International business refers to business activities that take place across national frontiers.

Though many
people use the terms international business and international trade synonymously, the former is a much
broader term. International business involves not only trade in goods and services, but also other
operations such as production and marketing of goods and services in foreign countries.

Reasons: The primary reason for international business is that nations cannot efficiently produce all that
they require. Due to differences in resource endowments and labour productivity, countries find it much
more advantageous to produce goods and services in which they have cost advantage and trade the
surplus in such goods and services with other nations in exchange of goods and services which others can
produce more efficiently.

Scope: Scope of international business is quite wide. It includes not only merchandise exports, but also
trade in services, licensing and franchising as well as foreign investments.

Benefits: International business benefits both the nations and firms. Nations gain by way of earning
foreign exchange, more efficient use of domestic resources, greater prospects of growth and creation of
employment opportunities. The advantages to the business firms include: prospects for higher profits,
greater utilisation of production capacities, way out to intense competition in domestic market and
improved business vision.

Modes of entry: A firm desirous of entering into international business has several options available to it.
These range from exporting/importing to contract manufacturing abroad, licensing and franchising, joint
ventures and setting up wholly owned subsidiaries abroad. Each entry mode has its own advantages and
disadvantages which the firm needs to take into account while deciding as to which mode of entry it
should prefer.

The important features of international business are as follows:

a) Large scale operation: In international business, all the operations are conducted on a very huge scale.
Production International Business and marketing activities are conducted on a large scale. It first sells its
goods in the local market. Then the surplus goods are exported.

b) Integration of economies: International business integration (combines) the economies of many

countries. This is because it uses finance from one country, labour from another country, and
infrastructure from another country. It designs the product in one country, produces its part in many
different countries and assembles the product in another country. It sells the product in many countries,
i.e. in the international market.

c) Dominated by developed countries and MNCs: International business is dominated by developed

countries and Japan dominated (fully control) foreign trade. This is because they have large financial and
other resources. They also have the best technology and research and development (R & D). They have
highly skilled employees and managers because they give very high salaries and other benefits.
Therefore, they produce good quality goods and services at low prices. This helps them to capture and
dominate the world market.

d) Benefits to participating countries: International business gives benefits to all participating countries.
However, the developed (rich) countries get the maximum benefits. The developing (poor) countries also
get benefits. They get foreign capital and technology. They get rapid industrial development of the
developing countries. Therefore, developing countries open up their economies through liberal economic
policies.

e) Keen competition: International business has to face keen (too much) competition in the world
market. The competition is between unequal partners i.e. developed and developing countries. In this
keen competition, developed countries and their MNC s are in a favourable position because they produce
superior quality goods and services at very low prices. Developed countries also have many contacts in
the world market. So, developing countries find it very di cult to face competition from developed
countries.

f) Special role of science and technology: International business gives a lot of importance to science
and technology. Science and Technology (S & T) help the business to have large-scale production.
Developed countries use high technologies. Therefore, they dominate global business. International
business helps them to transfer such top high-end technologies to the developing countries.

g) International restrictions: International business faces many restrictions on the inflow and outflow
of capital, technology and goods. Many governments do not allow international businesses to enter their
countries. They have many trade block, tariff barriers, foreign exchange restrictions, etc. All this is
harmful to international business.

h) Sensitive nature: The international business is very sensitive in nature. Any changes in the
economic policies, technology, political environment, has a huge impact on it. Therefore, international
business must conduct marketing research to find out and study these changes. They must adjust their
business activities and adapt accordingly to survive changes.

Problems of International business: The major problems faced are as follows:

1. Different currencies: Every country has its own currency. So importer has to make payment in the
currency of exporter’s country.

2. Legal Formalities: International business is subject to a large number of legal formalities and
restrictions.

3. Distance Barriers: Due to large distance between countries, it is difficult to establish quick and
personal contacts between traders from different countries.

4. Language Barrier: Due to different languages in different countries, it becomes difficult for
traders to understand the terms and conditions of the contract.

5. Difference in Laws: International business transactions are subject to laws, rule and regulations of
multiple countries. International business transactions are subject to laws, rule and regulations of multiple
countries.

6. Information Gap: It is difficult to obtain accurate information about foreign markets and about the
financial position of foreign merchants.
International vs Domestic business

Conducting and managing international business operations is more complex than undertaking domestic
business. Differences in the nationality of parties involved, relatively less mobility of factors of
production, customer heterogeneity across markets, variations in business practices and political systems,
varied business regulations and policies, use of different currencies are the key aspects that differentiate
international businesses from domestic business. These, moreover, are the factors that make international
business much more complex and a difficult activity. Some of the differences in Domestic and
International business are given below :

DIFFERENCE DOMESTIC BUSINESS INTERNATIONAL BUSINESS

NATIONALITY Employees, suppliers, middleman, shareholders Employees, suppliers, middleman, shareholders and
and partners are usually citizens of the same partners are from different nations.
country.

MOBILITY Mobility of factors of production is more within a Mobility of factors of production is relatively less.
country.

RISKS It is subject to political system and risks of a single It is subject to political system and risks of different
country. countries.

BUSINESS POLICIES Business practices, taxation system and policies of Business practices, taxation system and policies vary
a single country are applicable. considerably across countries.

Currency Mainly currency of domestic country is involved. Currencies of more than one country are involved in
international business.

International Business Environment

The international business environment can be defined as the environment in different sovereign
countries, with factors exogenous to the home environment of the organization, influencing decision-
making on resource use and capabilities.

International business environment refers to totality of all the factors viz. geographic, economic, financial,
socio-cultural, political, legal, technological and ecological which are external to and beyond the control
of individual business enterprises. International business environment is more complex than the business
environment because international business environment consists of foreign and global factors, which are
external to domestic environment. A firm is generally familiar with the factors operating at the national
level but a firm has to be aware of various factors operating in a country of trading partner. Thus,
international business environment is sum total of domestic, foreign and global environments.

International business environment consists of a number of micro-level and macro-level factors operating
at domestic level, foreign level and global level. Accordingly various factors constituting business
environment may be grouped as under:

(i) Domestic Environment

(ii) Foreign Environment

(iii) Global Environment

Elements of International Business Environment

The home-based or the domestic export expansion measures are necessarily related to the conditions
prevailing in possible markets. An Exporter has to overcome various constraints and adapt plans and
operations to suit foreign environmental conditions. The main elements of foreign environment affecting
marketing activities of a firm in a foreign country consist of the following.

A) POLITICAL DIMENSION: Nations greatly differ in their political environment. Govt. policies,
regulations and control mechanisms regarding the countries, foreign trade and commercial relations with
other countries or groups of countries. At least four factors should be considered in deciding whether to
do business in a particular country. They are

1) Attitudes towards International Buying: Some nations are very receptive, indeed encouraging, to
foreign firms, and some others are hostile. For e.g.: Singapore, UAE and Mexico are attracting foreign
investments by offering investment incentives, removal of trade barriers, infrastructure services, etc.

2) Political Stability: A country's future and stability is another important issue. Government
changes hands sometimes violently. Even without a change, a region may decide to respond to popular
feeling. A foreign firm's property may be seized; or its currency holdings blocked; or import quotas or
new duties may be imposed. When political stability is high one may go for direct investments. But when
instability is high, firms may prefer to export rather than involve in direct investments. This will bring in
foreign exchange fast and currency convertibility is also rapid.

3) Monetary Regulations: Sellers want to realise profits in a currency of value to them. In best
situations, the Importer pays in the seller's currency or in hard world currencies. In the worst case they
have to take the money out of the host country in the form of relatively unmarketable products that they
can sell elsewhere only at a loss. Besides currency restrictions, a fluctuating exchange rate also creates
high risks for the exporter.

4) Government Bureaucracy: It is the extent to which the Government in the host country runs an
efficient system for assisting foreign companies: efficient customs handling, adequate market
information, etc. The problem of foreign uncertainty is thus further complicated by a frequently imposed
“alien status", this increases the difficulty of properly assessing and forecasting the dynamic international
business. The political environment offers the best example of the alien status.

A foreign political environment can be extremely critical; a shift in Government often means sudden
changes in attitudes that can result in expropriation, expulsion, or major restrictions in operations. The
fact is that a foreign company is foreign and thus always subject to the political whim to a greater degree
than a domestic firm.

B) CULTURAL ENVIRONMENT: The manner in which people consume their priority of needs
and the wants they attempt to satisfy, and the manner in which they satisfy are functions of their culture
which moulds and dictates their style of living. This culture is the sum total of knowledge, belief, art,
morals, laws, customs and other capabilities acquired by humans as members of the society. Since culture
decides the style of living, it is pertinent to study it especially in export marketing. e.g. when a
promotional message is written, symbols recognizable and meaningful to the market (the culture) must be
used. When designing a product, the style used and other related marketing activities must be culturally
acceptable.

C) ECONOMIC ENVIRONMENT: In considering the international market, each Exporter must

consider the importing country's economy. Two economic characteristics reflect the country's
attractiveness as an export market. They are the country's industrial structure and the country's income
distribution by employment industrialization and socio economic justices.

D) LEGAL ENVIRONMENT: The legal dimension of international Business environment includes

all laws and regulations regarding product specification and standards, packaging and labeling, copyright,
trademark, patents, health and safety regulations particularly in respect of foods and drugs. There are also
controls in promotional methods, price control, trade margin, mark-up, etc., These legal aspects of
marketing abroad have several implications which an exporting firm needs to study closely.

Meaning of Globalisation

Globalizations are the outcome of the policies of liberalisation and privatisation. Globalisation is
generally understood to mean integration of the economy of the country with the world economy, it is a
complex phenomenon. It is an outcome of the set of various policies that are aimed at transforming the
world towards greater interdependence and integration. It involves creation of networks and activities
transcending economic, social and geographical boundaries.

Globalisation involves an increased level of interaction and interdependence among the various nations of
the global economy. Physical geographical gap or political boundaries no longer remain barriers for a
business enterprise to serve a customer in a distant geographical market.

In simple words, The term globalization can be defined as the opening one's economy toward the world
economy. It means to integrate the domestic economy with world economy. The govt. of India under the
prime minister ship of P. V Narasimha introduced liberalisation, privatisation and globalization during
1991 .Due to globalization the multinational corporations have been very popular. These corporations
transact their business activities more than one countries.

Globalisation and India

Indian economy had experienced major policy changes in early 1990s. The new economic reform,
popularly known as, Liberalization, Privatization and Globalization (LPG model) aimed at making the
Indian economy as fastest growing economy and globally competitive. The series of reforms undertaken
with respect to industrial sector, trade as well as financial sector aimed at making the economy more e
cient.

With the onset of reforms to liberalize the Indian economy in July of 1991, a new chapter has dawned for
India and her billion plus population. This period of economic transition has had a tremendous impact on
the overall economic development of almost all major sectors of the economy, and its e"ects over the last
decade can hardly be overlooked. Besides, it also marks the advent of the real integration of the Indian
economy into the global economy.
This era of reforms has also ushered in a remarkable change in the Indian mindset, as it deviates from the
traditional values held since Independence in 1947, such as self reliance and socialistic policies of
economic development, which mainly due to the inward looking restrictive form of governance, resulted
in the isolation, overall backwardness and inefficiency of the economy, amongst a host of other problems.
This, despite the fact that India has always had the potential to be on the fast track to prosperity.

Benefits of Globalisation

a) Increased Competition: One of the most visible effects is the improved quality of products due to
global competition. Customer service and the ‘customer is the king’ approaches to production have led to
improved quality of products and services. As the domestic companies have to fight out foreign
competition, they are compelled to raise their standards and customer satisfaction levels in order to
survive in the market.

b) Employment: With globalisation, companies are moving towards the developing countries and
hence generated employment for them. It has given an opportunity to invest in the emerging markets and
tap up the talent which is available there. In developing countries, there is often a lack of capital which
hinders the growth of domestic companies and hence creates unemployment. In such cases, due to global
nature of the businesses, people of developing countries too can obtain gainful employment opportunities.
c) Investment and Capital Flows: A lot of companies have directly invested in developing countries
like Brazil and India by starting production units. Companies which perform well attract a lot of foreign
investment and thus push up the reserve of foreign exchange.

d) Spread of Technical Know-How: While it is generally assumed that all the innovations happen in
the Western world, the know-how also comes into developing countries due to globalisation. Without it,
the knowledge of new inventions, medicines would remain cooped up in the countries that came up with
them and no one else would benefited. The spread of know –how can also be expanded to include
economic and political knowledge, which too has spread far and wide.

e) Spread of Culture: Not all good practices were born in one civilization. The world that we live in
today is a result of several cultures coming together. People of one culture, if receptive, tend to see the
flaws in their culture and pick up the culture which is more correct or in tune with the times. Societies
have become larger as they have welcomed people of other civilization and backgrounds and created a
whole new culture of their own. Cooking styles, languages and customs have spread all due to
globalization. The same can be said about movies, musical styles and other art forms. They too have
moved from one country to another, leaving impression on a culture which has adopted them.

IMPACT OF GLOBALIZATIN ON VARIOUS SECTOR OF INDIAN ECONOMY OR ROLE

OF GLOBALISATION

1) Impact of Globalization on Agricultural Sector

Agricultural Sector is the mainstay of the rural Indian economy around which socio-economic privileges
and deprivations revolve and any change in its structure is likely to have a corresponding impact on the
existing pattern of Social equity. The liberalization of India’s economy was adopted by India in 1991.
Facing a severe economic crisis, India approached the IMF for a loan, and the IMF granted what is called
a ‘structural adjustment’ loan, which is a loan with certain conditions attached which relate to structural
change in the economy. Essentially, the reforms sought to gradually phase out government control of the
market (liberalization), privatize public sector organizations (privatization), and reduce export subsidies
and import barriers to enable free trade Globalization has helped in:

 Raising living standards,

 Alleviating poverty,

 Assuring food security,

 Generating buoyant market for expansion of industry and services, and

 Making substantial contribution to the national economic growth.

2) Impact of Globalization on Indian trade and industry:

Globalization has its impact on India which is a developing country. The positive impact of globalization
can be analysed as follows:

1. Access to Technology: Globalization has drastically, improved the access to technology. Internet
facility has enabled India to gain access to knowledge and services from around the world. Use of Mobile
telephone has revolution used communication with other countries.

2. Growth of international trade: Tari" barriers have been removed which has resulted in the growth
of trade among nations. Global trade has been facilitated by GATT, WTO etc.

3. Increase in production: Globalization has resulted in increase in the production of a variety of

goods. MNCs have established manufacturing plants all over the world.

4. Employment opportunities: Establishment of MNCs have resulted in the increase of employment

opportunities.

5. Free flow of foreign capital: Globalization has encouraged free flow of capital which has
improved the economy of developing countries to some extent. It has increased the capital formation.

6. Products of superior quality: Products of superior quality are available in the market due to
increased competition, e ciency and productivity of the businesses and this leads to increased consumer
satisfaction.

7. Free flow of finance enable the banking and financial institutions in a country to fulfill financial
requirements through internet and electronic transfers easily and help businesses to flourish.

3) Impact on Financial Sector

Reforms of the financial sector constitute the most important component of India’s programme towards
economic liberalization. The recent economic liberalization measures have opened the door to foreign
competitors to enter into our domestic market. Innovation has become a must for survival. Financial
intermediaries have come out of their traditional approach and they are ready to assume more credit risks.
As a consequence, many innovations have taken place in the global financial sectors which have its won
impact on the domestic sector also. The emergences of various financial institutions and regulatory bodies
have transformed the financial services sector from being a conservative industry to a very dynamic one.
In this process this sector is facing a number of challenges. In this changed context, the financial services
industry in India has to play a very positive and dynamic role in the years to come by o"ering many
innovative products to suit the varied requirements of the millions of prospective investors spread
throughout the country. Reforms of the financial sector constitute the most important component of
India’s programme towards economic liberalization.

Growth in financial services (comprising banking, insurance, real estate and business services), after
dipping to 5.6% in 2003-04 bounced back to 8.7% in 2004-05 and 10.9% in 2005-06 The momentum has
been maintained with a growth of 11.1% in 2006-07. Because of Globalization, the financial services
industry is in a period of transition. Market shifts, competition, and technological developments are
ushering in unprecedented changes in the global financial services industry.

4) Impact on Export and Import

India’s Export and Import in the year 2001-02 was to the extent of 32,572 and 38,362 million
respectively. Many Indian companies have started becoming respectable players in the International
scene. Agriculture exports account for about 13 to 18% of total annual of annual export of the country. In
2000-01 Agricultural product valued at more than US $ 6 million were exported from the country 23% of
which was contributed by the marine products alone. Marine products in recent years have emerged as the
single largest contributor to the total agricultural export from the country accounting for over one fifth of
the total agricultural exports. Cereals (mostly basmati price and non-basmati rice), oil seeds, tea and co"ee
are the other prominent products each of which accounts from nearly 5 to 10% of the country’s total
agricultural exports.

The implications of globalization for a national economy are many. Globalization has intensified
interdependence and competition between economies in the world market. This is reflected in
Interdependence in regard to trading in goods and services and in movement of capital. As a result
domestic economic developments are not determined entirely by domestic policies and market conditions.
Rather, they are influenced by both domestic and international policies and economic conditions. It is thus
clear that a globalizing economy, while formulating and evaluating its domestic policy cannot a"ord to
ignore the possible actions and reactions of policies and development in the rest of the world. This
constrained the policy option available to the government which implies loss of policy autonomy to some
extent, in decision-making at the national level.

Negative effect of globalization:

Negative effects of globalization on Indian industry have been:

1. Rise in demand for labor and the rise in wage rates leading to some increase in costs.

2. Weakening power of the trade unions over labor in emerging industries and growth sectors like
IT, entertainment, internet and mobile services, airlines, banking, insurance, banking services.

3. Too much competition in the market leading to continuous pressure on raising productivity,
enhancing consumer service, improving product quality, in order to survive.
4. Voluntary retirement for many public sector units.

5. Too many sales person chasing customers.

6. Too many cars on the road and tra c congestion.

7. Growth of consumerism.

8. Instability in profits due to too much choice among customers.

9. Shortage power and infrastructure a"ecting industrial expansion.

10. Closure of ine cient units supplying costly and shoddy products and loss of jobs.

11. Two years of large increase in textile industry jobs followed by large loss of jobs due to Rupee
appreciation making Indian industry uncompetitive.

12. Problems of dealing with uncertainty in the international market in terms of demand, supply and
prices.

OBSTACLES TO GLOBALIZATION

The Indian business suffers from many disadvantages in respect of globalization of business. The
important problems are following:

a) Government Policy & Procedures: Government policy procedure in India is among the most
complex, confusing and cumbersome in the world. Even after the much publicized liberalization, they do
not present a very conducive situation. Government policy and the bureaucratic culture in India in this
respect are not that encouraging.

b) High Cost: High cost of many vital input and factors like raw material and intermediates, power,
finance, infrastructure facilities like port etc. tent reduce the international competitiveness of the Indian
business.

c) Poor Infrastructure: Infrastructure in India is very inadequate and insu cient and they for very
costly this is the serious problem affecting the growth and competitiveness.

d) Resistance to Change: There are several socio-political factors which resist change and this
comes in the way of modernization, rationalization and efficiency improvement. Technological resist due
to fear of unemployment. The extend labors employed by Indian industry is alarming because of labors of
production is low and this may come in offsets the advantages of cheap labors.

e) Poor quality image: Due to various reasons, the quality of many Indian products is poor. Even
when the quality is good, the poor quality image, India has become a handicap.

f) Supply problem: Due the various reason like low production, infrastructure like power, port
facilities.
g) Small Size: Because of the small size and the low level of resources, in many cases Indian firms
are not able to compete with the giants of other counties. Even the largest Indian companies are small
compared to the multinational giants.

h) Limited R&D and marketing Research: Marketing research and R&D in other areas are vital
inputs for development of international business. However, these are poor in Indian business. Expenditure
on R&D in Indian is less than one percentage of the GNC while it is two to three percent in most of the
developed counties. In 1994- 95, Indian’s per capital R&D expenditure was less than $3 when it was
between $100 and $825 for most of the developed nation.

i) Growing competition: The competition is growing not only from the firm in the developed
countries but also from the developing country firms. Indeed, the growing competition from the
developing country firms is a serious challenge to Indian’s International business.

j) Trade Barriers: Although the tari" barriers to trade have been progressively reduced thanks to the
GATT/WTO, the non-tari" barriers have been increasing, particularly in the developed counties.

International Economic Grouping

After the Second World War, when the entire economy of the world was destroyed and a transformation
was going on from the wartime economy to peacetime economy, the world leaders have started to give
thought on the line of increasing the world trade. After the two world wars the countries of the world
erected tariff wall to reduce import. This ultimately resulted in fall in trade. Secondly, the need was felt
for an international institution which will monitor and act as the regulator of the world trade. All these
come out in the form of General Agreement on Trade and Tariffs (GATT). Later on it was replaced by
world Trade Organization (WTO). At the regional level also several groups emerges to promote
cooperation and trade at the regional level. Some of these are ASEAN and SAARC. After the World War
II, in order to revive the international monetary system a necessity was felt for an international financial
institution to support the economies which were damaged due to the war and also to help the countries to
run their economy efficiently. So, two international financial institutions came out which are International
Monetary Fund and World Bank.

GATT / World Trade Organisation and its Impact on Indian economy

The first half of the 20th century was marked by a major worldwide economic depression that occurred
between the two world wars and that all but destroyed most of the industrialized nations. International
trade got a setback when after the First World War countries erected high tari" walls and raised other tari"
barriers to intolerable heights. All this resulted in to the great depression. This was also one of the
fundamental reasons of the World War II.

After the Second World War leaders creates General Agreement on Tari"s and Trade (GTTO), to avoid
the repletion of the same. GATT was a forum for the member countries to negotiate a reduction of tari"s
and other barriers to trade. Countries including India signed the GATT. The original agreement provides a
process to reduce tari"s and created an agency to serve as a watchdog over world trade.

GATT came into existence with e"ect from 1st January 1948 and remained in force till December 1994.
Various rounds of negotiations have taken place under the auspices of GATT to reduce tari" and non-tari"
barriers. The last one, known as the Uruguay Round, was the most comprehensive one in terms of
coverage of issues, and also the lengthiest one from the point of view of duration of negotiations which
lasted over a period of seven years from 1986 to 1994.

One of the key achievements of the Uruguay Round of GATT negotiations was the decision to set up a
permanent institution for looking after the promotion of free and fair trade amongst nations. Consequent
to this decision, the GATT was transformed into World Trade Organisation (WTO) with e"ect from 1st
January 1995. The head quarters of WTO are situated at Geneva, Switzerland. Establishment of WTO,
thus, represents the implementation of the original proposal of setting up of the ITO as evolved almost
five decades back.

Though, WTO is a successor to GATT, it is a much more powerful body than GATT. It governs trade not
only in goods, but also in services and intellectual property rights. Unlike GATT, the WTO is a
permanent organisation created by an international treaty ratified by the governments and legislatures of
member states. It is, moreover, a member driven rule-based organisation in the sense that all the decisions
are taken by the member governments on the basis of a general consensus. As the principal international
body concerned with solving trade problems between countries and providing a forum for multilateral
trade negotiations, it has a global status similar to that of the IMF and the World Bank. India is a founding
member of WTO. As on 11th December 2005, there were 149 members in WTO.

Objectives of WTO: WTO lays down the following objectives:

a) Relation in the field of trade shall be conducted with a view to raising standards of living,
ensuring full employment and large and steadily growing volume of real income and e"ective demand,
and expanding the production and trade in goods and services.

b) To allow for the optimal use of the world’s resources in accordance with the objective of
sustainable development.

c) To make positive e"orts designed to ensure that developing countries especially the least
developed among them, secure a share in the growth in international trade.

d) To achieve these objectives by entering into reciprocal and mutually advantageous arrangements
directed towards substantial reduction of tari"s and other barriers to trade and the elimination of
discriminatory treatment in international trade relations.

e) To develop an integrated, more viable and durable multilateral trading system.

f) To ensure linkages between trade policies, environment policies and sustainable development.

Functions of WTO: The following are the functions of the WTO:

a) It facilitates the implementation, administration and operation of the objectives of the Agreement
and of the Multilateral Trade Agreements.

b) It provides the framework for the implementation, administration and operation of the multilateral
Trade Agreements relating to trade in civil aircraft, government procurement, trade in diary products and
bovine meat.
c) It provides the forum for negotiations among its members.

d) It administers the Understanding on Rules and Procedures governing the Settlement of Disputes
of the Agreement.

e) It cooperates with the IMF and the World Bank and its a liated agencies with a view to achieving
greater coherence in global economic policy-making.

Implications for India: After the Uruguay Round, India was one of the first 76 Governments that
became member of the WTO on its first day. Di"erent views have been expressed in support and against
our country becoming a member of the WTO.

Favourable Factors

a) Benefits from reduction of tariffs on exports.

b) Improved prospects for agricultural exports because the prices of agricultural products in the
world market will increase due to reduction in domestic subsidies and barriers to trade.

c) Likely increase in the exports of textiles and clothing due to the phasing out of MFA by 2005.

d) Advantages from greater security and predictability of the international trading system.

e) Compulsions imposed on India to be competitive in the world market.

Unfavourable Factors

a) Tariff reductions on goods of export interest to India are very small.

b) Less prospects of increase in agricultural exports due to the limited extent of agricultural
liberalisation.

c) There will be hardly any liberalisation of our textile exports during the next 10 years.

d) India will be under pressure to liberalize the services industries.

e) There will be only marginal liberalisation to the movement of labour services in which it is
competitive.

f) Increased outflows of foreign exchange due to commitments undertaken in the fields of TRIPS,
TRIMS and services.

g) Technological dependence on foreign firms will increase.

h) Only a few large firms or transnational corporations may benefit and smaller firms may
disappear.

IMF and Its Contribution in Indian Economy

Introduction to IMF: The IMF was established on December 27, 1945 in Washington on the
recommendations of Bretton Woods Conference. But it started working on March 1, 1947. The fund has
185 member countries accounting for more than 80 per cent of total world production and 90 per cent of
world trade. The purpose of the Fund is to promote international monetary cooperation, to facilitate the
expansion and balanced growth of international trade, to promote exchange stability and to prevent
unnecessary exchange depreciations, to remove all exchange controls and restrictions and to establish
multi-convertibility of all currencies and lastly to help member countries with funds to correct
maladjustments in their balance of payments. The fund of the IMF is SDRs 216.75 billion and to
replenish its resources it borrows from the world financial markets and member countries. IMF’s own
fund is contributed by member countries.

IMF and INDIA

IMF has played an importance role in Indian economy. IMF had provided economic assistance from time
to time to India and has also provided appropriate consultancy in determination of various policies in the
country. India is the founder member of IMF. It played a significant role in the formulation of Fund
Policies. The Finance Minister is ex-o cio Governor in IMF Board of Governors. Till 1970, India was
among the first five nations having the highest quota with IMF and due to this status India was allotted a
permanent place in Executive Board of Directors.

India has taken loans in foreign currencies from IMF or improving its balance of payments imbalances.
India has also taken technical consultancy for solving its internal economic problems. The expert groups
of the IMF have visited India on various occasions.

Objective of IMF: The objective for which IMF was established has been described as following:

1) Promote International Monetary Co-operation: The main objective of the fund was to promote
international monetary co-operation through a permanent institution which provides that machinery for

consultation and collaboration on international monetary problems.

2) Balanced Growth of International Trade: The one of the main objective of the Fund was to
facilities the expansion and balanced growth of international trade and to contribute thereby to the
promotion and maintenance of high levels of employment and real income and to the development
productive resources of all members.

3) Stability of Exchange Rates: Another important objective of IMF was to promote exchange
stability, to maintain orderly exchange arrangements among members and to avoid competitive exchange
depreciation.

4) Establishment of Multilateral trade and payment system: Another objective of the establishment
of IMF was to assist the establishment of the multilateral system of payments in respect of current
transactions between members and in the elimination of foreign exchange restrictions which hamper the
growth of world trade.

5) To develop confidence to member: Another objective of IMF was to give confidence to members
by making the funds, resources available to them under adequate safeguards, thus providing with
opportunity to correct maladjustments in their balance of payments without resorting to measures
destructive of national or international prosperity.

6) Removing Deficit of balance of Payments: Another objective of the establishment of IMF was
removal of the deficit of balance of payments also. IMF makes arrangement of necessary loans from
foreign exchange reserves for removing the deficit of balance of payments.

In addition to this India also got the following benefits of becoming the IMF members:

1. Independence of the Indian Rupee: Before the establishment of the IMF, the Indian rupee was
linked with the British Pound Sterling. But Indian rupee has become independent after the establishment
of IMF. Its value is expressed in terms of gold. It is not determined by the Pound Sterling. It means that
Indian rupee is easily convertible into the currency of any other country.

2. Membership of the World Bank: India has become a member of the World Bank also by virtue of
its membership of the Fund. As a result, India got several loan facilities from the World Bank for the
development purposes.

3. Availability of Foreign Currencies: The Government of India has been purchasing foreign
currencies from the Fund from time to time to meet the requirements of development activities. The large
amount of availability of foreign currencies has greatly promoted the economic development of the
country.

4. Reputation in International Circle: India is one of those six countries which have occupied a
special place in the Board of Directors of the Fund. Thus, India had played a creditable role in
determining the policies of the Fund. This has increased India’s prestige in the international circles. India
takes keen interest in the formulation of Fund’s policies.

5. Guidance and Advice: Being member of the Fund, India got the expert opinion from the Fund for
solving its economic problems. The attitude of the Fund towards India has always remained sympathetic.
The Fund has given valuable advice to the Government of India with regard to the financing of the Five-
Year Plans.

6. Timely Help: India has received timely help from the Fund to eliminate the deficit on its balance
of payments. The Fund granted loans to meet the financial di cult is arising out of the Indo-Pak conflict of
1965 and 1971. Thus, the fund has given timely help to solve economic crisis.

7. Freedom from Sterling: Indian rupee was convertible into other currencies through the medium of
sterling before becoming the member of the fund. With the fixation of paper value of the rupee in gold,
Indian currency is now freely convertible into any other currency.

8. Sale and Purchase of Foreign Exchange: Fund has entrusted the sale and purchase of foreign
exchange worth more than Rs. 2 lakh to Reserve Bank of India. The latter cannot enter into any
transaction of foreign exchange that is of the value of less than Rs. 2 lakh.

9. Economic Consultation: In the financial management of Five- Year Plans, IMF has given
valuable advice to Government of India and to suggest measures for its economic development.
10. Help during Emergency: India got a large amount of financial assistance from the Fund to solve
its economic crisis arising due to natural calamities like flood, earthquakes, famines etc.

World Bank and Its Impact on Indian Economy

Introduction: A need arises to finance various projects in various countries to promote the development of
economically backward regions. The United States and other countries have established a variety of
development banks whose lending is directed to investments that would not otherwise be funded by
private capital. The investments include dams, roads, communication systems, and other infrastructural
projects whose economic benefits cannot be computed and/or captured by private investors, as well as
projects, such as steel mills or chemical plants, whose value lies not only in the economic terms but also,
significantly in the political and social advantages to the nation.

The loans generally are medium-term to long-term and carry concessional rates. Even though most
lending is done directly to a government, this type of financing has two implications for the private sector.
First, the projects require goods and services which corporations can produce. Secondly, by establishing
an infrastructure, new investment opportunities become available for multinational corporations.

The World Bank or the International Bank for Reconstruction and Development (IBRD) was established
in 1945 under the Bretton Woods Agreement of 1944. An International Monetary and Financial
Conference was held at Bretton Woods, New Hampshire during July 1-22, 1944. The main purpose of the
conference was finalisation of the Articles of Association of IMF and establishment of an institution for
the reconstruction of the war shattered world economies. Thus, the conference has given birth to World
Bank or International Bank for Reconstruction and Development (IBRD). World Bank was established to
provide long-term assistance for the reconstruction and development of the economies of the member
countries while IMF was established to provide short term assistance to correct the balance of payment
disequilibrium.

There are the four basic objectives of the World Bank’s funding strategy:

a) To make sure availability of funds in the market.

b) To provide the funds at the lowest possible cost to the borrowers through appropriate currency
mix of its borrowing and opting to borrow when interest rates are expected to rise.

c) To control volatility in net income and overall loan changes.

d) To provide an appropriate degree of maturity transformation between its lending and the
borrowing. Maturity transformation depicts the Bank’s capacity to lend for longer period than it borrows.

Functions and objectives of World Bank

a) To assist in the reconstruction and development of the territories of its members by facilitating
the investment of capital for productive purposes.

b) To promote private foreign investment by means of guarantee of participation in loans and other
investments made by private investors and, when private capital is not available on reasonable terms, to
make loans for productive purposes out of its own resources or from funds borrowed by it.
c) To promote the long term balanced growth of international trade and the maintenance of
equilibrium in balance of payments by encouraging international investment for the development of the
productive resources of members.

d) To arrange loans made or guaranteed by it in relation to international loans through other

channels so that more useful and urgent projects, large and small alike, will be dealt first.

India and the World Bank

India is the founder member of the Bank and held a permanent seat for number of years on its Board of
Executive Directors. India is one of the largest receivers of assistance since 1949. Upto June 2002,
cumulative lending’s of the World Bank to India amounted to $ 26.69 billion in 187 loans. The total
amount borrowed by India from the World Bank and the IDA till June 2002 amounted to $ 58.54 billion
in 434 loans. This amounted to 11.6 per cent of the total loans and credits approved by the World Bank
groups. During 2001-02, India received $ 893 million from the World Bank accounting for 11.22 per cent
of its total loans. India is helped by the World Bank in its planned economic development through
granting loans, conducting field surveys, sending study terms and missions and through rendering expert
advice. The Bank also provides training to Indian personnel at EDI. It also helped India to solve its river
water dispute with Pakistan.

The benefits desired by India from the World Bank are:

a) India has received a lot of assistance from the World Bank for its development projects.

b) Aid India Club was founded in 1950 by the e"orts of the World Bank with a view to help India.
This club is now called India Development Forum. This Forum had decided to give loans amounting to $
600 crore to India for implementing its structural adjustment.

c) The bank’s role in solving the Indus water dispute between India and Pakistan has been
invaluable.

d) General loans have also been granted by the World Bank to India, to be utilised as per its own
discretion.

e) As a member of the World Bank, India has become the members of International Finance
Corporation, International Development Association and Multilateral Investment Guarantee Agency also.

f) India has received technical assistance from time to time from the World Bank for its various
projects. The Expert Team of the Bank has visited India and given valuable suggestions also.

g) The massive population of India has always created problems in the economic development of
the country. World Bank has been helping India in the population control programmes and urban
development. For this purpose loans amounting to $ 495 crore have also been given to India.

h) World Bank has been giving financial assistance to NGOs operating in India e.g. Leprosy
Elimination, Education Projects, Child development service projects etc.
On the other hand, critics argue that the World Bank have endangered the economic freedom of India.
The basic points of criticism are as follows:

a) The World Bank has laid a great deal of emphasis on measures of economic liberalisation and
more free play of market forces.

b) A lot of stress has been laid on going very slow on the setting up of public sector enterprises
including financial intermediaries and encouraging private sector.

c) India’s dependence on World Bank has been increasing which is adversely affecting its economic
freedom.

d) The attitude of World Bank reflects the preference for free enterprise and a market oriented
economy. It shows dissatisfaction with the general performance of economies which are based on
planning and regulation. At di"erent occasions the Bank has tried to undermine the Significance of our
Planning Commission.

e) The devaluation of Indian rupee in 1966 and 1991 was done at the insistence of the World Bank
only.

India’s main problem till now has been the government’s incapacity to act rightly, firmly and effectively
in time, on account of being more emotional to set ideologies and compromising attitude to safeguard the
political party’s interest more than the national interest.

SAFTA

SAFTA is an abbreviation for the South Asian Free Trade Area. It is a proposed free trade agreement
between the seven members of the SAARC group. These include Bangladesh, Bhutan, India, Maldives,
Nepal, Pakistan and Sri Lanka. The ultimate aim of Safta will be to put in place a full-fledged South Asia
Economic Union on the lines of the EU. Among its aims are promoting and enhancing mutual trade and
economic cooperation by eliminating barriers in trade, promoting conditions of fair competition in the
free trade area, ensuring equitable benefits to all and establishing a framework for further regional
cooperation to expand the mutual benefits of the agreement.

It could lead to enhancement of foreign investment among Saarc nations. The visible spurt in foreign
investment within Asean countries and the increase in investments by India in Sri Lanka and vice versa
following the India-Sri Lanka FTA bear testimony to the potential of such agreements in boosting
investments.

The agreement can be structured to ensure that such investments don’t harm the domestic industries of
member-nations. RTAs, like the proposed Safta, can also catalyse beneficial industrial restructuring in
member- countries through cross-border corporate marriages and acquisitions.