Effects of Liberalization on Indian Economy and Society
Table of Content
- Growth rate
- Education Sector & Health Sector
We have seen landmark shift in Indian Economy since the adoption of new economic policy in 1991. This had far reaching impacts on all spheres of life in India. There can be no concrete conclusions about their impact on Indian people. This turns out to be more of an ideological debate like capitalism vs Socialism. But there is no doubt in the fact that those reforms were unavoidable and very compelling. There was in fact, similar wave all across the globe after disintegration of USSR and end of the Cold War. Many Post-colonial democratic regimes, which were earlier sheltered by USSR, lost their umbrella. They had no option, but to fall in line to new unipolar world order dictated by USA. Even China in late 1980’s adopted ‘Open Door Policy’ through which it liberalized its economy by shedding communist mentality completely. South East Asian economies also reformed their economy and started engaging more with global economy. These along with China, pursued export led growth whereas Indian economy still relies almost wholly on domestic consumption.
Note changing Sectoral composition of India economy since independence
Composition – Services – Steady significant Increase (was more marked after reforms), Industry – Less marked increase (stagnated after reforms) , Agriculture Significant Decline
Patterns in the above graph explain inequity of Indian growth story. As per principle of economics, when a particular sector performs disproportionately higher than average growth rate, economic wealth starts concentrating into that sector. In this case that sector is Service sector. Within this sector, highest growth is marked by sectors such as financial services, Real estate services etc. , which are least employment elastic. Consequently, Growth of past decade was limited to upscale areas of the countries as almost whole service industry, operates from these areas. Majority of India got spillover or trickle down growth from here. This accelerated migration to urban areas. This in turned created array of social problems associated with urbanization. It fundamentally changed pattern of Indian Society.
Now we have ultra-modern and ultra-primitive society coexisting and conflicting with each other. On one side Social institutions like Personal Law boards, Khaps & kangaroo courts etc. tries to uphold their control over their respective community members, on other hand there is western wave pulling out these very members.
Undoubtedly strongest revolution of new century has been one of Information Technology, which started in last years of past century. This revolution was different because it made globalization even more obvious and stark. It made possible transfer of real time human labor across nations, without transfer humans themselves. Further, it erased all boundaries which hinder free flow of information. This has benefited sharing, nurturing and development of knowledge in societies which earlier had access only to substandard or non-updated information. As always package is coupled with some grim realities too.
Governments all across the world has lost their capacity to regulate and ward of against malicious, false, sensitive information and content. Rise of Islamic State demonstrates that, IT revolution has helped development of global Terrorist links more than anything. Moreover, explicit content is freely available on web, to which unmatured children have unrestricted access
GDP growth rate – India’s annual average growth rate from 1990 – 2010 has been 6.6 % which is
almost double than pre reforms era. GDP growth rate surpassed 5% mark in early 1980’s. This made impact of 1990’s reforms on growth unclear. Some believe that 1980’s reforms were precursor to LPG reforms. Other things apart, it is clear that 1980 reforms led to crash of economy in 1991, which was remedied by LPG reforms which were quite more comprehensive. It was IMF loan which gave government to adjust its economy. It was largest ever loan given by IMF. Initially there were global doubts on India’s credibility for loan, but India has been so far a disciplined borrower.
Industrial Growth Rate – Barring few years industrial growth rate has been not much impressive. Share of Industry still remains stagnantly low at 25%. Worst is that India has transitioned to be a service led economy, directly from an agrarian one. One expiation of this is end of policy of imports substitution which derived industrial growth upto 1990. Foreign companies got free access to Indian markets and made domestic products uncompetitive. They obviously had better access to technology and larger economies of scale.
India’s position also lagged on account of Research and innovation. Import substitution required certain degree of investment and efforts in domestic production. It was carried out even when imports were cheaper. This resulted in good and better capacity building upto that time. This was coupled with constant technology denial by west, which further pushed government to spend on R&D. Technology Denial ended with liberalization and globalization. Till that time Indian Industry was better and modern than that of China. But in two decades China has surpassed India by huge margin in case of both Industry and innovation.
Impact on Small Scale in India
This impact shall be studied right from the beginning of colonization in 18th century. Colonization can be considered as 1st wave of globalization. In pre colonization era, India’s textiles and handicraft was renowned worldwide and was backbone of Indian economy. With coming of industrial revolution along with foreign rule in India, Indian economy suffered a major setback and much of its indigenous small scale cottage Industry was destroyed.
After independence, government attempted to revive small scale sector by reserving items exclusively for it to manufacture. With liberalization list of reserved items was substantially curtailed and many new sectors were thrown open to big players.
Small scale industry however exists and still remains backbone of Indian Economy. It contributes to major portion of exports and private sector employment. Results are mixed, many erstwhile Small scale industries got bigger and better. But overall value addition, product innovation and technology adoption remains dismal and they exist only on back of government support. Their products are contested by cheaper imports from China. Policies of government toward SSI were covered in previous article access here and here
Impact on Agriculture
As already said, share of agriculture in domestic economy has declined to about 15%. However, people dependent upon agriculture are still around 55%. Cropping patterns has undergone a huge change, but impact of liberalization can’t be properly assessed. We saw under series relating to agriculture that there are still all pervasive government controls and interventions starting from production to distribution (here SPS and here – WTO).
Global agricultural economy is highly distorted. This is mainly because imbalance in economic and political power in hands of farmers of developed and developing countries. In developed countries, commercial and capitalistic agriculture is in place which is owned by influential Agri corporations. They easily influence policies of WTO and extract a better deal for themselves at cost of farmers of developing world.
Farming in developing world is subsistence and supports large number of poor people. With globalization there has been high fluctuation in commodity prices which put them in massive risk. This is particularly true for cash crops like Cotton and Sugarcane. Recent crises in both crops indicate towards this conclusively.
Also there is global Food vs. Fuel confusion going on. Sugar and corn are used to manufacture ethanol which is used as fuel. In USA Corn is produced mainly for this purpose, as sugar cane is in Brazil. Now there are apprehensions that what if converting food into fuel is more remunerative for producers? More than 1 billion people still live in hunger, much more are just hand to mouth. It is futile to expect that free market will take care of these people, who don’t have any purchasing power. Clearly, Agriculture is biggest market failure, but is rarely discussed for being so in WTO.
Another global debate born out of globalization is one of GM crops. Here too powerful MNCs like Monsanto hold the key. USA allows unhindered use of GM crops, but EU bans it. In India field trails are going on. (It was discusses here)
On the positive note, India’s largely self-sufficient and high value distinguished products like Basmati Rice are in high demand all over. Generally speaking, India is better placed to take up challenge of globalization in this case. If done in sustainable and inclusive manner, it will have a huge multiplier impact on whole economy. Worldwide implicit compulsion to develop Food processing Industry is another landmark effect of globalization.
Apart from these, Farm Mechanization i.e. use of electronic/solar pumps, Tractors, combines etc. all are fruits of globalization. Now moving a step further, Information technology is being incorporated into agriculture to facilitate farming.
Impact on Services Sector
In this case globalization has been boon for developing countries and bane for developed ones. Due to historic economic disparity between two groups, human resources have been much cheaper in developing economies. This was further facilitated by IT revolution and this all culminated in exodus of numerous jobs from developed countries to developing countries. Here US have to jealously guard its jobs as we guard our agriculture.
Software, BPO, KPO, LPO industry boom in India has helped India to absorb a big chunk of demographic dividend, which otherwise could have wasted. Best part is that export of services result in export of high value. There is almost no material exported which consume some natural resource. Only thing exported is labor of Professionals, which doesn’t deplete, instead grows with time. Now India is better placed to become a truly Knowledge Economy.
Exports of these services constitute big part of India’s foreign Exchange earnings. In fact, the only three years India had Current Account surplus, I.e. 2000-2002, was on back of this export only.
Further, in banking too India has been a gainer. Since reforms, there have been three rounds of License Grants for private banks. Private Banks such as ICICI, HDFC, Yes Bank and also foreign banks, raised standards of Indian Banking Industry. Now there is cut through competition in the banking industry, and public sector banks are more responsive to customers.
Here too IT is on path of bringing banking revolution. New government schemes like Pradhan Mantri Jan dhan Yojana aims to achieve their targets by using Adhaar Card. Having said this, Public Sector Banks still remain major lender in the country.
Similarly Insurance Industry now offers variety of products such as Unit Linked Insurance plans, Travel Insurance etc. But, in India life Insurance business is still decisively in hands of Life Insurance Corporation of India.
Another major development is one of Stock Markets. Stock Markets are platforms on which Corporate Securities can be traded real time. It provides mechanisms for constant price discovery, options for investors to exit from or enter into investment any time. These are back bone of free markets these days and there is robust trade going all over the world on stock exchanges. Their Importance can be estimated from the fact that, behavior of stock markets of a country is strongest indicator of health and future prospects of an economy.
These markets has thrown open wide array of associated services such as Investment Banking, Asset Management, Underwriting services, Hedging advice etc. These collectively employ lakhs of people all over India.
Similarly there are commodities market which provides avenues for investment and sale of various eligible commodities.
Conventionally, Telecom sector was a government owned monopoly and consequently service was quite substandard. After reforms, private telecom sector reached pinnacle of success. And Indian telecom companies went global. However, corruption and rent seeking marred growth and outlook of this sector.
Entry of modern Direct to Home services saw improvements in quality of Television services on one hand and loss of livelihood for numerous local cable operators.
Education and Health Sector
It should be noted that food (Agriculture), Health and education (and to lesser extent banking) are among basic necessities, which every human being deserves and can’t do without. Unfortunately, in developing countries there is market failure in all these sectors and majority of people can’t afford beyond a certain limit (or can’t afford at all). Concept of free markets, globalization, liberalization etc. fails here miserably. Free markets provide goods and services to people who can afford paying for them, not to those who deserve and need these.
Now if we consider these sectors from angle of our inclination towards free markets, certainly there has been lot of progress. There has been world class education available in India and Deregulation has resulted in Mushrooming of private engineering and Medical Colleges. But in reality, this had far reaching devastating effect on society.
These new colleges accommodate only a miniscule proportion of aspirants at very high costs. Recently, an Independent organization ‘Transparency International’ came out with report claiming that India’s medical system is most corrupt in the world. This was no surprise, we all know from where it starts. High fees of education forces many aspirants to take educational loans from banks. After qualifying job market is unable to absorb majority of them. Practice turns out to be option of last resort. Now to make a decent living and to pay back the loans person is lured by corruption. Consequently, when many similar cases are put together, we get a corrupt system, economy and society.
Reality is that after deregulation and liberalization, government along with other sectors, pulled its hand from social sectors too. Now there is Mediocre to high quality options are available in private sector which can be availed as per one’s budget. In public Sector Less than Mediocre to Mediocre options are available. This leaves huge proportion of aspiring students and expecting patients.
On Social front India’s performance is deplored all over the world and it is probably behind all important developing economies. This lacuna has been recognized and government has taken the charge. In case of education almost universal enrollments has been achieved upto primary level and now impetus should be on improving quality, so that student of public schools comes at par with atleast average private ones.
This essay provides information about the Globalization, Liberalisation and Privatisation in India!
The term globalization can be used in different contexts. The general usages of the term Globalization can be as follows:
i. Interactions and interdependence among countries.
ii. Integration of world economy.
Image Courtesy : upload.wikimedia.org/wikipedia/en/thumb/f/f8/PUNE.jpg
By synthesising all the above views Globalization can be broadly defined as follows:
It refers to a process whereby there are social, cultural, technological exchanges across the border.
The term Globalization was first coined in 1980s. But even before this there were interactions among nations. But in the modern days Globalization has touched all spheres of life such as economy, education. Technology, cultural phenomenon, social aspects etc. The term “global village” is also frequently used to highlight the significance of globalization. This term signifies that revolution in electronic communication would unite the world.
Undoubtedly, it can be accepted that globalization is not only the present trend but also future world order.
Effect of Globalization on India:
Globalization has its impact on India which is a developing country. The impact of globalization can be analysed as follows:
1. Access to Technology:
Globalization has drastically, improved the access to technology. Internet facility has enabled India to gain access to knowledge and services from around the world. Use of Mobile telephone has revolution used communication with other countries.
2. Growth of international trade:
Tariff barriers have been removed which has resulted in the growth of trade among nations. Global trade has been facilitated by GATT, WTO etc.
3. Increase in production:
Globalization has resulted in increase in the production of a variety of goods. MNCs have established manufacturing plants all over the world.
4. Employment opportunities:
Establishment of MNCs have resulted in the increase of employment opportunities.
5. Free flow of foreign capital:
Globalization has encouraged free flow of capital which has improved the economy of developing countries to some extent. It has increased the capital formation.
Negative effect of globalization:
Globalization is not free from negative effects. They can be summed up as follows:
1. Inequalities within countries:
Globalisation has increased inequalities among the countries. Some of the policies of Globalization (liberalisation, WTO policies etc.) are more beneficial to developed countries. The countries which have adopted the free trade agenda have become highly successful. E.g.: China is a classic example of success of globalization. But a country like India is not able to overcome the problem.
2. Financial Instability:
As a consequence of globalization there is free flow of foreign capital poured into developing countries. But the economy is subject to constant fluctuations. On account of variations in the flow of foreign capital.
3. Impact on workers:
Globalization has opened up employment opportunities. But there is no job security for employees. The nature of work has created new pressures on workers. Workers are not permitted to organise trade unions.
4. Impact on farmers:
Indian farmers are facing a lot of threat from global markets. They are facing a serious competition from powerful agricultural industries quite often cheaply produced agro products in developed countries are being dumped into India.
5. Impact on Environment:
Globalization has led to 50% rise in the volume of world trade. Mass movement of goods across the world has resulted in gas emission. Some of the projects financed by World Bank are potentially devastating to ecological balance. E.g.: Extensive import or export of meat.
6. Domination by MNCs:
MNCs are the driving force behind globalization. They are in a position to dictate powers. Multinational companies are emerging as growing corporate power. They are exploiting the cheap labour and natural resources of the host countries.
7. Threat to national sovereignty:
Globalizations results in shift of economic power from independent countries to international organisations, like WTO United Nations etc. The sovereignty of the elected governments are naturally undermined, as the policies are formulated in favour of globalization. Thus globalization has its own positive and negative consequences. According to Peter F Drucker Globalization for better or worse has changed the way the world does business. It is unstoppable. Thus Globalization is inevitable, but India should acquire global competitiveness in all fields.
It is an immediate effect of globalization. Liberalisation is commonly known as free trade. It implies removal of restrictions and barriers to free trade. India has taken many efforts for liberalisation which are as follows:
New economic policy 1991.
Objectives of the new economic policy.
i. To achieve higher economic growth rate.
ii. To reduce inflation
iii. To rebuild foreign exchange reserves.
Foreign exchange Regulation Act 1973 was repealed and Foreign exchange Management Act was passed. The enactment has incorporated clauses which have facilitated easy entry of MNCs.
i. Joint ventures with foreign companies. E.g.: TVS Suzuki.
ii. Reduction of import tariffs.
iii. Removal of export subsidies.
iv. Full convertibility of Rupee on current account.
v. Encouraging foreign direct investments.
The effect of liberalisation is that the companies of developing countries are facing a tough competition from powerful corporations of developed countries.
The local communities are exploited by multinational companies on account of removal of regulations governing the activities of MNCs.
In the event of globalization privatisation has become an order of the day. Privatisation can be defined as the transfer of ownership and control of public sector units to private individuals or companies. It has become inevitable as a result of structural adjustment programmes imposed by IMF.
Objectives of Privatisation:
To strengthen the private sectors.
Government to concentrate on areas like education and infrastructure.
In the event of globalization the government felt that increasing inefficiency on the part of public sectors would not help in achieving global standards. Hence a decision was taken to privatise the Public Sectors.
Causes of Inefficiency of Public Sectors:
i. Bureaucratic administration
ii. Out dated Technology
iv. Lack of accountability.
v. Domination of trade unions
vi. Political interference.
vii. Lack of proper marketing activities.
Privatisation has its own advantages and disadvantages Viz:
ii. Absence of political interference
iii. Quality service.
iv. Systematic marketing
v. Use of modern Technology
vii. Creation of competitive environment.
ix. Research and development
x. Optimum utilisation of resources
xi. Infra structure.
However, privatisation suffers from the following defects.
i. Exploitation of labour.
ii. Abuse of powers by executives.
iii. Unequal distribution of wealth and income.
iv. Lack of job security for employees.
Privatisation has become inevitable in the present scenario. But some control should be exercised by the government over private sectors.
Changes across Euro, Third World, USA and Their Impact on India:
Changes across Euro and USA:
Significant changes have taken place across Euro and USA on account of globalization, particularly in the field of international business politics etc. Such changes have given rise to change in cultural and social aspects as well.
The economy of European countries and US are getting integrated with the global economy. Different arrangements have been made in this regard which are as follows:
1. Free Trade Area:
It is an agreement among a group of countries to abolish all trade restrictions and barriers, in carrying out international trade.
2. Customs Union:
The member countries abolish all the restrictions and barriers and adopt a uniform commercial policy.
3. European Economic Community:
It was initially formed by six countries viz: France, Federal Republic of Germany, Italy, Belgium, Netherlands and Luxembourg. It came into existence on 1.1.1958. How EEC has 15 members. In order to become a member of EEC, a country must be European country and it must be democratic.
Activities of EEC:
i. Elimination of custom duties and quantity restrictions on export and import of goods.
ii. Devising a common agricultural policy.
iii. Devising a common transport policy.
iv. To control disequilibrium in balance of payments.
v. Development of a common commercial policy.
4. North American Free Trade Agreement:
i. It came into being in 1994 Developed countries like US, Canada and a developing country Mexico became the members.
Objectives and Activities of NAFTA:
i. Removing barriers among the member countries to facilitate free trade.
ii. To enhance Industrial development.
iii. To enhance competition.
iv. To improve Political relationship among member countries.
v. To develop industries in Mexico. the international market.
European Free Trade Association:
It was formed in 1959. The member countries are: Austria, Norway, Denmark, Sweden and Switzerland and Great Britain.
Objectives of EFTA
i. To eliminate trade barriers.
ii. To remove tariffs.
iii. To encourage free trade.
iv. To enhance economic development of member countries.
Changes in the Third World:
The concept of Third World does not have much significance in the present scenario. This term was popular prior to the disintegration of Soviet Union. USA and USSR were considered as super powers and the countries in the world were divided in supporting them. The countries which did not have an alliance with both the countries were considered as Third World countries. But with the disintegration of USSR the concept of Third World has almost disappeared. However changes in Asian countries and other countries (other than Europe and USA) have affected India. Such changes can be discussed as follows:
Trade blocks in Asia:
South Asian Association for Regional Cooperation (SAARC)
It came into being in 1983 countries like India, Bangladesh, Bhutan, Pakistan, Maldives and Sri Lanka adopted a declaration on SAARC.
Objectives of SAARC:
i. To promote economic social and cultural development among member countries.
ii. To improve the life of people among member countries.
iii. To enhance cooperation with other developing economies.
iv. To liberalise trade among member countries.
v. To promote economic cooperation among member countries.
Changes in Asian Countries:
China has introduced many economic reforms. It started privatisation in 1984. China has formed special economic Zones. It has attracted heavy foreign investments. It has also formed economic and Technical Development Zones in towns and cities. These zones are free zones which allow quick business operations.
There is a rapid growth in Japan during the past Fifty years. Japanese maintained a close link with ministry of international trade and investment. The Strategies of Japanese-corporate sector was directed by ministry of international trade.
Impact on India:
Changes across Euro, USA and Third World has its own impact on India which can be summarised as follows:
i. India’s economic dependence on other countries has significantly increased.
ii. Extensive opportunities in the field of information technology.
iii. Extensive opportunities for India’s Telecom sector.
iv. Strategic alliances. Joint ventures, mergers have become the order of the day.
v. Extensive research and development.
vi. Bilateral treaties to promote free trade.
vii. Membership of WTO.
viii. Amending the domestic laws to suit the liberalised economy. E.g.: FEMA. Amendment of Patent Act
ix. Active participation in global politics.
x. Improvement in Productivity.
On the whole it can be concluded that changes across Euro, USA and other countries have significantly changed the Indian economy. India has realised that its business can’t survive without focusing on changes in other countries. Indian economy has become a major economy of the world and a significant trading partner. In the new era, India is looking at the potentials of the new products.
Globalization has led to the practice of management across culture. Modern business organisations have adopted Global management practices. Efforts are being made by India to understand Japanese, Chinese style of management. Issues in Motivation, communication across culture has gained significance. Every functional area of management is being studied with a global perspective. E.g.: International HRM, International Financial management, International marketing etc.