Globalisation and the Indian Economy

Why This Matters

Walk into any shop today. You will see many brands of mobile phones, many brands of cars, many kinds of cold drinks, shoes, chocolates and televisions. Some are made in India. Many are made in other countries. Twenty years ago, this was not true. Your parents grew up at a time when there were only one or two car models on Indian roads. The choice was small. The shops were quieter.

So something big has changed. In just a few years, our markets have filled up with goods from all over the world. A phone designed in one country, made in a second, and sold in a third now sits in your hand. How did this happen? And what did it do to the people of India — the shopkeeper, the factory worker, the small maker of toys?

This chapter answers that. It is the story of how the whole world is slowly joining into one big market, and what that means for us. By the end, you will understand the word everyone uses but few can explain: globalisation. You will see who is behind it, what made it possible, and — most importantly — why it has helped some Indians a lot and hurt others badly at the very same time.

The Big Idea

Globalisation is the process of countries becoming more and more connected — through goods, services, money and technology moving between them. The biggest force behind it is the multinational corporation (MNC) — a company that owns or controls production in more than one country. MNCs spread their production across many countries to find cheap labour, cheap resources and new markets, so their costs fall and their profits rise. They invest in other countries in three main ways: by setting up production jointly with a local firm, by buying a local firm, or by placing orders with small local producers. At the same time, foreign trade ties markets together — goods made in one place are sold everywhere, producers in distant countries start competing, and prices move closer. Two things made all this possible: huge improvements in technology (transport and the internet) and liberalisation (governments removing trade barriers like high taxes and quotas), pushed along by the WTO. The impact on India has not been equal: well-off consumers, big Indian companies and skilled workers have gained, but many small producers and ordinary workers have been hurt. So the real goal is fair globalisation — sharing the benefits better.

Let’s Break It Down

What is an MNC, and why does it cross borders?

Before we go further, let us make sure a few everyday words are clear, because the whole chapter rests on them.

This first box refreshes three plain ideas — a market, foreign trade, and investment — that the rest of the chapter builds on:

Now, here is the puzzle. Why would a company go to all the trouble of making its product in several different countries? Why not just build one big factory at home and ship the finished goods out?

The answer is money. An MNC sets up its offices and factories wherever it can get cheap labour and other resources. That keeps the cost of production low, so the company earns more profit. But it goes further than just picking one cheap country. A clever MNC breaks the making of a product into small steps, and then does each step in whichever country is cheapest or best for that step. On top of that, it likes to make things close to where the buyers are, so delivery is fast and cheap.

Let us trace one real product to see this. Figure 4.1 below follows a single piece of industrial equipment as it is made across the globe:

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Look at what is happening. The MNC is not just selling its product around the world — it is making it around the world. China is the cheap place to manufacture. Mexico and Eastern Europe are near the customers. India has skilled engineers and English-speaking youth for support work. Each country contributes the one thing it does cheapest or best. Add it all up, and the company can save 50 to 60 per cent of its cost. That is why an MNC bothers to spread production instead of doing everything at home — it is far cheaper, and it puts the goods close to the buyers.

The three ways MNCs invest in other countries

So an MNC wants to produce in another country. How does it actually get a foot in the door? It does not always build a brand-new factory from scratch. There are three main routes, and you should know all three.

Figure 4.2 below lays out the three routes side by side before we explain each one:

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Here are the three routes in detail.

1. Joint set-up. Sometimes the MNC sets up production together with a local company. This helps the local company in two ways. First, the MNC brings extra money to invest — for example, to buy new machines for faster production. Second, the MNC brings the latest technology.

2. Buy the local company. This is the most common route. An MNC has huge wealth, so it simply buys an existing local company and then expands it. For example, Cargill Foods, a very large American MNC, bought the smaller Indian company Parakh Foods. Parakh already had a trusted brand, a big selling network across India, and four oil refineries. By buying it, Cargill became the largest maker of edible oil in India almost overnight. Many top MNCs are so rich that their wealth is more than the entire budget of some developing-country governments — so imagine their power.

3. Place orders with small producers. Large MNCs in rich countries place orders for goods with many small producers — for shirts, shoes, footballs, sports items. The small producers make the goods; the MNC then sells them under its own brand name. Because the MNC controls the big orders, it can decide the price, the quality, the delivery date, and even the working conditions for these far-off producers.

In all three routes, notice the pattern: the MNC ends up controlling production in a distant country. Whether it partners, buys, or orders, production in these scattered places gets tied together — interlinked — under the MNC’s influence.

Let us check one thing that students often slip on:

Foreign trade — how it connects markets

MNCs are one way countries get connected. The older, simpler way is foreign trade. For thousands of years, trade has been the main channel joining distant lands — think of the old trade routes between India and the rest of the world.

What does foreign trade really do? It does two simple things. For a seller (producer), it opens a door to customers beyond their own country — they can sell in foreign markets too, not just at home. For a buyer, it widens the choice — they can buy goods made in other countries, not just local ones.

But here is the part NCERT states quickly and you should understand deeply: foreign trade connects markets. What does that mean, and how does it happen? Figure 4.3 below walks through it with the example of toys:

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Trace the story. Chinese toys are cheaper and have new designs. Once trade opens, they flow into India. Now Indian buyers can pick between Indian toys and Chinese toys — so the two sets of makers are suddenly competing, even though they live thousands of miles apart. Chinese toys win on price, so within a year most shops switch to them. Indian buyers get more choice at lower prices. Chinese toy makers grow. But Indian toy makers lose — their toys hardly sell.

Now watch the prices. Before trade, the same kind of toy cost ₹40 in India and ₹20 in China. After trade, the cheap toy floods in, so the price in India falls. The price of the same good in the two markets starts to come closer together. This is what “integration of markets” means: when goods can travel freely, the choice rises, distant producers compete, and the price of the same good in different countries moves towards becoming equal. The two markets stop being separate. They behave like one.

What enabled globalisation? Technology, liberalisation and the WTO

So globalisation is greater foreign trade plus greater foreign investment, tying production and markets across the world into one. But why now? Why did this speed up so much in the last few decades and not before? Three things made it possible.

Figure 4.4 below shows them as three pillars holding up globalisation:

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1. Technology. Two kinds matter. First, transport got much faster and cheaper. The shipping container — a big standard steel box — lets goods be packed once and loaded straight onto a ship, then a train, then a truck, with little extra handling. Air cargo also got cheaper. So goods now cross oceans quickly and cheaply. Second, information technology (IT) — the internet, telephones and mobiles, computers, satellites — lets people in different countries talk, send orders and share information instantly, at almost no cost. A magazine for London readers can be designed in Delhi and the payment sent online in seconds. Without IT, an MNC could never manage a product made in five countries at once.

2. Liberalisation. This is the most important one to understand why, so let us go slowly with a small box first.

This relies on the words “trade barrier” and “quota”, so here is a quick reminder before the explanation:

Now, why does removing barriers boost trade so much? Figure 4.5 below shows the answer:

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Trace the logic. Suppose India puts a heavy tax on imported toys. A ₹20 Chinese toy now costs ₹40 to the Indian buyer. At ₹40 it is no longer a bargain, so few people buy it, and very few toys are imported — trade stays small. Indian toy makers are protected. Now remove the tax. The Chinese toy stays ₹20. Suddenly it is cheap and attractive, so many flow in — trade grows large. That is the whole reason liberalisation increased trade so much: a barrier makes foreign goods costly and chokes the flow to a trickle; remove the barrier and goods rush in.

India did exactly this. After Independence, India put up barriers on purpose, to protect its young industries from foreign competition while they were still weak in the 1950s and 1960s. Then, starting around 1991, India changed course and removed most barriers — this was the big move called liberalisation. Indian producers would now have to compete with the world, which, it was hoped, would push them to improve quality.

3. The WTO (World Trade Organisation). India’s liberalisation was backed by powerful international organisations. The WTO is the main one. Its aim is to make international trade “free” — it says barriers are harmful and wants all countries to remove them. It sets the rules of world trade and checks that members follow them. About 160 countries are members. But here is the catch: in practice, the WTO often is not fair. It was started mainly by the rich, developed countries, and they have quietly kept many of their own barriers and supports — for example, the US gives huge sums of money to its farmers. Meanwhile, the developing countries have been pushed hard to remove their barriers. So free trade on paper is not always free and fair in real life.

The impact on India — and why it helps some but hurts others

Now the most important question. Globalisation came to India. Who did it help, and who did it hurt? The honest answer is that it did both at the same time — and who you are decides which side you are on.

Figure 4.6 below sorts the winners from the losers, and shows what “fair globalisation” needs:

Tap to zoom

The winners.

• Well-off consumers, mostly in cities, now enjoy far more choice, better quality and lower prices on cars, phones, electronics and more. Their standard of living rose.
• Big Indian companies got access to new technology and tougher competition that pushed them to improve. Some grew so strong they became MNCs themselves — Tata Motors, Infosys, Ranbaxy, Asian Paints, Sundaram Fasteners now operate worldwide.
• Skilled, educated workers found new, well-paid jobs, especially in IT and services — software, call centres, data entry, accounting done in India for clients abroad.

The losers.

• Small producers got crushed. A small Indian maker of batteries, toys, tyres, dairy products or vegetable oil suddenly faced cheaper, better-made foreign goods. Many could not match the price and had to shut down. Remember, small and medium industries employ a huge number of workers — second only to farming.
• Ordinary workers lost security. To win the big, low-price orders from MNCs, exporters cut costs by cutting labour costs. So they stopped hiring workers permanently. Instead they hire “flexibly” — for short bursts, on low wages, with long hours and night shifts. The job is no longer safe.

Now, why does the same event help one group and hurt another? Because globalisation is really just more competition. Competition is wonderful if you are a buyer, or a strong producer who can win — you get cheaper goods, or you grow. But it is brutal if you are a weak producer or a worker with little bargaining power — your cheaper rival takes your customers, or your employer squeezes your wages to survive. Same competition, opposite effects. So “is globalisation good?” has no single answer. It depends on which side of the competition you stand on.

That is why the goal is fair globalisation — globalisation that creates chances for all and shares the gains better. The government has the biggest role here. It can make sure labour laws actually protect workers; it can support small producers until they grow strong enough to compete; it can use trade barriers where they are truly needed; and it can fight at the WTO for fairer rules, joining hands with other developing countries. People’s own movements and campaigns also matter — public pressure has already changed some trade decisions.

Common Mistakes

Globalisation is full of half-true ideas. Here are the ones that trip students up most.

The first mistake is thinking an MNC just exports finished goods, like any exporter. Read why the truth is bigger:

The second mistake is the comforting belief that globalisation lifts everyone equally:

The third mistake is mixing up two different ways countries connect:

The fourth mistake is assuming the WTO actually delivers the free trade it preaches:

Quick Check

Time to test the core ideas. Answer each before tapping an option.

Practice Problems

These are exam-style questions. Try each fully in your head or on paper, then reveal the model answer to check.

Easy

Medium

Challenge

Summary

You should now be able to explain each of these in your own words:

• Globalisation is the rapid process of countries becoming more connected — through goods, services, investment and technology moving between them.
• An MNC owns or controls production in more than one country. MNCs spread production across countries to find cheap labour, cheap resources and new markets, cutting costs and raising profits.
• MNCs invest abroad in three ways: joint set-up with a local firm, buying a local firm (the most common), or placing orders with small producers and selling under their own brand.
• Foreign trade integrates markets: goods travel between countries, choice rises, distant producers compete, and the price of the same good in different markets moves closer together.
• Globalisation was enabled by technology (cheap transport and IT), liberalisation (governments removing trade barriers like taxes and quotas), and pressure from the WTO.
• A trade barrier like a high import tax raises the price of foreign goods and shrinks trade; removing it lets trade grow.
• The impact on India was not uniform: well-off consumers, big companies and skilled workers gained, while many small producers and ordinary workers were hurt.
• Fair globalisation means sharing the gains better — and the government can help by protecting workers, supporting small producers, and fighting for fairer WTO rules.

What’s Next

You have seen the producer’s and the worker’s side of the new market. But there is one more person in every market who needs protection: you, the buyer. When you pay for a packet of biscuits, a medicine, or a phone, how do you know it is safe, the weight is right, and you have not been cheated? What can you do if a shopkeeper sells you a bad product?

That is the subject of Chapter 5: Consumer Rights. It looks at how markets can mislead and exploit buyers, the rights every consumer has, the meaning of marks like ISI, Agmark and Hallmark, and how the law protects you when you have been cheated. After learning how globalisation reshaped what we buy, the next step is learning how to be a smart, protected buyer in that bigger market.