Globalisation and its impact on financial services
GLOBALISATION The term ‘globalization’ means integration of economies andsocieties through cross country flows of information, ideas, technologies,goods, services, capital, finance and people
PHENOMENON OF GLOBALISATION : Proximity Location Attitude
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 ofcapital and migration of people.The growth of globalization was mainly led by the technologicalforces in the fields of transport and communication. There wereless barriers to flow of trade and people across thegeographical boundaries.
ADVANTAGES of Globalization1. Cost reduction2. Global learning3. Rapid industrialization4. Better allocation of resources5. Reduction in poverty6. Employment generation7. Balanced development8. Better quality of life9. Human development
A coca- cola stall outsidethe Grand Gateway66 shopping mallin Xujiahui , Shanghai About 85% of Dubais population consists of migrant workers, a majority of whom are from India
DISADVANTAGES of globalization1. THREAT TO DOMESTIC INDUSTRIES2. UNEMPLOYEMENT3. EXPLOIATATION OF LABOUR4. WIDENING GAP BETWEEN RICH AND POOR5. OVERUSE OF NATURAL RESOURCES6. THREAT TO NATIONS SOVEREIGNTY
We have everything byglobalization, we havenothing by globalization
Stages of GlobalizationDomestic firm exports Domestic firm Domestic firm through exports sets up units dealers directly Becomes a global firm by Domestic firm serving the establishes a needs of the subsidiary customers
Impact of Globalization onInternational Business Globalization of Markets Globalization on production Globalization on Investment Globalization of Technology
India before LPG (prior to 1991) Most banks were state-owned Banks, 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. Big Villains were Difficult to start a bank, a mutual MRTP act, 1969 fund, a brokerage firm, an insurance company, a pension The Capital Issues (control) fund, a securities exchange or sub- act, 1947 broking firm. Indian Companies Act, 1956 Foreign firms were restricted to touch any one of these parts Industries Act, 1956 Comprehensive capital control and Foreign Exchange restrictive legislations Regulation Act, 1973
Globalization and India Globalize its economy in 1991 Mounting 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 theGlobalization strategy Devaluation of Currency Disinvestment Dismantling of The Industrial Licensing Regime Abolition of the MRTP Act Allowing Foreign Direct Investment Wide-ranging financial sector reforms
IMPACTIndia’s growth rate in the 1970’s was very low at 3% andGDP growth in countries like Brazil, Indonesia, Korea, andMexico was more than twice that of India.Though India’s average annual growth rate almost doubledin the eighties to 5.9%, it was still lower than the growth ratein China, Korea and Indonesia. The pick up in GDP growthhas helped improve India’s global position.India’s position in the global economy has improved fromthe 8th position in 1991 to 4th place in 2001; when GDP iscalculated on a purchasing power parity basis.
GDP growth rate before and after 1991 GDP growth rate %1210 8 GDP 6 growth rate % 4 2 0 1989 1990 1991 1992 1993 1995 1996 2004 2005 2006 2007
Large Number of Multinationals Have Moved to India PostGlobalization (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, GeneralMotors, 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 Understandingthe Impact of Globalization on theFinancial Services Sector Change in Structure Change in Function
Reforms relating to the bankingsystem Capital 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 abolished Consortium regulations were relaxed substantially Credit 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 market SEBI- the apex regulator of the Indian capital markets Regulations were framed for insider trading Abolition of capital issues control Introduction of free pricing of equity issues On-line trading was introduced at all stock exchanges
Where does Indian stand in terms ofGlobal 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 - Indias share of world merchandise exports increased from .05% to .07% over the past 20 years. Over the same period Chinas share has tripled to almost 4%.
Contd. Indias 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 ofpolicies that best enables it to take the opportunity whileavoiding the pitfalls and utilizing globalization to thefullest extent possible.
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