Globalisation and India:
Voices from the Ground
Rashmi Banga
UNCTAD INDIA
Lucknow
18th -19th December 2006
Globalisation and Poor
• Wide Agreement on trade contributes to
growth but there is a need to assess the
extent to which poor are being affected by
trade.
• Basic economic theory suggests that trade
expansion should have positive impact on
poverty reduction but there is limited
evidence on this.
Expected Impact of Globalisation
on poor
 Creation of new employment opportunities
 Higher wages for poor as demand for labour
intensive products rise.
 Cheaper imports of food and essential consumer
goods
 Lowering of domestic costs and prices due to
competition
 Increase in government revenue needed t
provide poor with basic human services
• Resource allocation efficiencies and higher
productivity
Gains may not necessarily come
through
• Trade and growth - growth and poverty
• trade, growth, income distribution, and poverty is
likely to evolve as an economy changes in
structure.
• The changes in product and factor prices
triggered by opening up of an economy
inevitably produce both winners and losers in
the short term.
Varying Experiences
• Countries differ significantly with respect to their
experiences regarding trade, growth and poverty
nexus.
• Sri Lanka and Maldives, have high trade ratios;
on the other hand, there are countries like India,
Nepal and Bangladesh have low trade ratios but
interestingly, almost all the countries
experienced growth in the 1990s.
• However, growth in many of these countries did
not lead to corresponding reduction in poverty
and improvement in human development.
External Factors
• But the extent to which openness affects
poverty and has a bearing on where and
how these gains and losses occur
depends on a number of external factors,
stage of development of the country;
the timing, scale, and sequencing of policy
reforms;
as well as pre-existing domestic and
international conditions.
Significance of domestic policies
• international trade dynamics need
corresponding domestic reforms for the
gains to percolate to poor.
• Measured liberalisation is required so that
competitiveness in domestic sectors may
not occur more quickly than industries’
learning curves.
• Proactive role of government in developing
safety nets and meeting adjustment costs
Policies of other developed
countries
• In poverty-sensitive sectors like agriculture
and textiles and clothing, policies of
developed countries can have major
impacts on poverty dynamics in
developing countries.
• Tariff reductions in agriculture alone will
not have poverty reduction effect on Indian
farmers.
Removal of Green Box Subsidy Generates
Gains for Developing Countries
•In a recent study by UNCTAD, Green Box
subsidies have been shown to be production
enhancing and trade distorting.
•Removal of removal of green box subsidies
would increase India’s Agri Output by 1.22%,
reduce imports by 6% and increase exports by
about 20%.
Limited market access limit
opportunities to gain for poor
• Barriers such as tariff escalation and
peaks, domestic support, export subsidies
and non-tariff barriers such as SPS
measures restrict market access.
• Limited opportunities of gains for poor
from trade.
• Ultimately, trade’s effect on poverty
depends on the extent to which the poor
are able to participate in the expanding
sectors.
• Sufficient national policy space to
favourably guide trade liberalisation
process towards development is required.
Globalisation in India and Poor
• 30 of India’s GDP is traded many employment
intensive sector depend on trade, e.g., textile
and clothing (20 million)
• created additional employment opportunities for
women in sectors like outsourcing and textile
and clothing.
• It has led to improved access to technology and
increased labour productivity.
• But it has also led to massive restructuring within
and across the sectors, especially in the
agricultural sector.
Poverty-Trade Linkage for India
• Agriculture is the mainstay of the economy
with more than 60% of total employment.
• Growth rate of agriculture is slow: avg
1.5% since 1997.
• But share of agriculture in total trade is
small. India is net exporter.
• Major items of imports: Edible oils (50%)
and pulses due to rising per capita
consumption.
• Need to balance consumer and producer
interests.
Export Basket India (2004)
Others
14%
Food products n.e.c.
23%
Wheat
4%
Bovine meat prods
5%
Vegetable oils and fats
12%
Processed rice
18%
Crops n.e.c.
12%
Vegetables, fruit, nuts
12%
Exports show erratic growth with
exception of Horticulture and Tobacco
2,500
2,000
Processed
rice
1,500
Wheat
Vegetables,
fruit, nuts
1,000
Crops n.e.c.
Vegetable
oils and fats
Food
products
n.e.c.
Beverages
and tobacco
product
500
0
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Effective Policies needed
• Ensure remunerative prices to farmers.
• Control inflation especially on products of
mass consumption of the poor.
• Palm Oil Tariffs Classic Example –
Bound Tariff at 300 whereas Applied
at 70 (80 in case of crude oil).
Export Growth & Domestic
Production
India's Domestic Production in Major Exports Sectors
Textiles
Production (in USD Million)
25,000
20,000
Industrial
chemicals
15,000
Textiles
10,000
Iron and
steel
5,000
Footw ear
1994
1995
1996
1997
Year
1998
1999
2000
Leather
products
Trade liberalisation and
employment generation
• The growth in export oriented sector has
not necessarily led to employment
generation*, subject to some important
caveats
– Exception to this trend: textiles and clothing
– Growth of informal sector could answer for
this anomaly ( see next chart)
______________________________________
______
*The employment elasticity of output growth has
fallen from0.52 to 0.16 during 1993-2000.
Share of formal/ informal employment
in key sectors
Share of employment
Agriculture
sectors
Other
manufacturing
Formal
Textile
Informal
Leather
Iron and steel
0
20
40
60
80
Share of employment
100
Trade liberalisation and impact
on wages
• Wages as a proportion of total value added
have gone down for all manufacturing
– Due to increased casualisation of labour
• The counterfactual in terms of reduction in head
count ratio of poverty suggests that the informal
sector absorbed unemployed labour thus
contributing to a reduction in poverty, even
though inequalities may have increased.
Trade Liberalisation and adjustment costs
• Adjustments costs vary from sector to sector.
• Gradualism Vs Swift sharp shocks
– Sequenced trade liberalization and the optimum use
of flexibilities under the existing framework ensured
better preparedness within the industry.
• Policy reforms aimed at structural changes in
industry structure
– E.g. SSI policy
• Strategy to be framed to address the social
costs of trade liberalisation, CMP and
Employment Guarantee scheme
Trade and Gender Empowerment
• Employment opportunities for women have
increased in textiles and clothing sector
• But gender wage gap persists
• In all South Asian countries, exception being Sri
Lanka, females earn less than 50 per income as
compared to males.
• Vulnerabilities of women have increased.
• Women, in particular, are more affected in the
race to cut labour cost and increase production
levels by increasing the number of working
hours.
Key Inferences from India's Trade
Reforms
• Soft landing of trade reforms so far
• Further tariff liberalisation could result in adverse effects
for output and employment, particularly skilled
employment
• Need for safety net for unemployed
• Competitiveness of industrial products in selected
sectors remains a major challenge
• Trade policy must go hand in hand with domestic
reforms.
• Consultative procedures and micro studies- need of
the hour to identify sectors and sections affected
and develop strategies accordingly