of incomes whose importance arises from the fact
that the spontaneous operation of the economic system may generate excessive
inequalities in society. Fiscal policy and public expenditure are also the means
through which governments can influence the aggregate level of demand in an
economy, which can often fall below levels necessary to sustain the maximum
feasible output or employment in a capitalist economy. Under globalization
however, the government’s use of fiscal policy for all such purposes tends to get
tempered or limited by the commitment to a low taxes and low fiscal deficit
policy.

4.6 UNEVENNESS IN DEVELOPMENT AND

GLOBALIZATION
The description of globalization as a process of increased global integration
facilitated by the increasing openness of economies could fit any kind of world
because it does not bring into the picture the differences between the countries
participating in that process. The fact however is that the world over which the
globalization process has unfolded is one that was and remains divided between
advances or developed countries and poorer developing countries. The former
constitute the dominant component of the world economy - they produce the major
chunk of the world’s output; they dominate world trade being both the major
exporters as well as importers; the bulk of the capital flows across countries
originate in these countries and they are also the principal destination for such
flows; a large proportion of the dominant transnational firms belong to these
countries; most technological developments take place in these countries; and
their currencies are the dominant international currencies. The majority of the
world’s population on the other hand lives in developing countries.

The inequalities between the world’s countries are however not merely economic,
but also political and military, and these too have had their impact on the nature
and course of the globalization process. Thus for instance, even though in principle
bodies like the World Trade Organization (WTO) and the rules enforced by them
are the result of multi-lateral agreements, these agreements are a result of a
political process within which developed countries command a disproportionate
influence. In other international institutions like the International Monetary Fund
(IMF) and World Bank, which have been active in promoting openness in
developing countries and in regulating the global economy, even formal equality
between countries does not exist and developed countries command the major
share of the voting rights in them. In other words, to whatever extent there is a
global structure of governance, it can scarcely be described as a democratic one
and is inherently biased against developing countries.

One important aspect of international inequality in a globalized world is that this

places countries whose moneys serve as international money and whose do not at
different levels within the structure of international transactions. A country like
India whose currency is not an international currency, when confronted with a
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Development Initiatives and large deficit in its transactions with the rest of the world, experienced a balance
Planning
of payments or foreign exchange crisis in 1991 as international borrowings became
increasingly difficult and costly. On the other hand, the USA has in recent times
been able to live with a very large external deficit because the dollar is the
number one international currency. Countries with the surpluses in their external
transactions have been willing to finance the US deficit by lending to it, including
in the form of investing their foreign exchange reserves in low-yield US government
securities. A comparison of the direction of capital flows during the East Asian
financial crisis and after the sub-prime crisis in the US would also show up a
similar asymmetry between countries. The East Asian countries in 1997 saw a
massive outflow of portfolio capital from their economies resulting in a sharp
and precipitous decline in the value of their currencies. But the global financial
crisis induced the flow of capital towards the US, the very place where the crisis
originated, and a strengthening of the dollar. The implication of such iniquities is
that the constraining of the policy space for developing country governments as a
result of exposure to volatile capital flows is of a higher order than for developed
countries.

In this session you read about the globalization and its impact on development
and now answer the questions given in the Check Your Progress-1.
Check Your Progress 1
Note: a) Answer the following questions in about 50 words.
b) Check your answer with possible answers given at the end of the unit.
1) What is meant by the increasing oppness of an economy?
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2) What are the major components of contemporary Globalization?
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3) Why does globalization restrict the scope for state intervention in the
economy?
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4) Does Globalization mean that nationality of individuals becomes irrelevant Globalization and
Development in India
to the degree of economic success they achieve?

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4.7 GLOBALIZATION AND DEVELOPMENT:

THE INTERNATIONAL EXPERIENCE
The process of Globalization has been accompanied by a major shift in the theory
underlying development policy in the Third World. In the period after the Second
World War, as many developing countries gained their independence from colonial
rule, the dominant conception shaping economic policy in the newly liberated
countries was that their development required both a high degree of autonomy as
well as a key role to be played by the state. Typically, import-substituting
industrialization strategies were pursued with varying degrees of emphasis on
domestic and export markets. However, from the debt crisis of the early 1980s,
institutions like the IMF and the World Bank have pushed Third world
governments to open up and liberalize their economies and soon the old view on
development came to be decisively replaced by what came to be known as the
Washington Consensus. This name is derived from the fact that three institutions
which have together played a key role in the making of Globalization – the IMF,
the World Bank, and the US Treasury Department - are all headquartered in
Washington.

The theory of development promoted by the Washington consensus, also called

neo-liberalism, argued globalization would promote both rapid growth as well
as convergence in the world economy. Convergence refers to the process of the
per capita incomes of different countries becoming similar to each other, which
would happen if developing country per capita incomes were to rise significantly
faster than in developed countries. The Washington Concensus was based on the
premises that:
a) the spontaneous working of the market mechanism promoted efficiency and
therefore should be interfered with to the minimum;
b) there are only benefits and no costs to all participating countries from freely
transacting with each other and therefore barriers to trade and capital flows
are undesirable;
c) taxes create disincentives for effort and risk-taking, and strong incentives
for tax-evasion, and therefore should be maintained at low levels;
d) fiscal deficits always produce adverse consequences like inflation and
exchange-rate instability and therefore should be avoided by maintaining
expenditures at levels commensurate with tax revenues;
e) developing countries would benefit tremendously from adopting the economic
policies following from the above premises. It was argued that by opening 65
Development Initiatives and themselves to capital inflows, labour surplus developing economies would
Planning
gain from the flow of capital to them from the capital rich developed
countries which also would have various spillover effects. In addition, free
trade would also promote the growth of labour-intensive exports from these
developing countries, which would in turn induce further growth through
the linkages between the exporting sectors and other sectors in the economy.
The gains from efficiency and productivity improvement, capital inflows
and trade would combine to generate higher growth of both output and
employment and also promote greater equality in the distribution of income.
The problem of development, or economic backwardness, is the problem of not
all the countries in the world but of the developing countries within them. These
countries, as mentioned earlier, were unequally positioned within the global
economy. The implicit meaning of the Washington Consensus was that these initial
conditions were entirely irrelevant and all countries could follow more or less
the same liberal economic policies. In other words there were no grounds for
specifically a development policy because the spontaneous operation of the global
economic system would be towards leveling out and eliminating the differences
between and within countries. The premises underlying the Washington Consensus
have never been universally accepted within the economics profession. Many
have challenged these on theoretical as well as empirical grounds. However, it
has ruled for a long time in the world of policy-making with results, as we shall
see, that have not been in conformity with the predictions of the Washington
Consensus.
Table 1: Rates of Growth of World Real GDP and per Capita GDP (% per annum)

Item Period 1950-73 1973-2007

Real GDP 5.1 2.9

Per Capita Real GDP 3.1 1.2

Source: WTO, World Trade Report 2008

Aggregate world output growth since the mid-1970s has actually taken place at a
significantly slower pace than was the case earlier, and the same is true of even
per capita output growth (Table 1). These are not necessarily true for every
individual country, India being one of the exceptions, but are generally the case
for both developed and developing countries. The principal reason to which this
slowing down has usually been attributed is the withdrawal of States after the
1970s from the earlier post-War practice of using fiscal policy for sustaining
adequate levels of demand in the economy.

Table 2: Per Capita GDP of Selected Country Groups and their Rates of Growth

Per Capita Annual Growth Rate 1975-

GDP in 2005 2005
Country group 2005 PPP US$ Percentage Per Annum
Developing countries 5,282 2.5
Least developed countries 1,499 0.9
Arab States 6,716 0.7
66
 Globalization and
East Asia and the Pacific 6,604 6.1 Development in India
Latin America and the 8,417 0.7
Caribbean
South Asia 3,416 2.6
Sub-Saharan Africa 1,998 -0.5
High income Countries 33,082 2.1
Source: UNDP, Human Development Report 2008

Not only has world output growth been slower, inequalities between countries
have also increased during Globalization. Many developing countries except those
in East and South Asia, including the least developed countries, have been the
worst victims of the growth slowdown. Per capita GDPs of many have virtually
stagnated and fallen way below the rates of growth in the developed countries
(Table 2). The gap between the per capita GDP of these developing countries
and those of developed ones has therefore clearly increased during the period of
Globalization. In the case of the few developing countries showing a faster rate
of growth, the base or starting levels of their per capita GDPs were significantly
lower than those of developed countries and even many other developing countries.
Consequently, even a higher rate of growth of the former cannot always prevent
the absolute gap between the two increasing. Thus, the per capita GDP in East
Asia and South Asia are still only a fifth and a tenth respectively of the levels in
high-income countries. Indeed, if we compare the differences between the per
capita GDP at constant prices of the US, advanced Western Europe, and Japan on
the one hand and individual developing countries on the other, they were almost
without exception greater in 2006 than was the case in 1973. Convergence
therefore clearly has not happened.

The promise of export-led growth has proved elusive for developing economies.
As Table 3 shows, though at first sight it might appear that the share of developing
countries in world exports has increased particularly since 1990, this is basically
a result of the rising share of East and South-East Asia rather than being
representative of the general experience of developing countries. In other words,
the distribution of developing country exports has become increasingly concentrated
in East Asia with China alone exporting more than any developing country region
other than East Asia. A similar story characterizes the exports of services, which
have been increasing their relative importance in world exports during
Globalization, the only difference being that in this case India too is amongst the
developing countries emerging as a major exporter. Developing countries have
increased their share in world services exports from 18.34 % in 1980 to 25.41 %
in 2007. This was however accompanied by East, South-East and South Asia
increasing their combined share in developing country services exports from
38.5% to 67%. Indeed, one of the apparent paradoxes of globalization is that
both in terms of growth as well as export performance, the developing countries
of Asia which have traditionally had greater state involvement in the economy
have fared better than developing countries in Latin America and Africa who
liberalized earlier and to a greater extent.

67
Development Initiatives and Table 3: Share of Developing Countries in World Merchandise Exports
Planning
(Percentage)
Country Group 1980 1990 2000 2007
All Developing Countries 29.40 24.25 31.85 37.52
Africa 5.86 3.08 2.37 2.87
Americas 5.48 4.13 5.65 5.53
West Asia 9.29 3.38 3.64 5.08
South Asia 1.29 1.35 1.44 1.90
East Asia 3.75 8.06 12.00 15.81
China 0.89 1.78 3.86 8.81
South-East Asia 3.64 4.18 6.69 6.26
Developing Countries 22.01 12.01 13.16 15.45
Excluding East and
S-E Asia
Source: UNCTAD, Handbook of Statistics, 2008

Globalization has also been accompanied by a more or less across the board
sharp rise in inequalities within countries, both developed and developing. The
richer sections in most countries have experienced an enormous increase in wealth
and income while those at the bottom have been bypassed. Consequently, even in
the few developing countries with relatively faster rates of growth of per capita
GDP, the positive impacts of that growth on the lives and standards of living of
the poorer sections of their societies has been less spectacular and at times this
impact has even been adverse. A large part of the world’s population therefore
continues to live in poverty. 40% of people in the world (2.6 billion) have incomes
below two dollars a day and they account for barely 5% of global income. On the
other hand, the richest 20% of people in the world have a share of 75% in world
income.

The opening up of developing countries to volatile capital flows has been

accompanied by several episodes of currency crises in these countries.
Paradoxically, such problems have been a price paid without any corresponding
gain because at least in the last decade or so, the perverse phenomenon observed
is that the direction of capital flows has been from developing countries towards
developed countries rather than the other way around. Of course not all developed
countries are net importers of capital and nor are all developing ones capital
exporters. But together developing countries have been exporting more capital to
the developed countries than they have been importing from them. Moreover,
much of the former flow takes the form of developing countries holding their
foreign exchange reserves in the form of liquid assets like US Government
securities with extremely low returns, while developed country capital invested
in developing countries earn significantly higher rates of return.

In this session you read about the globalization and its impact on economic growth
and development and now answer the questions given in the Check Your
Progress-2.
68
Check Your Progress 2 Globalization and
Development in India
Note: a) Answer the following questions in about 50 words.
b) Check your answer with possible answers given at the end of the unit.
1) Has Globalization been accompanied by convergence between countries?
.....................................................................................................................
.....................................................................................................................
.....................................................................................................................
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.....................................................................................................................
2) What is the unevenness in the growth and trade performance of developing
countries under Globalization?

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4.8 GLOBALIZATION AND INDIAN

DEVELOPMENT
India’s entry into the globalization process was somewhat later than that of most
developing countries. It was only with the liberalization measures initiated from
1991 onwards. Though there was some liberalization in the 1980s too it was
relatively limited and was accompanied by other policy measures that were
uncharacteristic of the globalization era. Trade and FDI liberalization in the 1980s
was fairly selective and much of the extensive system of Government controls
survived till 1991. The opening up to volatile capital flows in (Foreign Institutional
Investment) happened only in the 1990s. So did the restraint on public expenditure,
the rapid growth of which was a characteristic feature of the decade of the 1980s.

India’s development experience prior to 1991 had not been one of spectacular
successes but rather of extremely slow progress. Conditions had improved
somewhat compared to the state of affairs during the colonial era but the vast
mass of India’s populace had remained deprived of even the most basic needs.
GDP and per capita GDP growth rates after independence had been significantly
higher than in the first 50 years of the 20th century. But the incomes, food and
nutrition intake, health status, levels of education, housing conditions, etc. of the
average Indian were still exceptionally poor in 1991. The majority of Indians
still lived in rural areas and the majority of the workforce was dependent on
agriculture for its livelihood. Did participation in the globalization process bring
about significant changes in this picture, and if so, of what kind?
According to Goldman’s “Sach Economic Research Report on Global Economies”
released in 2007, India has the following advantages compared with other
economies.
69
Development Initiatives and i) India will challenge the Global Economic Order in the next 15 years.
Planning
ii) By 2050 it will be the second largest economy after China overtaking USA.
iii) India is the fourth largest GDP in the world in terms of purchasing power.
iv) India is the third fastest growing economy in the world after China and
Vietnam.
v) Received 4.5 billion as FDI.
vi) Service sector contributes around 55 percent of GDP. The share of agriculture
is around if percent and manufacture in 16 percent in 2005-06. This is a
character of a development.
vii) Expected GDP growth rate is 10 percent shortly.
viii) India has $262 billion as Foreign Exchange Reserve as on today. India had
just $1 billion as foreign exchange reserve when it opened its economy in
the year 1991.

4.8.1 Export and Import

As regards its level of integration into the global economy, the standard indicators
of this have clearly exhibited an upward trend since 1991, even if the heights
attained by them so far are not as high as in other countries. The levels of India’s
imports and exports of goods and services as a ratio of its GDP has increased
sharply implying that a much larger part of the economy is involved in cross-
border transactions.

Table 4: India’s External Trade as a Percentage of GDP

Year Merchandise Exports Merchandise Imports Services

Oil Non-oil Total Oil Non-oil Total Exports Imports

1990-91 0.16 5.55 5.72 1.90 5.68 7.58 1.43 1.12
1997-98 0.09 8.43 8.52 1.99 8.11 10.10 2.30 1.97
2002-03 0.51 9.89 10.39 3.48 8.63 12.11 4.09 3.37
2007-08 2.42 11.47 13.89 6.79 14.64 21.43 7.66 4.46

Source: RBI, Handbook of Statistics on the Indian Economy

In goods trade, import levels have tended to increase more than exports and
India’s share in world exports still remains very low. Despite the growth of
newer exports different from the items like textiles and garments, leather products,
and diamonds which traditionally dominated Indian exports, India’s merchandise
trade deficit has ballooned in periods of relatively higher growth and in 2008-09
stood at nearly 10% of India’s GDP. Not all of this has been on account of oil
imports, since the non-oil deficit alone in 2007-08 was 3.17% of GDP, larger
than the aggregate deficit to GDP ratio at the time of the 1991 foreign exchange
crisis. The trend in India’s merchandise trade essentially reflects the fact that the
manufacturing sector in the country in general has not been very competitive in
the world market. Poor infrastructure and low productivity have meant that costs
of industrial production in India tend to be high even with extremely low wages.
India has however done relatively better in services exports, primarily in IT and
IT-enabled services in which India has become the most important exporter amongst
70
developing countries. The ratio of services exports to total merchandise and Globalization and
Development in India
service exports in the Indian case (36%) is significantly higher than the world
average of around 20%.

Capital flows into India have also increased significantly after liberalization,
though even here it has been a relatively more attractive developing country
destination for portfolio flows than for FDI. It is because of these capital inflows
that India managed to accumulate large foreign exchange reserves even though in
most years its foreign currency expenditures have exceeded its earnings. While
India has escaped any major currency crisis, exchange rate instability has been a
problem. There have been periods of both sharp appreciation as well as
depreciation of the rupee. Of late, there is also an increasing trend of Indian
private capital being investing abroad mainly by companies but also by mutual
funds.

4.8.2 Growth and its Composition

As regards the growth of aggregate output, as indicated earlier, Indian growth
after 1975 was faster than in the two and a half decades before that. This transition
of India to a higher growth path actually happened around 1980, which was
however at least a decade before its own real participation in globalization began.
Between 1950 and 1980, India’s GDP growth rate averaged around 3-3.5% while
after 1980 it was around 5.5-6%. In other words, the acceleration in growth pre-
dates the extensive liberalization of the 1990s subsequent to which the trend was
simply maintained with no significant further acceleration. A spurt in growth
since 2002-03 from when GDP growth rates reached the 8-9% level has been
presumed to mark a further upward shift in India’s growth trend. However, the
recent slowing down after the global economic crisis has put a question mark on
this. From the viewpoint of development however, more important than the rates
of growth has been the nature of growth under globalization.

Macro Economic Performance in Post 1990 Years

Year Real GDP Growth Year Real GDP Growth
1991 .96 1999 6.5
1992 2.3 2000 6.1
1993 1.5 2001 4.0
1994 5.9 2002 6.2
1995 7.3 2003 5.5
1996 7.3 2004 8.0
1997 7.8
1998 6.5
Source: Kulkarni,KG “Effect of Globalization on India’s economic Growth”, [Link]
[Link]/effectsofglobalizationon [Link].

India’s growth in recent times has been dominated by the services sector, which
has been the fastest growing sector and contributed the major part of the increase
in output. This reflects the facts that in both domestic and external demand, the
proportion of services has been increasing. Industrial growth has tended to fluctuate
71
Development Initiatives and as it used to in the past too and the industrial sector’s share in output has tended
Planning
to stagnate at a level far below that indicating complete industrialization of a
country. The agricultural sector on the other hand has been the worst affected
with agricultural growth rates being on an average lower than in the pre-
liberalization era. In fact it is now officially acknowledged that India experienced
an agrarian crisis since the mid-1990s. The main factors behind this have been
the relative compression of rural development expenditures, the squeezing out of
the agricultural sector in bank credit, and the increased exposure of the agricultural
sector to volatility in global prices. These are the factors behind the spate of
farmer suicides in India which continues unabated. This growth pattern marked
by a robust growth of services at one end, a distressed agriculture on the other,
and unstable industry in between, both produces as well as reflects what has
come to be called “non-inclusive” growth.

4.8.3 Employment
The rapidly growing services sector in India has proved incapable of generating
significant employment. In fact, just about a quarter of India’s workforce is
employed in this sector which accounts for over 55% of India’s Net Domestic
Product. Agriculture, whose share in Net Domestic Product has fallen below
20% still employs 57% of the workforce but simply cannot absorb any more.
Industrial employment too has grown slowly. Within the industrial sector,
employment in the organized sector has been falling and it is in unorganized
industry that the incremental industrial workforce has been absorbed.

One implication of all of these has been that employment growth in India has
been extremely slow in the post-liberalization period, which is a matter of concern
particularly since there was already an existing backlog of unemployment.
Employment growth has been particularly poor in the more rapidly growing
segments of the economy. Thus while the organized sector has steadily increased
its share in output from about 36% in 1991 to 43% by 2007-08, employment in
that sector after initially increasing slowly fell after the late 1990s (Table 5) so
that in 2006 it was the same as in 1991 even though the total labour-force had
grown in between. In 1993-94, when the labour-force in India was 334 million,
only 27.4 million or 8.1% were employed in the organized sector. By 2004-05,
the labour-force in India had increased by another 85 million to reach a level of
nearly 420 million. Organized sector employment over the same period however
fell by nearly a million to 26.5 million which was just 6.4% of the labour-force.
A large part of the decline in organized sector employment has been on account
of the fall in public sector employment, but even private sector employment growth
has been very insignificant.

Table 5: Organized Sector Employment (in Lakhs)

Sector 1991 1998 2006
Public Sector 190.58 194.18 181.88
Private Sector 76.77 87.48 88.05
Total 267.35 281.66 269.93
Source: Economic Survey

72
The implication of this is that the large majority of Indians either cannot find Globalization and
Development in India
work or have to find low-income employment in the less dynamic segments of the
economy. In 2004-05, nearly 34.74 million or 8.28% of the labour force was
unemployed (on a Current Daily Status Basis), up from 20.27 million or 6.06%
in 1993-94. However, in the absence of any social security mechanism, people in
India cannot afford to remain unemployed for long and the sheer requirement of
survival forces them into a variety of extremely low-paying work in the
unorganized sector. But even the fortunate few entering the organized sector are
not necessarily finding high-wage work. While some segments of the white-collar
organized sector workforce have come to enjoy extremely high salaries after
liberalization, this is not the case for everybody employed in that sector. In fact
real wages of even the organized sector industrial workers have tended to stagnate
after liberalization.

4.8.4 Poverty and Inequality

As per official estimates by the Planning Commission, poverty in India has come
down after liberalization. What this means is that the proportion of the population
with income levels below a stipulated poverty line has come down. This statement
however needs to be further qualified in a number of ways.

Firstly, the pace of poverty reduction in the post-liberalization period has been
slower than before. Thus, in the fourteen year period between 1973-74 and 1987-
88, the proportion of those below the poverty line in the total population came
down by 16 percentage points from 54.9% to 38.9%. In the longer seventeen year
period since then, the reduction was to a smaller extent of 12.4 percentage points.

Table 6: Poverty Ratios and Number of Poor in India

1973-74 1977-78 1983 1987-88 1993-94 2004-05
Rural (%) 56.4 53.1 45.7 39.1 37.3 28.3
Urban (%) 49 45.2 40.8 38.2 32.4 25.7
All India 54.9 51.3 44.5 38.9 36 27.5
Number (Million) 321 329 323 307 320 302
Source: Economic Survey

Secondly, the poverty line is a fixed one that does not change with the level of the
per capita income. The only adjustment that is made over time is for the increase
in prices. The poverty line today is therefore no different than it was in 1973-74,
when real per capita income in India was a third of its current level, and the
poverty ratio is therefore only a measure of the population below some absolute
level of income. A reduction of poverty therefore can be accompanied by an
increasing gap between the top and the bottom sections of the population.

Thirdly, the poverty line in India is pegged at a very low level and some consider
destitution line to be a more appropriate description for it. In 2004-05, the all-
India poverty line for rural areas was Rs. 356.30 per capita per month and Rs.
538.60 for urban areas. The significance of this lies in the fact that there may be
very large variations in the income levels of even those above this line and one
cannot treat them all as non-poor. Indeed, the National Commission on Enterprises
in the Unorganized Sector (NCEUS) estimated that while 27% of the Indian
73
Development Initiatives and population in 2004-05 was below the official poverty line, as many as 77% of
Planning
people lived on less than Rs. 20 a day.

Fourthly, the poverty line was first arrived at using a minimum nutrition norm – it
was fixed at the minimum income-level at which the consumption of food was
found to be adequate for meeting that norm. Since then however, consumption
patterns have changed and the nutrition-intake associated with the same level of
real income (income adjusted for price changes) is lower. It has therefore been
argued by some that if a poverty line for today was to be constructed on the basis
of the same nutritional norm, it would be higher than the official poverty line and
more than 70% of the population would be below it. In fact, the average
expenditure by Indians on foodgrains in the recent past, when the economy was
growing at its fastest ever rates, was not only lower than it was at the begininning
of the 1990s and way back in the early 1960s in some years it was at a level
comparable to what it was during the two successive droughts in the mid-1960s
(Figure 1). The expenditure story is also supported by the data on per capita
availability of foodgrains which averaged 461.08 grams per day in 1961-65,
480.26 in 1987-91, and just 442.16 grams in 2003-07. These would be amongst
the lowest levels of food consumption in the world.

Figure 1: Per Capita Expenditure on Foodgrains at 1999-00 prices (Values in

Rupees)
Source: Computed from CSO, National Accounts Statistics, 2009 and Back Series

All the above point towards the undisputed fact that income inequalities in India
have grown sharply after 1991. Inequalities can however increase even when
everyone experiences rising incomes but the pace of increase of the richer sections
is greater. The nature of non-inclusive Indian growth under liberalization has
however been one where the large majority which in any case had low incomes
has experienced stagnating incomes while a small well-off minority has moved
ahead rapidly by cornering the bulk of the benefits of growth. It is this pattern of
distribution of the benefits of growth that explains the pattern of demand growth
74
in India. In a country where food intake levels and the penetration of manufactured Globalization and
Development in India
consumer goods are very low, with a general increase in incomes one should see
an absolute rise in expenditure on food and also a rise in the share of expenditure
on manufactured goods before the consumption pattern shifts towards services.
That we are witnessing instead not the first two but only a rising share of services
in Indian consumption demand has to reflect the fact that income increases are
concentrated at the upper end of the income distribution spectrum, where the
demand for food and manufactured consumption goods are relatively saturated.

4.8.5 Growth of Private Sector

Moreover, the problem is not merely one of increasing inter-personal inequality.
A significant part of the recent high growth of the Indian economy has been based
on the rapid growth of the private corporate sector. This is indicated by the rapid
rise in its share in GDP of the savings of the private corporate sector – that part
of the profits of companies which is not paid out either as taxes or as dividends
(Figure 2). It has grown many times faster than aggregate GDP – as compared to
a 71% rise in the nominal value of the latter between 2003-04 and 2007-08,
corporate savings increased by over 250%!Consequently, the share of corporate
savings in GDP has more than doubled, from just above 4% in 2003-04 to 8.4%
in 2007-08. Income-tax data on the other hand indicate that total private corporate
taxable profits in 2007-08 touched nearly 14% of GDP, and over 50% of this
was accounted for by less than 200 companies.

Figure 2: Gross Savings of the Private Corporate Sector (Joint-Stock Companies)

as a Percentage of GDP at Market Prices

Source: Central Statistical Organisation, National Accounts Statistics, 2009 and Back Series

Not only are the incomes of very few linked to corporate growth, this period also
witnessed unbalanced growth of incomes within the corporate sector. As Figure
3 starkly brings out the profits of private corporate sector companies have been
growing much more rapidly than the wages and salaries being paid by them to
their employees (the figure is based on a sample of companies which account for
70-80% of the corporate sector). From a level where profits before taxes were
less than half the value of wages and salaries 2001-02, they have climbed in the 75
Development Initiatives and short space of a few years to become nearly double. Underlying this is the
Planning
combination of the corporate sector holding employment at relatively low levels
even while expanding output and the low wages and salaries of many employees
even in the corporate sector.

Figure 3: Ratio of Profit Before Tax (PAT) and Profit After Tax (PAT) to Wages and
Salaries in Private Sector Companies

4.8.6 Growing Rural-Urban Divide

Another dimension of growing inequality in India has been the growing divide
between urban and rural India. Per capita incomes in rural India, where more
than 70% of the population still resides, have always been significantly lower
than in urban India. But a very sharp decline in this ratio happened immediately
after liberalization.

Table 7: Share of Rural India in Population and Net Domestic Product and
Rural/Urban Per Capita NDP
Share (%) of Rural India in: Rural Per Capita NDP
Year Population NDP as % of Urban
1970-71 80.22 62.35 40.88
1980-81 76.88 58.91 43.11
1993-94 73.51 54.27 42.76
1999-00 72.53 48.3 35.39
Source: CSO, National Accounts Statistics

The relative decline of the rural sector also exhibits itself in the sharp decline in
the ratio of per capita consumption expenditure in rural India relative to urban
levels (Figure 4). The average Indian living in the countryside now consumes
76
just about half of what his/her urban counterpart consumes, as compared to over Globalization and
Development in India
70% in 1977-78.

Figure 4: Average Per Capita Expenditure: Rural India as a Percentage of Urban

India.

Source: NSSO Report No. 508: Levels and Patterns of Consumer Expenditure, 2004-05

4.8.7 Public Expenditure Stagnation

At the root of many of the problems confronting Indian development has been the
inability to increase public expenditure levels, a direct consequence of the
globalization of the Indian economy. As shown in Table 8, the ratio of public
expenditure to GDP, which was in any case amongst the lowest in the world, has
stagnated at levels attained before liberalization. In fact even during the recent
period of very high growth, the period in which tax receipts to GDP ratios were
the best, rather than an expansion of expenditure what one saw was a reduction of
the fiscal deficit – to which the Government had committed itself through the
FRBM Act.

Table 8: Receipts and Expenditure of Central and State Governments as a

Percentage of GDP

Year Total Revenue Tax Receipts Expenditure

Receipts
1990-91 18.6 15.4 28.7
1997-98 17.8 14.3 25.8
2002-03 18.8 15 28.9
2007-08 22.3 18.5 27.9
Source: Economic Survey

One implication of the restraint on public expenditure has been that investment in
the development of the country’s infrastructure, including rural infrastructure, has
suffered. This in turn has had adverse consequences for agriculture and rural
development, industrial growth, the competitiveness of the Indian economy, and
employment. Social sectors like health and education have also been badly hit.
Even as public expenditure on these has stagnated, people have to spend more
out of their own pockets for health and education services (Table 9).
77
Development Initiatives and Table 9: Government and Private Expenditure on Health and Education as
Planning
a Percentage of GDP
Government Expenditure Private Final Consumption
(Central & State Governments) Expenditure

Year Health Education Total Health Education Total

1990-91 1.2 3.1 4.30 1.68 1.11 2.79
1997-98 1.1 2.8 3.90 1.95 1.11 3.06
2002-03 1.24 2.74 3.98 3.31 1.39 4.69
2007-08 1.41 2.87 4.28 3.22 1.33 4.55
Source: Economic Survey and CSO, National Accounts Statistics

4.8.8 The Indian Experience with Globalization: Growth sans

Development?
How should then one describe India’s experience with Globalization? India does
not appear to belong to that group of developing countries where the pace of
aggregate growth has been adversely affected by globalization. Yet, even with its
significantly higher growth performance it has like other developing countries
found it difficult to address its formidable development challenge as this growth
has not positively touched the lives of the majority of Indians. It is this duality
that underlies the controversy about the impact of globalization on India. Those
who emphasize that growth is a necessary and condition for eliminating
backwardness and believe growth has automatic trickle-down effects highlight
the growth performance of India under liberalization. Others point out the limited
impact of this growth on general well-being. This divide is deeper than might
first appear. That Indian growth under liberalization has not been inclusive in
nature is now officially accepted and transforming that is often highlighted as a
major policy objective. The question however is, can the growth that has happened
and its lack of inclusiveness be separated from each other? If the government has
to keep taxes very low and restrict its spending, then it may be able to do precious
little to change the economic outcomes spontaneously emerging except by enticing
private capital. But if it is to depend on profit oriented domestic and foreign
private capital to deliver growth by enticing it to invest, and keep Indian financial
markets attractive to foreign portfolio investors, then it has to keep its taxes and
expenditure low, and instead offer further concessions. This is a vicious circle
from which escape is very difficult unless the policy space is enlarged and used
to alter the pattern of growth. That however may not be possible without some
restraints on the extent of integration with the global economy.

In this session you read about the globalization and its impact on various
indicators of development and now answer the questions given in the Check Your
Progress-3.
Check Your Progress 3
Note: a) Answer the following questions in about 50 words.
b) Check your answer with possible answers given at the end of the unit.
1) What is the asymmetry between the shares of India’s organized sector in
output and employment?
78
 ..................................................................................................................... Globalization and
Development in India
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2) Is poverty in India disappearing?

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3) In what sense has Indian growth after liberalization been non-inclusive

growth?

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4.9 LET US SUM UP

The period since the mid-1970s is what is usually called the period of
Globalization or increasing integration between the world’s economies.
Developing countries also become a part of this process though they entered it
with levels of economic attainment significantly lower than those of developed
countries. Global economic performance under Globalization, measured in terms
of both aggregate output growth as well in terms of meeting the challenge of
development, has however proved to be much less impressive than the promise
accompanying its rise as the dominant official ideology in the world. The central
factor responsible for this has been the fact that both the ideology and the reality
of Globalization have hamstrung governments from taking measures necessary
for improved performance. India, which has been a late entrant into the
globalization process, is an example of the fact that even if a developing country
may be lucky to escape the fate of depressed growth it still cannot easily deliver
development to its people. As the world ponders over the future of Globalization
in the wake of the worst crisis since the Great Depression, which is itself a fall-
out of the nature of contemporary Globalization, the development dimension of
this question also needs to be focused on.

4.10 REFERENCES AND SUGGESTED READINGS

Bhagwati, Jagdish (2004), In Defence of Globalization, Oxford University Press.
Chandrasekhar, C.P. and Jayati Ghosh (2002): The Market That Failed: Neoliberal
79
Development Initiatives and Economic Reforms in India, Second Edition, Left Word Books, New Delhi
Planning
Government of India, Ministry of Finance, Economic Survey (Various Issues).
Government of India, Planning Commission (2006), Towards Faster and More
Inclusive Growth: An Approach to the 11th Five Year Plan.
Hanumantha Rao, C.H. (2009),” Inclusive Growth: Recent Experience and
Challenges Ahead”, Economic and Political Weekly, Vol 44 No. 13 March 28 -
April 03
Kannan, K.P. and G. Raveendran (2009), “Growth Sans Employment: A Quarter
century of Jobless Growth in India’s Organized Manufacturing”, Economic and
Political Weekly, Vol. 44 No. 10 March 07 - March 13
Kohli, Atul (2006), “Politics of Economic Growth in India, 1980-2005” Parts I
and II, Economic and Political Weekly, Vol 41 No. 13 April 01 - April 07, and
Vol 41 No. 14 April 08 - April 14
Nayyar, Deepak (2008), Liberalization and Development, Oxford University
Press, New Delhi.
Nayyar, Deepak (2008), Trade and Globalization, Oxford University Press, New
Delhi.
Papola, T.S. (2005): “Emerging Structure of the Indian Economy: Implications of
Growing Inter-Sectoral Imbalances, Presidential Address, 88th Conference of
the Indian Economic Association, Andhra University, Vishakhapatnam (http://
[Link])
Patnaik, Utsa (2004), “The Republic of Hunger”, in Social Scientist, Vol. 32,
No. 9/10 (Sep. - Oct.)
Sen, Sunanda (2007), Globalisation and Development, National Book Trust,
New Delhi.
Sengupta, Arjun, K.P. Kannan, and G. Raveendran (2008), “India’s Common
People: Who Are They, How Many Are They and How Do They Live?”, Economic
and Political Weekly, Vol 43 No. 11 March 15 - March 21.
Stiglitz, Joseph (2003), Globalization and Its Discontents, W.W. Norton and
Company.
UNCTAD, Trade and Development Report (Various Issues)
UNDP, Human Development Report (Various Issues).
World Bank, World Development Report (various Issues)

4.11 CHECK YOUR PROGRESS-POSSIBLE

ANSWERS
Check Your Progress 1
1) What is meant by the increasing openness of an economy?
An economy becomes more open when barriers to transactions across its
80 borders are reduced. Specifically, increasing openness signifies the freeing
 of inflows of products and capital into the economy from government controls Globalization and
Development in India
and restraints.
2) What are the major components of contemporary Globalization?
The globalization of finance, markets, and production are the three main
components of contemporary Globalization. The first refers to the integration
of the financial markets of countries and the large movements of portfolio
capital between them, the second to the integration of their product markets,
and the third to the emergence of internally integrated and coordinated
networks of production spread across countries.
3) Why does Globalization restrict the scope for State intervention in the
economy?
In general, open economies are less autonomous and therefore less amenable
to direction by their respective States. In contemporary Globalization
specifically, the possibility of the migration of economic activity and capital
to other countries restraints governments from intervening in ways disliked
by private capital.
4) Does Globalization mean that nationality of individuals becomes irrelevant
to the degree of economic success they achieve?
Since conditions obtaining in different countries are not the same, and the
movement of people across borders remains highly restricted, it cannot be
said that in the competition for economic success everyone starts with equally
favourable or unfavourable initial circumstances irrespective of nationality.
Check Your Progress 2
1) Has Globalization been accompanied by convergence between countries?
Globalization has not been accompanied by convergence between countries.
Per capita incomes of many developing countries have grown slower than
those of developed countries in the last three decades. Even in the case of
developing countries with higher rates of growth, the gap between them and
the developed countries continues to be immense.
2) What is the unevenness in the growth and trade performance of developing
countries under Globalization?
Most developing countries in Latin America and Africa, and also West Asia,
have relatively lost out in growth and trade during the era of Globalization.
Some developing countries in East and South Asia have however done better,
not only growing relatively faster than the rest of the world but also increasing
their share in world exports.
Check Your Progress 3
1) What is the asymmetry between the shares of India’s organized sector in
output and employment?
The asymmetry between the shares of India’s organized sector in output and
employment is that while its output growth is above average and its share in
output is increasing, its share in employment is falling with as a result of
stagnating levels of employment in that sector.
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Development Initiatives and 2) Is poverty in India disappearing?
Planning
Poverty in India cannot be said to be disappearing because the number of
people below the poverty line are large and not declining rapidly and also
because poverty understood in even a slightly broader sense continues to
plague the overwhelming majority of Indians.
3) In what sense has Indian growth after liberalization been non-inclusive
growth?
Indian growth after liberalization has been non-inclusive because the benefits
of that growth have been heavily concentrated in a narrow spectrum of the
population. For the rest, this growth has failed to provide adequate
opportunities for employment and rising incomes so that the economic
conditions of the majority have stagnated or worsened and not merely grown
more slowly.

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