Challenges of Globalization of

Indian Economy

Dr. (Mrs.) Vijaya Katti

Professor & Chairperson (MDPs)
Indian Institute of Foreign Trade

Session on 16-9-2018: For Talentedge participants

• After achieving an impressive growth trajectory of about
9 percent during 2003-08 and weathering the first bout
of the global financial crisis rather well, the Indian
economy entered a period of slow down since 2011.
• The continuing difficulties in the global economy have
certainly impacted the Indian economy but that explains
only part of the reason.
• The domestic factors especially the slackening industrial
growth perhaps explain the growth deceleration more
than the external factors.
• Besides the deceleration of the growth rate,
balance of payment challenges, there is another
one that needs to be grappled with is the challenge
of job creation which is becoming a serious one
with every passing day in the context of jobless
growth witnessed in recent years against the
background of youth bulge that the country is
facing that could turn the demographic dividend
into a demographic nightmare if not harnessed
properly through productive job creation.
 Reforms and Globalization
• A major liberalization of trade and investment
regimes has taken place since 1991 as a part of the
package of reforms undertaken to deepen
integration of the Indian economy with the world
economy as a whole.
• Peak tariff rates came down from 150 percent in the
early 1990s to just 10 percent by 2007.
• These economic reforms have led to industrial
restructuring in the country with a focus on
competitiveness and global economic integration.
• The growing economic integration of the Indian economy is
reflected in various indicators including the rising share of trade in
the economy.
• An important and more dynamic aspect of India’s integration with
the world economy is through the growing trade in services.
• India is also attracting attention from major multinational
enterprises (MNEs) around the world wishing to make India a hub
for knowledge-based services to tap the availability of high-quality
low-cost trained human resources as well as scientific and
technological infrastructure.
• Another aspect of growing global integration is through FDI – both
inward and outward.
 Growth of Merchandise Trade
• The reforms of the 1990s led to a rapid expansion of
India’s trade. The growth rates of India’s exports and
imports averaged over 10 percent during the 1990s but
stepped up to an average of 22 percent in the past
decade. Imports have generally grown at faster rates
(24%) than exports (20%)
• The other noticeable trend is the widening deficit in
balance of trade with imports growing at a faster rate
than exports.
• The widening trade deficit has created balance of
payment challenges for the economy even after taking
care of a substantial surplus in the invisible or service
trade
 Changing Structure of Trade
• The export structure is expected to change
with the level of development from one
dominated by primary products to products
with greater value-added.
• Diversification of export structure also makes
the exporting country less vulnerable to
external shocks compared to a country with a
more concentrated export structure.
• There is also a slight reorganization of exports of
manufactured products as the share of conventional
products like textiles and clothing has come down from a
25 percent to just 9 percent since 1995-6 while leather
products declined to 2 percent, which is only a third of
what it was in 1995-6.
• Gems and Jewelery has also lost its importance slightly
from a 17 percent share to 15 percent.
• At the same time, the share of engineering goods rose
steadily from 14 percent to 22 percent of all merchandise
exports
• Among engineering goods, exports of transport
equipment have risen very fast from less than a
billion dollars in 1995 to nearly USD$21 billion in
2011-12. Machinery and equipment has been
another category that has risen in importance.
• Chemicals and related products is another group
of manufactured products that has improved its
share in total merchandises exports even if only
marginally from 11 to 12 percent.
• But among the chemicals and allied products,
chemicals and pharmaceuticals group has gained the
most.
• This is due to India’s emergence as a major exporter
of generic medicines in the world, accounting for a
third of global pharmaceuticals exports by volume.
• It is clear that India’s export structure has over time
moved from the export of primary and conventional
products such as textiles and clothing, leather
products and gems and jewelry towards products
with greater value-added, such as transport
equipment, generic pharmaceuticals and refined
petroleum products.
• However, the share of technology-intensive products
in India’s exports is still very low compared to that of
East Asian countries.
• India has also not been able to make a mark in fast-
growing high value-added segments of manufacturing
such as electronic and telecom equipment.
• In fact growing imports of electronic equipment and
other hardware are straining India’s trade balance.
• India has also not been able to exploit the job-creating
potential of exports and has been unable to develop
highly labor-intensive export-oriented industries such as
toys and electronic assembly, among others.
• India’s import structure has also changed over the years.
• Firstly imports comprising crude oil, raw materials and
certain food imports account for as much as 44 percent of
total merchandise imports in 2011-12 compared to 39
percent in 1995-6.
• Considering that the demand of bulk imports that are
mainly raw materials and foods is relatively price inelastic,
in the context of rising trade deficit, one needs to pay
attention to rising imports of capital goods and others even
though their overall share in total imports may have come
down.
• In particular, imports of electronic goods are expected to rise to
$400 billion by 2020 at current trends.
• The demise of India’s fledgling electronic hardware industry is to
be partly explained in terms of India’s premature signing of the
WTO’s Information Technology Agreement 2000.
• It exposed Indian manufacturers to a direct competition with
established rivals in the East Asian countries that have massive
scales of production due to their links with multinational supply
chains.
• While a part of the gold feeds into the gems and jewelry exports,
a large part is for domestic consumption and investment by
households.
 Changing Geography of Trade
• A major transformation has taken place in the direction of
India’s trade in terms of declining dependence on
conventional trade partners like the European Union and
the United States and diversification of trade in new and
emerging markets.
• The trade structure is gradually diversifying in favor of
emerging countries in Asia-Pacific region and beyond. The
most impressive rise is that of China from a negligible
share in 1990 to over 10 percent of India’s trade by 2010,
making China the single largest trade partner of India.
• ASEAN’s share in India’s trade has also gone up
from 5.7 percent to nearly 10 percent in 2009
before declining marginally to 9.2 percent in
2010.
• Another region rising in prominence as a trade
partner is the Middle East with a share in
India’s trade nearly doubling between1990 and
2010 to 18.9 percent, mainly on account of
India’s high dependence on the region for fuels.
 Services in India’s Trade
• The emergence of the services sector as the most
dynamic sector driving India’s growth has been
accompanied by its growing importance in trade. The
share of trade in services in India’s GDP has
quadrupled.
• The share of trade in services in India’s GDP has
quadrupled.
• Growth of trade in services in India has also been
faster than in other countries, tripling India’s share in
global services trade.
• The bulk of India’s commercial services exports comprise
those of computer, communications and other related
services (or ICT services).
• Among the sources of its strength in the sector are people
skills and their abundance given the large youthful
workforce of the country. India’s success in IT services has
been attributed to, among other factors, a farsighted
government policy to spot emerging opportunities and
create high-end education and training facilities and
computing infrastructure way back in late 1970s
• In future, this strength in ICT services needs to
be leveraged to build a strong electronic
goods industry.
 The Way forward for India: Manufacturing for
Growth, Sustainable Balance of Payments and Jobs
Creation
• The foregoing analysis has shown that growth
slowdown has primarily resulted from
essentially stagnating and even shrinking
manufacturing output in recent times.
• The rising imports of manufactured goods in
the wake of trade liberalization and an
appreciating rupee has resulted in a premature
hollowing out of Indian industry, which led to a
burgeoning deficit in trade in goods.
• Even after moderation by a healthy surplus in
services trade, the result is a current account deficit
reaching an unprecedented level.
• In a situation of such as the present slowdown of
the global economy, a major expansion of exports
can be challenging given an environment of excess
capacities throughout the Asia-Pacific region, the
growing threat of protectionism, and the temptation
of dumping by those with deep pockets.
• While large bulk imports of fuels and raw materials may be
price inelastic, attention should be paid to very large and fast
growing imports of electronics, non-electrical machinery, and
defense equipment, among others that provide opportunities
for strategic import substitution.
• An effort needs to be made to start domestic manufacture of
these products leveraging India’s large domestic market size
and by targeting MNEs to set up local manufacturing facilities
through creation of incentives for pioneering industries, as
has been done in East Asian countries like Malaysia, besides
incentives in public procurement like ‘buy America’ programs.
• The inability of services to absorb millions of
workers stuck in low productivity work in
agriculture.
 Fostering Manufacturing-led Growth
• Revival of manufacturing has to be done through a set of
strategic interventions that help to create a facilitating
environment for entrepreneurship and giving them a level
playing field vis-à-vis exporters from other countries.
• Innovation is an important driver of modern
manufacturing. Here Indian strengths in frugal
engineering and software design could be harnessed for
developing new, more efficient and resource saving
products and processes for domestic and international
markets.
• Another important tool for developing
competitive manufacturing capabilities is to
leverage the large domestic market to attract
FDI in manufacturing.
• The other lesson that comes from experiences
of different countries is the role of
performance requirements in improving the
quality and development impact of FDI.
• The reforms pursued since 1991 have led to a much deeper
integration of the Indian economy with the global economy
in terms of a rising share of merchandise trade, an even
more dramatic transformation of the services trade and the
emergence of the country as one of the most attractive
destinations for FDI, as well as an important source of FDI
outflows.
• Despite healthy trade surpluses earned by services as India
emerged as a global hub for ICT outsourcing, the balance of
payment situation has again entered into a period of stress
due to a merchandise trade deficit.
.
• While India now has the comfort of sizeable
foreign exchange reserves unlike in 1991, this
is an important policy challenge needing an
immediate response before the situation turns
difficult
• Export competitiveness needs to be strengthened through
appropriate exchange rate management and opportunities
for strategic import substitution need to be exploited
• by leveraging India’s large domestic market size. To exploit
these opportunities a number of policy measures that are
normally grouped as industrial policy including infant industry
protection, pioneer industry incentives, public procurement
preferences and a special targeting of multinational
enterprises to establish local manufacturing facilities, as
employed extensively by the developed countries in the past
and emerging countries in more recent times, may be fruitful.
• In the dramatically changed international
context of the aftermath of global financial
crisis, an India-US partnership should be driven
by a new mutuality of interests and explore
win-win collaborations beyond ICT outsourcing
to cover other services and manufacturing,
technology generation and transfer and better
understanding of each other’s position to
conclude pending global negotiations.
Thank you