Globalisation and the Indian Economy

1. Where this chapter sits

Walk into any shop today and you will see goods made all over the world — Chinese toys, Korean phones, Japanese cameras, Swiss watches. A generation ago this was unthinkable. The Indian market has been transformed in the last few decades, and the force behind this transformation is globalisation.

This chapter answers a chain of linked questions:

• How is production spread across countries, and who organises it? (MNCs.)
• How does foreign trade connect distant markets?
• What exactly is globalisation, and what caused it? (Technology + liberalisation.)
• What role does the WTO play?
• What has the impact been on India — and how can globalisation be made fair?

2. Production across countries

Until the middle of the twentieth century, production was largely organised within countries. What crossed borders were finished goods (and raw materials and food). Trade was the main link between countries — distant lands were difficult to reach, so producers and buyers in different countries stayed apart.

This has changed dramatically. Today production is increasingly organised in complex ways. The production process is divided into small parts and spread out across the globe — each step done wherever it is cheapest or best. The companies that organise this kind of cross-border production are the multinational corporations.

3. What is a Multinational Corporation (MNC)?

A Multinational Corporation (MNC) is a company that owns or controls production in more than one country. MNCs set up offices and factories in regions where they can get cheap labour and other resources, so that the cost of production is low and they earn greater profits.

An MNC often sets up production jointly with a local company. The benefits to the MNC are twofold — (1) it can use the local company's plants and equipment for production, and (2) the MNC can bring in the latest technology and improve production. MNCs control production wherever it is most advantageous.

Most MNCs have their head offices in the developed countries (USA, Europe, Japan), but they spread production worldwide.

4. How MNCs interlink production across countries

This is a favourite exam question. MNCs set up or control production in other countries in several ways:

The result is that production in distant locations is interlinked. By spreading production across countries, MNCs create a network in which goods and services move continuously across borders — money, technology and trade flow alongside them.

5. Foreign trade and the integration of markets

Foreign trade is the oldest and most basic way of connecting countries. Its essence: it gives producers and buyers an opportunity to reach beyond the markets of their own country.

• For producers: goods can be sold not just at home but in markets located in other countries.
• For buyers: there is a choice of goods beyond what is produced domestically.

6. What is globalisation?

MNCs have been a major force in connecting countries — more than just trading, they are spreading their production across countries. Putting all of this together:

The movement involves several flows across borders:

• movement of goods and services (foreign trade);
• movement of capital / investments (money flowing across borders);
• movement of technology;
• movement of people between countries — usually for better income, education or jobs. (This is far more limited than the other flows, because countries put up restrictions on the movement of people.)

7. Factors enabling globalisation — (a) Technology

Rapid improvement in technology has been the most important factor stimulating globalisation.

• Transport technology: faster and cheaper transport has made delivery of goods across long distances possible at lower costs. The use of containers for transport, and developments in air transport, are key.
• Information and Communication Technology (IT): telecommunication facilities (telephone, mobile phones, fax) are used to contact one another around the world, to access information instantly and to communicate from remote areas. This has been made possible by satellite communication. Computers have entered almost every field; the internet allows us to send instant electronic mail (e-mail) and talk across the world at negligible cost.

8. Factors enabling globalisation — (b) Liberalisation

Governments can place barriers to foreign trade and investment. These are called trade barriers — the most common being the tax on imports. A barrier is used to increase or decrease (regulate) foreign trade and to decide what kinds of goods and how much should come in.

India after Independence (until 1991): the government put barriers on foreign trade and foreign investment to protect domestic producers from foreign competition, especially because industries were just coming up in the 1950s and 1960s and competition from imports at that stage would have damaged them. So India allowed imports of only essential items.

The change in 1991: the government decided that the time had come for Indian producers to compete with producers around the globe. Competition, it was felt, would improve quality. So barriers on foreign trade and foreign investment were removed to a large extent.

9. World Trade Organisation (WTO)

The World Trade Organisation (WTO) is an international organisation whose stated aim is to liberalise international trade. It was started at the initiative of the developed countries. The WTO establishes rules regarding international trade and sees that these rules are obeyed. About 160 countries of the world are currently members of the WTO.

10. Impact of globalisation in India

Globalisation has had a mixed impact in India. The benefits and harms have not been the same for everyone.

Positive effects (who has gained):

• Consumers, especially the well-off in urban areas: greater choice and better quality of goods at lower prices — cars, electronics, mobile phones, etc. People enjoy a higher standard of living.
• MNCs and big Indian companies: have benefited from greater investment and bigger markets. Some Indian companies have themselves emerged as multinationals (e.g. Tata Motors, Infosys, Asian Paints).
• New jobs have been created in industries and services, particularly IT, where companies provide services to firms abroad.
• Top service providers (IT, banking, finance) and skilled, educated workers have benefited greatly.

Negative effects (who has been hurt):

• Small producers and manufacturers (batteries, plastics, toys, tyres, dairy products, vegetable oil) have been hit hard by competition — many small units have shut down, causing job losses.
• Workers: the rising competition forces employers to keep labour conditions flexible — workers are employed on a temporary basis, denied job security, work long hours and get low wages.

11. The struggle for a fair globalisation

Because globalisation's gains are unevenly shared, the demand is for a fair globalisation — one that creates opportunities for all and ensures the benefits are shared more equally.

An important point: people themselves are playing a role. Massive campaigns and the organising of people have started to influence decisions relating to trade and investment, demanding fair rules at the WTO. People's organisations show that they too can play a part in fighting for fairness.

12. Key terms — quick glossary

• Globalisation: the integration / interconnection of countries through greater foreign trade and foreign investment.
• MNC (Multinational Corporation): a company that owns or controls production in more than one country.
• Foreign trade: trade between countries; the import and export of goods and services across national borders.
• Foreign investment: investment made by MNCs and others to buy assets such as land, building, machines and equipment in another country.
• Trade barrier: a restriction (such as a tax on imports) used by a government to regulate foreign trade.
• Liberalisation: removing the barriers / restrictions set by the government on trade and investment.
• WTO: an international body that aims to liberalise international trade and frames rules for it.
• SEZ (Special Economic Zone): industrial zones with world-class facilities (electricity, water, roads, transport) where companies setting up units get tax holidays and relaxed labour laws, to attract investment.
• Tax on imports (import duty): the most common trade barrier; makes foreign goods costlier so domestic producers are protected.

13. NCERT Exercise — Q1 to Q3 (answered)

Q1. What do you understand by globalisation? Explain in your own words.

Globalisation is the process of rapid integration or interconnection between countries through greater foreign trade and foreign investment. More and more goods and services, capital, technology and (to a limited extent) people are moving between countries. MNCs play a major role in this by spreading their production across countries. As a result, the different regions of the world have come into much closer contact with one another than in the past.

Q2. What was the reason for putting barriers to foreign trade and foreign investment by the Indian government? Why did it wish to remove these barriers?

After Independence, India put up barriers to protect domestic producers from foreign competition. Industries were just coming up in the 1950s and 1960s, and competition from imports at that stage would have harmed them; so only essential items were allowed to be imported. By 1991, the government felt Indian producers were ready to compete with producers around the world, that such competition would improve quality, and that the economy needed to integrate with the world. Hence it decided to remove the barriers to a large extent (liberalisation).

Q3. How could flexibility in labour laws help companies?

Flexibility in labour laws lets companies hire and fire workers as needed. They can employ workers on a temporary basis during peak seasons and reduce the workforce when demand falls, rather than keeping permanent staff. They are freed from giving job security and long-term benefits, which lowers labour costs and helps the company stay competitive and earn more profit. (The cost, however, is paid by workers, who lose job security.)

14. NCERT Exercise — Q4 to Q6 (answered)

Q4. What are the various ways in which MNCs set up, or control, production in other countries?

MNCs spread or control production in four main ways: (i) by buying up local companies and then expanding production (e.g. Cargill buying Parakh Foods); (ii) by setting up production jointly with local companies in joint ventures, bringing in money and technology; (iii) by placing orders with many small producers in countries like India (in garments, footwear, sports goods), buying the goods and selling them under the MNC's own brand, while controlling price and quality; and (iv) by setting up their own factories / production units in other countries. In all cases distant production is interlinked.

Q5. Why do developed countries want developing countries to liberalise their trade and investment? What do you think should the developing countries demand in return?

Developed countries want developing countries to liberalise because it lets their MNCs set up factories in developing countries to use cheap labour and resources, and lets them sell their goods in large new markets without trade barriers — increasing their profits. In return, developing countries should demand that developed countries also remove their own trade barriers and subsidies (e.g. farm subsidies), so trade is genuinely fair to all; that WTO rules be made fairer; and that developing nations be allowed reasonable protection for their vulnerable producers.

Q6. "The impact of globalisation has not been uniform." Explain this statement.

Globalisation has helped some people and harmed others. It has benefited well-off consumers (more choice, better quality, lower prices), skilled and educated workers, MNCs and big companies, and has created jobs in IT and services. But it has hurt small producers and manufacturers (toys, dairy, plastics, vegetable oil), many of whom shut down, and has made the lives of ordinary workers insecure through flexible, low-paid, temporary jobs. So the gains and losses are unevenly distributed — the impact has not been uniform.

15. NCERT Exercise — Q7 to Q10 (answered)

Q7. How has liberalisation of trade and investment policies helped the globalisation process?

Liberalisation removed government barriers on trade and investment, so businesses can import and export freely and MNCs can invest and set up production easily across borders. This let foreign goods and capital flow in and out of countries, increased the spread of MNCs and interlinked production, and thereby speeded up the integration of countries — that is, it boosted the globalisation process.

Q8. How does foreign trade lead to integration of markets across countries? Explain with an example.

Foreign trade allows producers to reach beyond their own country's market and buyers to choose goods from other countries. Goods travel between markets, so producers in different countries compete and the prices of similar goods tend to become equal across countries — the markets become connected, i.e. integrated. Example: when Chinese toy makers export cheap toys to India, Indian buyers get a wider choice, Chinese toys sell well, Indian producers face competition, and the price of toys in India and China moves towards becoming equal — the two markets are integrated.

Q9. Globalisation will continue in the future. Can you imagine what the world would be like twenty years from now? Give reasons for your answer.

Twenty years from now the world is likely to be even more interconnected: technology will be faster and cheaper, trade and investment barriers fewer, and more services delivered across borders. People will have even greater choice of goods and services and new job opportunities in technology. At the same time, if globalisation remains unfair, the gap between rich and poor may widen and small producers and workers may stay vulnerable. The world's shape will depend on whether globalisation is made fair. (Reasonable, well-argued answers are accepted.)

Q10. Suppose you find two people arguing: one says globalisation has hurt our country's development, the other says globalisation is helping India develop. How would you respond?

Both views are partly correct, because the impact of globalisation has not been uniform. It has helped India by bringing investment, technology, new jobs in IT and services, better-quality goods and lower prices, and by creating Indian MNCs. But it has also hurt small producers and workers who could not face the competition. So globalisation is neither wholly good nor wholly bad; the goal should be a fair globalisation whose benefits reach everyone, achieved through proper labour laws, support for small producers and fairer WTO rules.

16. NCERT Exercise — Q11 to Q13 (objective, answered)

Q11. Fill in the blanks.

• Indian buyers have a greater choice of goods than they did two decades back. This is closely associated with the process of globalisation (and liberalisation).
• Markets in India are selling goods produced in many other countries. This means there is increasing foreign trade / integration of markets with other countries.
• Globalisation has led to improvement in living conditions of some of the people.

Q12. Match the following.

• (i) MNCs buy at cheap rates from small producers → (b) Garments, footwear, sports items.
• (ii) Quotas and taxes on imports are used to regulate trade → (d) Trade barriers.
• (iii) Indian companies that have become MNCs → (a) Tata Motors, Infosys, Ranbaxy.
• (iv) IT has helped in spreading of production of services → (c) Call centres.

Q13. Choose the most appropriate option.

• (i) The past two decades of globalisation has seen rapid movement in → (c) goods, services and people between countries.
• (ii) The most common route for investments by MNCs in countries around the world is to → (d) buy up local companies and then expand production.
• (iii) Globalisation has led to improvement in living conditions → (d) of some people / not of all people.

17. Common confusions

• Globalisation vs Liberalisation: liberalisation is removing barriers (a government policy); globalisation is the wider process of countries integrating. Liberalisation is one of the causes of globalisation, not the same thing.
• MNC vs ordinary exporter: an MNC owns or controls production in more than one country; a plain exporter only sells goods abroad without owning production there.
• Foreign trade vs foreign investment: trade is buying/selling goods across borders; investment is putting money into assets (factories, land) in another country.
• Trade barrier: the most common is a tax on imports, not a ban — it regulates how much comes in.
• WTO is "free trade for all" in theory only: in practice developed countries keep their barriers while developing ones are pushed to remove theirs.
• "Flexibility in labour laws" helps companies, not workers — it makes jobs insecure.

18. Quick revision checklist

• Globalisation = rapid integration of countries through trade, investment, technology (and limited movement of people).
• MNC = owns/controls production in more than one country; chooses location for cheap labour, markets and friendly policies.
• Four ways MNCs spread production: buy local firms, joint ventures, orders to small producers, own factories.
• Foreign trade integrates markets → more choice, prices become equal, distant producers compete.
• Two enablers: technology (transport, IT, internet, containers) and liberalisation (removing barriers; India 1991).
• WTO → aims at free trade but rules are often unfair to developing countries.
• Impact is not uniform: consumers, skilled workers and big firms gain; small producers and workers suffer.
• Fair globalisation → enforce labour laws, support small producers, fair WTO rules, ally with developing nations.