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The Impact of Globalization, Nationalism and Protectionism on India

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The report gives the idea of how the nationalism and the protectionism can affect the positive and negative well being of the country. This happened post the financial crisis of 2008 in USA. The report gives brief idea about the advent of Global financial crisis in 2008 and how it affected every country due to the fact that there is globalization. The country chosen for the project is India. This report provides the information about the impact on India due to the crisis and states the advantages and disadvantages of globalization in Indian economy along with challenges the Indian companies are facing due to increase in the Nationalism and Protectionism. Also solution is given so as to know whether the nationalism and protectionism should be there or not.

Introduction

Global financial crisis is considered to the worst financial crisis after the Great Depression of 1930s. It started with the subprime mortgage, where broker started giving loans to those who didn’t wanted at the lower cost. It is researched that it started with the Gramm Leach Bliley Act of 1999, where the FED reserves lowered the interest from 6. 5% to 1% in 2003. This motivated to break the wall between Commercial Banking, Investment Banking and Insurance. Commercial Bank and Investment bank merged and investment started giving Collateralized Debt Obligation (CDO) to the foreign companies and countries. Collateralized Debt Obligation can be defined as the addition of more number of mortgage papers. With more and more demand of CDOs the investment bank asked the commercial bank to provide more number of mortgage papers. These followed by commercial bank asking brokers to get the more customers, and they eventually got defaulters and subprime who cannot afford to pay the loan, which made the banks to get the houses of those who cannot afford to pay the loans and NPA arises. Countries lose their money in the investment banking.

The first financial institution to get affected was the Lehman Brothers. Impact on the IndiaPast three decades, Indian economy had performed very well, resulting in the growth rate of real Gross Domestic Product (GDP), domestic savings and increase in investment and productivity. However, the epicentre of the economic crisis was the US Subprime Mortgage market, as explained earlier; its impact was made throughout the world, in the financial market. At first, the government denied any impact on the Indian economy, in later stage it showed the impact and was recognized by the Indian Government. Though the impact was very less on India compared to the other countries, because of India’s strong fundamental of economy, well regulated banking system and less exposure of financial sector to the global financial market.

The meltdown in US has not made any credit crunch in Indian economy, but the credit crunch in US led to panic in India. With the Indian economy growing, the global financial crisis made the Indian economy to face the downturn, inflation at double digit rate, faltering of industrial growth, widening of current account deficit etc. Through distinct channel like financial market, trade flows, import-export and exchange rates, the global crisis affected the health of several sectors of Indian economy. The highest impact was on the Mining and manufacturing sector in the year 2007-08. It occurred due to the decline in exports particularly garment exports and the demand for India’s iron ore. Despite that Indian economy sustained an impressive growth rate of 9. 2 percent in 2007-08. However, the Indian economy could not withstand the impact of global meltdown beyond 2007-08. In 2008-09, there was decline in the growth rates of GDP from almost all the sectors except few. As a result, the GDP grew only 6. 7 later that year. However in 2009-10, India recovered and the GDP grew at 7. 2 percent, but the agriculture sector couldn’t sustained with the impact.

The effect of financial crisis on India’s external sector can be analyzed through the Balance of Payment. BOP is the summation of the current account, capital account, forex reserves and errors and omission. BOP summary gives clear picture of the country’s overall performance in the external sector. However, during 2008-09, the overall BOP balance turned negative i. e. it went to US $(- 20080) million. It shows that the crisis hit severely to the capital inflow in the country. However, it got revived not much but to the positive value in 2009-10. In the present global scenario, India has been considered to be the most promising and fastest growing economy standing at the 6th position in the world. Due to the Liberalized rules for Foreign Direct Investment (FDI) in Indian Economy, the real estate, telecommunication, construction and pwer sector have been very attractive investment avenues for both domestic and the foreign investors.

Globalization in India

Globalization is the economic activities’ expansion across the political boundaries of nation. This results in the economic growth of a nation and interdependence between two nations. Benefits of Globalization in IndiaGlobalization helped multinational corporations to get several jobs in Hyderabad, Bangalore etc. The benefits of Globalization can be summarized as:

  1. Increased in Employment: New jobs are causing naturally more of engagements and employments (Mohapatra, 2007). Various help is provided by the government like Special Economic Zones (SEZs), Export Processing Zones (EPZs) etc. to hire people. As the labour rate is cheaper in India, countries like USA and UK outsource their work in Indian companies. This creates more employment.
  2. Increase in Compensation: The level of compensation has been higher that what domestic firms world have provided at similar level of qualification and professional experience. According to Wharton (2011), merger & acquisition rise due to globalization.
  3. Enhancement of Living Standards & increased Purchasing Power: A huge amount of wealth generation is going on which leads to development of business and cities are developing with higher purchasing power. Cities are witnessing better living standards and also development in business economic growth in the city.
  4. Empowered Indian youth: Pride of working in Multinational organization has been increasing among the young professionals and that has done wonders in increasing their outstanding confidence in the early 20s which is not seen in any other group age. This phenomenon with professionalism gave a strong motivation to the Indian economy. Growth of commercial and housing real estate industry expanded significantly.

Disadvantages of globalization for India

There are some disadvantages which affects the industrial and the growth of economuy.

  • Increased likelihood of economic disruption in one nation effecting all nations.
  • Corporate influence far exceeds civil society and average individuals.
  • Threat that control of world media by a handful of corporations, limit cultural expressions.
  • Greater risk of disease being transported unintentionally between nations.
  • International bodies like World Trade Organizations infringe on national and individual sovereignty.
  • Increase in the chance of civil war and open war between developing countries as they vie for resources.
  • Decrease in environmental integrity as polluting corporations take advantage of weak regulatory rules in developing countries.

Increased Protectionism and Nationalism

In the process of Protectionism and Nationalism, government imposes extra duties and taxes on foreign company, by implementing various tariff and non-tariff barriers on the products. This is done to raise the price of the products so that, government can indirectly promote the Nationalism of their country and motivate the domestic company to sell the goods throughout the nation. This will give positive effect in the market and increase their market share. As far as protectionism is concerned, there are various steps followed by the government to promote the domestic product. Following is the practice followed by the government. In India, it is followed by the government. The tax rate i. e. income tax of the domestic companies are lower than that of the foreign companies. The tax rate for the domestic companies is 30%.

Today’s scenario tells that in the market of India, most of the products are of foreign company, which is imported. India is the preferred market for the companies worldwide to sell their product as the country has high population. This leads the competition in the Indian market, making hard for the domestic companies to sell their products. Protectionism is important for India to promote their local goods in the market. But in the current scenario, India became a global market with many policies made by the government like Make in India. However, protectionism is a short term benefit policy. Also developing Nationalism will lead to factors like advent of war, Socioeconomic cliques etc. Protectionism creates the job in domestic market; not allowing the foreign to interfere and promote the domestic product will be not helpful in the long run. There are some goods that India needs to import from foreign market. Also globalization plays huge roles, as the products of India need to be sold in the out countries so as to increase the profitability of a firm. However, if companies desire to go out and explore the foreign market, government can’t restrict to import goods but can slow down for the time being so as to run the domestic market.

Increased Protectionism and Nationalism will restrict the FDI and inflow of foreign money. As it is discussed above, how it is important for India to have inflow of money, government on the contrary would not want to restrict the FDI and inflow of money. It is researched that increasing protectionism and nationalism for the developed countries face unemployment and low wages problem due to the lower cost of doing business in low wage countries like China. The other argument rests on the fact that most companies cater to their domestic audiences while framing economic policies through a mixture of subsidies and quotas for enhancing the trade. Hence all this leads to a ballooning trade deficit for developed and higher wage countries. Another important issue which results from protectionism is the trade wars due to which all countries raise the tariffs and result in decrease in volume of world trade. India rises for the protectionism and nationalism with many conservative politicians like Donald Trump came to power on the back of creating jobs for the American market. This affects the India in the field of education, jobs, technology and trade. According to one research, India’s growth can be affected by 1. 2% if they increased the protectionism. Many western countries allege that Indian Tech firms have taken away their citizen’s job. As a result the tech firms like Infosys, TCS, Wipro etc. whose major business is generated from the US, have announced that they will hire American citizen over the next two years. But the policy is targeting the H1 B work Visa programme which used to hire cheap labour from countries such as India. However, the IMF has already sounded a warning bell by ordering that the developing countries like India, China and South Africa gain to lose the most which lead to financial stability risk in these economies and capital outflows further hurting the demand.

Approximately 61% of the Indian IT sector’s revenue is from US clients. The top 5 Indian players account for 46% of the IT industry’s revenues, the revenue contribution is approximately 58%. Also 30% of the industry revenues are estimated to be from financial services. If we talk about the qualitative point of view, the financial sector business are well entrenched and have significant impact. Post global financial crisis, US BFSI players created large outsourcing chunks, and made the Indian players learn from their experience, negotiated aggressively on pricing, pushed for services level commitments, and rewarded with more work. Thus, between 1999 and 2008, the share of US financial services as a % of total revenue for the top 3 Indian players just went from 25/5 to 38%.

Indian companies were flexible, delivering good quality and gave a key lever in managing their SG& A and time to market by freeing up more IT resources. It is ironic that this crisis would have had a worse impact, if Indian firms have partnered with the financial services entities much more closely, tying up invoices with the clients’ business resources.

A study by Forrester reveals that 43% of western companies are cutting back their IT spend and nearly 30% are scrutinizing IT projects for better returns. The slowing US economy has seen 70 percent of firms negotiating with the suppliers and nearly 60% are cutting back on contracts due to economy downturn. With this much of impact on the economy, US companies are squeezing their budget for IT sectors, there are more than just 40 percent of companies who plan to increase their offshore use of vendors

. Merger activity is going to provide more and new outsourcing opportunities, confirmed by Infy, as newly merged entities they may have to look for new providers to support the integration work and a broader global presence, especially if the account size is huge after combining the international operations. A BPO and some ITO, where there is quick remediation staff. SolutionThe solution to above problem is to lower the trade barriers and promoting free and open trade that is universal, rules based, non-discriminatory and open which should contribute to global growth and sustainable development goals. One of the best examples of this is Hong Kong; country is practising the free trade and still becoming wealthy. Learning this India should also implement this strategy, there should be concerted efforts to enhance collaboration and cooperation, and efforts should be made to increase productivity, quality and competitiveness. Many economists and their theories have argued for the presence of free trade as it is based on the principals of comparative advantage due to which a country produces those goods in which it has a comparative advantage over others resulting is rise in global production, efficiency and every being better off. However, there are arguments that free trade does not benefit each and every industry. But those fallacies can be resolved by providing better income support benefits, retraining for jobs or for relocating those workers displaced by international trade than by doing protectionism. Thus increasing Nationalism and Protectionism is in the interest of all nations, concerned that free trade rather than becomes protectionism the solution for the world economy and sustained growth.

Conclusion

There is no denying that the India’s growth has increased prevalent of globalization. It is still not as much as that in the years 1991-2005. However, the growth declined tremendously post financial crisis. The above stats show how it affected the growth in Indian economy and its companies. The IT sector was affected more, because due to globalization the countries are connected with each other through internet. This is the platform how they do transaction in interbank, which cause to lower the price of IT companies. I personally feel that the globalization is must, as and when if there are any needs and wants of customers, whom the nation can’t fulfil, they have to diversify. There are many countries which need the resources from the Indian and vice versa too. The increased in Nationalism and Protectionism is helpful to some extent, to promote the domestic players and motivate the employees. However, it may reduce the economic growth and can affect the sustainability of India.

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