Globalization of Indian Economy

8/9/2019 Globalization of Indian Economy

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Globalization of Indian Economy

By: Sahil Shroff

SIMSR 2009-2011MMS - A


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Reasons for Globalization

Indias 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.


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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.


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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 soughtout in various sectors

FDI involved setting up new capacities, and portfolio

investment

Buying equities in existing companies through the stock

market


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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 insteadprovided 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


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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


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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


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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 insome 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


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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


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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


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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


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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


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Effects of the Financial Reforms

Liberalization of the banking system has notdestabilized 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 havedropped substantially during the reform period

Better accounting system and financial

supervision

Entry of private banks leading to healthycompetition


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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



Robust increase in real wages

In the reform period real wages increased by 42%


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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 toincreased 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


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Future of Indian Economy post globalization

India has transitioned from a relatively closed to amore open economy fairing well

The macroeconomic environment is more

responsive to growth

India has increased its savings and investmentrates 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

Globalization of Indian Economy

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