‘Globalisation can be double edged sword for Indian economy’: Subbarao

BANGALORE: Reserve Bank of India (RBI) Governor D Subbarao on Friday said one of the big challenge India face today is to live with the globalised world as globalisation works like a double edged sword and managing a change is always a great challenge, be it for a nation or for an individual. Speaking 37th Convocation speech at the Indian Institute of Management- Bangalore here, he said while globalisation offers immense opportunities, it also poses ruthless challenges. ‘Nothing illustrates this better than the global fi nancial crisis of 2008-09. In the years before the crisis the global economy witnessed moderation where advanced economies saw steady growth while developing economies saw their countries on an accelerating path. Low and stable infl ation was all around. But the economic crisis put everything in the reverse gear,’ he said. Globalisation helped India and China join the world labour markets under the positive effect of globalisation. However the negative effects were very strong and the countries had to struggle hard to overcome it. ‘ That a bubble in a quintessentially non-tradable sector like housing snowballed into a global fi nancial crisis, taking a devastating toll on global growth and welfare, is a demonstration of the ferociousness of the forces of globalisation,’ he said. Dr Subbarao said “globalisation comes with benefi ts and costs. No matter what career you pursue or where you choose to work,you will have to learn to manage globalisation in ways that will maximise its benefi ts and minimise its costs. The RBI chief said today India’s ratio of external trade to GDP had gone up to 37 per cent but said globalisation also posed ruthless challenges. On India’s global integration, Subbarao said a metric frequently used to measure the degree of a country’s global integration is the ratio of external trade to GDP. ‘That ratio has gone up over four times, from eight per cent of GDP in 1972 to 37 per cent in 2011,’ he said. Over this period, fl ow of money around the world has far outpaced the fl ow of goods. So, a more complete measure of a country’s global integration is the two way fl ow of goods and fi - nance in and out of a country. That ratio has moved up nearly eight times in these four decades, from 14 per cent in 1972 to 109 per cent in 2011. ‘What this means is that India’s trade integration has been deep; but its fi - nancial integration has been deeper,’ he said. He said at the Reserve Bank, the offi cials had to confront the dilemmas of globalisation. People had mixed feeling on globalization and the debate surrounding it has been, in turn, lively, passionate, acrimonious, ill-defi ned, chaotic, noisy, constructive, untidy, and amorphous. “For its supporters, globalisation is the best way forward for collective global prosperity and welfare. For its critics, on the other hand, globalization is an unmitigated evil. Debate cannot be a binary issue. There is some validity to both sides of the argument, and the best way forward, as we just noted, is to maximise the positives and minimise the negatives,’ he added. Dr Subbarao said globalisation has a long history of 500 years, dating back to the voyages of discovery of the 15th and 16th centuries and colonisation by the European powers in the following centuries. ‘Colonies have gone, but the trade and commerce spawned by the colonial empires have largely endured. There is a widely held view that globalization is inevitable in today’s world of rapid technological progress and growing embrace of economic liberalisation by countries. Most people who hold this view think that globalisation is a uniquely twentieth century phenomenon and that it is progressing on a linear upward path. “In the era of knowledgepropelled globalisation, it is possible for countries to overcome handicaps of geography by exploiting their comparative advantage in human resources. Thatblue-collar jobs shift across geographic boundaries in pursuit of cheap hands has long been part of conventional wisdom. But what is new is that increasingly white-collar jobs, once considered safe from foreign competition, are now being off-shored. Hence, the new catch phrases such as ‘death of distance’ and ‘conquest of location,” the RBI chief explained. Subbarao said fi nancial openness, one of the main factors of globalization, helped deepen and broaden the fi nancial markets, enhances competition, raises effi ciency and improves corporate governance standards. On the other hand, it was true that there were certain pre-conditions to be met for fi nancial liberalisation to be a positive force. In particular, the government’s fi scal position should be sound, regulation and supervisory systems should be effective and there should be capacity for instituting internal controls within fi nancial institutions. ‘My broad position on this issue is that fi nancial liberalisation can offer potentially huge benefi ts, including collateral benefi ts, as does trade liberalisation. What is important to remember though, in promoting fi nancial liberalisation, is that the fi nancial sector has no standing of its own; it derives its strength and resilience from the real economy? It is the needs of the real sector that should drive fi nancial sector liberalization, not the other way round.’