Chapter 4: Globalisation and the Indian Economy
Complete exam-ready notes — MNCs, foreign trade, liberalisation, WTO, impact on India, SEZs, fair globalisation — with all case studies and UPSC-standard MCQs.
1. Introduction — The Transformation of Indian Markets
As consumers in today’s world, we have a wide choice of goods and services — digital cameras, mobile phones, televisions, automobiles by leading global manufacturers. Gone are the days when Ambassador and Fiat were the only cars on Indian roads. A similar explosion of brands can be seen from shirts to televisions to processed fruit juices.
Such wide-ranging choice of goods in our markets is a relatively recent phenomenon. You wouldn’t have found such variety in Indian markets even two decades back. In a matter of years, our markets have been transformed!
This chapter defines Globalisation as the integration between countries through foreign trade and foreign investments by multinational corporations (MNCs).
More broadly: Globalisation is the process of rapid integration or interconnection between countries. More and more goods and services, investments, and technology are moving between countries.
Note: The more complex issues of portfolio investment have been left out of this chapter’s scope.
2. Production Across Countries — MNCs
Historical Context
Until the middle of the twentieth century, production was largely organised within countries. What crossed borders were raw materials, food stuff, and finished products. Colonies like India exported raw materials and food stuff and imported finished goods. Trade was the main channel connecting distant countries — before MNCs emerged.
A Multinational Corporation (MNC) is a company that owns or controls production in more than one nation.
MNCs set up offices and factories in regions where they can get:
- Cheap labour and other resources
- Low cost of production → greater profits
In general, MNCs set up production where:
- It is close to the markets
- There is skilled and unskilled labour at low costs
- Availability of other factors of production is assured
- Government policies look after their interests
Spreading of Production by an MNC
A large MNC, producing industrial equipment, designs its products in research centres in the United States, has the components manufactured in China. These are shipped to Mexico and Eastern Europe where the products are assembled and finished products are sold all over the world. Meanwhile, the company’s customer care is carried out through call centres in India.Why each location? China = cheap manufacturing; Mexico/Eastern Europe = closeness to US/European markets; India = highly skilled engineers (technical understanding) + educated English-speaking youth (customer care). Cost savings: 50–60% for the MNC!
The money spent to buy assets such as land, building, machines and other equipment is called investment. Investment made by MNCs is called Foreign Investment. Any investment is made with the hope that assets will earn profits.
3. Interlinking Production Across Countries — Ways MNCs Operate
① Joint Production with Local Companies
MNCs provide money for additional investments (new machines) and bring latest technology. Benefits the local company.
② Buying Up Local Companies
Most common route. MNCs with huge wealth buy existing local companies and expand production. Example: Cargill Foods (US MNC) bought Parakh Foods (India).
③ Placing Orders with Small Producers
Large MNCs in developed countries place orders with small producers in developing countries. Products sold under MNC brand names. MNCs determine price, quality, delivery, and labour conditions.
④ Setting up Own Factories
MNCs set up fully owned factories/offices for production. Example: Ford Motors setting up plant near Chennai.
Cargill Foods, a very large American MNC, bought smaller Indian companies such as Parakh Foods.
- Parakh Foods had built a large marketing network across India with a well-reputed brand.
- Parakh Foods had four oil refineries — control now shifted to Cargill.
- Cargill is now the largest producer of edible oil in India with capacity to make 5 million pouches daily!
Note: Many top MNCs have wealth exceeding the entire budgets of developing country governments. Imagine the power and influence!
- Ford Motors is an American company, one of the world’s largest automobile manufacturers.
- Production spread over 26 countries of the world.
- Came to India in 1995; spent ₹1,700 crore to set up a large plant near Chennai.
- Done in collaboration with Mahindra and Mahindra (major Indian manufacturer of jeeps and trucks).
- By 2017: selling 88,000 cars in Indian markets + exported 1,81,000 cars to South Africa, Mexico, Brazil, and USA.
- In recent years, Ford stopped producing cars for India but exports cars and car engines on a small scale to other countries.
Ford is an MNC because it owns or controls production in more than one nation (26 countries). ₹1,700 crore is foreign investment.
Women at home in Ludhiana making footballs for large MNCs — an example of MNCs placing orders with small producers. MNCs determine price, quality, delivery, and labour conditions for these distant producers.
Jeans produced in developing countries being sold in USA for ₹6,500 ($145) — illustrating how MNCs capture most of the value in global supply chains.
4. Foreign Trade and Integration of Markets
Foreign trade creates an opportunity for producers to reach beyond domestic markets. Producers can sell not only in their own country’s markets but also compete in markets in other countries.
For buyers: Import of goods produced in another country is one way of expanding choice beyond what is domestically produced.
Result of foreign trade:
- Goods travel from one market to another
- Choice of goods in markets rises
- Prices of similar goods in the two markets tend to become equal
- Producers in two countries closely compete against each other even separated by thousands of miles
Foreign trade thus results in connecting the markets or integration of markets in different countries.
Chinese Toys in India — Example of Market Integration
Chinese manufacturers learn of opportunity to export toys to India (where toys are sold at high price). They start exporting plastic toys to India. Because of cheaper prices and new designs, Chinese toys become more popular within a year. 70–80% of toy shops replace Indian toys with Chinese toys. Toys are now cheaper in Indian markets than earlier.Effect: Indian buyers — greater choice at lower prices ✅ | Chinese toy makers — opportunity to expand business ✅ | Indian toy makers — face losses, toys selling much less ❌
| Feature | Foreign Trade | Foreign Investment |
|---|---|---|
| Definition | Exchange of goods and services across national borders (imports and exports) | Money spent by MNCs to buy assets (land, buildings, machines) in another country |
| Nature | Flow of goods and services | Flow of capital/ownership |
| Historical role | Main channel connecting countries for a long time | Became major channel in last 30 years via MNCs |
| Example | India exporting IT services; China exporting toys to India | Ford Motors investing ₹1,700 crore in Chennai plant |
- Steel companies in China: Face stiff competition from cheaper Indian steel; may face losses or shutdown
- Steel companies in India: Get opportunity to expand production and increase profits; access to Chinese market
- Industries buying steel in China: Benefit from lower-priced Indian steel; their production costs reduce
- Integration of markets: Steel prices in India and China tend to become equal; producers in both countries compete despite distance
5. What Is Globalisation?
The result of greater foreign investment AND greater foreign trade = greater integration of production and markets across countries.
Globalisation = Process of rapid integration or interconnection between countries.
MNCs are playing a major role in the globalisation process.
Ways countries can be connected (linked):
- Movement of goods between countries (trade)
- Movement of services between countries
- Movement of investments between countries (foreign investment)
- Movement of technology between countries
- Movement of people between countries (in search of better income/jobs/education) — though this has NOT increased much in the past few decades due to various restrictions
Globalisation, by connecting countries, results in: (b) GREATER competition among producers. (NCERT exercise answer)
6. Factors That Have Enabled Globalisation
Factor 1 — Technology
Transportation:
- Past 50 years: Several improvements in transportation technology.
- Containers: Goods placed in containers loaded intact onto ships, railways, planes, trucks → huge reduction in port handling costs; increased speed of exports reaching markets.
- Air transport cost has fallen → much greater volumes of goods transported by airlines.
Information and Communication Technology (IT):
- Telecommunications: telegraph, telephone (including mobile phones), fax — to contact one another around the world, access information instantly, communicate from remote areas.
- Facilitated by satellite communication devices.
- Computers have entered almost every field of activity.
- Internet: obtain and share information; send instant e-mail and voice-mail across the world at negligible costs.
- IT has played a major role in spreading out production of services across countries.
Using IT in Globalisation — Delhi Magazine Example
A news magazine published for London readers is designed and printed in Delhi. Text sent through Internet to Delhi office. Designers in Delhi get orders on how to design from the London office using telecommunication facilities. Designing done on a computer. After printing, magazines sent by air to London. Payment from bank in London to bank in Delhi done instantly through Internet (e-banking)!Technologies used: Internet, telecommunication, computer, air transport, e-banking — all enabling cross-border production of services.
Factor 2 — Liberalisation of Foreign Trade and Foreign Investment Policy
Trade Barrier = A restriction set up by governments on foreign trade to regulate imports/exports. Examples:
- Tax on imports (Tariff): Raises price of imported goods → imports reduce. Example: Tax on Chinese toys → Chinese toys become expensive → Indian toy makers prosper.
- Quotas: Limit on the number of goods that can be imported. E.g., if only 1 lakh Chinese toys allowed per year → Indian toy makers protected.
- Other trade barriers: Licensing, quality standards, bureaucratic hurdles.
Why India had trade barriers after Independence: To protect producers within the country from foreign competition. Industries were just coming up in 1950s and 1960s; competition from imports would not have allowed these industries to develop. India allowed imports of only essential items such as machinery, fertilisers, petroleum. Note: All developed countries, during early stages of development, gave protection to domestic producers through various means.
Starting around 1991, far-reaching changes in policy were made in India.
- Government decided the time had come for Indian producers to compete with producers around the globe.
- Competition would improve the performance of producers within the country since they would have to improve their quality.
- This decision was supported by powerful international organisations.
- Barriers on foreign trade and foreign investment were removed to a large extent → goods could be imported and exported easily; foreign companies could set up factories and offices here.
Liberalisation = Removing barriers or restrictions set by the government. With liberalisation of trade, businesses are allowed to make decisions freely about what they wish to import or export. Government imposes much less restrictions → said to be more liberal.
Factor 3 — World Trade Organisation (WTO)
| Feature | Details |
|---|---|
| Full form | World Trade Organisation |
| Aim | To liberalise international trade |
| Started by | Initiative of developed countries |
| Membership | About 160 countries |
| Role | Establishes rules regarding international trade and sees that these rules are obeyed |
| Website | http://www.wto.org |
Though WTO is supposed to allow free trade for all, in practice:
- Developed countries have unfairly retained trade barriers.
- WTO rules have forced developing countries to remove trade barriers.
Agriculture Debate:
- In India: Agriculture provides bulk of employment and significant portion of GDP (Chapter 2).
- In US: Agriculture = only 1% of GDP; share in total employment = tiny 0.5%.
- Yet US farmers receive massive sums from the US government for production and exports → can sell farm products at abnormally low prices.
- Surplus US farm products sold in other country markets at low prices → adversely affecting farmers in developing countries.
Developing countries’ question: “We have reduced trade barriers as per WTO rules. But you have ignored the rules of WTO and continued to pay your farmers vast sums of money. You asked our governments to stop supporting our farmers, but you are doing so yourselves. Is this free and fair trade?”
A typical cotton farm in USA = thousands of acres owned by a huge corporation that sells cotton abroad at lowered prices.
WTO was started at the initiative of developed countries. The aim of the WTO is to liberalise international trade. WTO establishes rules regarding international trade for all countries, and sees that these rules are obeyed. In practice, trade between countries is not free and fair. Developing countries like India have reduced trade barriers, whereas developed countries, in many cases, have continued to provide protection to their producers.
7. Impact of Globalisation in India
✅ Positive Impact
- Consumers (well-off urban): Greater choice, improved quality, lower prices → higher standard of living
- MNCs increased investments in India (cell phones, automobiles, electronics, soft drinks, fast food, banking) → new jobs created
- Local companies supplying raw materials to MNC industries have prospered
- Top Indian companies invested in newer technology, raised production standards, gained from collaborations
- Indian companies emerged as MNCs themselves: Tata Motors (automobiles), Infosys (IT), Ranbaxy (medicines), Asian Paints (paints), Sundaram Fasteners (nuts and bolts)
- New opportunities in IT services: data entry, accounting, administrative tasks, engineering — exported to developed countries
❌ Negative Impact
- Small producers and workers face major challenges from rising competition
- Industries hit hard: batteries, capacitors, plastics, toys, tyres, dairy products, vegetable oil
- Several small units have shut down → workers jobless
- Small and medium industries employ 11 crore workers — second only to agriculture
- Workers’ jobs are no longer secure; employers prefer to hire workers “flexibly”
- Workers denied their fair share of globalisation benefits
- Sushila’s case: Permanent garment worker → factory closed → temporary worker earning less than half, commuting 30 km, no benefits, 7 days a week
Globalisation has benefited:
- Well-off urban consumers (greater choice, lower prices)
- Producers with skill, education and wealth
- Large Indian companies (newer technology, global collaborations)
- Indian companies that became MNCs
- IT and services sector workers
Globalisation has hurt:
- Small producers (batteries, toys, capacitors, dairy, tyres)
- Unskilled workers in manufacturing
- Garment workers (flexible/temporary employment, lower wages)
- Workers in organised sector losing benefits as conditions resemble unorganised sector
People with education, skill and wealth have made the best use of new opportunities. Many others have not shared the benefits.
Ravi’s Case — Rising Competition (Small Producer)
Ravi took a bank loan to start a company producing capacitors in 1992 in Hosur, Tamil Nadu (capacitors used in tube lights, televisions). Within 3 years: 20 workers. His struggle began when government removed restrictions on imports of capacitors (per WTO agreement, 2001). TV companies (his main clients) preferred to import capacitors at half the price. Ravi now produces less than half the capacitors of 2000 and has only 7 workers. Many of Ravi’s friends in Hyderabad and Chennai have closed their units.Sushila’s Case — Competition and Uncertain Employment
35-year-old Sushila worked in garment export industry of Delhi as a permanent worker — entitled to health insurance, provident fund, overtime at double rate. Factory closed in late 1990s. After searching for 6 months, got a job 30 km away. Even after years, she is a temporary worker earning less than half of earlier salary. Leaves home at 7:30 am, returns at 10 pm, seven days a week. A day off = no wage. No benefits of earlier job.Reason: Large MNCs in garment industry in Europe/America look for cheapest goods. Indian exporters cut labour costs → permanent workers replaced by temporary workers → long hours, low wages, no benefits. While competition allows MNCs to make large profits, workers are denied their fair share of globalisation benefits.
8. Steps to Attract Foreign Investment — SEZs
- Central and state governments setting up industrial zones called Special Economic Zones (SEZs) to attract foreign companies to invest in India.
- SEZs have world class facilities: electricity, water, roads, transport, storage, recreational and educational facilities.
- Companies setting up production units in SEZs do not have to pay taxes for an initial period of five years.
- Government has also allowed flexibility in the labour laws to attract foreign investment → companies can ignore many rules protecting workers’ rights; hire workers “flexibly” for short periods when there is intense pressure of work.
- Foreign companies are demanding more flexibility in labour laws.
- Opposition to SEZs: Farmers and local communities oppose SEZs because agricultural land is acquired (sometimes forcibly) for industrial use — development for some at the cost of others (linking to Chapter 1).
9. The Struggle for a Fair Globalisation
- Ensure that labour laws are properly implemented and workers get their rights.
- Support small producers to improve their performance till they become strong enough to compete.
- If necessary, use trade and investment barriers.
- Negotiate at the WTO for ‘fairer rules’.
- Align with other developing countries with similar interests to fight domination of developed countries in WTO.
People’s organisations: In the past few years, massive campaigns and representation by people’s organisations have influenced important decisions relating to trade and investments at the WTO. Demonstration against WTO in Hong Kong, 2005 (pictured in NCERT) — people also can play an important role in the struggle for fair globalisation.
10. NCERT Exercise Answers
Indian buyers have a greater choice of goods than they did two decades back. This is closely associated with the process of globalisation. Markets in India are selling goods produced in many other countries. This means there is increasing integration/trade with other countries. MNCs are investing in India because India provides large markets and also cheaper skilled/unskilled labour. While consumers have more choices in the market, the effect of rising foreign trade and foreign investment has meant greater competition among the producers.
| # | Statement | Answer |
|---|---|---|
| (i) | MNCs buy at cheap rates from small producers | (b) Garments, footwear, sports items |
| (ii) | Quotas and taxes on imports are used to regulate trade | (e) Trade barriers |
| (iii) | Indian companies who have invested abroad | (d) Tata Motors, Infosys, Ranbaxy |
| (iv) | IT has helped in spreading of production of services | (c) Call centres |
| (v) | Several MNCs have invested in setting up factories in India | (a) Automobiles |
- Past two decades of globalisation has seen rapid movements in: (b) goods, services and investments between countries [People movement has NOT increased much due to restrictions]
- Most common route for MNC investments is to: (b) buy existing local companies
- Globalisation has led to improvement in living conditions: (d) none of the above [Impact is not uniform — only well-off consumers and skilled producers benefited; many small producers and workers have suffered]
- Globalisation: Process of rapid integration/interconnection between countries through foreign trade and foreign investment by MNCs; goods, services, investments, technology moving between countries.
- Reasons for trade barriers pre-1991 + why removed: Protect nascent Indian industries from foreign competition (1950s–60s). Removed around 1991: government felt competition would improve Indian producers’ quality; supported by powerful international organisations (WTO).
- Flexibility in labour laws helps companies: Hire workers temporarily → do not pay for whole year; reduce labour costs; hire during peak season → cut costs → compete globally for orders.
- Ways MNCs set up/control/produce in other countries: (a) Set up wholly owned subsidiaries; (b) Joint production with local companies; (c) Buy up local companies [most common]; (d) Place orders with small producers; (e) Closely compete with local companies.
- Why developed countries want developing countries to liberalise: Developed countries’ MNCs want access to developing country markets and cheap labour. Developing countries should demand in return: removal of farm subsidies in developed countries; fairer WTO rules; technology transfer; right to protect sensitive industries.
- Impact of globalisation not uniform: Benefited well-off consumers and skilled/educated/wealthy producers; hurt small producers, unskilled workers, garment/toy/capacitor manufacturers; created insecure employment.
- Liberalisation helped globalisation: Removed restrictions on imports/exports; allowed foreign companies to set up factories; reduced tariffs and quotas; allowed freer movement of goods, services and investments.
- Foreign trade leads to market integration: When India opens trade with China (steel), prices tend to equalise; Indian steel companies can sell more; Chinese industries get cheaper steel; producers in both countries compete — markets get integrated. Goods travelling = price differences reduce = markets connect.
- World in twenty years (globalisation continued): More integrated markets; AI-driven services trade; climate trade rules may emerge; possible deglobalisation pressures (national security, pandemics); rise of Asian MNCs; more countries part of global supply chains.
- Two arguments about globalisation: Both are partially correct. Globalisation has benefited skilled, educated producers and consumers (cheaper goods, higher standards); but has hurt small producers, unskilled workers. The answer lies in making globalisation fairer through better government policies, stronger labour laws, equitable WTO rules.
11. UPSC Value Addition — Beyond NCERT
The NCERT example of industrial equipment MNC (design in US, manufacture in China, assemble in Mexico, customer care in India) perfectly illustrates a Global Value Chain (GVC). India currently participates in GVCs primarily at the low-value-added end (assembly, BPO, call centres). Moving up the GVC — to design, R&D, branding — is a key policy challenge. The government’s Make in India (2014) and PLI (Production-Linked Incentive) Schemes aim to attract MNCs and enable India to climb up GVCs in electronics, pharmaceuticals, textiles, etc.
Foreign Direct Investment (FDI) is the formal term for what NCERT calls “foreign investment.” India is one of the top FDI destinations globally. Key FDI sectors: IT/BPO, manufacturing, telecommunications, financial services, retail. DPIIT (Dept. for Promotion of Industry and Internal Trade) monitors FDI inflows. Automatic route (no prior government approval) and Government route (prior approval needed) — India has liberalised most sectors to the automatic route since 1991.
India is one of the world’s largest garment exporters. The garment industry employs over 45 million workers (mostly women). Buyers are large MNCs (Walmart, H&M, Zara, Nike) who squeeze supplier margins. Workers remain in informal employment — exactly what Sushila’s case illustrates. The ILO (International Labour Organisation) — www.ilo.org — has called for a fairer globalisation to ensure workers get their fair share. India’s garment hubs: Tirupur, Surat, Delhi-NCR, Bengaluru.
- Globalisation = rapid integration/interconnection between countries (foreign trade + foreign investment)
- MNC = company that owns or controls production in more than one nation
- Most common MNC investment route = buying up local companies
- Cargill Foods (US) bought Parakh Foods (India) → largest edible oil producer in India; 5 million pouches/day
- Ford Motors: came to India 1995; ₹1,700 crore; Chennai; collaboration with Mahindra & Mahindra; 26 countries
- Chinese toys: within 1 year, 70–80% of Indian toy shops replaced Indian toys with Chinese toys
- Trade barrier: tax on imports (tariffs) + quotas (limit on quantity)
- Liberalisation = removing barriers/restrictions set by government; started in India around 1991
- WTO: started by developed countries; aims to liberalise international trade; ~160 members
- US agriculture: 1% of GDP; 0.5% of employment; yet massive government subsidies — unfair trade practice
- SEZs: world class facilities; no taxes for initial 5 years; flexible labour laws
- Small/medium industries in India employ 11 crore workers — next only to agriculture
- Indian MNCs: Tata Motors, Infosys, Ranbaxy, Asian Paints, Sundaram Fasteners
- Ravi’s capacitor company (Hosur, Tamil Nadu): started 1992; 20 workers → 7 workers after 2001 WTO import liberalisation
- Sushila: Delhi garment worker; permanent → temporary; 30 km commute; 7 days/week; less than half salary
- WTO Hong Kong protest 2005: people’s organisations influencing WTO decisions
- Fair globalisation = opportunities for all + benefits shared better
- Demonstration against WTO in Hong Kong, 2005 (NCERT image)
- International Labour Organisation: www.ilo.org — call for fairer globalisation
- World Trade Organisation: http://www.wto.org — variety of agreements being negotiated
- MNC information: MNC websites (most MNCs have their own)
- Critical MNC analysis: www.corporatewatch.org.uk
