Globalization and Anti-Globalization:
An Indian Perspective

If one is going to talk about globalization, the term globalization must be defined. That’s the easy part. Globalization is defined as free cross-border flow of goods, services, capital, labour, information, ideas, intellectual property. Everything in fact. Defined thus, globalization is more than mere trade reform. Globalization has a descriptive component, as well as a prescriptive one, with the latter more important than the former. The former is simply a factual statement. Over a period of time, globalization has increased in importance and countries have become less insular. It is possible to argue that one encountered such globalization also in the 19th century. There are however two differences between earlier phases of globalization and the present one. First, the speed of change is faster. Second, because most flows (including capital) are private ones, governments have become less powerful in controlling or determining the shape of globalization.

However, there is a prescriptive element to globalization as well. The cross-country empirical evidence is fairly robust that more open economies tend to perform better than more insulated ones. Borders are after all artificial boundaries, created by governments. They are irrelevant for purposes of efficient resource allocation. The logic of Adam Smith’s specialization and division of labour does not become any less compelling because artificial national boundaries have been erected. Here is a quote from Wealth of Nations. “By means of glasses, hotbeds and hotwalls, very good grapes can be raised in Scotland, and very good wine too can be made of them at about thirty times the expense for which at least equally good can be brought from foreign countries. Would it be a reasonable law to prohibit the importation of all foreign wines, merely to encourage the making of claret and burgundy in Scotland?” The point about efficiency gains need not be belaboured. If it does not make sense for Delhi to produce everything that it consumes, it does not make sense for India to produce everything that India consumes.

Why is this logic generally not accepted? It is not enough to argue that in the late 1950s and early 1960s, the government adopted a policy of inward-looking and import-substituting industrialization. Why is there extensive empathy for this import-substituting mindset? It is possible to identify a few inter-related strands, some speculative, others less so.

First, there was the colonial legacy and the identification of the Swadeshi movement with the Independence struggle. Progeny did not necessarily interpret Swadeshi in the sense that the Father of the Nation had. Second, warped policies self-perpetuated themselves in the sense that export pessimism and the resultant foreign exchange constraint, inherited from World War II, became a permanent constraint. The Foreign Exchange Regulation Act (FERA) of 1947, which gave semi-permanency to rules under the Defence of India Act of 1939, is an instance. The Preamble to this 1947 version merely stated that this was “an Act to regulate certain payments, dealings in foreign exchange and securities and the import and export of currency and bullion.” By the time the FERA of 1947 was replaced and tightened by the FERA of 1973, the Preamble had changed. The Preamble now stated that this legislation was necessary “for the conservation of the foreign exchange resources of the country and the proper utilization thereof in the interests of economic development of the country.” The late 1960s to the mid 1970s was the heyday of this Planning Commission kind of control mindset. The point however is that there was considerable public support for this mindset.

Third, perhaps innately, the Indian mind identifies itself much more easily with hierarchical and control structures. It is thus accepted that the government should control and monitor various things. Fourth, the sense of being economically marginalized in the global world was reinforced by a sense of political isolationism, the Non-Aligned Movement (NAM) not having amounted to much. It was difficult to empathize with US foreign policy and this extrapolated into striving for self-sufficiency in food, the PL-480 episode involving Lyndon Johnson and Indira Gandhi acting as a trigger. Conversely, it was easier to empathize with Soviet foreign policy and the apparent economic success of the Soviet Union was also a trigger. Fifth, as a counter factual, the scenario might have been different had the development paradigm been based on agriculture and light and small industry, rather than heavy industry. Instead, the agriculture sector was effectively taxed. Independence or no Independence, nothing changed for the vast majority of the Indian population and whether trade was opened up or not, was to them completely irrelevant. Sixth, so far as industry was concerned, there was no competition and industry functioned on the basis of licensing. Lobbying ensured licences for setting up industry. And lobbying also ensured import licences. Indigenous industry therefore had a vested interest in the status quo. The fact that import licensing and high tariffs lead to a high cost economy by increasing costs of raw materials and intermediates was perceived to be irrelevant. After all, high costs or not, significant profits could be reaped in the protected and oligopolistic domestic market. And so far as exporting to the competitive global market was concerned, there were always the crutches of export incentives. Admittedly, the deadweight losses of protection were borne by consumers. However, consumers were diffused and less vocal and in any case, consumption was perceived to be conspicuous and elitist and should not be encouraged. That apart, customs revenue was a major consideration for the government, especially because it did not have to be shared with the States.

A seventh reason is of more recent vintage and is linked to GATT’s emphasis on reciprocity. While there are benefits from unilateral liberalization, since 1947, GATT has emphasized reciprocity. There may not have been much popular awareness about GATT in earlier years. But certainly post 1991, or post 1993 (after the Dunkel Draft surfaced), GATT and WTO have become household words. Hence the argument that developed countries are not opening up markets in agriculture and textiles and garments. Or that free cross-border movements of capital are encouraged, but free cross-border movements of labour are discouraged. This feeds into the sense of unfairness about decision-making processes within the WTO, or outside it. Club that with the interpretation that the East Asian crisis (and now Argentina) demonstrated that globalization is undesirable. It is because India is relatively insulated that India has not been that affected by the global slowdown. After all, even if India grows by 4.5% in 2001-02, that is no mean achievement. Very few countries in the world will attain that kind of growth rate.

There is also a certain degree of ethnocentricity involved. India is sui generis. India is different. And comparisons cannot be made with other countries. Hong Kong, Taiwan, Singapore and South Korea are small countries. Nor can comparisons be made with communist China. In a democratic polity, decisions must be taken by consensus. If in the process, India grows at 5% and China grows at 7%, that 2% differential is an acceptable trade-off.

Indian reactions to globalization cannot be considered independent of Indian reactions to liberalization. Globalization, in so far as it only concerns the external sector, is a subset of liberalization. Given the state of reforms, it is more pertinent to say that non-liberalization is a subset of non-globalization. Triggered by a balance of payments crisis in 1990-91, most external sector reforms have happened, or there is a timeframe for their implementation – reduction in tariffs, elimination of quantitative restrictions, rationalization (or elimination) of export subsidies, a market-determined exchange rate with current account (limited capital account) convertibility and a more open policy on foreign direct investments (FDI). But in the domestic economy, barring industrial licensing and some reforms in the financial sector, everything else still remains on the agenda. Without being exhaustive, a list of such pending reforms will include – rationalization of indirect taxes and a movement towards VAT (value added tax), public sector disinvestments and privatization, agricultural reforms, law (including administrative law or subordinate legislation) reform, de-reservation of the SSI (small-scale industries) sector and social and physical infrastructure.

It is easy to argue that all three (Congress, United Front and NDA) governments have made a hash out of handling the political economy of the reform process. There has been no attempt to sell reforms to the poor, the beneficiaries. Consequently, reforms have been perceived to be top down, with a pro-urban and pro-rich bias. Myopic governments at the Centre and the State have been driven by populist considerations. Major beneficiaries of true reforms will be unorganized labour, small farmers, efficient trade and industry and consumers. Their gains will more than compensate for losses suffered by organized labour, large farmers, inefficient trade and industry and the bureaucracy. If this message can only be hammered home, the political economy will be taken care of and governments will realize that good economics is also good politics. These arguments are indeed true. But consider the following.

Fertilizer subsidies benefit fertilizer companies and large farmers. Other input subsidies on agriculture (credit, seeds, power, water) also benefit large farmers. But large farmers are a strong and vocal lobby. Given the present political composition of Parliament, they also have enhanced importance. Conversely, most small farmers have no marketable surpluses. Consequently, arguments that market-oriented reforms will help small farmers are difficult to sell. While on agriculture, it is necessary to mention the inordinately long distribution chain. Agreed that this needs to be collapsed through dis-intermediation. But this cartelization and monopolization of the distribution chain has a link with political classes and is not that easy to break.

Implicit and explicit subsidies have also benefited the urban rich. Explicit subsidies amount to Rs 30,000 crores a year. For a long time, there was a debate (in the complete absence of any reliable data) about whether reforms and growth had led to drops in poverty. The National Sample Survey (NSS) collects large sample data at infrequent intervals, roughly once every five years. The last large sample data, until recently, was for 1993-94 and a debate about the link between reforms and poverty went on, with the unrealistic assumption that reforms introduced in 1991 would have been reflected in poverty data for 1993-94. Thankfully, data for 1999-2000 are now available. Subject to some minor problems of non-comparability between 1993-94 and 1999-2000 data, at the all-India level, these show a drop in the poverty ratio from 36% in 1993-94 to 26% in 1999-2000. To get back to the question of subsidies, if Rs 30,000 crores were to be directly given as cash transfers to the 26% of the population that is below the poverty line, each poor household would get around Rs 8000 a year. Obviously, this is not happening. The beneficiaries of subsidies are not the poor, in whose name they are given, but the relatively rich. Out of every one rupee that is spent in the name of the poor, not more than 20% reaches the poor. (The Planning Commission argues that the figure is lower still.) Nowhere is this as well documented as in the case of the PDS (public distribution system). Agreed that food subsidies should only go to those who are below the poverty line. But if those who are above the poverty line have been receiving subsidies, any attempt at reform will run into strong vested interests. Appropriate user charges for power are yet another example of regressive cross-subsidization. The transmission and distribution (T&D) losses are probably around 40% (if they are adequately documented) and in the 2001-02 budget speech, the Finance Minister has put a formal stamp of approval on what has been known for a long time, that T&D losses are an euphemism for “theft and dacoity”. The point however is that this theft is not done by the poor, it is done by the relatively rich, such as industry. But if this relatively rich segment has obtained free power, it is difficult to persuade it to begin to pay for power.

Small-scale sector reservations are yet another example. The SSI sector is not genuinely small-scale, the word small-scale in India has nothing to do with the scale of operation. Units deliberately stay small, by fragmenting production, to avail of fiscal (excise) concessions and to stay outside the purview of labour laws. While excise exemptions should be scrapped, it is unrealistic to expect the so-called SSI sector to agree without a protest. Ditto for direct taxes. The total number of households is 200 million, of which, around 65 million are in the urban areas. As long as agriculture (including non-agricultural income of farmers) is outside the direct tax net, obviously the entire attempt to widen the direct tax net operates on a base of around 30 to 35 million people. Of course, the direct tax base needs to be broadened. But surely it is unrealistic to expect farmers to gleefully agree to pay taxes.

Then there is the inefficient public sector, or more broadly, the inefficient government. Taken together, the government employs 20 million people and it is true that the government needs downsizing. But where are these 20 million people employed? Usually in urban areas. Roughly, one out of every three urban households thus obtains a living from the government. Understandably, there will be resistance if there is any attempt to reform the public sector or the government. There is also the point that many sick public sector units, which will be closed down, are in the eastern parts of the country, where there is little prospect for job growth.

In discussing the political economy of reforms, it has often been argued that consumers represent a powerful lobby in favour of reforms. Consumers mean the middle class, which is an entity that is difficult to pin down, without using income criteria or criteria based on ownership of consumer durables. Depending on which criterion is used, the figure ranges from 30 million to 300 million. But where is this middle class based? Essentially in urban areas. And this middle class has been the primary beneficiary of subsidies in higher education, health care, food and power. It has obtained secure jobs in the government. Perhaps one should mention the so-called small investors in this context, who have been persuaded by the government that one can obtain high returns with zero risk in small saving schemes. There have therefore been bailouts by the government and these bailouts also represent a regressive transfer, since the genuinely poor have no money to invest in so-called small savings.

Three points follow. First, the middle class has indeed been the main beneficiary of reforms as a consuming class. It is indeed true that visible reforms for the poor in social or physical infrastructure (schools, healthcare, drinking water, sanitation, roads) haven’t happened. Hence, reforms are understandably identified with cell phones, opening up of airlines, passenger cars and scams, in government procurement, or otherwise. Second, the moment one moves from globalization (the external sector) to liberalization (the domestic sector), the middle class loses benefits due to the status quo, in more senses than one. Third, most of the initial flush of reforms concerned manufacturing, where the middle class generally benefited as consumers. However, many of the reforms now proposed concern services, where the middle class gets hurt as providers of services.

The Canadian publisher, Campbell Hughes, had the following definition of a Canadian. “A Canadian is someone who drinks Brazilian coffee from an English teacup and munches on French pastry while sitting on his Danish furniture having just come home from an Italian movie in his German car. He picks up his Japanese pen and writes to this member of Parliament to complain about the American takeover of the Canadian publishing business.” This is a very apt description of the urban Indian middle class as well.

The liberalization agenda is well-known. Once liberalization is implemented, the globalization agenda will follow. That does not need debating. The question to ask is, why is it so difficult to push through this agenda? The implicit assumption is that politicians and political parties don’t know what is good for enough. They are irrational. They don’t realize that good economics is good politics. This is probably a facile assumption. Politicians and political parties are just as rational as anyone else. It is just that the objective functions are different and in saying this, one has more than the obvious myopia in mind. It is sometimes argued that since the cutting edge of reforms is now at the level of the States, bad governance will eventually be reflected in voting patterns. There is absolutely no evidence to indicate this, the much-hyped Andhra Pradesh example notwithstanding. Reforms have increased disparities between States and this is increasingly reflected in higher rates of growth in Gujarat, Maharashtra and some of the South Indian States. It is also reflected in lower head count (poverty) ratios in these States and better social sector indicators (literacy is the obvious example, though not so much infant mortality rates). The conventional BIMARU (Bihar, Madhya Pradesh, Rajasthan, Uttar Pradesh) generalization is probably no longer valid, with Rajasthan and Uttar Pradesh climbing out of the BIMARU fold and some districts in Orissa and West Bengal exhibiting characteristics not very different from the BIMARU group. Faster growing States also tend to have lower rates of population growth, leading to higher rates of per capita growth. But there is no evidence yet, of relatively backward States learning from the experiences of faster growing States and replicating that experience.

If one divides voters into urban and rural segments, the evidence is more like the following. Rural voting patterns rarely reflect economic issues and are influenced much more by local considerations. (Inflation is perhaps the solitary exception to this rule, but inflation has been well under control since 1991.) Urban voting patterns do reflect economic issues, including liberalization. But if the earlier arguments are accepted, the conclusion is that there was support for globalization, because the middle class benefited as consumers. However, increasingly, one has lost the support for liberalization, since the middle class tends to lose as producers.

This sounds completely negative, so one should add an additional negative strand as well. China is the obvious example. The first flush of reforms in China in the late 1970s and early 1980s encompassed the agricultural sector. This led to an explosion in incomes and a consequent explosion in consumption in the rural areas and no doubt contributed to implicit support for the reform process. Given the Chinese polity, explicit support and explicit dissent are both unlikely. Stated differently, India made a mistake in sequencing liberalization. Had the long overdue agricultural reforms happened earlier, the political economy might have been different. Again as a counterfactual statement, the support for liberalization might have been more broad-based.

Despite the overall negative message of this paper, three positive developments need to be mentioned.

First, there is some limited evidence that the worst of the downturn is over. Liberalization is difficult when there is a downturn. Three major segments of Indian society (large-scale industry, small-scale industry, agriculture) have suffered for various reasons and have inevitably ascribed all their travails to globalization and the WTO. Large-scale industry wants high P/E ratios and high profitability and wants to postpone the inevitable shakeout. Small-scale industry wants protection, especially since there is import competition. In general, agriculture has been squeezed by high input prices and large farmers and millers want government-guaranteed high procurement prices. With the worst of the downturn over, it should become easier to push through reforms.

Second, agricultural reforms have been on the explicit agenda since at least 1998. Before that, they were not even on the agenda. It is now at least accepted that agricultural reforms must encompass both procurement and distribution. It is also accepted that agriculture is not just about rice and wheat. Most agricultural reforms however have to be implemented by the States. That will be a long haul. But the prospects for agricultural reform are brighter than what they were three years ago.

Third, despite the generalization that the middle class is against reforms, there are isolated instances of the middle class, as civil society, acting as a countervailing force and demanding better delivery on the part of the government, across a whole range of public services. There are instances of NGO involvement in education (which no doubt helped push the literacy rate up from 52% in 1991 to 65% in 2001), demanding right to information acts, or in rating public services. This too has a pro-urban focus, but is also spilling over into rural areas. In a public governance sense, despair with the three organs mentioned in the Constitution (executive, judiciary, legislature) requires a countervailing force. Cynicism and secession of the successful doesn’t get very far. Perhaps one can speculatively argue that these demands will intensify after 2005. That is roughly when the post-1991 satellite TV generation will enter the consumption stream and a few years down the line, will begin to enter the work force. In India, no one attains a position of influencing policy until the age of 65. The present policy-making generation has hang-ups about colonialism and the Lord Clive legacy. 2015 will roughly be the year when the post-Independence generation will attain the age of 65.

Therefore, there is no particular reason to despair. India will be much more confident about globalization once the pre-condition of liberalization takes place. That won’t happen in 2002. But it will happen somewhere between 2005 and 2015. China will be further ahead by then and there are opportunity costs of foregone growth. So what’s new? India has been used to this syndrome, if not from 1947, certainly from the early 1960s.