Role of States | Globalization | Economy Of India

Changing Role of State: Liberalization, Privatization, Globalization

 Initial

Role Played by the State  Need for Economic Reforms  Role during the post-reform period


LPG - Indian Economy

 The

background  Assessment of LPG  Suggestions to carry forward reforms


 Perfection

of an economic policy is time-

specific  Most macroeconomic economic policies become obsolete or irrelevant over time  Changes in the economic conditions turn existing policies ineffective  Hence fine-tuning or replacing of policies inevitable

Indian Economy : initial years

India’s economic development strategy immediately after Independence  Mahalanobis model, which gave preference to the investment goods industries sector, with secondary importance accorded to the services and household goods sector  For example, the Mahalanobis model placed strong emphasis on mining and manufacturing (for the production of capital goods) and infrastructural development (including electricity generation and transportation).

Indian Economy : initial years
The Mahalanobis model downplayed the role of the factory goods sector because it was more capital intensive and therefore would not address the problem of high unemployment in India.  Any increase in planned investments in India required a higher level of savings than that existed in the country.  Government had to impose restrictions on the growth of consumption expenditures to step up savings (since low income)


Development Strategy
strategy of economic development in India meant (1) direct participation of the government in economic activities such as production and  selling and  (2) regulation of private sector economic activities through a complex system of controls.  the Indian economy was sheltered from foreign competition through use of both the “infant industry argument” and a binding foreign exchange constraint.


 India

became a relatively closed economy, permitting only limited economic transactions with other countries.  Domestic producers were sheltered from foreign competition not only from abroad but also from within India itself.


1950s and 1960s
Over time, India created a large number of government institutions to meet the objective of growth with equity.  The size of the government grew substantially as it played an increasingly larger role in the economy in such areas as investment, production, retailing, and regulation of the private sector.  In the late 1950s and 1960s, the government established public sector enterprises in such areas as production and distribution of electricity, petroleum products, steel, coal, 8 and engineering goods.

 In

1970, to increase foreign exchange earnings, it designated exports as a priority sector for active government help  Encouraged 100 per cent exportoriented entities to help producers export


 Finally,

from the late 1970s through the mid-1980s, India liberalized imports such that those not subject to licensing as a proportion to total imports grew from five per cent in 1980-1981 to about 30 per cent in 1987-1988.  However, this partial removal of quantitative restrictions was accompanied by a steep rise in tariff rates.

Technology Missions
 Sam

Pitroda, Advisor to PM Rajiv Gandhi in the 1980s headed six technology missions related to telecommunications, water, literacy, immunisation, dairy, and oil seeds.  He was also the founder and first chairman of India's Telecom Commission.


Technology Missions
 He

is chairman of India's National Knowledge Commission, reporting to the Prime Minister.  The commission's mandate is to offer a series of recommendations on how to leverage India's knowledge strengths to help it become a knowledge economy.  Pitroda holds close to 100 worldwide patents

Outcomes of Controlling
 This

active and dominant participation by the government in economic activities resulted in the creation of a protected, highly-regulated, public sectordominated economic environment.  A dramatic increase in corruption in the economy.  A number of serious sectoral imbalances, with shortages in some sectors and surpluses in others.

 Deregulation


 Simplification

of procedures


 Ownership  Reasons



for creating & strengthening Public

 Problems  PSE

of PSE

ownership to be transferred to Private sectors

How Important is Globalization?
 Buzz

word of the decade  Used by policy makers, business persons, academics, journalists to signify:  Something (man-made) is happening/ emergence of new
 Economic  Political  Cultural


Globalization: Meaning

Fundamental shift in the National economies (self-contained entities, isolated,barriers of trade, distance, time zone differences, Govt regulation, culture, transportation, telecom, technology) The process by which visible shift in the above is occurring is referred to as Globalization (contd)

Globalization: Modes
 Markets

Integration  Production  Free movement of goods, capital and people  Technological innovations in Finance, transportation, communication and global institutions  Growing role of services

Interpretations (1)
 Dominance

of World Capitalistic Economic system  Supplanting primacy of nation state by TNCs/ Orgnaisations  Erosion of local cultures through global culture  Westernization of the world  Increasing homogeneity


Interpretations (2)
 Producing

diversity & heterogeneity through increased hybridization  Strategy for increasing corporate profits & power  Increase in State power  Lever to produce positive social goods like environment action, democratization, humanization  It is modernity

One Single meaning?
 Thus

globalization is a theoretical construct  Open to various meanings and inflections  It can be described positively, negatively or multivalent to describe complex and multidimensional process in the economy, polity, culture, and everyday life


Global culture
Promoting life-styles, consumption, products, and identities  TNCs deploy advertising to penetrate local markets to sell global products to overcome local resistance  Private cable and satellite systems aggressively promoting a commercial culture throughout the world  Global homogenization and new local hybrid forms and identities


What has Globalization created?
 Dissemination

of new technologies  Time-space compression produced by new media and communication technologies are helping to overcome previous barriers  New labour markets, production centres are getting created  Deindustrialization or “rustbelts” created elsewhere

Global Institutions
Creation of the World Bank and the IMF  GATT (1947) and NAFTA (1/1/1994)  WTO (1995)  As we look back 50 years, economic growth has expanded five-fold, international trade roughly twelve times and FDI 2/3rds of the international trade  However, there has been unevenness in the above developments  Economic elites benefited and LDCs could not, and the poorer regions of LDCs became relatively poorer


 Difficulties
 Differences

in tastes and preferences  Local preferences  Labour costs  Supply Chain Management  Lack of computer-based infrastructure  High holding costs (inventory)


 American

drives a car

made in Germany,  steel from Korea,  Tyres from Malaysia,  fills gasoline from UK BP,  oil pumped from a well in Africa by a French company,  transported to US in a ship owned by a Greek shipping company.


The world we live in
 Globalization
 Suffering


of domestic industry  Job losses, income inequalities  Economic crisis in some countries  Economic slowdown in the US  Japanese stock market fall  Reversal of reforms at times



Global commodity
 It

is a world in which products are made from inputs that come from all over the world  Increased opportunities and threats  Global markets

lakh small US business firms employing less than 100 had foreign sales  Boeing 777 has 1,32,500 major components made by 545 suppliers


In Defense of Globalization
 Anti-Globalization  Globalization’s
 Poverty  Child

Human Face:

Labor  Women  Wages and Labor Standards  Environment

Making Globalization Work Better
 Appropriate

Governance  Coping with Downsides  Accelerating the Achievements of Social Agendas  Managing Transitions: Optimal Not Maximal Speed


New Economic Policy (NEP)
 Liberalization,

Privatization, and Globalization (LPG)  Objective of the NEP has been to make India a vibrant economy  Achieve rapid rate of growth  Increasing involvement of private enterprise and initiative.


Reform Initiatives
 India

received IMF Package  We are committed to IMF to reduce the peak tariffs (nominal) applicable on imports to about 25 percent in 10 years  Loss-making PSUs would be disinvested/ privatised/ closed  Private investments to be encouraged into Nonstrategic sectors  Fiscal deficit would be lowered (FRBM Act)


The Background
 Foreign

Currency Assets remained too low (between US$ 1.1 to 1.7 bn) consecutively for the first six months of the financial year 1991-92  Import cover of reserves stood at a very inadequate level of 2.5 months for the year 1990-91


The Background (2)
 Manufacturing

sector in particular remained highly regulated  Very little scope for furthering competition prior to the reforms  Enormous delays existed due to lengthy procedures for FDI  The unjustifiable suppression of competition through business lobbying with politicians


The Background (3)
 Indian

Industry and economy was highly protected till pre-1991.
 High

Peak tariff rates of over 300% before 1991.

 Protection

was high even by 1991.

Some of the imported goods used to attract as high as 300 percent peak tariff rates in 1990-91


Assessment of reforms
Two approaches: 1)To take a stance in favour or against the reforms and attempting to justify the same, 2)To look at the key macroeconomic variables and contrasting the pre and post-reform figures with a view to trace the direction of change.

Assessment of LPG
 Review

the macroeconomic variables  Growth rate, Employment, Inflation, Structural change of the economy, Trade openness, Saving-Investment ratios  FDI, forex, Exchange rate movement, Composition of exports, Infrastructure, and Fiscal Deficit.  Communication sector progressed significantly  Banking/ Insurance sectors strengthened


Foreign exchange reserves
 Remained

between US$ 1-2 bn during

1991  Stands at over US$ 308.52 bn currently (July 11, 2008)  Continuous decline in international interest rates and the interest rate arbitrage in India was the major factor behind continuous rise in India’s foreign exchange reserves

Some Further Issues
1) Agriculture sector still remains the backbone of the Indian economy in terms of employment and output generation. Reforms have largely contributed to distortions in agriculture
 Union

Budget 2008-09 to focus on

Rural development

Health  Education


Some Further Issues
2) Low literacy, a very large

unorgainsed sector (93% on the basis of employment), the government requires to educate the masses on the benefits from reforms and the changing role of the State 3) Streamlining of procedures to attract more FDI.

Some Further Issues
4) Pre-reform inward-looking policies to tackle captive market by the domestic industry The entry of foreign players impacted domestic industry.  Some of the corporates in India are trying to adapt by restructuring and consolidating while retaining their core strengths

Some Further Issues
5)Labour reforms have been lagging due to the political differences and labour union resistance in the organized sector.
 The

skill sets required in the new environment, retraining the existing workforce in the PSEs is costly


Some Further Issues
6) Legal system and procedures are quite tedious, and time-consuming 7) The success of economic reforms depends on suitable political reforms; Least political interference in the dayto-day matters of business and economy.


 No

one single definition for globalization  India initiated reforms to revitalize the economy  LPG Initiatives have brought in some decisive positive effects in our economy  Assessment and Impacts  Some cautions

Some definitions

International companies are importers and exporters, they have no investment outside of their home country. Multinational companies have investment in other countries, but do not have coordinated product offerings in each country. More focused on adapting their products and service to each individual local market. Global companies have invested and are present in many countries. They market their products through the use of the same coordinated image/brand in all markets. Generally one corporate office that is responsible for global strategy. Emphasis on volume, cost management and efficiency. Transnational companies are much more complex organizations. They have invested in foreign operations, have a central corporate facility but give decision-making, R&D and marketing powers to each individual foreign market.


 Charlie

WL Hill, International Business, TMG, Delhi, 2003  Carbaugh Robert J. : International Economics, SouthWestern College Publishing, Cincinnati, US, 2000, Ch 1  Jagadish Bhagwati, In defense of Globalization, OUP, 2004  ANIL K. LAL & RONALD W. CLEMENT ECONOMIC DEVELOPMENT IN INDIA: THE ROLE OF INDIVIDUAL ENTERPRISE, Asia-Pacific Development Journal Vol. 12,
No. 2, December 2005


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