ECONOMIC GLOBALISATION: IMPACT ON GROWTH AND EQUITY IN INDIA

- S BISALIAH

1. Globalization:
Integration of economies and societies through cross country flow of: - Information and ideas. - Technologies. - Goods and services.

- Capital.
- People. Two connotations of Globalization concept:

- Economic and non-economic.

- Economic: Free flow of goods and services, capital, technology and labour. - Non-economic context: socio-cultural and political. - But difficult to draw the distinction: Interaction between economic and non-economic context.

CONTD.,
Claims in favour of Globalization: An Engine of: - Growth - Technical advancement. - Access to international resources.

- Productivity augmentation.
- Enlarging employment opportunities. - Increasing choice of commodities.

- Reducing poverty and improved standard of living.

A very powerful ideology, without any alternative.

CONTD.,
Counters to claims: - Widens the socio-economic gap within and between nations: - Exploitation of resources and environmental decay. - Loss of sovereignty in forming policies. - Loss of cultural diversity, westernization and cultural hegemony. - International market guides production and consumption. - Risks of open economy: Uncertainty, Vulnerability, and wide fluctuations in national economies. Ex: The impact of recent global economic meltdown - Globalization leads to global capitalism, controlled by MNCs. Now supported by I.T revolution Prophecy of Karl Marx and Engel in their Communist Manifesto (1848) The need of a constantly expanding market for its produce chases the bourgeoisie over the whole surface of the globe. It must nest everywhere, settle everywhere, establish connections every where

CONTD.,
But UNDP (1999) captures the essence of claims and counters to claims:

Globalization expands the opportunities for unprecedented human

advances for some, but shrinks those opportunities for others and erodes human security. It is integrating economy, culture and

governance, but fragmenting societies. Driven by commercial market

forces, globalization in this era seeks to promote economic efficiency, generate growth and yield profits. But it misses out on the goals of equity, poverty eradication and enhanced human security Question: Does the experience of India validate this view of UNDP (Details later)

2. Globalization: Not New, but a Cyclical Phenomenon.

Early military conquerors: First set of globalisers. Economic and political philosophers: The ideas of economists and political philosophers, both when they are right

and when they are wrong, are more powerful than is commonly understood.
Indeed the world is ruled by little else - Adam Smith: Free trade, private initiative and market economy Government to maintain law and order. - Marshall: Glorification of private enterprise, market economy and capitalism. - Marx: to destroy capitalism and private enterprise. - Keynes: Reform and tame capitalism, with space for private enterprise. - Developing world: Dominance of planned economy, public sector and economic regulation.

CONTD.,
- Supply side Economic Model: - Make suppliers happy by giving more space to private sector, with less of government regulation. - We are best served by maximum market freedom and minimum intervention by the state. Globalization, liberalization, privatization and marketisation Back to Adam Smith? - Recent Global Economic Crisis: Myth of LPG regime exploded, and the need for some government regulation Back to Keynes? Question: Is Globalization sustainable or unsustainable?

3. Policy paradigm shifts in India:

1950-Mid 1980s: Planning, Public sector and economic regulation fundamentalism pillars of old policy regime. - Respectable growth performance. - Three dark spots: Unemployment, poverty and inequalities.

Mid 1980s: The first wave of Economic Reforms.

- More scope for private sector. - Invite foreign equity capital. Since July 1991: - New buzz words: Liberalize, globalize, privatize and marketise. - Two strands of New policy: Stabilization: Demand Management

- Reduce budget deficit

- Control inflation - Reduce balance of payments deficit

CONTD.,
Structural Adjust Programme: Supply Management through Reforms and

policy initiatives.
- Devaluation - Trade Policy - Industrial policy: Allow FDI, disinvestment and open industries reserved for public sector to private participation and so on. - Reform in Capital market - Exchange rate reform - Reforms in financial sector - Reforms in agriculture sector - Reduce subsidies. Why not cost recovery?

Redefine the role of Government: Democracy essentially a system of

governance, not a system of economic management. Falling in line with Washington Consensus- One size (policy) fits all

CONTD.,
Why U-turn? Why Reforms?: - Heavy debt: Domestic and foreign. - Low rating of credit worthiness. - Fiscal deficit. - Dip in foreign exchange reserves.

- Double digit inflation.

- Prescription by IMF and World Bank. - Propagation of conservative economic policy, based on western ideology. - Collapse of centrally planned economies in soviet block. - Support of Indian elites. Hence the U-Turn From: Planning-Public Sector Dominance-Economic Regulation policy Regime To Globalization Liberalization Privatization Marketisation policy Regime

CONTD.,
4. Balance Sheet of Impact on Macroeconomic landscape: Two impact Domains: Impact on What? Impact on Whom? Define impact variables to measure both growth and equity dimensions. Growth impact of Globalization. 4.1. GDP Growth Rate and sectoral share in GDP
Period GDPGR (%) per annum Agri 1980-1985 1990-1992 1992-1997 1997-2002 2002-2007 2008-2009 2009-2010 5.5 3.4 6.5 5.5 7.5 6.8 8.0 37 31 29 25 20 16 Sectoral share (%) Ind 24 26 26 25 26 28 Service 39 43 45 50 54 56

2010-2011 Estimate by IMF)

8.8

CONTD.,
Period Sectoral Growth Rates (%) Agri Ind Service

1980-1985 1990-1992 2008-2009

5.5 1.0 1.6

5.3 3.7 3.9

5.7 4.9 9.7

Average Annual Growth rate in GDP during Six Broad Periods:

Period GDPGR (%) per annum 3.57 3.99 2.90 5.62 5.68 7.30

1950-59 1960-69 1970-79 1980-89 1990-99 2000-08

CONTD.,
What inferences on GDPGR, sectoral share in GDP and sectoral growth rates over a period of time? - High GDP growth rate during economic reform regime with Globalization. But growth rate of 1980-89 comparable to that of 1990-99. Marginal fall in GDP growth due to global economic crisis. - Falling share of agri-sector, almost constant share of industrial sector, and

increasing share of service sector in GDP.

- Deceleration growth in agriculture, almost stagnant growth in industry, and accelerated growth in service sector. Service - sector - led growth pattern. The emerging growth pattern leading to Rural-Urban Development Divide.

CONTD.,
4.2. Growth rate (% per annum) of per capita NN Income:
Period GR (%)

1860-1945
1950-51 1980-81 1980-81 2000-01 2000-01 2005-06

0.5 at 1970-71 prices

1.2 3.3 5.1

Hicks,J.R, et.al (1984): Framework of Indian Economy Percapita NN Income at constant prices (2004-05)
Period 1990-91 11,535 GR (%)

2000-01
2005-06 2008-09

16,133
20,734 31,821

2009-10

33,731

What do we infer on growth rates of per capita NN Income?

What do these data on per capita NN Income conceal?

4.3. Some other Growth performance indicators:

Exports and Imports: Rate of change (%) Exports and Imports

1990-91
1995-96 1999-2000 2004-05 2006-07 2007-08

9.2
20.8 10.8 30.8 25.3 21.6

13.5
28.0 17.2 42.7 27.3 25.9

Rate of change in imports greater than rate of change in exports.

- Compositional shifts in exports: Shifts from agricultural and mineral goods to

manufactured goods. - Sharp increase in export of electronic goods and software. - Share of India in World exports: a little over 1%

 Trends in FDI: - Total foreign investment flow (FDI and portfolio investment): 1991-92: USD 133 million 2006-07: USD 26,534 million

- India: Second most preferred FDI destination

Indias share in total global FDI flow: About 5% - Composition of FDI: Two-thirds of total FDI in service sector, computer software and hardware, housing and real estate, and telecommunication. - But FDI: Mainly domestic market seeking, with less of export orientation. - Yet to become an important driver of growth with positive impact on local

entrepreneurship and human capital.

- Less impact on in-house R & D of Indian industries FDI leading to technological and economic enclaves

 Employment growth Analysis:

- Employment Growth Rate (% per annum) Period 1983 to 1993 1993 to 2004-05 Rural 1.7 0.47 Urban 3.10 2.70 Total 2.01 0.98

- A situation of high GDP growth rare and declining of employment growth rate:

Increasing Incremental capital output ratio.

Jobless growth due to increase in capital intensity But: NREGA rural employment growth. - Sectoral share in total employment
Sector Agriculture Manufacturing Trade / Hotel Financial services Communications 1993-94 61% 11% 8% 1% 3% 2004-05 52% 13% 13% 2% 5%

Public and Private Sector: Annual Employment Growth Rate (%) in organized sector: Sector Public sector Private sector Total organized sector What do we conclude? 1983 to 1993 1.5 0.44 1.2 1994 to 2005 -0.70 0.58 -0.31

Falling employment growth rate

Negative employment growth in organized public sector. Increasing share of employment in service sector. Low share of agriculture in output (GDP) and high share in employment. Increasing labour productivity in service sector, and constant productivity in manufacturing.

5. Impact on Economic Health:

Foreign exchange reserves from about $ 5 billion in 1991 to over $ 311 billion by
October, 2011.

Inflationary trends: - From about 15% in 1990-91 to 3.5% in 200-01, 10% in 2002-03, 12.8% in

2008, and now around 9.8%.

- Inflationary trend, mainly a supply shock phenomenon. Fiscal Deficit % of GDP - Recall stabilization: A component of Economic reforms.

- 1990-91: Around 7%
- 1996-97: Around 4% - 2000-01: A little over 5% - 2008-09: About 6%

- Expectation: A little over 3% by 2013-14.

How is fiscal deficit reduced normally?: Reduce investment expenditure on what? Why not on subsidies? Act of 2004: Fiscal Responsibility and Budget Management Act: Reduce fiscal deficit to 3% of GDP by March 2009.

6. Equity Impact: Differential Impact of Globalization At Global Level: - Globalization segmentation of global population: - 47% of global income cornered by the super rich - Other beneficiaries: political elites, leading civil servants and top military personnel - Non globalisers: More than 50% of global population, bypassed segment.

The persistent global poverty and hunger.

Questing the very logical foundation of private sector and market fundamentalism, and limited economic space for government.

 Indian Experience:
- Economic Reform (under the banner of globalisation) is not needed for its own sake, but for the sake of Indias poor and in the interest of having them both contribute to the growth process and benefit from

it:
T. N. Srinivasan. What evidences on this view?: - Slowdown in Reduction of Poverty Rate: - 1980s: 3.1% per annum - 1990s: 1% per annum. - Details in the next session

 NSS Data: Enough evidences on increased income and consumption inequalities after globalisation. NCAER Study: Benefits of Economic Reforms: Mainly to the elite and affluent, and top middle class. Recall data on employment impact: Jobs in service sector

For whom the bell tolls?

Recall pattern of growth: Rural Urban development divide. Regional Development Disparity: Broadened and Deepened. - Growth rate of SDP in Backward States: 1980s : 4.9% 1990s : 3.0

Growth divergence, not growth convergence.

- Regional growth/ development imbalance in Karnataka: Deepened.

 Main Inference on Equity Impact:

- Some sectors, regions, and socio-economic groups, bypassed - Even before globalization: India, a country of contrast, and a society of unequals. Now the contrast sharpened - Counter to differential impact of globalization: Development is always selective - But the spirit of Indian Constitution in PREAMBLE and DIRECTIVE

PRINCIPLES OF STATE POLICY: To the backburner.

7. What do we Conclude? What are the Concerns and Directions of Indian Economy and Society? Respectable performance in GDP growth, growth of per capita income, exports, imports, FDI and management of economic health. Dismal performance in equity front: hunger and poverty, employment, and regional development. Globalization vertical spread of growth benefits,

instead of horizontal spread.

Greatest happiness of the smallest number, instead of largest number.

 Some Implications and Concerns of Globalization: - Growth of GDP per se cannot address the problems of development disparities between sectors, regions and socio-economic groups - Micro level success stories would obscure the macro realities - Place more emphasis on Build on the Rest (Called Inclusive Growth), in addition to Build on the Best

- The Challenge: Maximize the benefits of globalisation and address the

problems of equity. Why trade off between growth and equity? - Realize the consequences of failure in equity front:

- The Psychological Theorem on four stages of human

behaviour. - Two propensities of human behaviour.

 Some Policy/Programme Directions - Need more emphasis on R&D: % of GDP on research in Science and Technology: 0.9%: India? 2.8%: USA 2.9%: Germany. Is there a need for review research priorities in science & technology, and do the current priorities reflect economic and social needs of the country? FDI: To have impact on domestic industry, entrepreneurship and human capital, instead of creating economic colonies and enclaves. Fiscal Discipline: Reduce government consumption expenditure, instead of reducing investment in social sector. Place agriculture on the top of development agenda. Two development channels: - Globalised market led channel - Government sponsored and supported channel, called targeted/ghetto development channel.

But our failure in governance outcome does not match outlay.

Question: What policies, policy instruments and strategies to ensure growth Plus equity landscape in the country? What kind of governance? : I leave it to this group to indulge in mental rioting to address this question.