Globalization of Indian Economy

By: Sahil Shroff

SIMSR 2009-2011
MMS - A
Reasons for Globalization

• India’s Growth performance between 1960 – 1980 had

been very disappointing compared to other East Asian
countries - 3.5% per annum against a target of 5%.

• Isolation.

• Overall Backwardness.

• Inefficiency of economy.
Reasons for the problems
• Rigidly controlled environment.

• Extensive government control over private sector activity.

• High levels of protection to encourage domestic

production(self-relaince).

• Restrictive approach to foreign investment.

• Lower trade openness.

Globalization Process
• Globalization of Indian economy took place in early
1990s
• Liberalization towards Trade
• Movement to a flexible exchange rate
• Gradual depreciation
• Tariff reduction

• Liberalization towards FDI

• In the 1990s FDI was welcome and also actively sought out in
various sectors
• FDI involved setting up new capacities, and portfolio investment
• Buying equities in existing companies through the stock market
Globalization Process
• Privatization
• Change in perception of public sector.
• Exclusive public sectors like steel, petroleum, telecommunication
was thrown open to private sector.
• India did not hand over management control, but instead provided
minority stakes in the public sector enterprises up for sale.
• Profit-making public sector enterprises were not privatized.

• Reforms in various sectors including finance and

infrastructure
Reasons for Financial Reform
• Dismal levels of operational and allocation efficiency in
the banking system
• Low profitability
• High and growing non performing assets
• Low capital base
• Administered interest rate structure
• Cross subsidization in lending rates
• Poor quality of loan assets
• Excessive focus on quantitative achievements
• Total neglect of returns and earnings
• Lack of capital adequacy measures
• Bad debts
• Poor customer service
Reasons for Financial Reform
• Genuine need for banks to undertake substantial
restructuring additional capitalization to preserve their
solvency

• Development of new types of financial instruments

• Technological changes

• Expanding capital markets

• Competition from overseas banks

Financial Reforms
• Reforms aimed at :
1. Enhancing the productivity and efficiency of the economy as a
whole
2. Increasing international competitiveness
3. Moving away from central allocation of resources in some key
sectors and instead allocating according to market forces
4. Improving the allocating and functional efficiency of the
financial system
5. Developing a diversified competitive financial system to support
the development and growth of the real sector
Financial Reforms
• Objectives
1. Modifications in the policy framework

2. Improvement in the financial health and competitive capabilities

3. Building financial infrastructures

4. Up gradation of the level of managerial competence and the

quality of human resources
Financial Reforms
• Reforms in the Banking Sector
• Deregulation of interest rates
• Flexibility to determine cost at which to raise money and lend it out

• Liberalization in controls over bank credit allocation

• Different lending rates for different credit limits

• Introduction of prudential norms

• Income recognition
• Asset clarification
• Provision for bad and doubtful debts
• Capital Adequacy
Financial Reforms
• Improved Supervisory standards
• Board for Financial Supervision(BFS) was setup in 1994
• Introduction of new system of Off-site monitoring and Surveillance
System(OSMOS)
• CAMELS and CACS for rating of banks to help identify special
needs for supervisory attention

• Liberalization of entry for private banks

• Existing banks are allowed to expand their operations
• New private banks are permitted to establish themselves
• Introduction of minority private share holding in public
banks
• Reduction of public ownership to minimum holding of 51%
• Foreign institutions are permitted to own up to 20% equity in
domestic markets
Financial Reforms
• Reforms in the Capital Market

• Elimination of government control over the issue of capita

• Establishment of an independent regulator for the securities

market

• Opening the mutual fund sector for private mutual funds

• Reforms in Insurance
• Opening the sector to new private sector insurers but with a cap of
26% in foreign equity
Effects of the Financial Reforms
• Liberalization of the banking system has not destabilized
it.
• Robustness of the system helped India during the East
Asian crisis in that it escaped the contagion
• Level of NPAs of the public sector banks have dropped
substantially during the reform period
• Better accounting system and financial supervision
• Entry of private banks leading to healthy competition
Outcomes of Globalization
• The Good
• GDP growth improved significantly
• 1960 -1980 Growth = 3.5%
• 1980 -1991 Growth = 5.4%
• 1992 -2005 Growth = 6.3%

• Poverty as conventionally measured declined

• In 1983 45% population was below the poverty line
• In 1993 36% population was below the poverty line
• In 1999 26% population was below the poverty line

• Robust increase in real wages

• In the reform period real wages increased by 42%
Outcomes of Globalization
• The Bad
• Growth achievements were less than expected
• Targets of 7% and 8% for the years 1992 -1996 and 2002 – 2007
respectively not achieved
• Benefits of growth were not seen to be evenly distributed among
different states
• Some states accelerated much more than others
• The most poorest and populated states actually decelarated in growth
• Marginal increase in Employment
• Shrinkage of employment in public sector did not lead to increased
employment in private sector
• Rural areas did not share adequately in growth as agriculture
decelerated significantly
• Agricultural GDP growth slowed down from 3.6% between 1980 –
1996 to 2% between 1997 -2004
Future of Indian Economy post globalization
• India has transitioned from a relatively closed to a more
open economy fairing well
• The macroeconomic environment is more responsive to
growth
• India has increased its savings and investment rates
steadily
• FDI has risen from virtually nothing to 1% of GDP with a
distinct possibility of raising to 2-3% of GDP
• Investor interest is increasing and 200 out of the fortune
500 companies are now operating in India
• Indian businessman have confidently started investing
abroad