GLOBALIZATION AND

INTERNATIONAL BUSINESS
Indian 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 INDIA

Three 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 infrastructure

All three are essential whatever approach adopt

towards the globalization

BUSINESS SCENARIO IN INDIA

Although 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
INDIA
With 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
INDIA
From 1991 to 2011, Indias GDP quadrupled, while its forex reserves
soared more than 50-fold to over $300 billion, and exports surged 14fold 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
INDIA
Despite 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 India

Demographic 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 nonperforming 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

Comparative advantages of India

The 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)

2011

2012

2013

2014

2014

Brazil

2.7%

1.0%

2.5%

0.3%

-0.4%

Russia

4.3%

3.4%

1.3%

0.2%

1.35%

India

6.3%

4.7%

5.0%%

5.6%

6.7%

China

9.3%

7.7%

7.7%

7.4%

7.5%

Foreign direct investment

The 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 policy

Intent and Objective

Definitions
General Conditions on FDI
Calculation of Foreign Investment
Foreign Investment Promotion Board
(FIPB)
Sector Specific Conditions on FDI

Intent and Objective

The 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.

Definitions
FDI
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).

Definitions

Foreign 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 nonresident investor (other than SEBI registered FII and SEBI
registered FVCI) who meets the KYC requirements of SEBI

General Conditions on FDI

Who 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 FDI

Entities into which FDI can be
made
FDI in an Indian Company
FDI in Partnership Firm/Proprietary
Concern
FDI inVenture Capital Fund
FDI in Limited Liability Partnerships

General Conditions on FDI

Types of Instruments
Indian 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 year
Indian 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 FDI

preference 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 Investment

Total 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.

Illustration
To 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.