Globalisation and the Indian Economy

As consumers in today's world, some of us have a wide choice of goods and services before us. The latest models of digital cameras, mobile phones and televisions made by the leading manufacturers of the world are within our reach. Every season, new models of automobiles can be seen on Indian roads. Gone are the days when Ambassador and Fiat were the only cars on Indian roads. Today, Indians are buying cars produced by nearly all the top companies in the world. A similar explosion of brands can be seen for many other goods: from shirts to televisions to processed fruit juices. Such wide-ranging choice of goods in our markets is a relatively recent phenomenon. You wouldn't have found such a wide variety of goods in Indian markets even two decades back. In a matter of years, our markets have been transformed! How do we understand these rapid transformations? What are the factors that are bringing about these changes? And, how are these changes affecting the lives of the people? We shall dwell on these questions in this chapter.

Until the middle of the twentieth century, production was largely organised within countries. What crossed the boundaries of these countries were raw material, food stuff and finished products. Colonies such as India exported raw materials and food stuff and imported finished goods. Trade was the main channel connecting distant countries. This was before large companies called multinational corporations (MNCs) emerged on the scene. A MNC is a company that owns or controls production in more than one nation. MNCs set up offices and factories for production in regions where they can get cheap labour and other resources. This is done so that the cost of production is low and the MNCs can earn greater profits. Consider the following example.

Spreading of Production by an MNC
A large MNC, producing industrial equipment, designs its products in research centres in the United States, and then has the components manufactured in China. These are then shipped to Mexico and Eastern Europe where the products are assembled and the finished products are sold all over the world. Meanwhile, the company's customer care is carried out through call centres located in India

In this example the MNC is not only selling its finished products globally, but more important, the goods and services are produced globally. As a result, production is organised in increasingly complex ways. The production process is divided into small parts and spread out across the globe. In the above example, China provides the advantage of being a cheap manufacturing location. Mexico and Eastern Europe are useful for their closeness to the markets in the US and Europe. India has highly skilled engineers who can understand the technical aspects of production. It also has educated English speaking youth who can provide customer care services. And all this probably can mean 50-60 per cent cost-savings for the MNC! The advantage of spreading out production across the borders to the multinationals can be truly immense.

In general, MNCs set up production where it is close to the markets; where there is skilled and unskilled labour available at low costs; and where the availability of other factors of production is assured. In addition, MNCs might look for government policies that look after their interests. You will read more about the policies later in the chapter.

Having assured themselves of these conditions, MNCs set up factories and offices for production. The money that is spent to buy assets such as land, building, machines and other equipment is called investment. Investment made by MNCs is called foreign investment. Any investment is made with the hope that these assets will earn profits.

At times, MNCs set up production jointly with some of the local companies of these countries. The benefit to the local company of such joint production is two-fold. First, MNCs can provide money for additional investments, like buying new machines for faster production. Second, MNCs might bring with them the latest technology for production.

But the most common route for MNC investments is to buy up local companies and then to expand production. MNCs with huge wealth can quite easily do so. To take an example, Cargill Foods, a very large American MNC, has bought over smaller Indian companies such as Parakh Foods. Parakh Foods had built a large marketing network in various parts of India, where its brand was well-reputed. Also, Parakh Foods had four oil refineries, whose control has now shifted to Cargill. Cargill is now the largest producer of edible oil in India, with a capacity to make 5 million pouches daily!

In fact, many of the top MNCs have wealth exceeding the entire budgets of the developing country governments. With such enormous wealth, imagine the power and influence of these MNCs!

There's another way in which MNCs control production. Large MNCs in developed countries place orders for production with small producers. Garments, footwear, sports items are examples of industries where production is carried out by a large number of small producers around the world. The products are supplied to the MNCs, which then sell these under their own brand names to the customers. These large MNCs have tremendous power to determine price, quality, delivery, and labour conditions for these distant producers.

Thus, we see that there are a variety of ways in which the MNCs are spreading their production and interacting with local producers in various countries across the globe. By setting up partnerships with local companies, by using the local companies for supplies, by closely competing with the local companies or buying them up, MNCs are exerting a strong influence on production at these distant locations. As a result, production in these widely dispersed locations is getting interlinked.

For a long time foreign trade has been the main channel connecting countries. In history you would have read about the trade routes connecting India and South Asia to markets both in the East and West and the extensive trade that took place along these routes. Also, you would remember that it was trading interests which attracted various trading companies such as the East India Company to India. What then is the basic function of foreign trade? To put it simply, foreign trade creates an opportunity for the producers to reach beyond the domestic markets, i.e., markets of their own countries. Producers can sell their produce not only in markets located within the country but can also compete in markets located in other countries of the world. Similarly, for the buyers, import of goods produced in another country is one way of expanding the choice of goods beyond what is domestically produced.

Let us see the effect of foreign trade through the example of Chinese toys in the Indian markets.

Chinese Toys in India -
Chinese manufacturers learn of an opportunity to export toys to India, where toys are sold at a high price. They start exporting plastic toys to India. Buyers in India now have the option of choosing between Indian and the Chinese toys. Because of the cheaper prices and new designs, Chinese toys become more popular in the Indian markets. Within a year, 70 to 80 per cent of the toy shops have replaced Indian toys with Chinese toys. Toys are now cheaper in the Indian markets than earlier. What is happening here? As a result of trade, Chinese toys come into the Indian markets. In the competition between Indian and Chinese toys, Chinese toys prove better. Indian buyers have a greater choice of toys and at lower prices. For the Chinese toy makers, this provides an opportunity to expand business. The opposite is true for Indian toy makers. They face losses, as their toys are selling much less.

In general, with the opening of trade, goods travel from one market to another. Choice of goods in the markets rises. Prices of similar goods in the two markets tend to become equal. And, producers in the two countries now closely compete against each other even though they are separated by thousands of miles! Foreign trade thus results in connecting the markets or integration of markets in different countries.

In the past two to three decades, more and more MNCs have been looking for locations around the world which would be cheap for their production. Foreign investment by MNCs in these countries has been rising. At the same time, foreign trade between countries has been rising rapidly. A large part of the foreign trade is also controlled by MNCs. For instance, the car manufacturing plant of Ford Motors in India not only produces cars for the Indian markets, it also exports cars to other developing countries and exports car components for its many factories around the world. Likewise, activities of most MNCs involve substantial trade in goods and also services. The result of greater foreign investment and greater foreign trade has been greater integration of production and markets across countries. Globalisation is this process of rapid integration or interconnection between countries. MNCs are playing a major role in the globalisation process. More and more goods and services, investments and technology are moving between countries. Most regions of the world are in closer contact with each other than a few decades back. Besides the movements of goods, services, investments and technology, there is one more way in which the countries can be connected. This is through the movement of people between countries. People usually move from one country to another in search of better income, better jobs or better education. In the past few decades, however, there has not been much increase in the movement of people between countries due to various restrictions.

We have seen that the liberalisation of foreign trade and investment in India was supported by some very powerful international organisations. These organisations say that all barriers to foreign trade and investment are harmful. There should be no barriers. Trade between countries should be 'free'. All countries in the world should liberalise their policies.

World Trade Organisation (WTO) is one such organisation whose aim is to liberalise international trade. Started at the initiative of the developed countries, 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.

Though WTO is supposed to allow free trade for all, in practice, it is seen that the developed countries have unfairly retained trade barriers. On the other hand, WTO rules have forced the developing countries to remove trade barriers. An example of this is the current debate on trade in agricultural products.

Debate on Trade Practices -

You have seen in Chapter 2, that the agriculture sector provides the bulk of employment and a significant portion of the GDP in India. Compare this to a developed country such as the US with the share of agriculture in GDP at 1% and its share in total employment a tiny 0.5%! And yet this very small percentage of people who are engaged in agriculture in the US receive massive sums of money from the US government for production and for exports to other countries. Due to this massive money that they receive, US farmers can sell the farm products at abnormally low prices. The surplus farm products are sold in other country markets at low prices, adversely affecting farmers in these countries.

Developing countries are, therefore, asking the developed country governments, "We have reduced trade barriers as per WTO rules. But you have ignored the rules of WTO and have continued to pay your farmers vast sums of money. You have asked our governments to stop supporting our farmers, but you are doing so yourselves. Is this free and fair trade?"

In the last twenty years, globalisation of the Indian economy has come a long way. What has been its effect on the lives of people? Let us look at some of the evidence.

Globalisation and greater competition among producers - both local and foreign producers - has been of advantage to consumers, particularly the well-off sections in the urban areas. There is greater choice before these consumers who now enjoy improved quality and lower prices for several products. As a result, these people today, enjoy much higher standards of living than was possible earlier.

Among producers and workers, the impact of globalisation has not been uniform.

Firstly, MNCs have increased their investments in India over the past 20 years, which means investing in India has been beneficial for them. MNCs have been interested in industries such as cell phones, automobiles, electronics, soft drinks, fast food or services such as banking in urban areas. These products have a large number of well-off buyers. In these industries and services, new jobs have been created. Also, local companies supplying raw materials, etc. to these industries have prospered.

The above evidence indicates that not everyone has benefited from globalisation. People with education, skill and wealth have made the best use of the new opportunities. On the other hand, there are many people who have not shared the benefits. Since globalisation is now a reality, the question is how to make globalisation more 'fair'? Fair globalisation would create opportunities for all, and also ensure that the benefits of globalisation are shared better. The government can play a major role in making this possible. Its policies must protect the interests, not only of the rich and the powerful, but all the people in the country. You have read about some of the possible steps that the government can take. For instance, the government can ensure that labour laws are properly implemented and the workers get their rights. It can support small producers to improve their performance till the time they become strong enough to compete. If necessary, the government can use trade and investment barriers. It can negotiate at the WTO for 'fairer rules'. It can also align with other developing countries with similar interests to fight against the domination of developed countries in the WTO. In the past few years, massive campaigns and representation by people's organisations have influenced important decisions relating to trade and investments at the WTO. This has demonstrated that people also can play an important role in the struggle for fair globalisation.

In this chapter, we looked at the present phase of globalisation. Globalisation is the process of rapid integration of countries. This is happening through greater foreign trade and foreign investment. MNCs are playing a major role in the globalisation process. More and more MNCs are looking for locations around the world that are cheap for their production. As a result, production is being organised in complex ways. Technology, particularly IT, has played a big role in organising production across countries. In addition, liberalisation of trade and investment has facilitated globalisation by removing barriers to trade and investment. At the inter national level, WTO has put pressure on developing coun tries to liberalise trade and investment.While globalisation has benefited well-off consumers and also producers with skill, education and wealth, many small producers and workers have suffered as a result of the rising competition. Fair globalisation would create opportunities for all, and also ensure that the benefits of globalisation are shared better.