econ 12
Introduction
New Economic Policy, also known as New Economic Reforms, was introduced in 1991.
The policy emphasized liberalization, privatization, and globalization.
Before 1991, the public sector played a significant role, while the private sector was heavily controlled.
The public sector became inefficient due to bureaucratization, red-tapism (excessive bureaucratic rules), overstaffing, and lack of initiative.
This inefficiency led to an economic crisis in India in 1991.
Foreign exchange reserves were depleted, barely sufficient for two weeks of imports.
Fresh loans were scarce, and Non-Resident Indians (NRIs) were withdrawing funds.
There was a lack of confidence in the Indian economic system.
In July 1991, the government introduced a new economic policy to address the crisis and promote rapid development.
Key measures included:
Replacing a controlled economy with a liberal one by reducing controls and promoting liberalization.
Encouraging the private sector.
Promoting foreign direct investment.
Introducing improved technology.
Encouraging modernization of agriculture.
Introducing extensive changes in trade, monetary, and fiscal policies.
Keeping the fiscal deficit under control.
These measures collectively form the New Economic Policy.
The New Economic Policy aims to increase productivity and efficiency by creating a competitive environment.
Meaning of Economic Reforms or New Economic Policy
According to C. Rangarajan, former Governor of the Reserve Bank of India, the new economic reforms comprise various policy measures and changes introduced since 1991.
The thrust of these reforms is towards creating a more competitive environment to improve productivity and efficiency.
The new economic reforms emphasized liberalization, privatization, and globalization.
Controls were liberalized to encourage the establishment of new industrial units and expansion of existing ones.
The private sector was given a more important role in economic development.
Areas previously reserved for the public sector were opened to the private sector.
Foreign investment limits and foreign equity participation were liberalized.
The main objective of the new economic reforms is to promote competition and efficiency.
Globalization, liberalization, and privatization will promote competition, which will increase efficiency.
Need for Economic Reforms or New Economic Policy
The need for Economic Reforms or a New Economic Policy was primarily due to the following reasons:
Fiscal Deficit:
Before 1991, continuous increases in non-developmental government expenditure led to a rising fiscal deficit.
In 1981-82, it was 5.4% of GDP, rising to 8.4% in 1991-92.
The government had to raise loans and pay interest to meet the fiscal deficit.
Increased fiscal deficit led to increased public debt and interest payments.
In 1980-81, interest payments were 10% of total government expenditure, rising to 36.4% in 1991.
International financial institutions lost faith in the fiscal state of the government, making it necessary to reduce the fiscal deficit.
Increase in Unfavorable Balance of Payments:
Foreign exchange is needed to import goods and services.
Foreign exchange is earned through exports, remittances from NRIs, and foreign investment.
A balance of payments problem arises when foreign exchange receipts are less than payments (imports exceed exports).
Despite incentives to exporters, exports did not increase much.
The deficit in balance of payments rose from crore in 1980-81 to crore in 1990-91.
The new economic policy was needed to overcome this problem.
Fall in Foreign Exchange Reserves:
In 1990-91, India's foreign exchange reserves fell to a level sufficient for only two weeks of imports.
The government had to mortgage the country's gold to arrange foreign exchange.
This situation compelled the government to frame a new economic policy.
Rise in Prices:
Prices in India continued to rise, with the average annual inflation rate increasing to 10.3%.
In 1990-91, despite good monsoons, foodgrain prices rose substantially.
Increasing inflation further deteriorated the country's economic position, necessitating a new economic policy.
Poor Performance of Public Sector Undertakings (PSUs):
The number of PSUs increased from 5 in 1951 to 246 in 1990-91.
Significant public funds were invested in them.
Initial satisfactory performance deteriorated, with most PSUs suffering losses.
Their poor performance made them a liability, necessitating a new economic policy that gives more importance to the private sector.
These compelling factors made it inevitable for the government to adopt the New Economic Policy to speed up economic growth and attract foreign capital.
Main Divisions of New Economic Policy
The main divisions of the new economic policy are:
Structural Policies:
Relate to the supply side of the economic system.
Include:
Industrial Policy: Privatization, Liberalization, and Globalisation.
Foreign Trade Policy.
Foreign Investment Policy.
Stabilization Policies:
Relate to the demand side of the economic system.
Include:
Monetary Policy.
Fiscal Policy.
Structural and Stabilization reforms are most effective when introduced simultaneously, as they supplement each other.
Notable parameters of structural reforms are:
Liberalisation.
Privatisation.
Globalisation.
Monetary and Fiscal reforms are the principal parameters of stabilization policy.
Main Features of Economic Reforms or New Economic Policy
Main features of the new economic policy are liberalization, privatization, and globalization of the economy.
Liberalisation
Liberalisation means reducing unnecessary restrictions and controls on business units imposed by the government.
It involves procedural simplification and relaxing trade and industry from bureaucratic hurdles.
Prior to 1991, the government imposed several controls on the Indian economy, such as industrial licensing, price controls, import licenses, foreign exchange controls, and restrictions on investment by big business houses.
These controls led to shortcomings, dampened entrepreneurial enthusiasm, and gave rise to corruption, delays, and inefficiency.
The rate of economic growth fell sharply, and a high-cost economic system emerged.
Economic reforms aimed to reduce restrictions, based on the assumption that market forces could guide the economy more effectively than government control.
Examples of other underdeveloped countries like Korea, Thailand, and Singapore, which achieved rapid economic development through liberalization, were noteworthy.
Measures Taken for Liberalisation
(1) Liberalisation of Industrial Licensing:
The New Industrial Policy aims to adopt a policy of liberalisation instead of a controlled economy.
The private sector has been largely freed from licenses and other restrictions.
As of the 2006 amendment, industrial licensing has been abolished for all but 5 industries:
Liquor.
Cigarette.
Defense equipment.
Industrial explosives.
Dangerous chemicals.
An entrepreneur can start a new company in any industry except these 5 without restrictions.
(2) Relaxation from Monopolies Act:
According to the Monopolies and Restrictive Trade Practices Act (MRTP Act), companies with assets over crore were declared MRTP firms and faced restrictions.
The concept of MRTP has been done away with, and these firms no longer need prior government approval for investment decisions.
They are free to expand, facilitating the growth of large business houses.
Large concessions have been granted to companies falling under MRTP Act.
The capital investment limit fixed earlier has been removed.
In 2002, the MRTP Act was abolished, and the Competition Act, 2002 was enacted.
(3) Freedom for Expansion and Production to Industries:
Under liberalisation, industries not covered by industrial licensing are free to expand and produce without prior official approval.
Government used to fix maximum limits on production capacity, but this has been removed to enable industries to take full advantage of large-scale production.
Producers are now free to produce based on market demand.
(4) Increase in the Investment Limit of Small Industries:
The investment limit of small industries has been raised to crore to enable them to produce more goods.
The investment limit of micro-enterprises has also been increased to crore.
(5) Replacing FERA with FEMA:
The Foreign Exchange Regulation Act (FERA) regulated foreign exchange transactions but was restrictive.
With economic liberalisation, FERA was replaced by the Foreign Exchange Management Act (FEMA) in 1999.
FEMA's provisions are liberal.
(6) Liberalisation of Export and Import Transactions:
Government has liberalized import and export policies, making the import of capital goods, raw materials, and technology easier.
Quantitative restrictions on import have been withdrawn, and procedures for import quota, permit, and license have been simplified.
The procedures and documents related to import and export have been simplified.
(7) Liberalisation of Taxation Policy:
Earlier, high tax rates hindered rapid economic development and de-motivated entrepreneurs.
Changes in taxation policy include:
Reducing peak personal income tax rates.
Drastically reducing peak custom-duty rates.
Replacing the complex indirect tax structure with the Goods and Services Tax (GST).
(8) Liberalisation in Capital Market:
Earlier, provisions for public issue of shares and debentures were restrictive, favoring only big companies.
Now, companies are given the freedom to fix the price of their public issue.
Indian companies can raise funds from foreign capital markets.
Benefits of Liberalisation
(1) Increase in Foreign Investment:
Liberalisation has promoted globalisation, leading to an increase in foreign investment.
Foreign investors consider India a favorable destination.
There has been a significant inflow of foreign investment in the form of foreign direct investment and portfolio investment.
(2) Increase in Foreign Exchange Reserves:
Before 1991, India faced a shortage of foreign exchange.
After liberalisation, foreign exchange reserves improved due to increased foreign investment and exports.
On June 28th, 2024, India's foreign exchange reserves were billion U.S. dollars.
(3) Increase in Industrial Production:
Due to liberalisation, checks and controls have been removed, boosting entrepreneurial activities.
Foreign entrepreneurs have also set up industrial units in India, increasing industrial production.
(4) Increase in Competition:
Liberalisation has led to increased competition as many domestic and foreign enterprises have started business operations in India.
For example, the telecommunication sector has seen increased competition with the entry of units like Reliance, Tata, Vodafone, and Airtel.
Increased competition has resulted in reduced prices and improved quality, benefitting consumers and increasing the standard of living.
(5) Control over Price:
Before Liberalisation, inflation rates were very high.
Increased competition and production have helped in checking the rising prices.
In 2009-10, the inflation rate was 3.8%, while rates were 12.1% in 1990-91. In 2022-23 and 2023-24, the inflation rates were 6.7% and 5.4%, respectively.
(6) Check on Corruption:
Before liberalisation, business units required licenses, quotas, and permits from government officials, leading to bribery.
Liberalisation has reduced these restrictions, helping to check corruption.
Disadvantages/Criticism of Liberalisation
(1) Increase in Unemployment:
Liberalisation has promoted the import of capital-intensive technology, automation, computerisation, and mechanisation, increasing unemployment.
(2) Loss to Domestic Units:
Liberalisation has promoted competition, adversely affecting domestic business units that cannot compete with multinational corporations.
Many small domestic units have become sick and closed.
(3) Increased Dependence on Foreign Nations:
With liberal imports, Indian consumers increasingly use foreign goods.
Indian business units have stopped using and developing indigenous technology, affecting national self-sufficiency in the long run.
(4) Unbalanced Development:
Most MNCs have entered premium product segments, targeting upper-income groups, with little interest in mass consumption goods.
Liberalisation has not been beneficial for lower-income groups, increasing income inequalities.
(5) Increase in Regional Imbalances:
Private sector units and foreign enterprises do not set up business units in backward regions, preferring already developed areas with good infrastructure, increasing regional imbalances.
Privatisation
In the context of economic reforms, privatization means allowing the private sector to set up more industries that were previously reserved for the public sector.
It involves selling existing public sector enterprises wholly or partially to the private sector.
Barbara Lee defines Privatisation as "the general process of involving the private sector in the ownership or operation of a state-owned enterprise."
The need for privatization was felt mainly because of the inefficiency of the public sector, with most enterprises running into losses.
Managers of public sector enterprises were not free to make decisions independently, with important decisions taken by ministers concerned with political interests.
This led to long decision-making times, underutilization of production capacity, and decreased productivity.
Privatization leads to more competition, increased efficiency, enhanced quality and diversity of production, and benefits for consumers.
Measures Adopted for Privatisation in India
(1) Contraction of Public Sector:
The number of industries reserved for the public sector has been reduced from 17 to 2: atomic energy and railways.
The remaining industries have been opened for the private sector.
Even some key components of railways infrastructure have been opened for the private sector.
This measure will increase the flow of investments to priority sectors and increase competition and efficiency.
(2) Sale of Shares of Public Sector to Private Sector:
Up to 74% of shares of the public sector have been sold to foreign investors, institutional investors, mutual funds, the public, and workers.
Till the end of March 2024, shares of public sector worth crore were sold.
In some PSUs, even 100% shares are disinvested.
Now shares of PSUs are sold through Bidding Process.
(3) Sick Public Sector Units:
Public sector units are treated in the same way as sick units of the private sector.
In some cases, sick public sector units are sold to the private sector.
(4) Memorandum of Understanding (MoU):
To improve the working of public sector enterprises, a system of MoU has been introduced.
Under it, management of public sector enterprises will be given more freedom and they will be accountable for the results.
MoU gives more autonomy to directors, who need not take permission for routine decisions from ministers.
In 1991-92, 71 public sector enterprises signed MoU. In the year 2021-22, 107 enterprises have signed memorandum of understanding.
About 77% of the public sector units who have signed MoU have improved their performance.
(5) National Renewal Fund:
This fund was established to protect the interest of employees on account of privatization.
The employees were offered voluntary retirement under this scheme.
Upto March 2019, 6.28 lakh employees had sought voluntary retirement from public sector units.
This fund is used for providing social security measures to retrenched employees of PSUs.
(6) Increase in Private Sector Investment in Plans:
Government has increased share of private sector in total investment of plans.
Share of private sector investment has been increased from 42% in fifth five year plan to 78% in twelfth plan.
(7) Setting up National Investment Fund:
In year 2005, government set up National Investment Fund.
Proceeds of disinvestment are credited to this fund.
75% of income of this fund is utilised to finance social sector schemes like health, education, employment, etc.
The remaining 25% of income is used for capital investment in profitable and revivable public enterprises.
At present, disinvestment proceeds are being used for various social sector schemes like MGNREGA, Indira Awas Yajona, Deendayal Upadhyaya Gram Jyoti Yojana (a scheme for promoting rural electrification), Accelerated Irrigation Benefit Programme, etc.
Advantages of Privatisation
(1) Increase in Efficiency:
Privatisation of public sector industries increases their productivity, profitability, and effectiveness.
(2) Professional Management:
Through privatization, benefits of professional management of the private sector can be availed.
In the private sector, persons with professional qualifications like MBAs from reputed management institutes are appointed.
If a strategic partner is a foreign investor, then even benefits of foreign expertise can be availed.
(3) Increase in Competition:
By increasing the area of the private sector and by privatising existing public sector units, benefits of competition can be availed.
Consumers are benefited as a result of increase in competition.
For example, because of privatisation of the telecommunication sector, tariff rates of telephone services have come down.
Now there is no monopoly of public sector units and the business environment is more competitive.
(4) Reduction in Economic Burden of Government:
Through pri vatisation, the private sector will share the burden of economic development and will provide funds for capital investment.
The burden of government with regard to investment in new projects, modernisation of loss-making projects, sick units is reduced.
Economic burden of government is reduced by privatising loss-making PSUs.
(5) Increase in Responsibility:
Privatisation puts an end to problems like red-tapism, nepotism, and other bureaucratic problems.
This increases the feeling of responsibility among staff.
(6) Reduction in Political Interference:
One gets rid of political interference to some extent as a result of privatization.
There is no delay in taking industrial decisions. Industries are run on sound economic principles.
(7) Encouragement to New Inventions:
In private sector, more emphasis is given to research .
Privatisation encourages new inventions, research and development activities.
(8) Increase in Industrial Growth Rate:
Privatisation promotes industrialisation, further creating employment, boosting industrial production, and promoting export.
(9) Increase in Foreign Direct Investment:
Privatisation promotes globalisation and encourages foreign investors to invest in the domestic economy.
In India, from April 2000 to March 2024, crore are invested in the form of Foreign Direct Investment.
(10) Reduction in Loss of Public Sector Units:
Privatisation also encourages existing public sector units to improve their efficiency because there is always the threat of privatisation.
Many loss-making PSUs have started generating profits because of the threat of privatisation.
Arguments Against/Disadvantages/Obstacles in Privatisation
(1) Industrial Sickness:
Privatisation does not necessarily add to efficiency. Widespread industrial sickness in India is a glaring example.
In year 2016, there were 4,80,280 sick micro and small scale industrial units in private sector. Bank loans amounting to crore were outstanding against them.
(2) Ignores Social Welfare:
Under privatisation, private entrepreneurs are keen to invest their capital in those industries in which margin of profit is very high.
Private sector gives more importance to profit motive than social welfare.
(3) Class Struggle:
Privatisation implies class struggle. Capitalists (entrepreneurs) and labourers have conflicting interests that adversely affect smooth functioning of the economy.
(4) Increase in Inequalities:
Privatisation gives rise to increased possibility of economic inequalities and it results in concentration of economic power.
Privatisation helps the large industries to grow further and small industries suffer from privatisation because of increased competition.
For example, with the privatisation of VSNL and IPCL, government has increased the dominance of Tata and Reliance respectively.
(5) Opposition by Employees:
Trade unions in India oppose privatization of public enterprises.
According to them, it will spread unemployment and lead to exploitation of employees.
Although, in order to protect the interest of the employees, government has set up National Renewal Fund and has provided more for it, yet the trade unions have not so far favored privatisation.
(6) Problem of Financing:
Private sector needs huge resources to buy public sector enterprises. Private sector cannot manage large financial resources all by itself.
If private sector borrows funds from financial institutions to buy shares of public sector enterprises, it will amount to utilising government funds by the private sector.
Shares of public enterprises should be sold to the public through stock markets. However, there is little possibility of it because people are less sure of the profitability of public sector enterprises.
(7) Increase in Unemployment:
There is more possibility of increase in unemployment after privatisation.
In case of privatisation, some employees who were working in PSUs which are privatised may be retrenched.
Moreover, to augment their profits, private entrepreneurs employ highly sophisticated technology which is mostly capital intensive. Such technology causes unemployment.
(8) Ignores Weaker Sections:
Profit motive is the guiding principle of private sector. Production aims at maximising profits. Entrepreneurs are more inclined to make goods that cater to luxuries and comforts.
Needs of weaker sections of the society are ignored.
Moreover, private sector does not offer job reservations to SC, ST, and OBC candidates.
(9) Ignores Enterprises of National Importance:
Private sector works only on profit motive. So this sector does not enter in such area in which profit possibility is less.
So, sometimes key and basic industries are ignored by private sector.
(10) Increase in Regional Imbalances:
Because of inadequate infrastructures, private sector hesitates to set up units in backward areas. Private entrepreneurs set up their units in already developed regions.
It has led to disparities.
Globalisation
Globalisation means linking the economy of a country with the economies of other countries by means of free trade, free mobility of capital and labour, etc.
It also means inviting multinational corporations to invest in India.
“Globalisation may be defined as a process associated with increasing openness, growing economic interdependence and deepening economic integration in the world economy.”
Economic Reforms assume that Indian economy should have close link with the world economy.
As a result, there will be unrestricted flow of goods and services, capital, people, technology and expertise among different countries of the world.
There will be increased cooperation of Indian economy with different economies across the world. Capital and technology will flow from the developed countries of the world towards India.
The ultimate aim of globalisation is to look upon the world as a 'global' village, i.e., to bring different economies of the world closer together.
India's increasing integration with the rest of the world is reflected in the growing foreign trade to GDP ratio, that has increased from 24.4 per cent in 2003-04 to 31.2 per cent in 2023-24.
Measures Adopted for Globalisation of Indian Economy
(1) Increase in Foreign Investment:
Under economic reforms, the limit of foreign capital investment has been raised. In many industries, foreign direct investment (FDI) to the extent of 100 per cent has been allowed without any restriction and red-tapism.
Foreign Exchange Regulation Act (FERA) which was a hindrance in the free flow of foreign capital has been abolished and replaced with a liberal Act - FEMA, i.e. Foreign Exchange Management Act.
Moreover, many incentives are given to NRls to attract their investment.
(2) Partial Convertibility of Indian Rupee:
To achieve the objective of globalisation, partial convertibility of Indian rupee was allowed. It was in conformity with economic reforms.
Partial convertibility means to buy or sell foreign currency like, dollar or pound sterling, for foreign transactions at a price determined by the market.
This convertibility is valid for the following transactions:-
Import and export of goods and services.
Payment of interest or dividend on investment.
Remittances to meet family expenses.
It is called partial convertibility because it does not cover capital transactions. Recently, government is seriously thinking of making rupee fully convertible for capital transactions also.
(3) Liberal Foreign Trade Policy :
To render Indian economy beneficial internationally, custom duties and tariffs imposed on imports and exports are being reduced gradually.
India's present foreign trade policy 2023 is a liberal policy. Under this policy, various restrictions and controls on foreign trade have been removed.
Open competition has been encouraged and all facilities provided to this end. Barring some specific goods, any product can be imported or exported.
By restricting the number of goods that can be imported or exported by the state agencies, more opportunities of trade have been provided to private sector. Administrative controls have also been minimised.
(4) Export Promotion :
Several measures have been taken to meet the deficit of balance of payments. Exports have been promoted.
Special facilities have been provided to the exporters in order to increase the share of Indian exports in world trade.
(5) Freedom to Repatriate :
Before new economic policy, foreign investment was allowed in India on non-repatriation-basis, i.e., the foreign investors could not take their income on foreign investment back to their country without the prior approval of RBI. Reserve Bank of India would allow this repatriation on very restrictive basis.
This provision was a great hindrance in inflow of foreign investment. But now foreign investors are free to repatriate their investment as well as income on investment. It has attracted more foreign investors to invest in India.
Effects of Globalisation on Indian Economy
Globalisation has both positive and negative effects on the Indian economy:
Positive Effects of Globalisation
(1) Increase in Foreign Trade:
As a result of foreign trade policies adopted in the wake of globalisation, India's share in the world trade has gone up. In 1990-91, India's share in world trade was 0.53 per cent. In 1995-96, it rose to 0.60 per cent. In 2022-23, it further increased to 2.71 per cent.
Table 1. India's Share in World Trade
| Year | India's Percentage Share In World Trade |
| ----------- | ----------- |
| 1990-91 | 0.53 |
| 1995-96 | 0.60 |
| 2010-11 | 1.96 |
| 2021-22 | 2.70 |
| 2022-23 | 2.71 |
Source: Economic Survey, 2023-24; Handbook of Statistics on Indian Economy, 2023-24
Table 1 shows that as a result of globalisation of India's foreign trade, there has been some increase in India's share in world trade.
(2) Increase in Foreign Investment:
As a consequence of globalisation, there has been a considerable increase in foreign direct investment as well as foreign portfolio investment. In the year 1990-91, total foreign investment (FDI and Portfolio investment) was US $ 103 million. In 2020-21, inflow of foreign investment increased to US $ 1,20,698 million. In 2023-24, inflow of foreign investment was US $ 1,13,858 million. Because of significant increase in foreign investment, India began to experience improvement in foreign exchange reserves.
(3) Increase in Foreign Collaborations:
Globalisation has promoted collaboration of foreign companies with many Indian companies. These collaboration agreements can be technical collaboration, financial collaboration or both. In financial collaboration, foreign companies provide financial resources, while in technical collaboration modern foreign technology is provided by foreign companies. Foreign companies are setting up many enterprises in India in collaboration with Indian companies.
(4) Increase in Foreign Exchange Reserves:
As a result of globalisation of Indian economy, foreign exchange reserves have also increased substantially. In 1991, foreign exchange reserves of India amounted to crore which on 28th June, 202-l increased to crore (US$ billion). Thus, there has been an increase of 1,238 times in foreign exchange reserves of India.
(5) Expansion of Market:
Globalisation has expanded the size of the market. It has permitted Indian business units to expand their business in the whole world. Now multinational corporations have no national boundaries. Indian companies like Infosys, Tata Consultancy, Wipro, Tata Steel, Reliance, etc., are doing their business in many countries.
(6) Technological Development:
Globalisation has enabled the inflow of foreign technology, which is very superior and advanced. Now Indian business units use this modern technology.
(7) Development of Capital Market:
Globalisation has helped in development of Indian capital market. Now many foreign investors invest in Indian capital market. Recently there has been substantial increase in inflow of foreign direct investment and portfolio investment.
(8) Development of Service Sector:
Globalisation has helped in growth of service sector. With the entry of foreign companies, tremendous improvement has been witnessed in various services like telecommunication, insurance, banking, etc. Now mobile phones are very cheap and popular in India.
(9) Increase in Employment:
Globalisation has promoted employment opportunities. Foreign companies are establishing their production and trading units in India. It has increased employment opportunities for Indians, e.g., many Indians are presently employed in foreign insurance companies, mobile companies, etc.
(10) Reduction in Brain Drain:
As a result of globalisation, many multinational corporations have set up their business units in India. These MNCs provide attractive salary package and good working conditions to efficient, skilled Indian engineers, managers, professionals, etc. Now Indians get good employment opportunities in India. It has resulted in reduction in brain drain.
(11) Improvement in Standard of Living:
As a result of globalisation, the standard of living of Indian population has improved. Now Indians get better quality goods at low prices. Globalisation has resulted in reduction of prices of many products particularly electronic items like television, AC, mobile phones, refrigerator, etc. Now middle- income group also uses these luxury products, which were earlier used by rich class only.
Negative Effects of Globalisation
(1) Loss to Domestic Industries:
As a consequence of globalisation, foreign competition has increased in India. Now Indian industrial units have to compete with foreign industrial units. Because of better quality and low cost of foreign goods, many Indian industrial units have failed to face competition and have been closed. ·Small and cottage industries are worst hit by this increased competition.
(2) Unemployment:
Foreign companies operating in India use capital intensive technology. Even some Indian companies use imported capital-intensive technology. With the increasing use of computers and automatic machines, employment avenues are reduced.
(3) Exploitation of Labour:
Globalisation is exploiting unskilled workers by giving lower wages, less job security, long working hours. Labourers have to work even in these conditions because bad job and less wages are better than no jobs.
(4) Demonstration Effect:
With the easy availability of foreign goods, demonstration effect has increased among Indians. Now many consumers are using luxury products by imitating others. It has promoted tendency of wasteful consumption in India. This increasing wasteful expenditure has in turn reduced saving and capital formation.
(5) Increase in Inequalities:
Globalisation has increased inequalities in our economy. Globalisation has benefitted MNCs and big industrial units but small and cottage industries are adversely hit by it. It has increased income inequalities in India.
(6) Dominance of Foreign Institutions:
With globalisation, the dominance of foreign institutions has increased in India. Globalisation has helped foreign companies in enlarging their market share. For example, in Indian cold drink market, a large share is controlled by Pepsi and Coca-Cola, which are foreign companies.
(7) Bad Effect on Culture and Value System:
Many global companies sell such products as distort our culture and value system. The vulgar advertisements shown by some MNCs pollute the thinking of young generation. Some MNCs indulge in unethical and corrupt practices for their self-interest. These companies do not hesitate to offer bribe to high officials of host nation to allow them to enter into such transactions which only serve their own interest.
(8) Less Entry in Strategic Areas:
The global companies mostly take entry in consumer goods like readymade garments, cosmetics, processed foods, soft drinks, toothpaste, etc. These goods do not play vital role in the economic development of any nation. The global companies do not invest in strategic areas like power sector, steel industry, fertilizers, etc. The entry in risky projects is also very limited. Similarly, there is insufficient entry of global companies in the area of technology and capital goods.
(9) Unbalanced Regional Development:
Global companies set up industries in developed cities and towns where infrastructural facilities are easily available and not in backward areas. It leads to further development of already developed areas and backward areas continue to remain backward. As a result, regional disparities increase.
(10) Tax Evasion:
The host country imposes corporation tax on the income of companies. To avoid this tax, global companies reduce their profits by adopting transfer pricing methods. Under this method, companies manipulate the prices of goods and services sold between their subsidiaries to shift profits to low-tax jurisdictions, thereby minimizing their overall tax liability.