GLOBALISATION AND ITS IMPACT ON

FINANCIAL SERVICES

BY :

NIYATI RAWAT

LAIRENLAKPAM MANGAL

GLOBALISATION

The term ‘globalization’ means integration of economies and

societies through cross country flows of information, ideas, technologies,

goods, services, capital, finance and people

PHENOMENON OF GLOBALISATION :

ProximityLocationAttitude

Historical Development

 

Globalization has been a historical process with

ebbs and flows. During the Pre-World War I period

of 1870 to 1914, there was rapid integration of the

economies in terms of trade flows, movement of

capital and migration of people.

The growth of globalization was mainly led by the technological

forces in the fields of transport and communication. There were

less barriers to flow of trade and people across the

geographical boundaries.

ADVANTAGES of Globalization

1. Cost reduction

2. Global learning

3. Rapid industrialization

4. Better allocation of resources

5. Reduction in poverty

6. Employment generation

7. Balanced development

8. Better quality of life

9. Human development

A coca-  cola stall outside the Grand Gateway 66 shopping mall in Xujiahui , Shanghai

About 85% of Dubai's population consists of migrant workers, a majority of whom are from India

DISADVANTAGES of globalization 1. THREAT TO DOMESTIC INDUSTRIES

2. UNEMPLOYEMENT

3. EXPLOIATATION OF LABOUR

4. WIDENING GAP BETWEEN RICH AND POOR

5. OVERUSE OF NATURAL RESOURCES

6. THREAT TO NATIONS SOVEREIGNTY

We have everything by globalization, we have nothing by globalization

Stages of GlobalizationDomestic firm

exports through dealers

Domestic firm exports directly

Domestic firm sets up units

Domestic firm establishes a

subsidiary

Becomes a global firm by serving the

needs of the customers

The Dimensions of Globalisation

Factors Causing Globalization

Globalization

Technological

Factors

Social Factors

Competitive

Factors

Political Factors

Impact of Globalization on International Business

Globalization of MarketsGlobalization on productionGlobalization on InvestmentGlobalization of Technology

India before LPG (prior to 1991)

Most banks were state-ownedBanks, pension funds and

insurance companies were forced to buy State Issued bonds - primary investment.

Bombay Stock Exchange was closed market. Run by Brokers for the benefit of its members. There was no right governance and regulation.

There was no single derivative market.

All financial transactions were controlled by the RBI and Ministry of Finance

Pre-LPG period (prior to 1991)Socialistic Model Weapons

Strict entry barriers in every sub-industry.

Difficult to start a bank, a mutual fund, a brokerage firm, an insurance company, a pension fund, a securities exchange or sub-broking firm.

Foreign firms were restricted to touch any one of these parts

Comprehensive capital control and restrictive legislations

Big Villains wereMRTP act, 1969The Capital Issues (control)

act, 1947Indian Companies Act, 1956Industries Act, 1956Foreign Exchange

Regulation Act, 1973

Globalization and India

Globalize its economy in 1991Mounting problems- huge fiscal deficits, BoP crisis

and foreign exchange crisis Foreign investors and NRIs had lost confidence in Indian

economy

Major measures as a part of the Globalization strategy

Devaluation of CurrencyDisinvestmentDismantling of The Industrial Licensing

Regime Abolition of the MRTP ActAllowing Foreign Direct InvestmentWide-ranging financial sector reforms

IMPACT

India’s growth rate in the 1970’s was very low at 3% and GDP growth in countries like Brazil, Indonesia, Korea, and Mexico was more than twice that of India.

 Though India’s average annual growth rate almost doubled in the eighties to 5.9%, it was still lower than the growth rate in China, Korea and Indonesia. The pick up in GDP growth has helped improve India’s global position.

 India’s position in the global economy has improved from the 8th position in 1991 to 4th place in 2001; when GDP is calculated on a purchasing power parity basis. 

GDP growth rate before and after 1991

1989 1990 1991 1992 1993 1995 1996 2004 2005 2006 20070

2

4

6

8

10

12GDP growth rate %

GDP growth rate %

Large Number of Multinationals Have Moved to India Post Globalization (Strategy 100% Equity, Collaboration, Franchise, Importing, Manufacturing)

 Beverages (Coke, Pepsi)Fast Foods (McDonalds, Pizza Hut, KFC)Coffee (Barista, Café Coffee Day)Sports Wear & Goods (Nike, Adidas)Apparels & Garments (Levis, Reid & Taylor)Cosmetics (Revlon, Oriflamme, Maybellene)Two/Four Wheelers (Honda, Toyota, Suzuki, Hyundai, General Motors, Ford, Mercedes)Computers (Dell, HP, IBM, Samsung, Sony)ConstructionEngineering CompaniesPharmaceuticals (US, Europe, Britain)Music (Sony, BMG, Warner)Entertainment Channels (Star, National Geographic, Discovery, Sony)

Globalization in the context of the financial services sector

A Framework for Understanding the Impact of Globalization on the Financial Services SectorChange in StructureChange in Function

Reforms relating to the banking systemCapital base of the banks were strengthened by recapitalization, public equity

issues and subordinated debt.Prudential norms were introduced and progressively tightened for income

recognition, classification of assets, provisioning of bad debts, marking to market of investments.

Pre-emption of bank resources by the government was reduced sharply.New private sector banks were licensed and branch licensing restrictions were

relaxed.At the same time, several operational reforms were introduced in the realm of

credit policy:Detailed regulations relating to Maximum Permissible Bank Finance were

abolishedConsortium regulations were relaxed substantiallyCredit delivery was shifted away from cash credit to loan method

Exchange Control and Convertibility Exchange controls on current account transactions were progressively

relaxed culminating in current account convertibility. Foreign Institutional Investors were allowed to invest in Indian equities

subject to restrictions on maximum holdings in individual companies. Restrictions remain on investment in debt, but these too have been

progressively relaxed. Indian companies were allowed to raise equity in international markets

subject to various restrictions. Indian companies were allowed to borrow in international markets subject to

a minimum maturity, a ceiling on the maximum interest rate, and annual caps on aggregate external commercial borrowings by all entities put together.

Indian mutual funds were allowed to invest a small portion of their assets abroad.

Indian companies were given access to long dated forward contracts and to cross currency options.(Derivatives)

Reforms in the capital marketSEBI- the apex regulator of the Indian capital

marketsRegulations were framed for insider tradingAbolition of capital issues controlIntroduction of free pricing of equity issuesOn-line trading was introduced at all stock

exchanges

Where does Indian stand in terms of Global Integration?Over the past decade FDI flows into India have

averaged around 0.5% of GDP against 5% for China 5.5% for Brazil. Whereas FDI inflows into China now exceeds US $ 50 billion annually. It is only US $ 4billion in the case of India

Consider global trade - India's share of world merchandise exports increased from .05% to .07% over the past 20 years. Over the same period China's share has tripled to almost 4%.

Contd.India's share of global trade is similar to that of the

Philippines, an economy 6 times smaller according to IMF estimates. India under trades by 70-80% given its size, proximity to markets and labor cost advantages.

Conclusion

A country must carefully choose a combination of policies that best enables it to take the opportunity while avoiding the pitfalls and utilizing globalization to the fullest extent possible.

Thank you

Don’t ask too many questions Use your analytical skills to develop your thinking

abilityGOD HELP THOSE WHO HELP THEMSELVES