Chapter Four 1 GLOBALISATION  Irreversible Phenomenon, which involves removing restrictions on foreign trade and foreign investment to leverage the benefits of comparative advantage  Restructuring of industries and companies in the form of privatisation and globalisation  Based on the concepts ‘comparative advantage’, ‘unity in diversity’ and ‘global village’ 2 GLOBALISATION-MEANING Globalisation of the economy means reduction of import duties, removal of Non-Tariff Barriers on trade such as Exchange control, import licensing etc., allowing FDI and FPI, allowing companies to raise capital abroad and grow beyond national boundaries and encourage exports. Both Foreign Trade and Foreign investment volume have grown rapidly over the last few years. 4 TRADE LIBERALISATION AND GLOBALISATION  First, When Tariffs are lowered and QRs are removed, relative prices change and resources are reallocated to production activities that may raise output. However, increased import of manufactured products will have adverse impact on domestic production.  Second, larger long run benefits due to the free flow of technology and new production structures.  Exports and Imports - most dynamic factors in the process of economic growth after 1995. 5 2 VIEWS on Globalisation  Those stress the Virtues of Import Substitution and limited openness ie, View against Free Trade and Globalisation  Those emphasise the importance of Free Trade. Arguments a) Achieve International Competitiveness b) Reduce the price level c)More choice for consumers 6 GLOBALISATION - PHASES  1870-1914 : First Wave  1914-1945 : Retreat to Nationalism  1945-1980 Globalisation : Second wave of  1980 onwards Globalisation : Third wave of 7 GLOBALISE or PERISH  Secret of Success of many firms. Eg: Software companies get major chunk of revenue from foreign markets,  Opening up of Markets for Global companies has sent a shock wave among certain business circles. Many Industrial Units are trying to catch up with the words ‘Globalise or Perish’. Many industries have realised that Globalisation brings with it many new technologies and Production structures 9 ECONOMIC ENVIRONMENT  Free Flow of Imports  Heavy Competition and Influx of New Technology  Theoretical Foundation for the link between Open Economy and Higher Economic Growth is not solid, imports of raw materials, intermediate and capital goods are not perfectly substitutable by domestically produced goods.  Economic Reforms has been transformed into the process of globalisation 10 BUSINESS ENVIRONMENT Indian industry (secondary sector) has not performed very well over the post-reform period. Though the average Annual real GDP growth accelerated from 5.4% (1981-82 to 1991-92) to 6.4% (1992-93 to 2000-01), Industrial growth slowed down to 6.0% during the post-reform period(1992-93 to 2000-01) as against 7.8% in the pre-reform period(1981-82 to 1991-92).GDP and IIP growth(%)- 5.8, 2.7(2001-02), 4, 5.7(02-03), 8.5, 7%(03-04) and 7, 8.4% (2004-05) respectively. 11 REFORMS FOR ECONOMIC GROWTH  Exchange Market Reforms (Full current account convertibility etc.)  Reforms in Foreign Investment Regime (Liberalising rules for FDI and allowing FII)  Reforms in Infrastructure (PPP)  Reforms in the form of EXIM policy(Tariff Rate reduction, QR removal, EDI system)  Allowing Indian Mutual Funds to invest in Foreign companies  Challenges and Opportunities (Threat to SSIs?)  Joint Ventures with Foreign Companies in India and Abroad 12 WTO-Main Agreements  TRIPS(Trade Related Intellectual Property Rights)  Bound Rates(Tariff Bindings) and QR removal  GATS (Services)  TBT(Technical Barriers to Trade)  ATC(Agreement on Textiles and Clothing)  TRIMS (Trade Related Investment Measures)  Agreement on Agriculture 13 INDIA - GROWTH RATES in % (1990-91 to 2004-05)  Industrial Production – 8.2, 0.6, 2.3, 6.0, 8.4, 12.8, 5.6, 6.6, 4.1, 6.6, 5.7, 2.7, 5.7, 7 and 8.4% respectively  Exports (in USD terms) – 9.2, -1.5, 3.8, 20, 18.4, 20.8, 5.3, 4.6, -5.1, 13.2, 21, -1.6, 20, 21 respectively, 25.6% (04-05)  Imports(in USD terms) –13.5, -19.4, 12.7, 6.5, 22.9, 28, 6.7, 6.0, 2.2, 11.4, 14.4, 1.7, 19.4, 27.3 respectively, 34.7% (04-05) Source: Economic Survey, Ministry of Finance, Govt.of India 14 QRs: Some Facts Removal of QRs doesn’t mean duty free imports. It means that an item can be imported without license/restriction. Goods are subject to payment of Customs Duty (tariffs). Applied Duties can be raised by the Govt. upto Bound level, to protect the interests of the Domestic industry including SSIs and agriculture. 15 AGRICULTURAL SECTOR Agricultural products- Traditional export items of India. Price of many items like Rubber, coconut etc. have fallen due to import liberalisation. Therefore, farmers suffer from low income. Thrust is given to the export of agricultural items in the Exim policy/Foreign Trade policy. 16 MINING AND PETROLEUM Mining and Petroleum- Major policy changes include automatic permission for foreign equity participation of upto 50% in the mining of 13 minerals. The Govt.of India has emphasised on oil exploration to reduce import dependence and offers tax holidays to companies to invest in India. 17 MANUFACTURING SECTOR Reforms have been widespread including reductions in average. Tariff rates, removal of import licensing and liberalisation of foreign investment policies. Sector responded positively in the Mid 1990s, however, the growth slipped down after 1996-97 due to constraints like infrastructure bottleneck, low FDI flow etc. 18 SERVICE SECTOR  Contribute more than 5% to India’s GDP.  India has a large pool of well-qualified professionals capable of providing services abroad whereas developed countries have surplus capital to invest. 19 BUSINESS ENVIRONMENT – SECTORWISE ANALYSIS 1. Telecom Sector 2. Insurance Sector 3. Banking and Financial Sector 4. Retail Sector 5. Automobile Sector 6. Textiles Sector 20 TEXTILES SECTOR TRENDS IN IMPORT OF TEXTILES AND CLOTHING (in US$ billion) Year US EU-15 Canad World a 58 06 237 1995 51 2000 83 64 08 287 2001 81 65 08 278 2002 84 68 08 290 2003 89 80 09 321 Source: WTO International Trade Statistics, 2004 21 INTERNATIONAL SCENARIO: TEXTILES SECTOR Removal of quotas (as per WTO ATC agreement) has opened up opportunities for the T & C Sector of India to increase its exports. North America and West Europe together account for nearly 70% of India’s exports of T & C and both had enforced strict quota restrictions until last year. There is scope for increasing exports to countries like Japan, Australia, Hong Kong an Latin American countries. Studies have shown that world trade in T & C is likely to increase substantially in the coming years. 22