Globalization and the Indian Economy: Impact, Challenges & Future Outlook

Globalisation is one of the most debated issues of recent times. The United States of America, as a major proponent of free trade, is resorting to blanket trade barriers to protect its domestic industries from cheap imports. The American government is negotiating bilateral Free Trade Agreements (FTAs) with countries to safeguard its domestic economy. What has been India’s experience with globalisation since the introduction of economic liberalisation in 1991?   

This article discusses globalisation as an engine of economic growth and how it helped the Indian economy prosper.   

What is Globalisation?

Globalisation is a complex and multifaceted process of promoting interconnectedness and interdependence among countries. This can happen through international trade, cross-border flow of investments, technologies, intellectual properties, population and cultural exchange. 

The first mention of globalisation can be traced back to the first half of the 20th Century. Theodore Levitt made the term mainstream with his article "The Globalization of Markets" in 1983. However, globalisation has existed since ancient times. 

Some of the prominent examples of interactions and interconnectedness between countries and regions are: 

• Trading activities between China and Europe through the famous Silk Route 
• Maritime spice trades from India to the Middle East and Africa 
• The spread of Buddhism from India to China, Sri Lanka, Thailand and Japan 

Today, international organisations, like the International Monetary Fund (IMF), the World Bank (WB), the United Nations (UN) and major developed economies promote globalisation through the following avenues: 

• Economic globalisation - This involves increasing cross-border trading of goods and services, free flow of capital and investments.    
• Cultural globalisation - This promotes minimal restrictions on cross-border movement of people (immigration), international travel and tourism, and the exchange of cultural practices and values. This can potentially lead to awareness of ethnic differences and stronger cultural homogenisation.  
• Political globalisation - This requires accepting the influence of international organisations and multilateral agreements in national policy-making and governance. Some of the common examples of such global goods are building climate resilience, controlling cross-border organised crime and sharing natural resources. 

In the 21st Century, humanity as a whole is facing several unprecedented challenges in terms of global warming, rising income inequality, scarcity of potable water and reliable access to employment. So, along with international trade, political and cultural synergies among countries are becoming ever more essential. The key determinants behind the modern-day globalisation will be: 

• Reliable and affordable cross-border transportation 
• Reduced barriers to international trade 
• Global, multilateral and unilateral economic partnerships 
• Stronger international organisations 

Economic Liberalisation in India 

From ancient times, India has been a vital link in international trade due to its spices, jewellery, textiles, and precious stones. Archaeological excavations unearthed signs of India's close international maritime ties with the Middle East, Africa and Europe. Even during the 17th, 18th and early 19th centuries, Europe had tremendous demand for textiles manufactured by Indian artisans. 

However, subsequent policy decisions in independent India delinked the Indian economy from international trade as the policymakers preferred building self-reliance and promoting domestic industries. Major industries were brought under government control, and private companies needed licenses to manufacture. 

Some limited attempts were made during 1966 for economic liberation through the devaluation of the Indian rupee. The primary objectives were to make Indian commodities attractive in the export market and to build the country's foreign exchange reserves. However, political resistance and increased import costs forced the government to roll back their decisions and adopt a centralised, socialist policy stance.  

This changed in 1991 because of a severe balance of payment crisis and rock-bottom foreign currency reserves. The Gulf War prompted a rapid increase in crude oil prices, which made inflation worse in the domestic market. Simultaneously, the burden of fiscal deficit on the government was becoming unsustainable. Together, these conditions necessitate drastic economic reform to prevent the economy from going down into a vicious cycle of economic stagnation and losing its global standing. 

Against the backdrop of such severe challenges, Prime Minister Mr. P.V. Narasimha Rao, along with his Finance Minister Mr. Manmohan Singh, made the bold decision to liberalise the Indian economy. 

The three (3) major pillars of their policy decision were:

• Liberalisation 
• Privatisation 
• Globalisation 

Liberalisation 

This involved a gradual abolition of License Raj or removing industrial licensing practices. The government removed licensing requirements for 18 industries. Large private companies no longer needed to get approval to invest in production expansion. 

Privatisation 

Privatisation initiative started with deregulating sectors that were previously under direct government control. Only 18 sectors were kept reserved for Public Sector Undertakings (PSUs). These were the areas essential for ensuring national security, social integrity and sovereignty. The government also started listing PSUs in stock markets, divesting its shares in favour of private participation and dismantling PSUs' monopolies. Monopolies and Restrictive Trade Practices Act (MRTP) was scrapped.  

Globalisation 

The government started reducing trade barriers, like tariffs, significantly, and took a measured stance to gradually re-regulate foreign direct investments (FDIs) in Indian industries. Indian currency was made partially convertible. Plans were made to make pre-approved 51% FDI in several sectors. 

Impact of Globalisation on the Indian Economy

The economic liberalisation of 1991 was a watershed moment for the Indian economy as it laid the foundation for India's 21st Century growth story. The prominent empirical impact of this policy decision are: 

• Accelerated economic growth - The average rate of growth in GDP between 1991-92 to 2011-12 was around 7%.  
• Stronger foreign exchange reserves - Globalisation initiatives increased both FDI and foreign portfolio investments toward India. Foreign currency reserves in September 2024 stood at around $704 billion compared to approximately $2.2 billion in 1990-91. The total exports in 1990 were around $17.9 billion compared to $ 602.64 billion between April to December 2024. 
• Growth of the service sector - Increased access to modern technologies through globalisation and reduced import restrictions gave rise to modern services industries, like Information Technologies, engineering design and telecommunications. In 2024, the sector contributed nearly 54% to India's GDP.   
• Improved living standard - The percentage of people living below the poverty line in India was 45.3%, which came down to 21.9% in 2011-12. As per the World Bank data, the poverty rate in 2021 stood at 12.9% as per 2017 Purchasing Power Parity (PPP) standard. 

Globalisation and Key Sectors of the Indian Economy

Some of the key sectors that witnessed significant impact from the economic liberalisation of 1991 are: 

• IT and ITeS 

The removal of restrictions on export and import, and incentives to FDIs had a profound impact on the Information Technology (IT) and IT-enabled services sectors. This led to new business opportunities in business process outsourcing, software design and telecommunication.  

• Agriculture 

This sector felt a mixed-bag experience following the globalisation pushes during the economic liberalisation of 1991 and subsequent policy initiatives. Indian farmers received access to modern agricultural technologies. However, small farmers failed to leverage this benefit due to a lack of capital and a large scale of operations. On the brighter side, opportunities for exporting farm produce increased tremendously. The total agri-export in 1990-91 was around ₹6000 crore compared to ₹3,05,469 crore in 2020-21.   

• Financial services 

Entry of private enterprises and foreign players in the financial services sector increased competition, lowered cost of service delivery and improved quality of services. The major impact can be visible in banking, financial intermediaries, wealth management and insurance sectors. This increased access to credits and products for managing personal financial management. 

• Manufacturing 

Sectors like automobile, electronics, iron & steel, pharmaceutical and petrochemicals witnessed significant impact in terms of increased private participation and FDIs. However, competition from low-cost manufacturing hubs in countries like China also increased because of reduced trade barriers.  

Challenges of Globalisation for India

While the economic liberalisation and subsequent pro-globalisation policies have helped the Indian economy in several ways, they also opened up the country to many challenges. Some of these challenges are: 

• Growing economic inequality - Globalisation has opened up new opportunities in India for the English-speaking, educated urban middle-class population. However, these opportunities remained out of reach for people living in rural areas. It caused economic inequality. 
• Cultural homogenisation - Youth working in modern workplaces are getting more and more attracted to Western values and cultural practices, often ignoring their traditional cultural roots. It resulted in cultural homogenisation and loss of identity for many. 
• Environmental degradation - Increased economic activity resulted in deforestation, depletion of natural resources, rapid unplanned urbanisation and pollution. The number of cars increased on roads, and excess productivity pressure on agriculture resulted in increased use of chemical pesticides and loss of biodiversity. 
• Displacement of traditional job roles - Access to modern production technology and increased competition caused job losses in sectors like textile, agriculture, mining, and construction. 

India's Role in the Global Economy

Economic liberalisation of 1991 made significant improvements to India's role in the global economy. 

• Net recipient to net donor - Earlier, India was a net recipient of foreign aid. However, in 2017, the government declared India to be a net donor country for foreign aid.
• Major economic power - The country ranked third-largest in terms of Purchasing Power Parity (PPP) as of 2024. The share of the Indian economy in global GDP increased from 4% in 2000 to 7.5% in 2023.
• Major investment destination - Every year, Indian companies and financial markets attract a significant volume of capital inflow in terms of FDI and portfolio investments. Many MNCs are opening their Global Capability Centres in India to support their operations across the world. 
• Geopolitical importance - As the largest democracy and a key maritime power in the Indian Ocean Region (IOR), the geopolitical importance of the country is also steadily increasing. 

Future of Globalisation and India

Globalisation is a reality that no country can ignore despite its many drawbacks. The concerns like climate change, food insecurity, pandemics, water scarcity and poverty require global solutions, like strong collaboration and cooperation between countries. At the same time, globalisation may also have negative side effects, like job losses, identity crisis and the environmental impact of economic activities. We need to find solutions to these downsides of globalisation as well. 

India has a significant role to play in today's changing dynamics of global connectedness. Some of the factors that position India in a unique leverage point for the positive future of globalisation are: 

• The demographic dividend of large working-age population 
• Pro-business policy decisions of the government 
• India's preference towards rule-based international order 
• India's strong tech-enabled services sector