Chapter 4: Globalisation and the Indian Economy

Economics · CBSE Class 10 · Understanding Economic Development

Globalisation and the Indian Economy — Detailed Notes

1. A Transformed Market

Consumers today enjoy a wide choice of goods — mobiles, cars, TVs, processed juices — from leading world manufacturers. Two decades back such variety did not exist. This chapter studies the factors behind this transformation and how it affects people's lives. Here globalisation is studied in a limited economic sense: integration between countries through foreign trade and foreign investment by MNCs.

2. Production Across Countries — MNCs

Until the mid-20th century production was organised within countries; only raw materials, foodstuff and finished goods crossed borders (colonies like India exported raw materials, imported finished goods). Then came Multinational Corporations (MNCs).

An MNC is a company that owns or controls production in more than one nation. MNCs set up offices and factories where they get cheap labour and other resources, so the cost of production is low and profits are high. Example: an MNC designs a product in the USA, makes components in China (cheap manufacturing), assembles in Mexico/East Europe (close to US/Europe markets) and runs customer care through call centres in India (skilled, English-speaking youth) — possibly saving 50-60% of costs. Thus goods are produced globally, with production split into small parts spread across the globe.

3. How MNCs Interlink Production

MNCs spread and control production in several ways:

• Joint production with local companies — bringing money for investment and the latest technology.
• Buying up local companies — e.g. Cargill Foods (US) bought Parakh Foods, becoming India's largest edible-oil producer (5 million pouches/day). Many top MNCs have wealth exceeding the budgets of developing-country governments.
• Placing orders with small producers (garments, footwear, sports goods), then selling under the MNC's brand — giving the MNC power over price, quality, delivery and labour conditions.
Investment: money spent to buy assets (land, buildings, machines). Investment by MNCs is foreign investment, made to earn profit.

4. Foreign Trade and Integration of Markets

Foreign trade has long connected countries. Its basic function: it lets producers reach beyond their domestic markets, and lets buyers import goods to widen their choice. Example — Chinese toys in India: cheaper, new-design Chinese toys became popular; within a year 70-80% of toy shops replaced Indian toys; prices fell, Indian buyers gained choice and Chinese makers expanded, but Indian toy-makers suffered losses.

With open trade, goods travel between markets, choice rises, prices of similar goods tend to become equal, and producers thousands of miles apart compete closely. Thus foreign trade leads to the integration of markets across countries.

5. What is Globalisation?

Greater foreign investment and foreign trade have produced greater integration of production and markets across countries. Globalisation is this process of rapid integration/interconnection between countries, with MNCs playing a major role. Countries can also be connected by the movement of people (for jobs, income, education), but this has grown little recently because of restrictions.

6. Factors that Enabled Globalisation

• Technology: rapid improvements in transport (faster, cheaper delivery; containers cut port-handling costs and speed; cheaper air transport) and especially information and communication technology (IT) — telecom, computers, the internet — letting information, e-mail and voice-mail move worldwide at negligible cost. (Example: a London magazine designed/printed in Delhi and paid for instantly via e-banking.) Globalisation of services would not have been possible without IT.
• Liberalisation of trade and investment: a trade barrier (e.g. a tax or quota on imports) restricts trade. After Independence India kept barriers to protect new domestic industries, allowing only essential imports. Around 1991, India made far-reaching changes, deciding its producers should compete globally; barriers were largely removed. Liberalisation = removing government-set barriers/restrictions so businesses freely decide what to import/export.
• Pressure from international organisations — the WTO.

7. World Trade Organisation (WTO)

The WTO aims to liberalise international trade; it was started at the initiative of developed countries, sets rules for international trade and sees that they are obeyed (about 160 members). Though meant to allow free trade for all, in practice developed countries have unfairly kept their own trade barriers while WTO rules have forced developing countries to remove theirs. Example — agriculture: the US (agriculture only ~1% of GDP, ~0.5% of employment) pays its farmers huge sums, so US farm surpluses are sold abroad at abnormally low prices, hurting farmers in other countries — an unfair-trade debate.

8. Impact of Globalisation in India

The impact has not been uniform:

• Winners: well-off consumers (more choice, better quality, lower prices, higher living standards); MNCs (rising investment in cell phones, cars, electronics, soft drinks, fast food, banking), creating new jobs and prospering local suppliers; several top Indian companies that invested in new technology and even became MNCs themselves — Tata Motors, Infosys, Ranbaxy, Asian Paints, Sundaram Fasteners; and new IT-enabled service opportunities (magazine design, call centres, data entry, accounting) exported to developed countries.
• Steps to attract foreign investment: Special Economic Zones (SEZs) with world-class facilities and a five-year tax holiday; and flexibility in labour laws — hiring workers ‘flexibly' for short periods to cut labour cost (foreign companies still demand more).
• Losers — small producers: batteries, capacitors, plastics, toys, tyres, dairy, vegetable oil — many small units shut down (e.g. Ravi's capacitor unit after import restrictions were removed under WTO in 2001). Small and medium industry employs the most workers (~11 crore) after agriculture.
• Losers — workers: ‘flexible' hiring makes jobs insecure. Sushila, once a permanent garment worker with benefits, is now a temporary worker earning less than half with no benefits. MNCs seeking the cheapest goods push Indian exporters to cut labour costs; organised-sector conditions increasingly resemble the unorganised sector.

9. The Struggle for a Fair Globalisation

Globalisation is now a reality; the question is how to make it fair — creating opportunities for all and sharing benefits better. The government can: ensure labour laws are properly implemented; support small producers until they can compete; use trade and investment barriers where necessary; negotiate for ‘fairer rules' at the WTO; and align with other developing countries against the dominance of developed countries. People's organisations and campaigns have also influenced WTO decisions — showing people can help the struggle for fair globalisation.

10. One-line Recap

Globalisation is the rapid integration of countries through foreign trade and MNC investment, enabled by technology, liberalisation and the WTO. It has helped well-off consumers and skilled/wealthy producers but hurt many small producers and workers — so the goal is a fairer globalisation that benefits all.

NCERT Solutions — Chapter 4: Globalisation and the Indian Economy

1What do you understand by globalisation? Explain in your own words.

Globalisation is the process of rapid integration or interconnection between countries, mainly through foreign trade and foreign investment by MNCs. More and more goods, services, investment and technology move between countries, so production and markets across the world become closely linked. For example, a car may be designed in one country, its parts made in another and assembled in a third, then sold worldwide.

2What were the reasons for putting barriers to foreign trade and foreign investment by the Indian government? Why did it wish to remove these barriers?

Reasons for barriers (after Independence): to protect new domestic industries coming up in the 1950s-60s from foreign competition, which they could not yet face; so India allowed only essential imports (machinery, fertilisers, petroleum). All developed countries also protected their industries in early stages.

Why remove them (around 1991): the government felt Indian producers were now ready to compete globally, that competition would improve their quality and performance, and this was supported by powerful international organisations. So barriers were largely removed (liberalisation).

3How would flexibility in labour laws help companies?

Flexibility in labour laws lets companies hire workers on a temporary/‘flexible' basis for short periods instead of employing them permanently, and ignore many rules that protect workers. This reduces labour costs — companies need not pay for the whole year or provide benefits like provident fund, paid leave and job security — helping them cut costs and attract/retain foreign investment. (But it makes workers' jobs insecure.)

4What are the various ways in which MNCs set up, control or produce in other countries?

MNCs operate in other countries by: (1) setting up their own factories/offices where labour and resources are cheap and markets are close; (2) joint production with local companies, providing money and technology; (3) buying up local companies and expanding (e.g. Cargill bought Parakh Foods); and (4) placing orders with small producers (garments, footwear, sports goods) and selling under their own brand, controlling price, quality, delivery and labour conditions.

5Why do developed countries want developing countries to liberalise their trade and investment? What should developing countries demand in return?

Why developed countries want it: so their MNCs and exporters can freely enter developing-country markets — set up factories, sell goods and earn profits without barriers.

What developing countries should demand: that developed countries also remove their own trade barriers and farm subsidies (which they have unfairly kept), so trade is genuinely free and fair; and ‘fairer rules' at the WTO that protect the interests of developing countries' producers and workers.

6“The impact of globalisation has not been uniform.” Explain this statement.

Globalisation has helped some and hurt others. Beneficiaries: well-off urban consumers (more choice, better quality, lower prices); MNCs; and skilled, educated, wealthy producers and top Indian companies (Tata Motors, Infosys, etc.) and IT-service workers. Those who suffered: many small producers (toys, capacitors, dairy, etc.) whose units shut down under competition, and workers who lost secure jobs and now work ‘flexibly' for low wages and no benefits (e.g. Sushila, Ravi). Hence the impact is uneven.

7How has liberalisation of trade and investment policies helped the globalisation process?

By removing barriers (taxes, quotas, restrictions) on trade and investment, liberalisation allowed goods to be imported and exported easily and let foreign companies set up factories and offices in India. Businesses could freely decide what to import or export. This sharply increased foreign trade and foreign investment, integrating India's production and markets with the world — i.e. it accelerated globalisation.

8How does foreign trade lead to integration of markets across countries? Explain with an example other than those given here.

Foreign trade lets producers sell in other countries and buyers import goods, so the same goods become available in several markets; competition between home and foreign producers makes the prices of similar goods tend to become equal, effectively joining the markets.
Example: If India exports cheap smartphones to Nepal, Nepali buyers choose between local and Indian phones; prices in the two countries move closer and producers in both compete. The two phone markets become integrated.

9Globalisation will continue in the future. Can you imagine what the world would be like twenty years from now? Give reasons for your answer.

In twenty years the world is likely to be even more interconnected: more MNCs and cross-border production, faster and cheaper technology and digital services, wider consumer choice and possibly freer movement of services and skilled people. Reasons: continuing improvements in IT and transport and further liberalisation. However, this depends on whether globalisation becomes fairer — if benefits remain uneven, there may also be stronger demands to protect small producers and workers. (Reasoned opinion; answers may vary.)

10Suppose two people are arguing: one says globalisation has hurt our country's development, the other says it is helping India develop. How would you respond?

Both are partly right because the impact is not uniform. Globalisation has helped — consumers get more choice and better/cheaper goods, MNC investment and IT services created jobs, and top Indian firms became competitive and even MNCs. But it has also hurt — many small producers shut down and workers lost secure jobs, now working ‘flexibly' for low wages. So the right response is that globalisation is neither wholly good nor wholly bad; the goal should be a fair globalisation that spreads benefits to all, with the government protecting small producers and workers.

11Fill in the blanks: Indian buyers have a greater choice of goods … associated with the process of ___. … increasing ___ with other countries. … MNCs are investing in India because ___. … the effect of rising ___ and ___ has meant greater ___ among the producers.

This is closely associated with the process of globalisation. There is increasing foreign trade with other countries. MNCs are investing in India because they find it profitable — cheap labour and resources, a large market and supportive government policies. The effect of rising foreign trade and foreign investment has meant greater competition among the producers.

12Match the following: (i) MNCs buy at cheap rates from small producers (ii) Quotas and taxes on imports used to regulate trade (iii) Indian companies who have invested abroad (iv) IT has helped in spreading of production of services (v) Several MNCs have invested in setting up factories in India.

(i) → (b) Garments, footwear, sports items
(ii) → (e) Trade barriers
(iii) → (d) Tata Motors, Infosys, Ranbaxy
(iv) → (c) Call centres
(v) → (a) Automobiles.

13Choose the most appropriate option: (i) The past two decades of globalisation has seen rapid movements in ___. (ii) The most common route for MNC investment is to ___. (iii) Globalisation has led to improvement in living conditions ___.

(i) (b) goods, services and investments between countries (people have NOT moved much due to restrictions).
(ii) (b) buy existing local companies.
(iii) (d) none of the above — living conditions improved for well-off/skilled people, not for everyone.

Extra Practice — Very Difficult / HOTS

Assertion-reason, case & source-based, multi-statement, matching and 5-mark analytical questions — harder than the board average.

1Assertion-Reason: A: MNCs spread their production across several countries. R: They set up production where labour and other resources are cheap, close to markets, so that cost is low and profit is high. Choose: (a) Both true, R explains A (b) Both true, R doesn't explain A (c) A true, R false (d) A false, R true.

(a) Both true, and R explains A. MNCs divide production across countries precisely to exploit cheap labour/resources and proximity to markets (e.g. components in China, assembly near US/Europe markets, call centres in India) — lowering cost and raising profit, which is exactly R's reason.

2Case: Cheaper, new-design Chinese toys capture 70-80% of Indian toy shops within a year. Identify (i) the winners, (ii) the losers, and (iii) what the government could do to protect Indian toy-makers — naming the policy tools.

(i) Winners: Indian consumers (cheaper toys, more choice) and Chinese toy-makers (expanded business).
(ii) Losers: Indian toy-makers, who lose sales and may shut down.
(iii) Government tools: impose a tax on imports (tariff) or a quota limiting the number of imported toys — i.e. trade barriers — to protect domestic producers; and support them with better infrastructure, technology and cheap credit until they can compete. (Whether to use barriers is debatable — they protect producers but reduce consumer choice.)

3Multi-statement: (A) An MNC owns or controls production in more than one country. (B) Liberalisation means adding more trade barriers. (C) WTO was started at the initiative of developed countries. (D) The movement of people between countries has risen sharply under globalisation. Which is/are CORRECT?

(A) and (C) are correct.
• (A) correct — definition of an MNC.
• (B) wrong — liberalisation means removing barriers, not adding them.
• (C) correct — the WTO was started at the initiative of developed countries.
• (D) wrong — movement of people has not risen much, due to restrictions.

4Source-based (WTO debate): ‘US agriculture is ~1% of GDP and ~0.5% of employment, yet US farmers get massive government support and sell surpluses abroad at abnormally low prices.' (i) Why do developing countries call this unfair? (ii) What is this practice called, and (iii) what should developing countries demand at the WTO?

(i) It is unfair because developing countries were forced by WTO rules to remove their trade barriers and farm support, while developed countries kept huge subsidies; the cheap subsidised surpluses then hurt farmers in developing countries.
(ii) Paying farmers large sums for production/export is a form of subsidy (protection).
(iii) Developing countries should demand ‘fairer rules' — that developed countries also cut their subsidies and barriers so trade is genuinely free and fair — and should ally with other developing countries to press this at the WTO.

5Matching: Match (i) SEZ (ii) Flexible labour (iii) Cargill–Parakh (iv) Container — with — (P) MNC buying a local company (Q) tax-free industrial zone with world-class facilities (R) cut port-handling cost, sped up exports (S) hiring workers for short periods to cut labour cost.

(i)–(Q): SEZ = tax-free industrial zone with world-class facilities.
(ii)–(S): Flexible labour = hiring workers for short periods to cut labour cost.
(iii)–(P): Cargill buying Parakh Foods = an MNC buying a local company.
(iv)–(R): Container = cut port-handling cost and sped up exports.

6Analytical (5 marks): ‘Technology and liberalisation together made globalisation possible, but the WTO made it uneven.' Examine this statement.

Technology: faster, cheaper transport (containers, air freight) and especially IT (telecom, computers, internet, e-banking) let goods, information and services move worldwide at low cost — e.g. a London magazine designed in Delhi. Without IT, globalisation of services would be impossible.
Liberalisation: India's 1991 removal of trade/investment barriers let goods be freely imported/exported and foreign firms set up here, sharply raising trade and investment.
Why the WTO made it uneven: though meant to ensure free trade, the WTO forced developing countries to drop their barriers while developed countries kept subsidies and barriers (e.g. US farm support), so benefits were skewed towards the rich countries.
Conclusion: technology and liberalisation enabled globalisation, but unequal WTO rules made its gains uneven — hence the call for a fairer globalisation.

7Application (Ravi's capacitors vs Sushila the garment worker): Both were hurt by globalisation. Explain how each was affected and name the common underlying cause.

Ravi (small producer): after import restrictions on capacitors were removed under the WTO (2001), cheaper imported capacitors (half his price) took his clients; his output fell to less than half and his workforce shrank from 20 to 7.
Sushila (worker): her permanent garment job (with benefits) ended when her factory closed; she is now a temporary worker earning less than half with no benefits and very long hours.
Common cause: intense competition under globalisation — MNCs seeking the cheapest goods push exporters to cut costs (hitting workers) and cheap imports undercut small producers. Both show the uneven, harmful side of globalisation for small producers and workers.

8Evaluation: ‘A fair globalisation is possible only if the government acts.' List THREE specific government actions and explain how each makes globalisation fairer.

(1) Enforce labour laws — ensuring workers get secure jobs, fair wages and benefits, so the gains of globalisation reach workers, not only employers.
(2) Support small producers — better roads, power, water, credit and technology until they are strong enough to compete, so small units survive rather than shut down.
(3) Negotiate ‘fairer rules' at the WTO and ally with other developing countries — and use trade/investment barriers where necessary — so developed countries' subsidies do not harm Indian producers.
Together these create opportunities for all and ensure the benefits of globalisation are shared better.