Business environment

Industrial Policy, Globalization and FDI : 1956 Industrial Policy - 1991 Industrial Policy – Globalization - Global Trade and Developing Countries - Globalization and its Impact on India - FDI Strategies – Acquisitions and Greenfield Investment – FDI Theories and Concepts – FDI and Developing Countries – FDI in India – Benefits of FDI – EXIM Policy.

INTRODUCTION

Definition:

―Business Environment encompasses the -climate‘ or set of conditions, economic, social, political or institutional in which business operations are Conducted.

‖ —Arthur M. Weimer

―Environment contains the external factors that create opportunities and threats to the business. This includes socio-economic conditions, technology and political conditions.

‖ – William Gluck and Jauch

(i) System Approach:

In original, business is a system by which it produces goods and services for the satisfaction of wants, by using several inputs, such as, raw material, capital, labour etc. from the environment.

(ii) Social Responsibility Approach:

In this approach business should fulfill its responsibility towards several categories of the society such as consumers, stockholders, employees, government etc.

(iii) Creative Approach:

As per this approach, business gives shape to the environment by facing the challenges and availing the opportunities in time. The business brings about changes in the society by giving attention to the needs of the people.

Significance of Business Environment & Importance of Business Environment

Business environment notes PDF

A business can be established, but to successfully sustain a business,

The business needs resources like

 Finance for which it has to depend on financial institutions.
 Acceptance of social norms, for which it has to depend on society.
 Proper market conditions, for which it has to depend on the market.
 The sale of products/services, for which it has to depend on the customers.
 The labour, for which it has to depend on society.
 Then there are natural resources and raw material, for which it has to depend on Nature.
 Also, the legal support of the government, for which it has to depend on the government.

There are many factors and dimensions that affect Business Environment.

The changing needs of customers and new innovations in the market are a part of the business environment. The challenge for businesses in this technological era is not to enter the market but to survive in the market. To survive in the market means to adapt to the changes as fast as possible. To adapt to the changes means to be aware of the business environment.

On the basis of the foregoing discussion, it can be said that the Business Environment is the most important aspect of any business. To be aware of the ongoing changes, not only helps the business to adapt to these changes but also to use them as opportunities.

Business Environment presents threats as well as opportunities for any business. A good business manager not only identifies and evaluates the environment but also reacts to these external forces.

The importance of the business environment can be neatly understood if we consider the following facts:

1. Enables to Identify Business Opportunities

All changes are not negative. If understood and evaluated them, they can be the reason for the success of a business. It is very necessary to identify a change and use it as a tool to solve the solve the problems of the business or populous.3 For example, Mr. Phanindra Sama was troubled by the ticket booking condition in India. He used to travel a long distance to his travel agent to book his ticket but even after traveling this distance he was not sure if his seat was confirmed. He saw the opportunity to establish an app in the face of the problem and co-founded the online ticket booking app called ‗red Bus‘.

2. Helps in Tapping Useful Resources

Careful scanning of the Business Environment helps in tapping the useful resources required for the business. It helps the firm to track these resources and convert them into goods and services.

3. Coping with Changes

The business must be aware of the ongoing changes in the business environment, whether it be changes in customer requirements, emerging trends, new government policies, technological changes. If the business is aware of these regular changes then it can bring about a response to deal with those changes. For example, when the Android OS market was blooming and the customers were preferring Android devices for its easy interface and apps, Nokia failed to cope with the change by not implementing Android OS on Nokia devices. They failed to adapt and lost tremendous market value.

4. Assistance in planning

This is another aspect of the importance of the business environment. Planning purely means what is to be done in the future. When the Business Environment presents a problem or an opportunity, it is up to the business to decide what plan would it have to come up with in order to address the future and solve the problem or utilize the opportunity. After analyzing the changes presented, the business can incorporate plans to counteract the changes for a secure future.

5. Helps in Improving Performance

Enterprises that are thoroughly scanning their environment not only deal with the changes presented but also flourish with them. Adapting to the external forces help the business to improve the performance and survive in the market.

Business Environment refers to the ―Sum total of conditions which surround man at a given point in space and time. In the past, the environment of man consisted of only the physical aspects of the planet Earth (air, water and land) and the biotin communities. But in due course of time and advancement of society, man extended his environment through his social, economic and political function.

In a globalized economy, the business environment plays an important role in almost all business enterprises.

1. 1956 INDUSTRIAL POLICY

What is industrial policy?

An industrial policy of a country, sometimes denoted with IP, it is official strategic effort to encourage the development and growth of all or part of the economy.

Main Features of Industrial Policy Resolution of 1956!

In a short period of operation of the 1948 Industrial Policy, some significant changes took place in the economic and political spheres that called for changes in industrial policy as well. The country hand launched a programmer of planned economic development with the first five-year plan.

The second five- year plan gave high priority to industrial development aimed at setting up a number of heavy industries such as steel plants, capital goods industries, etc., for which direct government participation and state involvement was needed.

Further in December 1954, the Parliament adopted the ‗Socialistic Pattern of Society‘ as the goal of economic policy which called for the state or the public sector to increase its sphere of activity in industrial sector and thus prevent concentration of economic power in private hands. In view of aill these developments, a new industrial policy was announced in April 1956. The main features of this Industrial Policy Resolution of 1956 were as follows:

New Classification of industries:

The Industrial Policy Resolution - 1956 was shaped by the Mahalanobis Model of growth, which suggested that emphasis on heavy industries would lead the economy towards a long term higher growth path. The Resolution widened the scope of the public sector. The objective was to accelerate economic growth and boost the process of industrialization as a means to achieving a socialistic pattern of society. Given the scarce capital and inadequate entrepreneurial base, the Resolution accorded a predominant role to the State to assume direct responsibility for industrial development. All industries of basic and strategic importance and those in the nature of public utility services besides those requiring large scale investment were reserved for the public sector.

The Industrial Policy Resolution - 1956 classified industries into three categories.

The first category comprised 17 industries (included in Schedule A of the Resolution) exclusively under the domain of the Government. These included inter alia, railways, air transport, arms and ammunition, iron and steel and atomic energy.

The second category comprised 12 industries (included in Schedule B of the Resolution), which were envisaged to be progressively State owned but private sector was expected to supplement the efforts of the State.

The third category contained all the remaining industries and it was expected that private sector would initiate development of these industries but they would remain open for the State as well. It was envisaged that the State would facilitate and encourage development of these industries in the private sector, in accordance with the programmers formulated under the Five Year Plans, by appropriate fiscal measures and ensuring adequate infrastructure.

Despite the demarcation of industries into separate categories, the Resolution was flexible enough to allow the required adjustments and modifications in the national interest. Another objective spelt out in the Industrial Policy Resolution – 1956 was the removal of regional disparities through development of regions with low industrial base. Accordingly, adequate infrastructure for industrial development of such regions was duly emphasized. Given the potential to provide large-scale employment, the Resolution reiterated the Government‘s determination to provide all sorts of assistance to small and cottage industries for wider dispersal of the industrial base and more equitable distribution of income. The Resolution, in fact, reflected the prevalent value system of India in the early 1950s, which was centered around self sufficiency in industrial production.

The Industrial Policy Resolution – 1956 was a landmark policy statement and it formed the basis of subsequent policy announcements.

Assistance to Private Sector:

While the Industrial Policy of 1956 sought to give a dominant role to public sector, at the same time it assured a fair treatment to the private sector. The ‗policy‘ said that the state would continue to strengthen and expand financial institutions that extend financial assistance to private industry and cooperative enterprises. The state would also strengthen infrastructure (power, transport etc.) to help private sector.

Expanded role of Cottage and Small-Scale Industries: The Industrial Policy of 1956 laid stress on the role of cottage and small scale industries for generating larger employment opportunities, making use of local manpower and resources and reducing- regional inequalities in industrial development. It stated that the Government would continue pursuing a policy of supporting such industries through tax concessions and subsidies.

Balanced Industrial Growth among Various Regions:

The Industrial Policy, 1956 helped to reduce regional disparities in industrial development. The policy stated that facilities for development will be made available to industrially backward areas. The state, apart from setting up more public sector industries in these backward areas, will provide incentives such as tax concessions, subsidized loans etc., to the private sector to start industries in these backward regions.

Role of Foreign Capital:

The industrial Policy 1956 recognized the important role of foreign capital in country‘s development. The foreign capital supplements domestic savings. Provides more resources for investment and relieves pressure on Balance of payments. The country therefore welcomed inflow of foreign capital. But the ‗Policy‘ made it clear that inflow of foreign capital will be permitted subject to the condition that major share in management, ownership and control should be in the hands of Indians.

Development of managerial and Technical Cadres:

The Industrial Policy, 1956 notes that the programmer of rapid industrialization in India will create large demand for managerial and technical personnel. Therefore, the policy emphasized the setting up and strengthening of institutions that Trans and provide such personnel. It was also announced that proper technical and managerial cadres in the public services are also being established.

Incentives to labor:

The Industrial Policy, 1956 recognized the important role of labor as a partner in the task of development. The ‗policy‘ therefore put emphasis on the provision of adequate incentives to workers and improvement in their working and service conditions. It laid down that wherever possible the workers should be progressively associated with that management so that they are enthusiastically involved in the development process.

Conclusion:

The Industrial Policy 1956 thus provided a comprehensive framework for industrial development in India. However, this policy has been criticized on the grounds that by enormously expanding the field of public sector it had drastically reduced the area of activity for the private sector.

2. 1991 INDUSTRIAL POLICY

Major Objectives of India‟s New Industrial Policy 1991

   (i) Liberalizing the industry from the regulatory devices such as licenses and controls.
    (ii) Enhancing support to the small scale sector.
    (iii) Increasing competitiveness of industries for the benefit of the common man.
    (iv) Ensuring running of public enterprises on business lines and thus cutting their losses.
     (v) Providing more incentives for industrialization of the backward areas, and
    (vi) Ensuring rapid industrial development in a competitive environment.

The Industrial Policy of 1991

On July 24, 1991, Government of India announced its new industrial policy with an aim to correct the distortion and weakness of the Industrial Structure of the country that had developed in 4 decades; raise industrial efficiency to the international level; and accelerate industrial growth.

Major Provisions of 1991 Policy

(a)Abolition of licensing procedures:

The NIP has abolished the industrial licensing requirement irrespective of the level of investment in all industries except those 18 industries specified in Annexure II of the ID & R Act (1951). The industries where industrial licensing will be necessary include areas like coal, petroleum, sugar, cigarettes, motor cars, hazardous chemicals, drugs and pharmaceuticals and some luxury items.

(b) Broad branding facility and FMP :

Existing and new industrial units have been provided with the broad branding facility to produce any article so long as no additional investment in plant and machinery is undertaken. The Phased Manufacturing Programmer (PMP) will no longer be applicable to new projects.

(c) M codifications in the MRTP Act:

The MRTP Act will be amended to remove the threshold limit of assets in respect of MRTP companies and dominant undertakings. This would eliminate the requirement of prior approval of the Central Government for establishment of new undertakings, merger, amalgamation, takeover and appointment of directors under certain circumstances.

(d) Foreign investment:

While welcoming foreign investment with its attendant advantage of technology transfer, marketing expertise, introduction of modern managerial techniques and export promotion, the NIP provides for automatic approval of foreign equity participation up to 51% in high priority industries which include 34 broad areas like metallurgy, electrical equipment, transformer, food processing, hotel and tourism.

There will be no bottlenecks of any kind in clearing proposals for foreign equity participation. Such clearance will be available if foreign equity covers the foreign exchange requirement for imported capital goods. Furthermore, the foreign equity proposals need not necessarily be accompanied by foreign

(e) Foreign collaboration:

On foreign technology agreements, the Government intends to combine the need for updating technology in high priority areas with incentives for domestic sales and export promotion. The stress is on foreign technology agreements in high priority areas with incentives for domestic sales and export promotion. Foreign technology agreements in high priority industries will be given automatic permission up to a lump-sum payment of Rs. 1 crore. In non-high priority areas, automatic permission would be given as per the same guidelines provided no free foreign exchange is required for the payments. So far as hiring foreign technicians or foreign testing of indigenously developed products, no permission would be required. Payments may be made from blanket permits or free foreign exchange as per RBI guidelines.

(f) Import of capital goods:

The NIP envisages automatic clearances for import of capital goods provided the foreign exchange requirement for such imports is ensured through foreign equity. In addition, with effect from April 1992, such automatic approval would be given provided the cost, insurance and freight (c.i.f.) value of the capital goods to be imported was less than 25% of the total value of plant and machinery and subject to maximum limit of Rs. 2 crores.

(g) Public sector:

The pre-eminent place of public sector will be continued in 8 core areas. These are arms and ammunition, atomic energy, mineral oils, rail transport and mining of coal and minerals.

Though the role of the public sector has been emphasized, the Government has committed to ensure that it runs on sound commercial lines and continues to innovate and maintain its dominant role in strategic areas. Furthermore, in order to raise resources and encourage wider public participation, a part of the Government‘s shareholding in the public sector units would be offered to mutual funds, financial institutions, the public and workers.

Chronically sick PSUs, which are unlikely to turn around, will be referred to the BIFR or other such institutions to formulate a rehabilitation-cum- revival scheme for such units. Also, a social security mechanism will be created to protect the interests of workers likely to be affected by such rehabilitation packages.

(h) Non-applicability of convertible clause:

In a significant step, the NIP has dispensed with the applicability of the mandatory convertibility clause which enabled financial institutions to convert loans into equity for the term loans extended by financial institutions for new projects.

(i) Reservation for small-scale industries:

The reservation of items for small-scale sector will be continued to promote industrial and agro-industrial employment base. A package for tiny and small scale sector will be announced by the Government separately.

(j) Locational policy:

In cities of less than 1 million population there will be no need for obtaining industrial approvals from the Central Government except for industries subject to compulsory licensing. In respect of cities with population greater than 1 million, industries (other than those of a non-polluting nature such as electronics, computer software and printing) will be located outside 25 kms. of the periphery, except in prior designated industrial areas.

3. GLOBALIZATION

Globalization Meaning:

By the term globalization we mean opening up of the economy for world market by attaining international competitiveness. Thus the globalization of the economy simply indicates interaction of the country relating to production, trading and financial transactions with the developed industrialized countries of the world. Accordingly, the term globalization has four parameters:

(a) Permitting free flow of goods by removing or reducing trade barriers between the countries,

(b) Creating environment for flow of capital between the countries,

(d) Creating environment for free movement of labour between the countries of the world. Thus taking the entire world as global village, all the four components are equally important for attaining a smooth path for globalization.

The concept of Globalization by integrating nation states within the frame work of World Trade Organisation (WTO) is an alternative version of the ‗Theory of Comparative Cost Advantage‘ propagated by the classical economists for assuming unrestricted flow of goods between the countries for mutual benefit, especially from Great Britain to other less developed countries or to their colonies

In this way, the imperialist nations gained much at the cost of the colonial countries who had to suffer from the scar of stagnation and poverty. But the advocates of the policy of globalization argue that globalization would help the underdeveloped and developing countries to improve their competitive strength 10 and attain higher growth rates. Now it is to be seen how far the developing countries would gain by adopting the path of globalization in future. In the mean time, various countries of the world have adopted the policy of globalization. Following the same path India had also adopted the same policy since 1991 and started the process of dismantling trade barriers along with abolishing quantitative restrictions (QRs) phase-wise.

Accordingly, the Government of India has been reducing the peak rate of customs duty in its subsequent budgets and removed QRs on the remaining 715 items in the EXIM Policy 2001-2002. All these have resulted open access to new markets and new technology for the country.

Advantages of Globalization:
The following are some of the important advantages of globalisation for a developing country like India:

(i) Globalisation helps to boost the long run average growth rate of the economy of the country through: (a) Improvement in the allocative efficiency of resources;

(b) Increase in labour productivity; and

(ii) Globalization paves the way for removing inefficiency in production system. Prolonged protective scenario in the absence of globalization makes the production system careless about cost effectiveness which can be attained by following the policy of globalization.

(iii) Globalization attracts entry of foreign capital along with foreign updated technology which improves the quality of production.

(iv) Globalization usually restructure production and trade pattern favoring labour-intensive goods and labour-intensive techniques as well as expansion of trade in services.

(v) In a globalized scenario, domestic industries of developing country become conscious about price reduction and quality improvement to their products so as to face foreign competition.

(vi) Globalization discourages uneconomic import substitution and favor cheaper imports of capital goods which reduces capital-output ratio in manufacturing industries. Cost effectiveness and price reduction of manufactured commodities will improve the terms of trade in favor of agriculture.

(vii) Globalization facilitates consumer goods industries to expand faster to meet growing demand for these consumer goods which would result faster expansion of employment opportunities over a period of time. This would result trickle down effect to reduce the proportion of population living below the poverty line

(viii) Globalization enhances the efficiency of the banking insurance and financial sectors with the opening up to those areas to foreign capital, foreign banks and insurance companies.

4. GLOBAL TRADE AND DEVELOPING COUNTRIES

A new frontier for trade

It isn‘t easy for politicians and policy-makers to tackle the issue. Protests against trade deals quickly erupt if governments are perceived to be endangering the good of the public or the environment for better trade deals.

This is the new frontier in the global trade agenda.

Trade policy cannot question the right of countries to protect their citizens and promote sustainable development. But trade policy can, and must, guide how countries exercise this right. The manner in which a country implements its regulatory choices, and the way it operates its regulations, is not a free-for-all – especially when it frustrates the attainment of sustainable development through trade by other countries, particularly the poorest countries.

To move in this direction, five concerted actions are critical:

1. The transparency of existing regulations needs to be increased. UNCLAD is leading an international effort to collect and freely disseminate comprehensive data on currently imposed non-tariff measures. This data covers 80% of world trade and further data collection is underway, particularly in Africa. These efforts go hand-in-hand with capacity building.

2. The international trade community should increasingly embrace international standards. This will simplify unnecessary regulatory hurdles, especially for developing countries. By some estimates, African exporters of textiles and clothing lose up to 50% of their potential export earnings because European Union regulations differ from the international standards set by the International Organization for Standardization. By promoting the use of international standards at home, countries also help their companies to integrate into global value chains. And since international standards usually embed global best practices, the increased uptake of such standards can help promote sustainable development.

3. Meanwhile, regional trade blocs should push for more regional regulatory convergence, finding common answers to address their regulatory needs. A recent UNCTAD study of the South American free-trade bloc MERCOSUR showed that international standards can bring almost twice the gains of regulatory convergence. Strikingly, the welfare gains would also be far higher for MERCOSUR if its key trading partners, such as the EU, simultaneously converged to international standards. Regional regulatory convergence should therefore be seen as a stepping stone for global convergence.

4. Countries can and should do much better in avoiding unnecessary red tape for trade in national regulatory processes. Rules and guidelines exist on this issue, by the WTO and the OECD for example. But the effective and efficient application of these principles is broadly missing.

5. Regulatory measures disproportionately affect trade in developing countries, so we need to strengthen their participation in international standard-setting bodies. Technical cooperation and capacity building needs to be increased to help these countries comply with regulatory requirements and reduce procedural obstacles.

Global Trade Opportunities

GDP in developing countries was expected to grow at 5 percent in 2016 and 5.8 percent in 2017, compared to growth in developed economies of only 1.4 percent and 1.7 percent, respectively. Over the medium term, while we expect that advanced economies will continue along a disappointingly low growth path, emerging market and developing economies should accelerate as most of the large countries with currently shrinking economies stabilize and return to their longer-term growth paths,‖ according to the International Monetary Fund (IMF).

This is not a new pattern. ―Since the early 1990s, developing countries have been the fastest-growing market in the world for most products and services, according to an article in the Harvard Business Review (HBR) titled ―Strategies that Fit Emerging Markets. As importantly, this is not a short term or cyclical difference, but a long-term, secular transformation of the global economy – a fact that too few corporate executives appreciate, says the PwC consultancy.6 In an international trade survey published by the KPMG consultancy in 2015, over half of all respondents (54 percent) said that high-growth, developing 13 countries already account for more than 30 percent of their revenue.7 Among only mid-sized companies, 44 percent claimed developing country revenue of 30 percent or more. Seventy-six percent of all respondents expected revenue from this market segment to increase in the coming three to five years. In developing countries, ―massive consumer growth, increasing prosperity, greater rule of law and young populations all create significant opportunity,‖ KPMG concludes. U.S. SMEs currently conduct international trade mostly in Mexico or Canada (43 percent), according to a 2016 survey by American Express, followed by Europe (29 percent) and Asia (17 percent). ―While exporters are more likely to see the regions where they are already exporting and regions nearest to home as possessing the greatest growth potential, Asia may experience increased sales efforts in the next five years,‖ the survey showed.

The Appeal of Developed-Country Markets in International Trade

Despite low growth and established competition, developed markets also hold obvious appeal. For example, there are over 500 million consumers in the European Union (EU), which is evolving around the principle of free movement of goods without barriers to trade and with a minimum of administrative burden.9 Even with slow growth, a large addressable market like the EU can deliver the business benefits of lower unit costs, easier access to a wide range of commercial partners and greater rewards for innovation.

Online information resource Startup Overseas factored in this easy access across the EU when declaring Denmark a good ―starter market‖ for SMEs,11 even though the local market has only 5.7 million people and is growing at only 1 percent to 1.9 percent in 2016. Newcomers have succeeded in taking market share in European consumer goods, for example, despite apparent market saturation. Smartphone market statistics for the third quarter of 2016 bear this out: Huawei, a relative newcomer from China, has built a brand in Europe that continued to take market share in the quarter from more established suppliers by providing competitive features at lower price points, according to market researcher IDC.

In any market, the digitization of global trade presents new opportunities by lowering costs and other barriers to entry for SMEs as well as the biggest multinationals. ―Trade was once largely confined to advanced economies and their large multinational companies. Today, a more digital form of globalization has opened the door to developing countries, to small companies and startups, and to billions of individuals,‖ according to the McKinsey Global Institute. As an example, McKinsey cites tens of millions of SMEs worldwide that have turned themselves into exporters by joining e-commerce marketplaces.

Global Trade Challenges

Still, many companies struggle to expand outside of their existing markets to capture the benefits of global trade, KPMG says. Expansion can be delayed by a lack of insight into local markets, as well as the need to identify the right market entry models and local partners to reduce risk while maximizing reach.

Add to that the litany of practical challenges quantified in the World Bank‘s Doing Business 2017 report, including taxes, the costs of starting a business, construction permits, getting electricity, labor market regulation, enforcing contracts, property registrations and trading documentation and finance. In these and other areas, developed economies dominate the report‘s ―ease of doing business‖ ranking.

As the oil that lubricates international commerce, trade finance can be a key challenge for exporters as well as importers – and this is particularly true for SMEs and developing countries. ―Following the 2008-09 economic crisis, SMEs have found it increasingly difficult to access this vital form of credit,‖ according to the WTO. ―The poorer the country, the greater the challenge Even analyzing the market opportunity can be harder in developing countries.

Executives are usually taught that data is an objective and critical input for strategic planning and operations. Applying this, however, is much easier said than done — especially among companies operating in emerging markets,‖ according to an HBR analysis. Issues include significant data gaps, biased data and outdated or incorrect numbers that can lead executives to make misguided investment decisions. But developed countries present their own set of challenges.

According to noted management theorist Michael Porter, competing with entrenched market leaders often means investing to achieve sufficient scale, overcoming customers‘ long-standing loyalties, testing local government's relationships with national industry and battling advantages in everything from distribution channels to locked-in supply contracts.

Global Trade Strategies and Tactics ―Business in emerging markets is just business,‖ says Harvard Business School Professor Felix Oberholzer-Gee. ―That is the essence of global management. A thousand things change completely as you go from one market to another, and a thousand things stay exactly the same. The difficulty is in knowing which is which – what needs to change, what can stay the same. Successful companies take the trouble to understand and work around institutional voids, information gaps and market barriers in whatever country they are targeting, according to specialists in global trade. ―They develop strategies for doing business in emerging markets that are different from those they use at home and often find novel ways of implementing them, too. They also customize their approaches to fit each nation‘s institutional context,‖ according to the HBR article on ―Strategies that Fit Emerging Markets.

In developed markets, entrants may need to keep an especially keen eye on the established competition, and may need particularly aggressive marketing and advertising to persuade competitors‘ customers to switch. For SMEs, in particular, ―engaging in appropriate levels of brand management opens all the initial channels for negotiating with government regulators and potential business partners – such as supply chain, manufacturing, warehouse solutions, distribution, and delivery services – in foreign markets,‖ says Smartling, a translation technology company.

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5. GLOBALIZATION AND ITS IMPACT ON INDIA

Globalization and its impact on Indian Economy: Developments and Challenges

Globalization(or globalization) describes a process by which regional economies, societies, and cultures have become integrated through a global network of communication, transportation, and trade. The term is sometimes used to refer specifically to economic globalization: the integration of national economies into the international economy through trade, foreign direct investment, capital flows, migration, and the spread of technology. Globalization as a spatial integration in the sphere of social relations when he said ―Globalization can be defined as the intensification of worldwide social relations which link distant locations in such a way that local happenings are shaped by events occurring many miles away and vice – versa.‖ Globalization generally means integrating economy of our nation with the world economy. The economic changes initiated have had a dramatic effect on the overall growth of the economy. It also heralded the integration of the Indian economy into the global economy. The Indian economy was in major crisis in 1991 when foreign currency reserves went down to $1 billion. Globalization had its impact on various sectors including Agricultural, Industrial, Financial, Health sector and many others. It was only after the LPG policy i.e. Liberalization, Privatization and Globalization launched by the then Finance Minister Man Mohan Singh that India saw its development in various sectors.

Advent of New Economic Policy -

After suffering a huge financial and economic crisis Dr. Man Mohan Singh brought a new policy which is known as Liberalization, Privatization and Globalization Policy (LPG Policy) also known as New Economic Policy,1991 as it was a measure to come out of the crisis that was going on at that time.

The following measures were taken to liberalize and globalize the economy:

1. Devaluation: To solve the balance of payment problem Indian currency were devaluated by 18 to 19%.

2. Disinvestment: To make the LPG model smooth many of the public sectors were sold to the private sector.

3. Allowing Foreign Direct Investment (FDI): FDI was allowed in a wide range of sectors such as Insurance (26%), defense industries (26%) etc.

4. NRI Scheme: The facilities which were available to foreign investors were also given to NRI's. The New Economic Policy (NEP-1991) introduced changes in the areas of trade policies, monetary & financial policies, fiscal & budgetary policies, and pricing & institutional reforms. The salient features of NEP-1991 are (i) liberalization (internal and external), (ii) extending privatization, (iii) redirecting scarce Public Sector Resources to Areas where the private sector is unlikely to enter, (iv) globalization of economy, and (v) market friendly state.

Consequences of Globalization:

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 afford to ignore the possible actions and reactions of policies and developments 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. Now for Further analysis we take up Impact of Globalization on various sector of Indian Economy.

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 a 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). 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.

Impact of Globalization on Industrial Sector:

Effects of Globalization on Indian Industry started when the government opened the country's markets to foreign investments in the early 1990s. Globalization of the Indian Industry took place in its various sectors such as steel, pharmaceutical, petroleum, chemical, textile, cement, retail, and BPO. Globalization means the dismantling of trade barriers between nations and the integration of the nations economies through financial flow, trade in goods and services, and corporate investments between nations. Globalization has increased across the world in recent years due to the fast progress that has been made in the field of technology especially in communications and transport. The government of India made changes in its economic policy in 1991 by which it allowed direct foreign investments in the country. The benefits of the effects of globalization in the Indian Industry are that many foreign companies set up industries in India, especially in the pharmaceutical, BPO, petroleum, manufacturing, and chemical sectors and this helped to provide employment to many people in the country. This helped reduce the level of unemployment and poverty in the country. Also the benefit of the Effects of Globalization on Indian Industry are that the foreign companies brought in highly advanced technology with them and this helped to make the Indian Industry more technologically advanced. The negative Effects of Globalization on Indian Industry are that with the coming of technology the number of labor required decreased and this resulted in many people being removed from their jobs. This happened mainly in the pharmaceutical, chemical, manufacturing, and cement industries.

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 own 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 offering 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.

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 products valued at more than US $ 6million 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 rice and non-basmati rice), oil seeds, tea and coffee are the other prominent products each of which accounts fro nearly 5 to 10% of the countries total agricultural exports.

Advantages of Globalization:

• There is an International market for companies and for consumers there is a wider range of products to choose from.

• Increase in flow of investments from developed countries to developing countries, which can be used for economic reconstruction.

• Greater and faster flow of information between countries and greater cultural interaction has helped to overcome cultural barriers.

• Technological development has resulted in reverse brain drain in developing countries. Demerits of Globalization (Challenges):

• The outsourcing of jobs to developing countries has resulted in loss of jobs in developed countries. • There is a greater threat of spread of communicable diseases.

• There is an underlying threat of multinational corporations with immense power ruling the globe.

• For smaller developing nations at the receiving end, it could indirectly lead to a subtle form of colonization. ·

The number of rural landless families increased from 35 %in 1987 to 45 % in 1999, further to 55% in 2005. The farmers are destined to die of starvation or suicide.

A Comparison with Other Developing Countries:

Consider global trade – India‘s share of world merchandise exports increased from .05% to .07% over the past 20 years. Over the same period China‘s share has tripled to almost 4%. India‘s share of global trade is similar to that of the Philippines an economy 6 times smaller according to IMF estimates.

Over the past decade FDI flows into India have averaged around 0.5% of GDP against 5% for China and 5.5% for Brazil. FDI inflows to China now exceed US $ 50 billion annually. It is only US $ 4billion in the case of India.

Conclusion:

India gained highly from the LPG model as its GDP increased to 9.7% in 2007-2008. In respect of market capitalization, India ranks fourth in the world. But even after globalization, condition of agriculture has not improved. The share of agriculture in the GDP is only 17%. The number of landless families has increased and farmers are still committing suicide. But seeing the positive effects of globalization, it can be said that very soon India will overcome these hurdles too and march strongly on its path of development. The lesson of recent experience is that a country must carefully choose a combination of policies that best enables it to take the opportunity - while avoiding the pitfalls. For over a century the United States has been the largest economy in the world but major developments have taken place in the world Economy since then, leading to the shift of focus from the US and the rich countries of Europe to the two Asian giants- India and China. Economics experts and various studies conducted across the globe envisage India and China to rule the world in the 21st century. India, which is now the fourth largest economy in terms of purchasing power parity, may overtake Japan and become third major economic power within 10 years. To conclude we can say that the modernization that we see around us in our daily life is a contribution of Globalization. Globalization has both positive and as well as negative impacts on various sectors of Indian Economy. So Globalization has taken us a long way from 1991 which has resultant in the advancement our country.

MBA LIBRARY

Saturday, March 20, 2021