EFFECT OF GLOBALIZATION IN INDIAS ECONOMIC GROWTH
EFFECT OF GLOBALIZATION ON
INTRODUCTION:
As a new participant in the globalization wave,
The present paper is organized as follows: Section 1 makes the survey of trade policy in period 1950 to 1985, Section 2 summarizes the economic changes in period 1985 to 2005 with special focus on the liberalization attempt in 1991 and its aftereffects. Section 3 summarizes results and makes a conclusion. In general it is not very hard to prove that even a limited attempt of globalization has benefited Indian economy in the best possible way. As it is argued numerous times in other circles and by other economists (such as Prof. Jagdish Bhagwati and T. N. Srinivasan,) the drive of liberalization has to pick up the speed for better and faster gains for the economy.
Section 1: The Big Move Toward Protectionist Posture
The Indian independence movement in 1940s, led by Mahatma Gandhi, was based on the general dislike of anything and everything “foreign”, especially the one originating from
Naturally, it was hard to convince the policy makers that import substitution was an expensive policy action in economic sense, even if politically it seemed to be a “patriotic” thing to do. This “extreme nationalism” was evident in blindly carried out economic planning process of early days. Leftists had an influence on each economic plan which increased tariffs on almost all imports, and economy resulted into almost “autarky” stage. Table 1 makes the point clear. The export and import were so low that they formed less than one percent of the total world trade. These low figures of trade were by the country that has had roughly 15% of world population. The highest merchandise export figure was reached in 1980 (of $919.8 million) and they declined significantly in 1981 and 1982. For 6 years in a row (from 1979 to 1985) the merchandise exports were stagnant at roughly $700 to $800 million. The services sector did not fair any better. While the services exports were steadily increasing in this period the figures were less that $400.00 million. This was a period when computer technology services were unheard of and services sector in
Merchandise imports were highest in 1981 (at $925.5 million) and with that exceptional year they were steadily increasing. One can see the giant jump in imports of merchandise in year 1974, thanks to the first oil price increase by the OPEC.
In general 1965 to 1985 was a turbulent time period. It witnessed the stagnation of the economy as well as that of Indian trade.
TABLE 1
Merchandise Services Merchandise Services Trade
Exports Exports Imports Imports Balance
1965 129.4 62.1 125.3 57.5 4.9
1966 139.3 69.1 146.5 66.2 -8.6
1967 98.9 74.8 152.1 73.2 -57.3
1968 82.5 67.0 130.6 63.0 -51.2
1969 107.1 69.3 107.0 56.8 .9
1970 146.2 85.1 143.5 71.3 2.1
1971 150.8 97.2 200.6 85.0 -49.0
1972 191.7 99.8 215.5 84.0 -25.8
1973 291.0 118.9 326.0 93.2 -16.2
1974 329.4 140.7 476.7 125.3 -160.4
1975 306.5 182.5 441.9 118.3 -102.7
1976 402.0 172.5 427.9 117.2 -22.8
1977 512.6 212.1 564.7 149.8 -48.3
1978 640.3 262.0 618.4 192.1 18.9
1979 779.6 2 92.8 754.1 253.5 -21.2
1980 919.8 279.8 899.9 262.8 -79.1
1981 896.4 302.8 925.5 282.0 -147.9
1982 685.5 340.6 837.6 308.5 -263.2
1983 742.0 342.5 721.6 280.7 -56.9
1984 743.2 347.1 756.6 310.9 -131.3
1985 814.0 394.3 814.3 362.9 -115.1
Source: International Financial Statistics Yearbook 1994, International Monetary Fund,
All figures are expressed in millions of US dollars at the current prices.
One of the reasons for this retarded growth in Indian trade was the disoriented trade policy. There was even a problem of assigning priority to industries for importing necessary parts and raw materials. As Bhagwati-Desai put it, “ It was not surprising, therefore, that the agencies involved in determining industry-wise allocation fell back on vague notions of “fairness”, implying pro rata allocations with reference to capacity installed or employment, or shares defined by past import allocations and similar other rules of thumb with out any rationale” (see Bhagwati-Desai (1970) in bibliography, page 290).
The hardship experienced by this virtual “closed economy” was no more evident than in early 1970s when the economy went through numerous shocks. The poor monsoons created agricultural production short-fall leading to severe droughts in some parts of the country. This put pressure on the industrial production which was not progressing very well in the first place. Due to the additional burden exerted by the Indo-Pakistan War of 1971, the economy started suffering miserably. Rationing of necessities was common and criminal elements made a heyday by hoarding. The political opposition parties made life miserable for Indira Gandhi government which had a little choice but to blame all starvation on foreign elements. In 1973, came the OPEC oil price shock and the things really went out of control. While country had no reserves to pay for imported oil, the import bill was growing very fast and export earnings were sluggish. See Table 1 figures for 1973 when imports increased from $191.7 million to $291 million and again in 1976 went up to $402 million. Political parties were extremely active. But economically there was no way out. The protectionism was to the highest level. Consider the 350% import tariff rate on automobiles and average tariff rate of 152%. Domestic industries were well protected that they loved being monopolists and had no inclination for technological innovation. The maturity stage, that was supposed to have taken place according to the famous (?) Infant Industry Argument has never arrived. Strict foreign exchange controls were not only required but were very necessary to stop illegal foreign currency and gold smuggling transactions. It was an administrative nightmare where rent seeker made merry and black market constituted half of the official economy. Academicians learned several lessons of how protectionism can ruin the economy and policy makers watched economy reaching to a real low point while they searched for the solutions.
To top the political chaos, the ruling party (Indira Congress) declared emergency restricting many a freedoms and ruthlessly putting anyone in jail, who gave even a hint of “anti-governmental activity”. The country definitely needed a magic for rapid economic growth which could have silenced the political “trouble makers”.
In early 1980s the monsoon god was nice to
Section 2: The Wave of Globalization Arrived
In 1980s there were some signs of policy change in Rajiv Gandhi’s Prime Ministership, but the Macro-economy was already damaged by earlier faults. As Aggarwal (2004) puts it “The Macroeconomic crisis reached its peak in 1990 with combined fiscal deficit of Centre and State governments standing at 10% as percentage of GDP, current account balance at 3.3% of GDP backed by a rate of inflation 9.9% despite India’s record economic performance measured in terms of rate of growth of GDP, 6.0 percent, due to high rates of industrial growth of 5.9% and domestic saving ratio of 21.9% of the GDP.” (see Aggarwal, (2004) page 47). Nonetheless this growth was accompanied by strange macro-imbalances that resulted into tremendous external borrowing, leading to heavy external debt of 28.7%. As Joshi-Little (1997) pointed out, “For the first time in her history,
In June of 1991, when the current Prime Minister Dr. Manmohan Singh was the Finance Minister (and Mr. Narasinha Rao was the Prime Minister), country received first significant shock of globalization and liberalization. This was also the product of strong demand by some well known economists and policy planners for significantly changing the policy structure. While the declared plan reduced the Rupee value significantly by devaluating it by 21% in one day, it also made it abundantly clear that the old ways of high tariff rates were almost completely over. The tariff rates were slashed, more foreign direct investment (FDI) was invited and import quotas were demolished. There were essentially 2 parts of the liberalization program: Structural and Stabilization. Stabilization measures were supposed to be of short-term nature, including such policies as the “austerity in governmental budgets”, which was supposed to bring about the decline in aggregate demand and therefore lower the inflation rate. The structural adjustment was to be of a long-term nature with such measures as the convertibility on current account of the balance of payment, lower restrictions on domestic business and export promotion.
In words of Aggarwal, “Far reaching meaningful changes in trade and exchange rate policies, viz., two bouts of devaluation of the Rupee, sweeping but phased reduction in import tariffs, quantitative restrictions, and quota except on consumer goods, the suspension of cash compensatory support of exports, trimming and rationalizing the structure of mounting export subsidies, full convertibility of the rupee on current account on balance of payment in 1993, moving from a dual exchange rate system in 1992 to a single market determined unified exchange rate system, have been made” ( see Aggarwal, (2004), page 48). These steps not only made a complete switch in the policy moves heretofore, but also showed policy makers’ inclination to move to market oriented economy as the blunders of governmental controls were becoming more and more visible. All in all, these reforms aimed to achieve stability, curb the inflationary pressure and release the breaks on production and productivity. (Aggarwal, page 49).
The post reform years showed quick and efficient recovery from the acute macroeconomic crisis of 1991. The real GDP in 1990s increased at an annual rate of 6% which is even more impressive because the rest of the world was going through a minor recession. The highest increase in real GDP was experienced in 1996-1997 with 7.8% (expected to be surpassed in 2004) Increased production had its effect on the prices. Inflation rate of 13.6 percent in 1991 was reduced to 1.3 percent in 2001-2002, a remarkable achievement by any standard. The monetary policy was carried out responsibly and the fiscal pressures were negative but much more manageable than earlier years. However the fiscal policy austerity program was not totally effective, thanks to the crisis created by
As Table 2 shows, in 1994 while the real GDP increased by 5.9%, the inflation rate declined from 13.7% in 1992 to 8.4%. While the interest was still very high, it had some downward pressure. The official unemployment number was very high (36.69 million) but it remained steady, a mild achievement in an increasing population. But as it is evident for several years, the Indian unemployment is beyond the reported figures of unemployed labor. It consists of heavy under-employment, it is marred by extreme poverty partly due to illiteracy. The so called “full-time employment” in
Table 2
Macroeconomic Performance in Post 1991 Years
Year Real GDP Inflation Interest Unemployment Money Supply
Growth Rate Rate No. in Millions Billions of Rs
1991 .96 8.9 17.88 36.3 1046.1
1992 2.3 13.7 18.92 36.75 1120.9
1993 1.5 10.1 16.25 36.27 1330.2
1994 5.9 8.4 14.75 36.69 1695.0
1995 7.3 10.9 15.46 36.74 1883.5
1996 7.3 7.7 15.96 37.43 2148.9
1997 7.8 6.4 13.83 39.14 2419.3
1998 6.5 4.8 13.54 40.01 2703.5
1999 6.5 6.9 12.54 40.37 3161.2
2000 6.1 3.3 12.29 40.34 3495.9
2001 4.0 7.1 12.08 41.99 3846.0
2002 6.2 4.7 11.92 42.36 4318.6
2003 5.5 5.1 11.50 43.10 4822.3
2004 8.0 4.5 10.60 42.50 5402.3
Source: Some figures are from Aggarwal (2004) and some are from IMF’s publication, International Financial Statistics Yearbook, 2003.
While the international trade policy was further liberalized, al beit, at a slower rate than many of the academicians argued for, there were signs for further opening up, by reduction in import tariff, convertibility on the current account transactions, freer availability of foreign reserves, and increased zest for inviting foreign direct investment. It appeared that policy makers by 1995 were convinced that globalization is what is needed for faster economic growth. Success sometimes breeds upon itself, and policy makers usually are fast learners especially when political benefits are high. However the growth of 1994-19917 was not perfectly matched by accelerated growth in 1997-2000 period. As Chitre (2003) points out, this sluggishness was due to the slow growth in agricultural sector, not because of industrial slowdown. The international trade as witnessed in Table 3 did not perform poorly either.
Better monsoons of years 2000 to 2004 helped not only the agricultural sector grow faster but also the manufacturing, trade and services sectors moved admirably. In 2004 it became official that Indian economy was second fastest growing in the world, second only to the Chinese economy. In fact, the Chinese economy’s growth is also primarily explained by her newly found affection for openness. The Indian economy, much like the world economy, went through technological change. While the computer mega cities such as
Table 3
International Trade Performance Post 1991 Years
Exports Imports BOT Exchange rate
In billions of US dollars for 3 columns Rs/SDR
1991 18.09 21.08 4.01 36.95
1992 20.01 22.93 4.71 36.02
1993 22.01 24.1 3.48 43.10
1994 25.52 29.67 6.31 45.81
1995 31.23 37.95 10.21 52.29
1996 33.73 43.78 13.98 51.66
1997 35.20 45.73 13.36 52.99
1998 34.07 44.82 13.60 59.81
1999 36.87 45.55 11.44 59.69
2000 43.13 55.32 13.77 60.91
2001 43.82 50.53 5.97 60.54
2002 52.71 51.41 7.58 65.29
2003 63.45 61.42 8.69 67.27
2004 65.09 77.03 13.37 68.88
Source: IMF’s International Financial Statistics Year book, 2003
Website: www.rbi.org.in/statistics for figures after 1999.
Table 3 shows the drastic turn around of the economy in 1990s in terms of international trade patterns. While the exports increased drastically, the opening of the borders and reduction in tariff rates also allowed the imports to go up. The balance of trade figures were in a manageable amount (almost always less that $14 billion).
What is interesting to point out is that the “non-oil” imports and exports showed a positive balance of trade for the Indian economy since year 2000. Hence oil imports formed the major drain on the foreign reserves and constituted the main reason for balance of trade deficit. While the Services sector picked the exports considerably, important raw material imports have also grown significantly.
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