GLOBALIZATION AND INTERNATIONAL BUSINESS

GLOBALIZATION AND INTERNATIONAL BUSINESSIndian context

Observations Perceptions about globalization and its effects vary, and have gone through a definite cycle in the past ten years or so. The upswing of the cycle occurred in first half of the 1990s, a period characterized by a highly optimistic mood in industrialized countries. Politically, the collapse of Communism in Eastern Europe at the end of the 1980s and of the Soviet Union in 1991, and the enthusiastic adoption of democratic systems and market oriented policies by these countries, contributed to an air of triumphalism in the West. These events coincided with the start of a prolonged boom in the U.S., which was fed by extraordinary productivity gains from new technology especially the application of IT. The benefits of globalization were expected to flow to developing countries also through access to export markets in industrialized countries, while also promising a limitless supply of capital to all well managed economies.

Observations This mood of triumphalist optimism did not last very long. The East Asian crisis towards the end of 1997 provided a rude shock and this was followed in quick succession by the currency collapse in Russia in 1998, Brazil in 1999 and Turkey and Argentina subsequently. These crises, and the severe economic downturns they caused, focused attention on the vulnerability of emerging market economies, and the risks posed by globalization, especially in the financial markets. The failure of the international financial institutions to warn about these vulnerabilities, and their subsequent failure to restore stability quickly, eroded confidence in the quality of institutional support underpinning economic integration.

Observations Given extreme swing in perception, it is not surprising to people in India being plagued by doubts about the nature of globalization. Globalization is not a specific policy, or even a defined set of policies, that one can be for or against. Rather, it is a process taking place in the world around us, which are largely outside our control.Globalization has undoubtedly created a totally different external environment, and we must try to choose policies which enable us to derive the maximum benefits from it, it does not mean that dealing with the global environment must be the only focus of development policy.It will be better able to cope with globalization if the country have a strong economy.

BUSINESS SCENARIO IN INDIAThree areas at present that are critical for the domestic agenda independent of what can be do externally are the provision of essential social services (i.e., primary education and health), the need to restore dynamism to agriculture and the need to strengthen infrastructureAll three are essential whatever approach adopt towards the globalization

BUSINESS SCENARIO IN INDIAAlthough India had made some perfunctory attempts to open up its insular economy in the late 1980s, these efforts attained the utmost urgency from 1990 onwards, as a balance of payments crisis took the country to the brink of bankruptcy.

The collapse of the Soviet Union eliminated a major supplier of cheap oil to India, and as oil prices skyrocketed due to the Gulf War, Indias foreign exchange reserves were depleted to less than $1 billion by mid-1991, only enough to cover two weeks of imports.

BUSINESS SCENARIO IN INDIAWith the country in the grip of an economic crisis and still reeling from the assassination of former Prime Minister Rajiv Gandhi, an unexpected free-market champion emerged during this dark hour in the form of Manmohan Singh, a well-regarded economist who became Indias new finance minister in June 1991.

Singh immediately launched an ambitious slate of economic reforms based on three pillars devaluation of the rupee, slashing of import tariffs, and decontrol of gold imports (to eliminate currency black market).

Singh also liberalized the industrial licensing policy and relaxed the rules for foreign direct and portfolio investments.

BUSINESS SCENARIO IN INDIAFrom 1991 to 2011, Indias GDP quadrupled, while its forex reserves soared more than 50-fold to over $300 billion, and exports surged 14-fold to $250 billion.

The telecom sector and the introduction of cellular phones in the 1990s dramatically changed the industry.

The number of phone subscribers soared from 0.5 million in 1991 to 960 million by May 2012, the overwhelming majority of which were cellphone users; this was not just an urban revolution but a rural one as well, with rural users making up 35% of the subscriber base.

As a result, the number of phones per 100 people in India increased in leaps and bounds, from just 0.02 in 1950 to almost 3 in 1990, and over 79 in 2012.

BUSINESS SCENARIO IN INDIADespite these tremendous achievements, the Indian economy was bogged down in recent years by various factors.

These included inadequate infrastructure, a deteriorating financial position characterized by rising fiscal and current account deficits.

Proposed measures include infrastructure development, implementation of a goods-and-services (GST) tax that could contribute to percentage increase in annual GDP growth, and opening up more areas of the economy to foreign investment.

Another priority would be reducing the burgeoning subsidy bill that had grown fivefold over the past decade to 2.6 trillion rupees annually.

Comparative advantages of IndiaDemographic divide: By 2020, India will have the worlds youngest population, with a median age of 29 years, compared with a median age of 37 in China.Growing middle class: Indias middle class of 250 million already represents one of the biggest consumer markets in the world. This educated, tech-savvy and relatively affluent group is expected to continue its rapid growth in the years ahead.Low penetration of goods and services: Indian market still has a relatively low penetration of goods and services, which translates into massive untapped potential. For example, in 2009, there were only 11 passenger cars per 1,000 people in India, compared with 34 in China, 179 in Brazil, 233 in Russia, and 440 in the U.S.A functioning democracy: One of Indias greatest strengths is that it is a vibrant and functioning albeit a trifle chaotic democracy, where the electorate regularly exercises its constitutional right to kick out non-performing governments.Established companies and institutions: India has a thriving business sector with dynamic SMEs and large companies that are increasingly expanding overseas, educational institutions that are among the worlds best, and competent financial organizations. Indias central bank, the Reserve Bank of India (RBI), is currently headed by Raghuram Rajan, who was formerly chief economist at the IMF.

Comparative advantages of IndiaThe long-term outlook for the Indian economy is getting brighter just as that of its BRIC counterparts is getting murkier.BRIC GDP growth rates (2011-13) and projections (2014-15)20112012201320142014Brazil2.7%1.0%2.5%0.3%-0.4%Russia4.3%3.4%1.3%0.2%1.35%India6.3%4.7%5.0%%5.6%6.7%China9.3%7.7%7.7%7.4%7.5%

Foreign direct investmentThe Indian governments policy regime and a robust business environment have ensured that foreign capital keep flowing into the country.

The government has taken many initiatives in recent years such as relaxing FDI norms in 2013, in sectors such as defense, PSU oil refineries, telecom, power exchanges and stock exchanges, among others.

The same year, big global brands such as Tesco, Singapore Airlines, Air asia and Etihad lined up to invest in India as the government opened more sectors to foreign investment.

Indian FDI policyIntent and ObjectiveDefinitionsGeneral Conditions on FDICalculation of Foreign InvestmentForeign Investment Promotion Board (FIPB)Sector Specific Conditions on FDI

Intent and ObjectiveThe intent and objective of the Government of India to attract and promote foreign direct investment in order to supplement domestic capital, technology and skills, for accelerated economic growth.

The Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce & Industry, Government of India makes policy pronouncements on FDI through Press Notes/Press Releases which are notified by the Reserve Bank of India as amendments to the Foreign Exchange Management Act, 2000.

DefinitionsFDI means investment by non-resident entity/person resident outside India in the capital of an Indian company under Schedule 1 of Foreign Exchange Management Act, 2000.

Foreign Institutional Investor(FII) means an entity established or incorporated outside India which proposes to make investment in India and which is registered as a FII in accordance with the Securities and Exchange Board of India (SEBI).

DefinitionsForeign Portfolio Investor(FPI) means a person registered in accordance with the provisions of Securities and Exchange Board of India (SEBI) (Foreign Portfolio Investors) Regulations, 2014, as amended from time to time.Non-Resident Indian (NRI) means an individual resident outside India who is a citizen of India or is a person of Indian origin.A company is considered as 'Owned by resident Indian citizens if more than 50% of the capital in it is beneficially owned by resident Indian citizens and / or Indian companies, which are ultimately owned and controlled by resident Indian citizens.A Qualified Foreign Investor (QFI) means a non-resident investor (other than SEBI registered FII and SEBI registered FVCI) who meets the KYC requirements of SEBI for the purpose of making investments in accordance with the regulations/orders/circulars of RBI/SEBI.

General Conditions on FDIWho Can Invest in India?A non-resident entity can invest in India, subject to the FDI Policy except in those sectors/activities which are prohibited. However, a citizen of Bangladesh or an entity incorporated in Bangladesh can invest only under the Government route. Further, a citizen of Pakistan or an entity incorporated in Pakistan can invest, only under the Government route, in sectors/activities other than defense, space and atomic energy and sectors/activities prohibited for foreign investment.An FII/FPI may invest in the capital of an Indian company under the Portfolio Investment Scheme which limits the individual holding of an FII/FPI below 10% of the capital of the company and the aggregate limit for FII/FPI/QFI investment to 24% of the capital of the company.

General Conditions on FDIEntities into which FDI can be madeFDI in an Indian CompanyFDI in Partnership Firm/Proprietary ConcernFDI inVenture Capital Fund FDI in Limited Liability Partnerships

General Conditions on FDITypes of InstrumentsIndian companies can issue equity shares, fully, compulsorily and mandatorily convertible debentures and fully, compulsorily and mandatorily convertible preference shares subject to pricing guidelines/valuation norms prescribed under FEMA Regulations.Under FDI scheme, subject to the following conditions:There is a minimum lock-in period of one yearIndian companies can raise foreign currency resources abroad through the issue of FCCB/DR (ADRs/GDRs)Investments can be made by non-residents in the equity shares/fully, compulsorily and mandatorily convertible debentures/fully, compulsorily and mandatorily convertible

General Conditions on FDIpreference shares of an Indian company, through the Automatic Route or the Government Route.

Under the Automatic Route, the non-resident investor or the Indian company does not require any approval from Government of India for the investment.

Under the Government Route, prior approval of the Government of India is required. Proposals for foreign investment under Government route, are considered by FIPB.

Calculation of Foreign InvestmentTotal Foreign Investment i.e. Direct and Indirect Foreign Investment in Indian Companies.Any non-resident investment in an Indian company is direct foreign investment.An Indian company would have indirect foreign investment if the Indian investing company has foreign investment in it.Indirect foreign investment, foreign investment in an Indian company shall include all types of foreign investments i.e. FDI; investment by FIIs; FPIs; QFIs; NRIs; ADRs; GDRs; Foreign Currency Convertible Bonds (FCCB), etc.

IllustrationTo illustrate, if the indirect foreign investment is being calculated for Company X which has investment through an investing Company Y having foreign investment, the following would be the method of calculation: (A)where Company Y has foreign investment less than 50% -Company X would not be taken as having any indirect foreign investment through Company Y. (B)where Company Y has foreign investment of say 75% and: (I)invests 26% in Company X, the entire 26% investment by Company Y would be treated as indirect foreign investment in Company X;(II) invests 80% in Company X, the indirect foreign investment in Company X would be taken as 80%(III) where Company X is a wholly owned subsidiary of Company Y (i.e. Company Y owns 100% shares of Company X), then only 75% would be treated as indirect foreign equity and the balance 25% would be treated as resident held equity. The indirect foreign equity in Company X would be computed in the ratio of 75:25 in the total investment of Company Y in Company X. (iii)The total foreign investment would be the sum total of direct and indirect foreign investment.

Foreign Investment Promotion Board

FIPB comprises of the following Secretaries to the Government of India:(i)Secretary, Department of Economic Affairs, Ministry of Finance Chairperson(ii)Secretary, Department of Industrial Policy & Promotion, Ministry of Commerce & Industry(iii) Secretary, Department of Commerce, Ministry of Commerce & Industry(iv)Secretary, Economic Relations, Ministry of External Affairs (v)Secretary, Ministry of Overseas Indian Affairs

The Minister of Finance who is in-charge of FIPB would consider the recommendations of FIPB on proposals with total foreign equity inflow of and below Rs.1200 crore.total foreign equity inflow of more than Rs. 1200 crore would be placed for consideration of Cabinet Committee on Economic Affairs (CCEA)

FDI is prohibited in:(a) Lottery Business including Government/private lottery, online lotteries, etc. (b) Gambling and Betting including casinos etc.( c) Chit funds(d) Real Estate Business or Construction of Farm Houses (e) Manufacturing of cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes(f) Activities/sectors not open to private sector investment e.g. Atomic Energy and Railway Transport.