Globalisation and the Indian Economy

This is Chapter 4 of the Class 10 book Understanding Economic Development: 19 pages (55–73), with a page of notes for teachers (p. 54). It has eight headed parts — production across countries; interlinking production across countries; foreign trade and integration of markets; what is globalisation; factors that have enabled globalisation (technology; liberalisation of foreign trade and investment policy; WTO); impact of globalisation in India; the struggle for a fair globalisation; summing up. It has no graphs or numbered tables: the ideas come through boxed stories (an MNC's production chain; Ford Motors; Chinese toys; containers; a London magazine designed in Delhi; the debate on trade practices; steps to attract foreign investment; Ravi; Sushila), ten ‘Let's work these out’ boxes, cartoons and photographs, and 13 exercise questions plus a project. The few numbers it gives are recomputed here; illustrations we add are marked †.

• Builds on jess201 (what may be development for one may be destructive for another — used for SEZs), jess202 (organised and unorganised sectors, the share of agriculture in jobs — used for the farm-subsidy debate and Sushila) and jess203 (credit for small producers — one of Ravi's three needs). Leads into jess205 (consumer rights in a market of many brands).
• Pairs with Indian Economic Development (keec1): keec103 (Liberalisation, Privatisation and Globalisation — the 1991 crisis, trade reform, WTO and the appraisal of reforms) above all, and keec106 (Employment — informalisation and casual work); Introductory Macroeconomics (leec1): leec106 (Open Economy — balance of payments, FDI and portfolio flows, exchange rates).
• Also: Contemporary World Politics leps107 (Globalisation — its political and cultural sides), Social Change and Development in India lesy206 (Globalisation and Social Change), and India: People and Economy legy108 (International Trade).
• UPSC, honestly: Prelims has asked what a multinational is (1982), the objectives of the SEZ Act (2010), what makes FDI distinctive (2020) and which body deals with farm subsidies and the ‘peace clause’ (WTO: 2015, 2016). GS3 has asked how globalisation shrank formal employment (2016), how Indian companies fared against MNCs (2013), the case for FDI (2016), SEZs (2015) and labour reform (2015); GS2 the WTO's mandate (2014), the Doha deadlock (2016) and the IT Agreement (2014); GS3 2025 the turn from free trade to protectionism. We link fourteen. The detail (FDI caps, BoP, WTO boxes) is tested through keec103 and leec106; this chapter gives the base ideas.

• MNC = a company that owns or controls production in more than one nation; it locates where labour and other resources are cheap and markets are near.
• Production is split across countries (design US → components China → assembly Mexico/E. Europe; customer care India) — NCERT: ‘probably’ 50–60% cost savings.
• Foreign investment = MNC money spent on assets; most common route: buy up local companies (Cargill ← Parakh Foods). Also joint production (Ford + Mahindra, ₹1,700 crore, 1995) and orders to small producers.
• Foreign trade integrates markets: more choice, prices tend to equalise, producers compete across borders (Chinese toys: 70–80% of shops switched within a year).
• Globalisation = rapid integration of countries via trade and investment; enabled by technology, liberalisation (removing trade barriers such as import taxes and quotas, from about 1991) and the WTO.
• Impact not uniform: well-off consumers, MNCs, top Indian firms and IT services gained; small producers (Ravi) and flexible workers (Sushila) lost. SEZs: world-class facilities, no tax for 5 years. Fair globalisation is the goal.

Until the middle of the twentieth century, production was organised largely within countries. What crossed borders were raw materials, foodstuffs and finished goods: colonies such as India exported raw materials and food and imported finished goods. Trade was the main channel linking distant countries. Then large companies called multinational corporations (MNCs) appeared. An MNC is a company that owns or controls production in more than one nation. It sets up offices and factories where it can get cheap labour and other resources, so that its cost of production is low and its profit high.

NCERT's example: an MNC making industrial equipment designs its products in research centres in the United States, has the components made in China, ships them to Mexico and Eastern Europe for assembly, sells the finished goods worldwide, and runs its customer care from call centres in India. The MNC is not only selling globally; the goods and services are produced globally, in increasingly complex ways — the process is divided into small parts and spread across the globe. Each place is chosen for a reason: China as a cheap manufacturing location; Mexico and Eastern Europe for closeness to US and European markets; India for skilled engineers and educated English-speaking youth. NCERT says all this ‘probably can mean’ 50–60% cost savings for the MNC.

MNCs set up production where it is close to markets, where skilled and unskilled labour is available at low cost, and where the availability of other factors of production is assured; they also look for government policies that look after their interests. Then they set up factories and offices. Money spent to buy assets such as land, buildings, machines and other equipment is investment; investment made by MNCs is foreign investment. Any investment is made in the hope that the assets will earn profits.

Ways of spreading production. (1) Joint production with local companies, which gains two ways: the MNC provides money for additional investment (new machines for faster production) and may bring the latest technology. (2) Buying up local companies and then expanding production — ‘the most common route’. Example: Cargill Foods, a very large American MNC, bought smaller Indian companies such as Parakh Foods, which had a large, well-reputed marketing network and four oil refineries; Cargill became India's largest producer of edible oil, able to make 5 million pouches a day (about 182.5 crore a year, our arithmetic). Many top MNCs have wealth exceeding the entire budgets of developing-country governments. (3) Orders to small producers: large MNCs in developed countries order garments, footwear and sports items from many small producers worldwide and sell them under their own brand names; they have tremendous power over price, quality, delivery and labour conditions. By partnering, using local firms as suppliers, competing closely with them or buying them up, MNCs make production in widely dispersed places interlinked.

Foreign trade has long been the main channel linking countries — think of the old trade routes linking South Asia with markets east and west, and the trading interests that drew companies such as the East India Company to India. Its basic function: it lets producers reach beyond domestic markets and compete in other countries, and lets buyers expand their choice beyond what is produced at home.

Chinese toys in India (NCERT's story). Chinese makers see that toys sell at high prices in India and start exporting plastic toys. Indian buyers can now choose; Chinese toys win on cheaper prices and new designs; within a year 70–80% of toy shops replace Indian toys with Chinese ones, and toys become cheaper. Indian buyers gain choice and lower prices; Chinese toy-makers expand; Indian toy-makers face losses. In general, with trade, goods travel between markets, choice rises, prices of similar goods tend to become equal, and producers in two countries compete closely though thousands of miles apart. Foreign trade thus results in integration of markets.

In the past two to three decades, more and more MNCs have looked for cheap locations; foreign investment by MNCs has risen and foreign trade has risen rapidly, much of it controlled by MNCs (Ford's Indian plant sells in India, exports cars to other developing countries and exports components to its factories worldwide). The result is greater integration of production and markets across countries. Globalisation is this process of rapid integration or interconnection between countries. MNCs play a major role. More and more goods and services, investments and technology move between countries. A fifth way of linking countries — the movement of people for better income, jobs or education — has not increased much in recent decades because of various restrictions.

Rapid improvement in technology has been one major factor. In transport, the past fifty years have brought much faster delivery over long distances at lower cost. Containers — goods packed in standard boxes loaded intact onto ships, trains, planes and trucks — have hugely cut port handling costs and sped up exports; the cost of air transport has fallen, so airlines carry far greater volumes. Even more remarkable is information and communication technology: telecommunication (telegraph, telephones including mobile phones, fax) linked by satellite devices, computers in almost every field, and the Internet with e-mail and voice-mail at negligible cost. IT has been central to spreading out the production of services.

Suppose the government puts a tax on imported toys. Importers pay it, buyers pay a higher price, Chinese toys are no longer as cheap, imports fall and Indian toy-makers prosper. A tax on imports is a trade barrier — ‘barrier’ because a restriction is set up. Governments use trade barriers to increase or decrease (regulate) foreign trade and decide what goods, and how much of each, come in. Another barrier is a quota, a limit on the number of goods that can be imported.

Why India once had barriers. After Independence, India put barriers on foreign trade and foreign investment to protect domestic producers: industries were just coming up in the 1950s and 1960s, and import competition would not have let them grow. Only essential items — machinery, fertilisers, petroleum — were freely imported. NCERT adds that all developed countries protected their producers in their early stages of development. Why they were removed: starting around 1991, the government decided Indian producers should compete with producers around the globe, believing competition would improve their performance and quality; powerful international organisations supported this. Barriers on trade and investment were removed to a large extent: goods could be imported and exported easily, and foreign companies could set up factories and offices. Removing barriers or restrictions set by the government is liberalisation; with liberal trade, businesses decide freely what to import or export.

Powerful international organisations hold that all barriers to trade and investment are harmful and that trade should be ‘free’. The World Trade Organisation (WTO) is one whose aim is to liberalise international trade. NCERT says it was started at the initiative of the developed countries; it establishes rules for international trade and sees that they are obeyed; ‘about 160’ countries are members. Though the WTO is supposed to allow free trade for all, NCERT says that in practice developed countries have unfairly retained trade barriers while WTO rules have forced developing countries to remove theirs — the example being the debate on trade in agricultural products.

Debate on Trade Practices (box). In India agriculture provides the bulk of employment and a significant share of GDP (Chapter 2). In the US, agriculture is 1% of GDP and a ‘tiny 0.5%’ of employment — yet these few farmers receive massive sums from the US government for production and exports, so they can sell farm products at abnormally low prices, and surplus produce sold abroad hurts farmers elsewhere. Developing countries ask: we reduced our barriers under WTO rules, but you keep paying your farmers and ask us to stop supporting ours — is this free and fair trade?

Consumers: greater competition among local and foreign producers has benefited consumers, particularly the well-off in urban areas — more choice, better quality, lower prices for several products, and much higher living standards. Producers and workers: the impact ‘has not been uniform’. (1) MNCs have increased investment over the past 20 years — so investing in India has paid them — in cell phones, automobiles, electronics, soft drinks, fast food and urban banking, goods with many well-off buyers; new jobs were created there and local suppliers prospered. (2) Several top Indian companies gained from competition by investing in new technology and production methods and raising standards; some gained from collaborations with foreign firms. (3) Some large Indian companies became MNCs themselves: Tata Motors (automobiles), Infosys (IT), Ranbaxy (medicines), Asian Paints (paints), Sundaram Fasteners (nuts and bolts). (4) New opportunities for services, especially IT — the Delhi magazine, call centres, data entry, accounting, administration, engineering — done cheaply in India and exported.

Steps to attract foreign investment (box). Central and state governments are setting up Special Economic Zones (SEZs) with world-class facilities — electricity, water, roads, transport, storage, recreational and educational facilities; companies in SEZs pay no taxes for an initial period of five years. The government has also allowed flexibility in labour laws: companies may ignore many rules that protect organised-sector workers and hire ‘flexibly’ for short periods when work is intense, to cut labour costs — and foreign companies are demanding still more flexibility.

Small producers: compete or perish. Ravi took a bank loan in 1992 to make capacitors in Hosur, Tamil Nadu; within three years he had 20 workers. When the government removed restrictions on capacitor imports under its WTO agreement in 2001, his clients — television companies — were pushed by MNC brands into assembling for MNCs, and those still buying capacitors imported them at half Ravi's price. He now makes less than half his 2000 output with 7 workers; many friends in Hyderabad and Chennai have closed. Batteries, capacitors, plastics, toys, tyres, dairy products and vegetable oil are industries where small manufacturers were hit hard; units shut, workers lost jobs. Small and medium industries employ the most workers after agriculture — 11 crore.

Competition and uncertain employment. Facing competition, most employers now hire ‘flexibly’, so jobs are no longer secure. In the garment export industry, large MNCs in Europe and America order from Indian exporters and look for the cheapest goods; to win orders, exporters cut costs — not raw materials, which they cannot, but labour: temporary instead of permanent workers, very long hours, regular night shifts in the peak season, low wages, forced overtime. MNCs make large profits; workers are denied a fair share. Sushila, 35, was a ‘permanent worker’ in Delhi's garment export industry with health insurance, provident fund and overtime at double rate until her factory closed in the late 1990s; after six months she found a job 30 km away where, years later, she is still temporary, earns less than half, and leaves home at 7:30 a.m., returning at 10 p.m., seven days a week. Such conditions are now common; most workers are in the unorganised sector, and organised-sector conditions increasingly resemble it.

Not everyone has benefited. People with education, skill and wealth made the best use of the new opportunities; many others have not shared the benefits. Since globalisation is now a reality, NCERT asks how to make it more ‘fair’: fair globalisation would create opportunities for all and ensure that its benefits are shared better. The government can play a major role: its policies must protect all the people, not only the rich and powerful. It can ensure labour laws are implemented and workers get their rights; support small producers until they are strong enough to compete; use trade and investment barriers if necessary; negotiate at the WTO for fairer rules; and align with other developing countries against the domination of developed countries. People's organisations, through massive campaigns and representation, have influenced important WTO decisions on trade and investment — showing that people too can shape fair globalisation.

Ten ‘Let's work these out’ boxes. Outlines below; numbers recomputed; illustrations marked †.

Thirteen questions and a project. Try first, then open.

Numbers

One-liners

• An MNC owns or controls production in more than one nation.
• MNCs split production into parts and put each where it is cheapest or nearest to markets.
• Foreign investment is MNC money spent on assets; buying local firms is the commonest route.
• Foreign trade integrates markets; foreign investment interlinks production.
• Globalisation = rapid integration of countries through trade and investment.
• Goods, services, investment and technology move freely; people much less.
• Technology, liberalisation and the WTO enabled globalisation.
• A tax on imports and a quota are both trade barriers.
• NCERT says the WTO's rules have bound developing countries more than developed ones.
• The impact of globalisation has not been uniform.
• Fair globalisation creates opportunities for all and shares benefits better.

Traps to avoid

• An exporter is not an MNC; an MNC produces in more than one country.
• Most common MNC route: buying local companies, not new factories.
• Movement of people has not increased much — Exercise 13(i) is (b), not (a).
• Globalisation means greater, not lesser, competition among producers.
• ‘About 160’ WTO members is dated; 166 since 2024.
• Ranbaxy is no longer Indian-owned (Daiichi Sankyo 2008; merged into Sun Pharma 2015).
• The jeans' ₹6,500 = $145 reflects an old exchange rate (≈ ₹44.8 per $).
• SEZ ‘no taxes for five years’ simplifies an income-tax exemption on export profits, now closed to new units.
• Barriers after Independence covered foreign investment as well as trade.
• Amber, blue and green boxes are WTO terms.

Prelims — what UPSC asks

• Definitions: multinational = a company operating in more than one country (1982); FDI is a largely non-debt-creating flow (2020) — FDI vs FPI detail is leec106's and keec103's ground.
• Zones and rules: SEZ Act objectives — infrastructure, foreign investment, exports of goods and services (2010); Agreement on Agriculture and the peace clause (2015) and amber/blue/green boxes (2016) belong to the WTO.
• Also expect: WTO founding (1995) and GATT, WTO membership, Information Technology Agreement, Kandla EPZ, FEMA 1999, the labour codes, Factories Act hours.

Mains — where it appears and how to answer

• GS3: globalisation and the shrinking formal sector (2016) — use Sushila and flexible hiring; Indian companies vs MNCs (2013) — Tata Motors, Infosys, Ravi; the need for FDI (2016); SEZ problems (2015); Make in India and labour reform (2015); the turn from free trade to protectionism (2025). GS2: WTO's mandate and food security (2014), the Doha deadlock (2016), the IT Agreement (2014).
• Set positions side by side — Bhagwati vs Stiglitz, Rodrik's trilemma, employers vs workers on flexibility, supporters vs critics of SEZs, developing vs developed members on farm support — and give laws and agreements as dated facts. No present-day political commentary.

Tap an option. NCERT's own exercise questions come first; the rest test the figures and common confusions.

Open any question to attempt it in the Question bank — your attempt is saved to your progress.