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Saturday, February 12, 2011

Impact of Globalization on Developing Countries

The Important Reform Measures (Step Towards Globalization)
Indian economy was in deep crisis in July 1991, when foreign currency reserves had plummeted to
almost $1 billion; Inflation had roared to an annual rate of 17 percent; fiscal deficit was very high and
had become 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 time. These were the economic
compulsions at home and abroad that called for a complete overhauling of our economic policies and
programs. Major measures initiated as a part of the liberalisation and globalisation strategy in the early
nineties included the following:
Devaluation: The first step towards globalization was taken with the announcement of the
devaluation of Indian currency by 18-19 percent against major currencies in the international
foreign exchange market. In fact, this measure was taken in order to resolve the BOP crisis
Disinvestment-In order to make the process of globalization smooth, privatization and
liberalisation policies are moving along as well. Under the privatization scheme, most of the
public sector undertakings have been/ are being sold to private sector
Dismantling of The Industrial Licensing Regime At present, only six industries are under
compulsory licensing mainly on accounting of environmental safety and strategic
considerations. A significantly amended locational policy in tune with the liberalized licensing
policy is in place. No industrial approval is required from the government for locations not
falling within 25 kms of the periphery of cities having a population of more than one million.
Allowing Foreign Direct Investment (FDI) across a wide spectrum of industries and
encouraging non-debt flows. The Department has put in place a liberal and transparent foreign
investment regime where most activities are opened to foreign investment on automatic route
without any limit on the extent of foreign ownership. Some of the recent initiatives taken to
further liberalise the FDI regime, inter alias, include opening up of sectors such as Insurance
(upto 26%); development of integrated townships (upto 100%); defence industry (upto 26%);
tea plantation (upto 100% subject to divestment of 26% within five years to FDI); enhancement
of FDI limits in private sector banking, allowing FDI up to 100% under the automatic route for
most manufacturing activities in SEZs; opening up B2B e-commerce; Internet Service
Providers (ISPs) without Gateways; electronic mail and voice mail to 100% foreign investment
subject to 26% divestment condition; etc. The Department has also strengthened investment
facilitation measures through Foreign Investment Implementation Authority (FIIA).
Non Resident Indian Scheme the general policy and facilities for foreign direct investment as
available to foreign investors/ Companies are fully applicable to NRIs as well. In addition,
Government has extended some concessions specially for NRIs and overseas corporate bodies
having more than 60% stake by NRIs
Throwing Open Industries Reserved For The Public Sector to Private Participation. Now
there are only three industries reserved for the public sector
Abolition of the (MRTP) Act, which necessitated prior approval for capacity expansion
The removal of quantitative restrictions on imports.
The reduction of the peak customs tariff from over 300 per cent prior to the 30 per cent rate
that applies now.
168 International Research Journal of Finance and Economics - Issue 5 (2006)
Severe restrictions on short-term debt and allowing external commercial borrowings based on
external debt sustainability.
Wide-ranging financial sector reforms in the banking, capital markets, and insurance sectors,
including the deregulation of interest rates, strong regulation and supervisory systems, and the
introduction of foreign/private sector competition.
Impact of Globalization
The implications of globalization for a national economy are many. Globalization has intensified
interdependence and competition between economies in the world market. These economic reforms
have yielded the following significant benefits:
Globalization in India had a favorable impact on the overall growth rate of the economy.This is
major improvement given that India’s growth rate in the 1970’s was very low at 3% and GDP growth
in countries like Brazil, Indonesia, Korea, and Mexico was more than twice that of India. Though
India’s average annual growth rate almost doubled in the eighties to 5.9%, it was still lower than the
growth rate in China, Korea and Indonesia. The pick up in GDP growth has helped improve India’s
global position. Consequently India’s position in the global economy has improved from the 8th
position in 1991 to 4th place in 2001; when GDP is calculated on a purchasing power parity basis.
During 1991-92 the first year of Rao’s reforms program, The Indian economy grew by 0.9%only.
However the Gross Domestic Product (GDP) growth accelerated to 5.3 % in 1992-93, and 6.2% 1993-
94. A growth rate of above 8% was an achievement by the Indian economy during the year 2003-04.
India’s GDP growth rate can be seen from the following graph since independence.
Structure of the Economy
Due to globalization not only the GDP has increased but also the direction of growth in the sectors has
also been changed. Earlier the maximum part of the GDP in the economy was generated from the
primary sector but now the service industry is devoting the maximum part of the GDP. The services
sector remains the growth driver of the economy with a contribution of more than 57 per cent of GDP.
India is ranked 18th among the world’s leading exporters of services with a share of 1.3 per cent in
world exports. The services sector is expected to benefit from the ongoing liberalization of the foreign
investment regime into the sector. Software and the ITES-BPO sectors have recorded an exponential
growth in recent years. Growth rate in the GDP from major sectors of the economy


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