Chapter-III

GLOBALIZATION – The concept and challenges

“I do not want my house to be walled on all sides and my windows

to be stuffed. I want the culture of all lands to be blown around my house
as freely as possible. But I refuse to be blown off my feet by any.”
-Mahatma Gandhi

3.1 INTRODUCTION
Globalization is dramatically reshaping policy landscapes, thereby
creating new opportunities and threats for governments and firms.
Everyone does not benefit from economic integration; there are ‘winners’
and ‘loosers’. Firms and governments are the relevant actors of
globalization. Actors could cope either individually or collectively or some
combination of both1. It has created opportunities for developing countries.
The experiences of India, China, Thailand, Indonesia and some other
countries have demonstrated that integration into the global economy is
necessary for long-term growth (World Bank Report, 2006). Globalization
has emerged as a powerful global reality which has a momentum of its
own. Some countries gained, some lost partly because of the prevailing
political circumstances and partly due to lack of good governance.
Developing countries have to manage the process of globalization with a
view to drive maximum benefits while minimizing risks2.

1
Prakash, Aseem & Hart, Jeffrey A., (2000), Coping with Globalization, London, Routledge, p.1.
2
Sing, Manjit & Raikhy, P.S (2011), “Globalization and Stability in Economic Development:
Experience of Developing Countries”, The Indian Journal of Economics, Vol. XIC

43
3.2 GLOBALIZATION AND INDIA
Globalization is seen to be very controversial because it is a process
which is taking on social, cultural, environmental, political, and legal
dimensions in addition to the predominantly world economic specter of
market economy3.

Globalization is the phenomenon of a new overriding incredibly

over-powering and coercively-integrating global system of linkages across
political and geographical borders, and which is characterized by shrinking
space and time, rapidly disappearing borders, accelerated interdependence
of peoples world over, unprecedented mobility of persons, things, trade and
capital, and information in the borderless world4.

The term “globalization” has also acquired considerable emotive

force. Some view it as a process which is beneficial - a key to future world
economic development- and also inevitable and irreversible. Others regard
it with hostility, even fear, believing that it increases inequality within and
between nations, threatens employment and living standards and thwarts
social progress5. Its modern origins are generally identified with the 1980s
when profound economic, political and technological transformation took
place around the world. Defining events include the discovery and use of
integrated systems of information and communication technology, more
open political systems and the ascendancy of neo-liberal (neo-classical)

3
Dhokalia, R.P, (2013), “Globalization a Complex Process: Its Ramifications and the Need of a
New Ethic”, in Vivek Dhokalia (ed.) ‘International Law Towards A New Global Order’, New
Delhi, Taxmann, p. 1.
4
Dhokalia, R.P, (2013), “Globalization: Challenges and Indian Vision of Peaceful Co-existence”,
in Vivek Dhokalia (ed.) ‘International Law Towards A New Global Order’, New Delhi, Taxmann,
p. 781-789.
5
Chittoo, Hemant B. & et al, (2009), Globalization and Public Sector Reforms in Developing
Country, Culture Mandala: Bulletin of the Centre for East-West Cultural & Economic Studies,
Vol.8, Issue.2, December 2009, p. 30-51.

44
economic strategies in both developing and developed countries6. The
revolution in communication, transport and most particularly, information
technology has been instrumental in accelerating economic globalization.

Globalization has both positive and negative contribution to the

world social, political and economic order. According to the positivists,
globalization has opened the door of opportunities. Breakthroughs in
communications, technologies and biotechnology, if directed to fulfill the
needs of people, can bring advances for all of humankind: Also, reform in
global governance to ensure greater equity, constructive approaches to
collective action at regional, national and local levels, with a view to
beneficially availing opportunities in the global market place, can
contribute more equitably to human advancement7.

According to the negativist viewpoint, on the other hand, the

complex process of globalization has different meanings for different
people as it has multi-dimensional ramifications – cultural, economic,
environmental, political, social as well as legal. The expansion and
intensification of connections and movements across national borders of
people, goods, capital, ideas, and cultures, entail the need to replace
national institutions with global ones. To its detractors, its impact has
resulted in pervasively widening inequality within economies; the triumph
of supranational capitalist order of economic and political power and
market driven consumer ideology. It is a threat to the very foundations of
nation State and is perceived as a most wicked system because it rewards
greed and aggressive economic ruthlessness8.

6
Chandra, Ramesh (2004), Globalisation, Liberalisation, Privatisation and Indian Polity, Vol.8,
Delhi, Isha Books, p. 1.
7
Dhokalia, R.P, (2013), “Globalization: Challenges and Indian Vision of Peaceful Co-existence”,
in Vivek Dhokalia (ed.) ‘International Law Towards A New Global Order’, New Delhi, Taxmann,
p. 782.
8
Ibid, p. 783.

45
 In the words of past Secretary – General of the United Nations, Mr.
Kofi Annan, “arguing against globalization is like arguing against the law
of gravity”9. The International Monetary Fund (IMF) defines globalization
as the growing economic interdependence of countries worldwide through
increasing volume and variety of cross border transactions in goods and
services and of international capital flows and also through the more rapid
and wide spread diffusion of technology10. In economic terms,
globalization refers to the growing economic integration of the world, as
trade, investment, money, technology and information are increasingly
cross international. Broadly speaking, globalization is a result of the
industrial revolution process. “It has acquired a considerable force since
1990s as a result of two leading forces: (i) A new technology that has
provided the mechanisms of the information super highway, the constant
accelerating speed of electronic data transfer through telecommunications
and the internet which have opened up opportunities in a virtual world that
have impacts on the real world without interpersonal contact, personally
negotiated agreements, or even an idea of one’s business partners and (ii)
International trade spurred by companies restructuring and switching
production to new plants in other countries, exploiting tax regimes from
one country to another in order to maximize profit, and creating an abstract
empire of multinational corporations as an instrument of economic and
political power itself.”11

Globalization in India is generally taken to mean ‘integrating’ the

economy of the country with the world economy. This, in turn, implies
opening up the economy to foreign direct investment by providing facilities

9
Kumar, Swatanter, (2012), “Speech of Hon’ble Justice Swatanter Kumar, Judge, Suprime Court
of India, at International Tax Conference” at New Delhi on February 10-11, 2012.
10
Cherunilam, Francis (2008), “International Business Environment”, Mumbai: Himalaya
Publishing House, p. 456.
11
Dhokalia, R.P, (2013), “Globalization a Complex Process: Its Ramifications and the Need of a
New Ethic”, in Vivek Dhokalia (ed.) ‘International Law Towards A New Global Order’, New
Delhi, Taxmann, p. 2.

46
to foreign companies to invest in different fields of economic activity in
India by removing constraints and obstacles to the entry of multi-national
corporations (MNCs), through dilutions and ultimate scrapping of
restrictive laws like FERA and allowing Indian companies to enter into
foreign collaborations in India and also encouraging them to set up joint
ventures abroad.12

India’s recent progress towards economic growth stems from

reforms undertaken after the 1991 fiscal crisis, which lifted India from
decades of slow growth under socialist rule and offered an opportunity to
improve living conditions in the immense, poor country. At the same time
much had changed in India after the balance of payments crisis of 1991.
Indian policies became more positive about promoting export and allowing
foreign capital to participate in the process of India’s growth13. But the
recent progress is not enough. Certainly, great steps have been taken
toward reform on trade, industrial policy, and the financial system;
substantial progress has been made in reducing poverty; and India has a
growing and thriving middle class. However, much remains to be done: the
government intrudes where it need not, in everything from coal mining to
discos, and fails to manage the basic services that it should, like decent
roads, a stable power distribution infrastructure, and quality primary
education14.

3.2.1 India’s step towards Globalization:

Indian economy was in deep crisis in July 1991, when foreign
currency reserves had plummeted to almost billion, inflation had roared to
an annual rate of 17 per cent; fiscal deficit was very high and had become
12
Misra, S.K and Puri, V.K. (2012) Indian Economy, Mumbai: Himalay Publishing House, p.
551.
13
Mukherji, Rhul (2005), “The Indian State Under Globalization: A Research Agenda”,
Background paper for the Ford Foundation’s Project administered by National Foundation of
India.
14
Government of India, (2006), Task Force Report on “Economic Reform in India”.

47
unsustainable; foreign investors and NRIs had lost confidence in Indian
Economy. Capital was flying out of the country and we were close to
defaulting on loans. Along with these bottlenecks at home, many
unforeseeable changes swept the economies of nations in Western and
Eastern Europe, South East Asia, Latin America and elsewhere, around the
same time15. These were the economic compulsions at India and abroad
that called for a complete revamp of Indian economic policies and
programs.

Major measures initiated as a part of the globalization and

liberalization strategy in the early nineties include devaluation of Indian
currency against major currencies in the international foreign exchange
market, initiating disinvestment process of public sectors, dismantling of
the industrial licensing regime, allowing foreign direct investment (FDI)
across a wide range of industries including enhancement of FDI limits in
private sector banking, allowing FDI up to 100 per cent under the
automatic route for most manufacturing activities in SEZs, introducing
Non-resident Indian scheme, throwing open industries reserved for the
public sector to private participation, abolition of the MRTP Act, the
removal of quantitative restrictions on imports, the reduction of the peak
customs tariff, separating restrictions on short-term debt allowing external
commercial borrowings based on external debt sustainability and wide
ranging financial sector reforms in banking, capital markets and insurance
sector etc.

3.2.2 Trends in the globalization:

An idea about the growing economic interdependence among
nations can be had from a brief review of world trends in trade and
investment. In 1950 world exports stood at $61 billion. They rose to $315
15
Somalkar, Prakash, (2012), “Impact of Globalization on Indian Economy”, Abhinav – Journal
of Research in Arts & Education, Vol.1, Issue. 8, p.6.

48
billion in 1970, $3,447 billion in 1990 and further to $10,393 billion in
2005. During this entire period, the growth in world trade was significantly
higher than the growth in world output. As a result, an increasing
proportion of world output entered into world trade. The share of world
trade in world GDP touched 32.5 per cent in 1990 and this rose further to
47 per cent in 2005 and 53 per cent in 200816.

There has been a substantial increase in foreign direct investment

(FDI) as well. FDI increased from $2,02,547 million in 1990 to $14,63,611
million in 2000 and further to 18,23,282 million in 2008. Because of global
recession FDI declined to $11,63,874 million in 200917.

Private capital flows to low and middle income economies more

than quadrupled from $ 200 billion in 2000 to $ 900 billion in 2007,
reaching 6.6 per cent of the economies collective GDP. Foreign direct
investment accounted for most of these flows, as MNCs established
foothold in new markets, shifted production sites to take advantage of
lower costs, or sought access to supplies of natural resources. Portfolio
investment in bond and equity markets also grew. Foreign investors were
drawn to emerging equity markets as the prospects for these economies
improved substantially and the returns outpaced those in more developed
markets. Net inflows from bonds and commercial bank lending grew from
$ 12 billion in 2000 to $ 264 billion in 2007 and globalization of the
banking industry continued18.

As accentuated by Kavaljit Singh, much faster and much more

influential than globalization of trade in recent years has been the

16
Misra, S.K and Puri, V.K. (2012) Indian Economy, Mumbai: Himalay Publishing House, p.
550.
17
World Bank (2010, 2011), World Development Indicators, 2010. Table 6.12 p. 396 and World
Development Indicators, 2011. Table 6.12 p. 364.
18
World Bank (2009), World Development Indicators, 2009. P. 4.

49
globalization of finance. Historically most trading in foreign exchange was
the result of international trade as buyers and sellers of foreign goods
required foreign currency for settlement of payments. Things have now
changed drastically as only 2 per cent of global currency movements are on
account of international trade. Financial flows are now rarely associated
with the flow of real resources and long-term productive investments. They
have acquired a life of their own and are guided mainly by short-term
speculative gains. The emergence of many new financial instruments like
bonds, mutual funds, GDRs (Global Depository Receipts) and derivatives
has contributed significantly to the globalization of finance. According to
an estimate made by the Bank for International Settlements (BIS) which
monitors the transactions in the world’s foreign exchange markets, $1.49
trillion is traded on an average on a single day19.

3.3 ECONOMIC CHALLENGES OF GLOBALIZATION

Following are the major economic challenges springing from
globalization:
• Devaluation of benefits: It is true that uninterrupted flow of capital
increases investment in the economy and thus accelerates the
economic development. That is why flow of capital thought to be
strong policy logic related with globalization20. But on the other
side, it generates many shortcomings with the implementation and
use of foreign capital and FDI. Some of its drawbacks like a sudden
outflow of capital from economy, outflow of resources in the form
of benefits and unplanned utilization of the resources of countries,
collectively devaluates the grand benefits accrued because of
globalization.

19
Kavaljit Singh (2000), Taming Global Financial Flows. P. 1.
20
Sing, Bimlesh (2010), Globalization – Concepts, Opportunities and Challenges: The Indian
Experience”, Economic Affairs,Vol. 55, No.1, p. 24-35.

50
 Table 3.1(a) and 3.1(b) deal with inward and outward flow of FDI in
India and also the net FDI before introducing globalization policies and
after introducing globalization policies. Table 3.1(a) reveals that the net
cumulative FDI flow before 1991 was $1,606.81 million between 1970 and
1990 (for twenty one years). Table 3.1(b) reveals the same between 1991
and 2011 (for twenty one years) which is $1,19,606.87 million. This makes
clear that the FDI flow after globalization has increased on an average by
approximately 74 times when compared to the pre-globalization period.
Though tables 3.1(a) and 3.1(b) are positive as regards to economic
development as a result of globalization, Table – 3.2 shows the drawbacks
of the same. It (Table – 3.2) shows how the FIIs have influenced the
sudden fall of Sensex index.21

In the last six years there is a fall of Sensex indices by more than
500 points in a day as a result of withdrawal of capital by the FIIs to the
tune of more than Rs.500 crores in a day. Such fall has taken place for 18
times in six years indicating an average of 3 times a year and making
Indian medium and small investors vulnerable.

21
There may be other domestic and international reasons for the fall in Sensex. However, the
objective factor shows that withdrawal of capital by FIIs is the main reason.

51
Inward and outward Foreign Direct Investment (FDI) flows of India,
1970-2011

Table – 3.1(a)
Pre-Globalization era
(US $ in Millions)
Net Cumulative Net
Year Inward Outward
Investment Investment
1970 45.46 0.00 45.46 45.46
1971 47.66 0.00 47.66 93.12
1972 17.79 0.00 17.79 110.91
1973 37.91 0.00 37.91 148.82
1974 56.97 0.00 56.97 205.79
1975 85.09 0.00 85.09 290.88
1976 51.11 0.00 51.11 341.99
1977 -36.06 0.00 -36.06 305.93
1978 18.09 0.00 18.09 324.02
1979 48.57 0.00 48.57 372.59
1980 79.16 4.00 75.16 447.75
1981 91.92 2.00 89.92 537.67
1982 72.08 1.00 71.08 608.75
1983 5.64 5.00 0.64 609.39
1984 19.24 4.00 15.24 624.63
1985 106.09 3.00 103.09 727.72
1986 117.73 -1.00 118.73 846.45
1987 212.32 5.00 207.32 1053.77
1988 91.25 11.00 80.25 1134.02
1989 252.10 10.00 242.1 1376.12
1990 236.69 6.00 230.69 1606.81
Measure: US Dollars at current price and current exchange rates in millions.
Source: UNCTAD Stats (updated as of 2012-07-18, 12:09:24).

52
 Table – 3.1(b)
Post-Globalization era
(US $ in Millions)
Net Cumulative
Year Inward Outward
Investment Net Investment
1991 75.00 -11.00 86.00 86.00
1992 252.00 24.00 228.00 314.00
1993 532.00 0.35 531.65 845.65
1994 974.00 82.00 892.00 1737.65
1995 2151.00 119.00 2032.00 3769.65
1996 2525.00 240.00 2285.00 6054.65
1997 3619.00 113.00 3506.00 9560.65
1998 2633.00 47.00 2586.00 12146.65
1999 2168.00 80.00 2088.00 14234.65
2000 3587.99 514.45 3073.54 17308.19
2001 5477.64 1397.44 4080.20 21388.39
2002 5629.67 1678.04 3951.63 25340.02
2003 4321.08 1875.78 2445.30 27785.32
2004 5777.81 2175.37 3602.44 31387.76
2005 7621.77 2985.49 4636.28 36024.04
2006 20327.76 14284.99 6042.77 42066.81
2007 25505.59 19594.36 5911.23 47978.04
2008 43406.3 19256.50 24149.80 72127.84
2009 35595.9 15927.10 19668.80 91796.64
2010 24159.2 13151.00 11008.20 102804.84
2011 31554.03 14752.00 16802.03 119606.87
Measure: US Dollars at current price and current exchange rates in millions.
Source: UNCTAD Stats (updated as of 2012-07-18, 12:09:24).

53
 Chart – 3.1
FDI flows of India before and after globalization period

130000
120000
110000
100000
90000
80000
Million $

70000
60000
50000
40000
30000
20000
10000
0
-10000
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
Years

Inward Outward Cummulative Net Investment

Table-3.2
Activity of Foreign Institutional Investors (FII) activity and Sensex fall

Gross Gross Net

Sl. Trading Sensex
Buying (Rs. Selling (Rs. Investment
No. Day Fall
in Cr.) in Cr.) (Rs. in Cr.)
1 18-May-06 2104.00 2914.60 -810.60 826.00
2 16-Aug-07 2,696.50 5546.40 -2849.90 642.70
3 17-Oct-07 6,076.50 7853.10 -1776.60 717.43
4 21-Nov-07 3,246.60 5469.00 -2222.40 678.18
5 17-Dec-07 4,117.70 5216.40 -1098.70 769.48
6 21-Jan-08 4,896.90 7322.50 -2425.60 1408.35
7 22-Jan-08 7,749.20 10005.50 -2256.30 857.00
8 11-Feb-08 8,169.90 10015.40 -1845.50 833.98
9 17-Mar-08 3,807.30 4439.60 -632.30 951.03

54
 Table-3.2 (Contd..)

Gross Gross Net

Sl. Trading Sensex
Buying (Rs. Selling (Rs. Investment
No. Day Fall
in Cr.) in Cr.) (Rs. in Cr.)
10 27-Jun-08 3,348.60 4094.70 -746.10 600.00
11 15-Sep-08 2,495.20 3124.50 -629.30 710.00
12 6-Oct-08 1,995.20 3116.60 -1121.40 724.62
13 10-Oct-08 3,959.00 6282.20 -2323.20 800.10
14 24-Oct-08 2,284.10 3462.10 -1178.00 1070.63
15 7-Jan-09 2,409.20 3467.60 -1058.40 749.05
16 17-Aug-09 1,766.40 2740.20 -973.80 626.71
17 24-Feb-11 3,685.70 5935.50 -2249.80 545.92
18 22-Nov-11 1,758.90 2621.10 -862.20 704.00
Note: Only Sensex fall of more than 500 points a day and net investment
(withdrawal) of more than Rs.500 Crores in a day are considered.
Source: Compiled from http://www.indiainfoline.com/MarketStatistics/FII-Activity/

• Negative trade balance: Due to opening up of domestic market for

foreign goods there will be a rapid growth in the imports because of
the attraction towards foreign goods. This is mainly due to
demonstration effect as well as quality imported goods. On the other
hand, the developing countries will be able to get foreign market for
their goods but their goods might not be competitive to similar
foreign goods and products in terms of cost and quality, due to level
of development achieved by the developed countries. Ultimately
such a situation will tend towards a negative balance of trade which
will not be beneficial for any developing economy. India being a
developing country has been facing the same challenge. This is
evident when we observe the trade balance of the country after 1991
(Table – 3.3).

55
 Table – 3.3
Trends in Export, Import and Trade Deficit of India (1980-2012)
(US $ in Millions)
Year Export Import Trade Deficit
1980 11274.40 16927.95 5653.55
1981 11234.71 17397.43 6162.72
1982 12159.03 17517.74 5358.71
1983 13059.98 17572.63 4512.65
1984 13423.63 17857.80 4434.17
1985 12849.20 18984.13 6134.93
1986 13476.23 19631.83 6155.60
1987 15247.40 22290.08 7042.68
1988 17301.08 25412.60 8111.52
1989 20283.70 28127.95 7844.25
1990 22911.06 29526.65 6615.59
1991 23020.36 27031.88 4011.52
1992 24953.49 29665.60 4712.11
1993 27122.92 30604.96 3482.04
1994 31560.65 37872.37 6311.72
1995 38013.22 48225.10 10211.88
1996 40975.69 54960.00 13984.31
1997 44812.71 58172.80 13360.09
1998 45766.80 59367.90 13601.10
1999 51386.30 62827.50 11441.20
2000 59931.70 73075.20 13143.50
2001 62130.20 71311.20 9181.00
2002 70619.30 75741.50 5122.20
2003 84795.00 92959.10 8164.10
2004 116219.60 131179.90 14960.30
2005 154703.30 181978.50 27275.20
2006 193498.10 225268.10 31770.00
2007 240712.90 279416.30 38703.40
2008 305729.00 380088.50 74359.50
2009 260847.50 328257.50 67410.00
2010 349976.00 439240.00 89264.00
2011 (E) 436712.00 540392.00 103680.00
2012 (E) 431914.39 566020.82 134106.42
Note : 2011 and 2012 figures are estimated.
Measure: US Dollars at current price and current exchange rates in millions.
Source: UNCTAD Stats (updated as of 2013-09-23).

56
• Distortion of economic structure of host country: Another strong
challenge is that, globalization led MNCs are not doing well for the
host countries of which low developed countries are the foremost.
Even when capital, technology, managerial skill and marketing
expertise of MNCs are utilized profitably by host country, they may
still create a number of problems such as making domestic
technology obsolete, producing inappropriate products, etc, these
global corporations may thus give an uneven impact on the
development process of the host country. In their attempt to make
huge profits, they may distort the economic structure of the host
country by adopting oligopolistic practices, suppressing domestic
entrepreneurship and thus inhibiting emergence of small scale local
enterprises and growth of indigenous technology22. A larger portion
of the profits of these corporations would flow out of the host
country in the form of dividends, royalty on technical fees etc. They
may even threaten the autonomy and sovereignty of the host country
by intervening and influencing in the decision making process.

• Impact on local corporations: Globalization may make adverse

impact on domestic corporations. Simply globalizing domestic
prices in the absence of global incomes may further marginalize the
vast majority of the poor. At the prevailing low level of incomes in
India free trade would simply facilitate MNCs to expand their
operations, while Indian companies would fail to penetrate the
western market. Many domestic companies ceased their operations
due to lack of competitiveness.

22
Sing, Bimlesh (2010), Globalization – Concepts, Opportunities and Challenges: The Indian
Experience”, Economic Affairs,Vol. 55, No.1, p. 24-35.

57
 Table – 3.4
Non-Government Companies which ceased to work in India
(2001-2012)
Companies Companies struck
Year Total
Liquidated off
2001-02 59 701 760
2002-03 79 872 951
2003-04 74 424 498
2004-05 25 1752 1777
2005-06 67 1313 1380
2006-07 NA* NA* 17818
2007-08 27 54307 54334
2008-09 28 17442 17470
2009-10 19 12871 12890
2010-11 9 20040 20049
2011-12 0 23762 23762
NA* = Information is not available.
Source: Annual Reports on the Working & Administration of the Companies Act, 1956.

Table 3.4 gives a picture of the number of private corporations

ceasing their operations during 2001-02 to 2011-12 in India. The trend
reveals a steady increase in the closure of non-government companies in
India.

• Unemployment: Globalization leads to jobless growth, not only in

low developed countries but also in the developed countries. The
employment problem has been an unending problem. It has
aggravated across the world after globalization. The total number of
unemployed manpower has increased during globalization period.
Globalization is thus seen to be deceptive in the sense that it
enhances unemployment instead of curtailing it. One of the main
reasons for this is that most of the undertakings of the so called
MNCs are very much capital intensive and not labor intensive. As a
consequence the employment created by MNC units is rather less

58
 than unemployment created in the competing domestic units due to
competition. Another reason of course may be increase in the
population of employable manpower. One thing is sure that the
globalization has not effectively confronted the employment. Table
– 3.5 shows a steady increase in unemployment rate during post-
globalization period in India.

Table – 3.5
Unemployment Scenario in India in post-globalization period
Year No. in Millions
1991 36.30
1994 36.69
1997 39.14
2000 40.34
2004 42.50
Source: IMF stats.

• Cost competitiveness: Except the cheap unskilled labour nothing

helps in combating the cost factor of goods in under developed
countries. Labour is one of the factors of production. But when we
look at other factors like capital, infrastructure, etc. the under
developed countries have nothing to cherish. To add to this, tax is
another factor. To be competitive in the global market domestic
taxes play an important role. If domestic taxes imposed a higher tax
burden on domestic producers than foreign taxes imposed on foreign
competitors, then, in the absence of offsetting customs regulations,
domestic producers will be at a competitive disadvantage23. Their
costs of production are higher with potentially negative
consequences for profitability, output, indirectly for tax revenue.

23
Genschel, Philipp (2005), “Globalization and the transformation of the tax state”, European
Review, Vol.13, Supp.1, p. 53-71.

59
• Tax competition: Globalized economies have been racing in the tax
competition. This competition is being attempted from all fronts
like: (i) structure and design of tax laws and methods of payment of
taxes which are being made payer friendly and rational, (ii)
procedures of taxes which are made simple and easy, and (iii)
effective tax rates which are continuously reduced keeping in mind
the tax rates of competing countries. The sovereign states endowed
with the power of taxation have come under the control of
globalization and the taxation freedom to act has been curtailed
indirectly. The economies have been negotiating tax treaties with
each other so as to bargain for availing maximum possible
advantage from economic activities. Table 4.5 (in Chapter – IV)
shows the DTAAs signed by India before and after the introduction
of globalization. The table shows that there is a tremendous rise in
number of agreements signed after 1990 when compared to the
period prior to 1990.

• Tax evasion and avoidance: To be competitive in the global

market one needs to reduce price and improve quality. Price is a
result of many influencing cost components. One important cost
component is tax. More is the effective tax on a product less will be
price competitiveness of the product in the market. Ability to
compete being the root to success the enterprise tries to reduce the
burden of tax by adopting to tax planning measures. Since, tax
planning is possible only to a certain extent and after exploiting that
fully when tax liability still becomes more burdensome the
unscrupulous assessees may adopt dubious methods like tax
evasion. The so called tax heavens and off-shore centres have
become a tool to use for this purpose. Aggressive tax planning in the

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 form of treaty shopping, conduit companies, thin capitalization etc.
have cropped up in global economic environment for the very same
reason. This has created a big challenge for the countries across the
world to fight problem of tax evasion using cross border
transactions.

• Growing offshore finance in FDI: Offshore finance mechanisms in

FDI include mainly (i) offshore financial centers (OFCs) or tax
havens and (ii) special purpose entities (SPEs). SPEs are foreign
affiliates that are established for a specific purpose or that have a
specific legal structure; they tend to be established in countries that
provide specific tax benefits for SPEs. Both OFCs and SPEs are
used to channel funds to and from third countries.

Investment in OFCs remains at historically high levels. Flow

to OFCs amounted to almost $ 80 billion in 2012, down $ 10 billion
from 2011, but well above the $15 billion average of the pre-2007
period. OFCs account for an increasing share of global FDI flows, at
about 6 per cent. SPEs play an even larger role relative to FDI flows
and stocks in a number of important investor countries, acting as a
channel for more than $600 billion of investment flows.24 Over the
past decade, in most economies that host SPEs, these entities have
gained importance in investment flows. In addition, the number of
countries offering favourable tax treatment to SPEs is on the
increase.25

The avoidance and transparency in international financial

transactions are issues of global concern that require multilateral
approach. According to World Investment Report 2013 by UNCTAD,

24
UNCTAD (2013), World Investment Report 2013. p. xiv.
25
Ibid. p. xv.

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 till date international efforts on these issues have focused mostly on
OFCs, but SPEs are a far larger phenomenon. Moreover, FDI flows to
OFCs remain at high levels. Addressing the growing concerns about
tax evasion requires refocusing international efforts. A first step could
be establishing a closed list of “benign” uses of SPEs and OFCs.26 This
would help to focus on any future measures on combating the
colourable devices of tax avoidance and lack of transparency.

3.4 CONCLUSION
The economic globalization has helped integrating the world
economics and thereby providing competitive produce to the consumers.
“Globalization has expanded economic freedom spurred competition and
raised productivity and living standards of people in countries that have
integrated into the global economy”27. It has widened the market for
products, labour, capital etc. At the same time some new challenges have
emerged, specially, in case of underdeveloped and less developed
economies. The challenges, cited earlier in the discussion, may become the
major problems if not handled properly at right time. It has become the
agenda of all the globalised economies to handle the challenges of
globalization. India is not an exception and hence many economic
measures have been initiated in the last few years.

In the Indian context a host of new policy measures encompassing

the agriculture, industry and service sectors have been developed to suit to
the requirements of economic globalization. A number of committees and
researchers have provided inputs for reforms in the areas like capital
markets, direct and indirect taxes, foreign direct investment, E-commerce,
banking, trade and commerce, etc. Accordingly, the Government has

26
Ibid.
27
Dhokalia, R.P, (2013), “Globalization a Complex Process: Its Ramifications and the Need of a
New Ethic”, in Vivek Dhokalia (ed.) ‘International Law Towards A New Global Order’, New
Delhi, Taxmann, p. 3.

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introduced reforms and schemes to match the requirement. However, the
tempo has not been maintained in the approval and implementation
because of the reasons like, Center-State difference of opinion, lack of
strong Government at Center, coalition compulsions etc. It is to be noted
that the reforms drive may have been slowed but never came to a halt.
However, due to recently changed political equations it has become easy to
push reforms further.

As regards to the challenges of globalization it is to be understood

that these challenges are dynamic and not static. So, they change in their
dimensions as the time passes. Hence, one particular solution is not
available to handle these challenges. Perhaps an integrated approach is
desired, wherein a number of complementing measures tackle many
different challenges with probably very less negative effects on the
domestic economy.

It is our wish that the new political scenario with strong Government
at the Center and many states would help ushering in many a reform
measures to exploit all possible benefits from globalization and achieve
faster economic development.

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