Globalisation of an economy implies that its commodity as well as factor market is functioning under the influence of market forces generated in the world economy without any barrier imposed by its nation-state.
Under such a condition production units of globalised economy gain efficiency and become competitive in the world market. Its export increases.
Foreign exchange problems get solved through increased export and adequate availability of private foreign capital. So the country concerned achieves external equilibrium and can be hoped to move to higher growth path with stability.
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With this expectation, Indian economy is also being globalised to get rid of perennial Balance of Payments (BOP) disequilibrium which resulted into severe BOPs crisis time and again. Such crises distort our planning process creating tension over the economy and affect its smooth functioning.
If India is to become more competitive, we need first to create a competitive micro economy and a stable macro- economy with no vested interests.
The liberalisation efforts by way of reducing controls, removing license raj, partial convertibility of the rupee etc. have to be undertaken.
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Globalisation is taking place on firm level through national and international interdependence encouraged by technological developments. Globalisation of the Indian economy really meant that the industry had to face competition from outside, subject to some degree of protection.
The argument in favour of integrating the Indian economy with the world economy has been put forth very strongly in the official circles. The IMF and the World Bank have also been advocating such a policy for India.
The recent worldwide interest in globalisation has resulted from a large scale failure of the hitherto followed economic policies. The poor performances of the world economy and sluggish growth have compelled various thinkers to frame alternative models.
Consequently there is a general agreement that the future growth of the world economy is largely dependent upon globalisation of production as well as consumption.
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Globalisation is viewed as a two way action plan. First, it envisages free competition, high productivity and second, selling in one single marketplace for the whole world.
Our policy-makers believe that by exposing Indian industries to free competition and integrating Indian economy with the global mainstream, we can accelerate and boost the pace of economic development.
It is said that competition from abroad would lead to improvement in quality, productivity, efficiency and cost effectiveness which would in turn, boost up exports and our foreign exchange earnings and steer our economy out of the present crisis.
Independent India inherited an inward-oriented policy and in the early years of planning an import substitution regime with anti-export bias was considered to be quite appropriate.
India’s trade regime remained basically inward-looking until export incentives were introduced in the mid-60s. In the 70s many more export incentives were introduced but this did not help export promotion much.
The 80s witnessed attempts towards export promotion and trade liberalisation under Sixth and Seventh Plans. Despite the efforts towards liberalisation, India’s trade regime remained more or less inward-looking.
Owing to greater reliance on the working of the closed economy, Indian economy has generated a high cost inefficient industry which has prohibited the optimum utilisation of factors of production.
Despite all potentialities Indian industries are not competing with the global industries with respect to cost and quality. Protection has always given an avenue to develop a high cost industry. Under the shadow of FERA and MRTP Act, monopoly houses have developed.
It is the closeness of the Indian economy that prohibits introduction of the advanced technology of the developed nations. So the globalisation of the economy is essentially needed.
It will provide an opportunity for India to become an important production centre of the world. It will also provide an opportunity to the Indian companies to become multinational concerns.
At the same time it can attract foreign investors so as to make India a centre of the world market. India can utilise these avenues very well on account of its competitive edge over other countries due to its large skilled labour.
The strategy adopted since July 1991 for further integration of the Indian economy with the world economy includes exchange rate adjustment to improve competitiveness of exports, reduction in tariffs and a more open policy towards direct foreign investment and technology.
The new economic policy aims at making the Indian economy competitive and much better integrated with the world economy.
We are now clearly in a new and different world. India cannot expect large inflow of external funds while there is an irrational exchange rate policy.
India has no other alternative but to integrate its economy into the global mainstream to further boost its economic growth.
As most of the countries in the world are steadily reorienting their economies to the market-friendly forces, it will be suicidal on the part of India to remain in isolation. Competition from abroad would lead to improvement in quality, productivity, efficiency and cost-effectiveness.
For integrating the Indian economy with the world economy not only faster export growth but also free access to imports is necessary and accordingly import duties have been brought down substantially.
High tariffs have created a high cost industrial structure and Indian competitiveness had been affected by this. When many other countries had substantially reduced the tariffs, India’s tariff structure also needed to be lowered.
Since globalisation requires the creation of suitable environment for free flow of direct foreign investment, the new industrial policy of 1991 permits approval for foreign direct investment up to 51 per cent foreign equity in the case of high priority industries and this obviously opens the door for multinationals in a big way.
The foreign investment will bring in new technology and marketing expertise from which the country will benefit. The market-friendly approach of the new economic policy is expected to create suitable environment for the entry of foreign capital on a large scale.
An open policy towards technology transfer is also an important requirement for globalisation of the Indian economy. One obstacle too much needed inflow of technology has been the cumbersome approval process involving delays and uncertainty.
To overcome this problem, in the new industrial policy automatic approval will be given by the government for technology agreements related to high priority industries and similar facility will be provided to non-priority industries also if expenditure in foreign exchange is not involved.
The new economic policy which advocates a market- friendly approach and removal of bureaucratic controls is expected to attract foreign capital and technology and also facilitate easy movement of goods through substantial reduction in tariffs and thus pave the way for further integrating the Indian economy with the global economy.
External environment is going to be more dynamic and complex. There will be less social protection for inefficiency. There will be noticeable fights in the market place for innovation and competitiveness. Unless we increase our productivity and efficiency, we will not be able to go beyond “the Hindu rate of growth.”
India’s globalisation efforts are hindered by lack of favourable international environment. At a time when advanced countries, particularly the US, are adopting a protectionist policy with Super 301 threat, it is very difficult to accomplish the objective of globalisation of the Indian economy.
Secondly, openness of the economy to the world competition is an invitation to the multinationals. The role of the multinationals is not salubrious for the poor countries.
Thirdly, globalisation would imply certain consequences which may not be always beneficial to the developing countries. One major implication of globalisation is the internationalisation of prices. Globalisation would also imply the equalisation of domestic prices with international prices.
This would mean that the firms in the developing economies should enhance their competitive strength. If some of the commodities have relatively lower prices due to subsidisation, the policy prescription would be that subsidies should be withdrawn so that the prices would attain parity with prices prevailing in the international markets.
In recent times the fertiliser prices in India had been raised and the subsidies were withdrawn. The aftermath of the withdrawal of subsidies would be a hefty increase in the prices of agricultural commodities.
This would mean that Indian prices must rise to US levels. So as a result of globalisation, inflationary tendencies would persist as prices are expected to rise by 15 to 20 per cent.