Indian Globalization:

Development through Markets and Government

Ben Segel-Brown

100791531

Comparative Politics

TA Myles Hulme

Prof. J. Paltiel

Carleton University

November 2, 2009

2

Dr. Manmohan Singh, the Prime Minister of India, has warned that the “achievements [in

terms of growth] of the era of globalization should not blind us to the new anxieties that

globalization has brought in its wake.”1 This essay will examine the effect of India‟s integration

into globalization – specifically through the reforms and deregulation starting in 1991 – on its

development, the population‟s quality of life, and the options available to its citizens.

Understanding the relationship between globalization and development is important to forming

foreign policy towards countries in the developing world. Canada‟s commitments to developing

countries in terms of aid and our advocacy of tariff reductions through the World Trade

Organization must be informed by an understanding of the interaction of globalization and

development.

While there were initial costs associated with the transition, India's liberalized policies

have been more successful by almost all measures. Although the policies were an improvement,

this growth has not sufficiently improved conditions for India‟s poor, and governmental support

and foreign grants and loans are still central improving their well-being. This idea represents a

variation on the Washington Consensus,2 where India‟s integration into the global economy is

recognised as a factor driving its growth. This paper will additionally examine the insufficiency

of this growth to help India‟s poor. Indeed, a wide review of literature on this topic has

concluded that “in spite of this [growth generating] positive effect of globalization, doubts are

1 Dr. Manmohan Singh, “Prime Minister‟s Address at the University of Cambridge Towards Inclusive

Globalization,” The Hindu, 22 October 2006, 1. 2 For a definition see: Peter Burnell and Vicky Randall, Politics in the Developing World:

Second Edition (Toronto: Oxford University Press, 2008), 527.

3

widespread about the success of the economy in achieving greater equity and acceptable levels of

poverty reduction.”3

From the 1950s until the 1970s India pursued inward-oriented “command and control”

economic policies, but switched to an outward orientation through „Structural Adjustment‟

policies from the 1980s until 1991.4 The change in policy was sweeping-- “after decades of

pursuing an import-substitution industrialization strategy, India initiated a drastic liberalization

of its external sector. The average tariff in manufacturing declined from 117 percent in 1990–91

to 39 percent in 1999–2000.”5 Likewise, the share of imports subject to nontariff barriers

“declined from 82 percent in 1990–91 to 17 percent in 1999–2000.”6 India‟s drastic change in

policy along with its democratic stability7 – which controls for a variety of variables

8 – make it

an ideal country and case to examine the effects of globalization on development.

By „globalization,‟ I refer to the sharper and continuing integration of the world economy.9

Liberalization policies aim to integrate India into this process of economic globalization. The

policy‟s success can be measured through increases in India‟s imports and exports relative to

GDP, and India‟s increasing share of the global market. This paper focuses on the effect of

3 Dipak Mazumdar and Sandip Sarkar, Globalization, Labor Markets and Inequality in India (New York:

Routledge, 2008), 5. 4 N. R. Bhanumurthy and A. Mitra, “The Globalization, Growth and Poverty in India,” United Nations

World Institute for Development Economics Research: Research Paper 41 (2006), 18. 5 Prachi Mishra and Utsav Kumar, “Trade Liberalization and Wage Inequality: Evidence From India,”

International Monetary Fund: Working Paper 05/20 (2005), 4. 6 Ibid.

7 Subrata Mitra, "Democracy from Above: The Post-Colonial State and the Electoral System in

India," Paper presented at the annual meeting of the American Political Science Association, (2003).

<http://www.allacademic.com/meta/p63475_index.html> [30 March 2010], 3. 8 For instance it means that the Ministry of Statistics and Programme Implementation continued to use

consistent methods to measure variables and was not overly pressured to fabricate success. 9 Baldev Raj Nayar, “India‟s Globalization: Evaluating the Economic Consequences,” East-West Center

Policy Studies 22 (2006), Vii. See Also, Burnell, 522.

4

India‟s liberalization policies as they represent India‟s conscious choice to participate in

globalization.

„Development‟ is more controversial to define, as it must include absolute increases in

living standards and an empowering of Indians on an individual and collective level to choose

their own fate. People‟s living standards are traditionally measured though their income,10

and

for India‟s impoverished majority, satisfaction of basic needs through increases in income and

public services is a necessary first step towards empowering them. One measure of development

is the extent to which India goals for the role of the economy in their society are met, as defined

in India‟s five-year plan these goals are: 11

a. That the citizens, men and women equally, have the right to an adequate means

of livelihood ;

b. That the ownership and control of the material resources of the community are

so distributed as best to serve the common good ; and

c. That the operation of the economic system does not result in the concentration

of wealth and means of production to the common detriment.

India‟s achievement of these goals is measurable through income equality12

and a high rate of

growth.13

The first step towards understanding the effects of globalization is to understand the nature

of the policy change. In terms of India‟s share of global trade:

India‟s merchandise exports had a steep decline during the autarkic regime going down

from 2.17 percent of world exports in 1949 to 0.44 in 1980. It hovered around 0.50

percent throughout the decade, and started going up only after 1991. Liberalization of

10

Burnell, 521. 11

Planning Commission, 5 Year Plan, n.d.

<http://planningcommission.nic.in/plans/planrel/fiveyr/welcome.html> [25 February 2010], 1. 12

Several measures, such as the Gini coefficient, are commonly used to measure this inequality. Burnell,

522. 13

Economic growth is the rate of growth of GDP. Burnell, 316.

5

trade has certainly had the impact of starting an upward trend and the share had reached a

high of 0.8 in 2004.14

India‟s integration into the global economy coincided with a shift of attitude within the planning

commission, who in 1992 stated that “there is today a recognition that in many areas of activity,

development can best be ensured by freeing them of unnecessary controls and regulations and

withdrawing State intervention.”15

In 1990 and 1991 no five-year plan was in effect due to

political turmoil and an “extreme” foreign exchange crisis, but a significant policy reversal led to

the “introduction of liberalization and privatization into the Indian economy.”16

Thus, the policy

changes that launched India into the global market occurred after the seventh five-year plan, and

before and during the eighth five-year plan. The most commonly cited date for the policy

reversal is 1991;17

however, liberalization was an ongoing process. The policy changes that took

place during this period were sweeping, covering almost all areas of economic life. Generally,

the policies focused on “reforms to the tax system, substantial cuts in the deficit of the

consolidated public sector, liberalization and deregulation in the industrial sector, trade and tariff

reforms, and measures to recapitalize and strengthen the supervision of banks and other financial

intermediaries.18

”

14

Dipak Mazumdar and Sandip Sarkar, Globalization, Labor Markets and Inequality in India (New York:

Routledge, 2008) 3. 15

Planning Commission, 8th Five Year Plan (Vol-1), online edition, 1992.

<http://planningcommission.nic.in/plans/planrel/fiveyr/8th/vol1/8v1foreword.htm> [30 March 2010],

foreword. 16

Compare Infobase Ltd., Eighth Five Year Plan India, 2007. <http://business.mapsofindia.com/india-

planning/eighth-five-year.html> [30 March 2010], 1. See Also, Amitava Krishna Dutt and J. Mohan Rao,

“Globalization and its Social Discontents: The Case of India,” Center for Economic Policy Analysis

Working Paper Series I No. 16 (2000), 1. 17

For instance, Burnell, 429. 18

Tim Callen, Patricia Reynolds and Christopher Towe, India at the Crossroads: Sustaining Growth and

Reducing Poverty (Washington: International Monetary Fund, 2001), 1.

6

Several factors led to the introduction of liberalization policies. First, with the collapse of

the Soviet Union, intellectual support for government control of the economy disappeared, and

China‟s successful liberalization provided a model for India to follow. The key factor was a

balance of payments crisis of 1991 that forced India‟s government to take an IMF loan

conditional on the liberalization of India‟s economy.19

The new policies were implemented by Narasimha Rao‟s government in collaboration with

the state governments following the general elections of 1991, and have been maintained by

subsequent governments from different political ideologies.20

However, the main driving force

for the reform was India‟s balance of payments crisis of 1991 which forced the government to

adopt the conditions offered by the IMF and World Bank in return for the loan that allowed them

to recover. 21

The government‟s pre-liberalization strategy had included increasingly large loans

from foreign actors to support growth, but this was unsustainable:22

“From 1980 to 1991 India's

domestic public debt increased steadily, from 36 percent to 56 percent of the GDP, while its

external debt more than tripled to $70 billion.”23

Liberalization offered not only a strategy for

growth, but also one for exports that would enable India to control its debt.24

While there was

opposition from those ideologically opposed to liberalisation who predicted its incompatibility

with political realities,25

there was recognition by the parties in power that change was

19

Dutt, 5. 20

Ibid. 21

Dutt, 5. See also, Independent Evaluation Group, Structural Adjustment in India, (Online report, 2001).

<http://lnweb90.worldbank.org/oed/oeddoclib.nsf/DocUNIDViewForJavaSearch/0586CC45A28A274985

2567F5005D8C89> [30 March 2010], 1. 22

Dilip K. Das, China and India: a tale of two economies, ( New York: Routeledge, 2006), 101. 23

Independent, 1. 24

According to the Washington consensus. Burnell, 527. 25

R. Jenkins, Democratic Politics and Economic Reform in India (Cambridge: Cambridge University

Press, 1999), 12.

7

necessary.26

The multi-party support for liberalization27

and their capacity to implement their

policies were key factors in the policies‟ success.

Having examined the unique context of India‟s liberalization, this paper will now

examine the successes of these economic policies at pushing India‟s development. It has been

noted that “reforms that increase growth will not automatically expand opportunities to lead a

normal span of life (and to live in good health, to read and write, and not to go hungry).”28

However, India‟s connection to global markets has helped people build better lives, helped the

government to better manage the country, and has given industries access to markets and

technology that allow them to be successful.

The improved lives of the Indian people can be measured as a rise in their incomes and

the improvement of many social indicators. The majority of academic analyses, including that of

the World Bank have found clear evidence that liberalization of trade has had a positive impact

on both economic growth and social variables.29

In a short period of time GDP growth rose from

the 4% of the 1980s to 6% in the 1990s, and has constantly exceeded projected growth since

1991.30

However, the increase in income was not uniformly shared: from 1993 to 2000 10.18%

of the population was pulled out of poverty31

, compared to 8% in the decade before under India‟s

unsustainable former policies (See Appendix 1.)32

While this is an improvement, it is a fairly

insignificant one and a shorter timeframe analysis shows the growth was inconsistent and that

26

Ibid. 27

Ibid., 1. 28

Lance Taylor, External liberalization in Asia, post-socialist Europe, and Brazil (New York: Oxford

University Press US, 2006), 140. 29

The effects on employment, poverty, income inequality, and the quality of life for the majority of

people. Dutt, 2. 30

Bhanumurthy, 3. 31

Poverty is defined as living on less than 1USD per day. 32

Gowher Rizvi, “Emergent India: Globalization, democracy, and social justice,” International Journal,

Autumn (2007), 757.

8

there is much more to the story than that poverty reduction simply accelerated (See Appendix 2.)

In terms of social indicators, life expectancy doubled and infant mortality halved between 1950

and 2002. 33

Some of this success was achieved before liberalization, but liberalization has made

such improvements sustainable, and the „90s economic growth paid down the debt that had been

accumulated in previous decades.34

There has also been some progress towards gender equality,

as the gap in male-female literacy rates has decreased from 24% in 1991 to 21% percentage

points in 2001.35

Likewise, literacy rates in rural India rose 15% compared to 7% in urban areas,

indicating movement towards closing the gap between rural and urban India. Between India‟s

states, those that pursued liberalizing economic reform experienced a larger decline in the

incidence of poverty in the 1990s compares to the 1980s.36

The growth was uneven however; the

states richest before liberalization were able decrease their poverty rates faster and inequality

rose in almost every state.37

Liberalization has also enabled the government to better manage the country by increasing

India‟s tax base and literacy rates, removing the burden of expensive subsidies, and making India

attractive for international grants and loans that help India‟s poor. While globalization did

disproportionately benefit India‟s rich, the rich people of India bear the bulk of the tax burden of

funding India‟s government through a progressive tax system.38

The increasing wealth of India‟s

33

Ibid. 34

The debt-to-GDP ratio was reduced from 79 percent in 1994/95 to 68 percent in 1997/98. Petia

Topalova and Dan Nyberg, “What Level of Public Debt Could India Target?” International Monetary

Fund: Working Paper 10/7 (2010), 16. 35

Ministry of Finance, Economic Survey 2001-2002, 2002, < http://indiabudget.nic.in/es2001-

02/welcome.html> [30 March 2010], Chapter 106. 36

Bhanumurthy, 20. 37

Petia Topalova, “Is the Rising Tide Lifting All Boats?” International Monetary Fund: Working Paper

08/54 (2008), 6. 38

Those earning less than 100,000 Rs. do not have to pay income tax. Embassy of India: Washington DC,

Taxation System, Online reasource, n.d.

9

population enlarged the tax base that India could draw upon to fund education and other

programs that are a necessary prerequisite for increasing the well-being of India‟s poor. India

also took several major steps to cut its expenditures, including reducing their fertilizer, sugar,

and motor oil subsidies, selling 20% of government equity, and adjusting tax rates.39

Finally,

there were a much greater number of World Bank loans and grants approved after policy

liberalization in 1991.40

Even the Indian firms previously protected by tariffs benefited from liberalization through

access to international markets and technology. An IMF analysis of the effect of liberalization on

firms in India concluded that “incumbent firms have responded to the entry threat posed

liberalization by innovating… increases in efficiency spawned by entry due to liberalization, and

by multinational entry in particular, have been an important determinant of exporting success.”41

Moreover, it noted that rather than multinationals driving Indian export growth it is “incumbent

firms that are driving export intensity increases.”42

While many inefficient firms were forced out

of the market by international competition, analyses of the steel, auto and software industries

showed that government and these industries became “partners” working for “global economic

engagement for national accumulation.”43

<http://www.indianembassy.org/newsite//doing_business_in_india/fiscal_taxation_system_in_india.asp#2

c> [30 March 2010], Personal Income tax. 39

Ministry of Finance, Budget 1991-92, 1991. < http://indiabudget.nic.in/es1991-

92_B/2%20Public%20Finances.pdf> [30 March 2010], 4. 40

By my analysis based on the World Bank Aggregate report data. Only 29 out of the World Bank‟s 405

Projects in India to date were approved before 1991. Tushar Poddar, “Domestic Competition Spurs

Exports: The Indian Example,” International Monetary Fund: Working Paper 04/173 (2004), 1. 41

Poddar, 4. 42

Ibid. 43

Anthony P. D‟Costa, “Economic nationalism in motion: Steel, auto, and software industries in India,”

Review of International Political Economy 16: 4, 641.

10

Despite the long-term positive influences on the lives of India‟s people, government

capacity, and industry, there were real short-term costs associated with the transition. Without a

developed insurance system to protect farmers against drought, thousands of farmers were driven

to suicide by their debt.44

This debt was caused by pressure to plant genetically modified Bt

cotton rather than normal cotton. The Bt cotton had much higher costs and had a susceptibility to

a fungal wilt disease that meant that in some areas most farmers did not even recover their costs,

much less make a profit to support a family on.45

This is just one example of the damage done to

those on the losing side of structural shifts and exposure to foreign competition.

By most measures, the rate of improvement with the liberalized policies is better than with

the previous command and control policies, but the rate of economic growth remains insufficient

for India‟s poor. In the Prime Minister‟s forward to the eleventh five-year plan it is stated that:

Our ultimate objective is to achieve broad based improvement in the living standards

of all our people. Rapid growth is essential for this outcome because it provides the

basis for expanding incomes and employment and also provides the resources needed

to finance programmes for social uplift. However, it is not by itself sufficient. We

also need to ensure that growth is widely spread so that its benefits, in terms of

income and employment, are adequately shared by the poor and weaker sections of

our society…46

In terms of quantitative data, as of 2007, 55% of children remained malnourished, adult literacy

was only 61%, and two thirds of women could not read or write, and India‟s maternal mortality

rate was almost 100 times the levels found in the west.47

In all of its Five Year Plans, targets are

set for many different of social indicators, with government plans to improve them.48

The logical

reason for this is that in a democracy, such as India, the government faces strong pressure from

44

Gowher, 757. 45

Anuradha Mittal, Suicide: The New Harvest of GM Cotton, n.d.

<http://www.oaklandinstitute.org/?q=node/view/370> [30 March 2010], 1. 46

Planning Commission, Eleventh Five Year Plan: 2007-1,. n.d.

<http://planningcommission.nic.in/plans/planrel/fiveyr/11th/11_v1/11th_vol1.pdf> [30 March 2010], 1. 47

Gowher, 757. 48

Planning, Eleventh, 1.

11

its electorate to fulfil the needs of the large number of poor. Instead of seeing India‟s

liberalization as alternative to social programs, it can be better understood as a new strategy to

improve social programs taking into account the limits of governmental efficiency. The

improvement of social indicators in India is not a direct result of its integration with the global

economy, but instead a result of government programs funded based on the taxes on the

economic growth arising from the integration.

Before concluding, there are several alternate theories worthy of consideration. Many are

concerned that India‟s development is exasperating inequalities to the detriment of society. The

statistics show clearly rising inequality, and the barely significant acceleration of poverty

reduction may be insufficient to justify the social harm done by this inequality.49

However, as

mentioned earlier, India has a progressive tax system with significant taxes on both personal and

corporate income (see Appendix 3.) There is no reason for the poor of India to innately be worse

off because other Indians are rich, but rather they are better off because the tax revenues are used

to provide services to the poor. The inequality argument also ignores the intellectual transfers

that occur through globalization. The caste system and social inequality are ancient ideas

embedded in India‟s culture. Exposure to the ideas of the rest of the world, particularly the

“American dream,” may help India become more egalitarian. Another objection comes from

dependency theory, objecting that India would be underdeveloped and forced into low skill

industries by the influence of capitalistic markets. However, given India‟s resilience to the Asian

financial crisis through its gradual and cautious approach to capital account liberalization,50

the

49

For a discussion of this view see Topalova, Petia. “Is the Rising Tide Lifting All Boats?” International

Monetary Fund: Working Paper 08/54 (2008). 50

World Bank, India: Publications & Reports, n.d. <http://go.worldbank.org/P9TEM15AT0> [24

February 2010], 76.

12

rise of the software industry and decline of the importance of agriculture51

this theory seems

indefensible.

Overall, the case study of India‟s 1991 liberalization shows how globalization can aid a

country in its development. India was motivated to reform by external forces: its balance of

payments crisis, the collapse of the Soviet Union, and the success of China. The growth

generated by globalization improved the lives of India‟s poor, gave India the capacity to achieve

its economic growth goals, and made India firms internationally competitive. However, there

were real costs associated with the economic change of globalization on particular segments of

society such as rural farmers that the government failed to deal with, and the benefits to India‟s

poor are less a result of a growth “trickle-down” effect and more the result of increased

government capacity to run its social programs.

51

Bhanumurthy, 3.

13

Appendix 1

Adapted from: Topalova (2008), 6.

*Note: around ¾ of India‟s poor live in rural areas. Mazumar, 3.

0

5

10

15

20

25

30

35

40

45

50

1980 1985 1990 1995 2000 2005 2010

Po

ve

rty R

ate

(%

)

Year

All India

14

Appendix 2

Adapted from: Gaurav Dutt and Martin Ravallon, “Is India‟s Economic Growth Leaving the

Poor Behind?” World Bank, (11 February 2002), 33.

15

Appendix 3

Income range (Rupee) Tax Rate (%)

0-100,000 Nil 0%

1,00,000-1,50,000 10%

1,50,000-2,50,000 20%

2,50,000 and above 30%

>8,50,000 Surcharges of 10% on total tax

Adapted from: Embassy, Personal Income tax.