Financial markets were not always as integrated as they are today. A number of factors are behind this change. The most important reason is the remarkable development of technology for transfer of money and information, making the same possible at an extremely fast speed and at considerably reduced cost. This has made possible the co-ordination of activities in various centers, even across national boundaries. Another significant development was the sudden increase in the inflation levels of various industrial countries which resulted in the price of various financial assets changing widely in response to the changes in the domestic inflation rates and the interest rates in different countries. These developments led to some others, which contributed all the more to the process of globalization. They are:
· The development of new financial instruments:For example, instruments of the euro-dollar market, interest rate swap, currency swap, futures contracts, forward contracts, options, etc.
· Liberalization of regulations governing the financial markets:Though the extent and direction of liberalization has been different in different countries, based on the domestic compulsions and the local perspective, it has been substantial enough to make operations in foreign markets a lucrative affair.
· Increased cross penetration of foreign ownership:This has helped in the countries developing an international perspective while deciding on various factors influencing the process of globalization.
The function of the financial system is to efficiently transfer resources from the surplus units to the deficit units. Greater integration of the financial markets helps in performing this function in a better manner. Just like natural resources are distributed unequally among various countries, some countries are capital-rich, while others are capital-poor. Capital-rich countries generally enjoy a lower return on capital than the capital-poor countries. Let us imagine the scenario where there is no capital flows between these two sets of countries. In the absence of adequate capital, the capital-poor countries will have to either forego or postpone some of the high-yielding investments. On the other hand, capital-rich countries will be investing in some of the low-yielding investments due to lack of better opportunities. When capital flows are allowed to take place, investors from the capital-rich countries would invest in the high-yielding projects available in the capital-poor countries. This would benefit both the countries. The residents of the capital-rich country will benefit by earning a higher return on their investments, and the cash-poor country will benefit by earning profits on the project, which they would otherwise have had to forego. Integration of financial markets thus results in a more efficient allocation of capital and a better working financial system.
India in the Global Economy
India is theseventh largest and second most populous country in the world. A new spirit of economic freedom is now stirring in the country, bringing sweeping changes in its wake. A series of ambitious economic reforms aimed at deregulating the country and stimulating foreign investment has moved India firmly into the front ranks of the rapidly growing Asia Pacific region and unleashed the latent strengths of a complex and rapidly changing nation.
India's process of economic reform is firmly rooted in a political consensus that spans her diverse political parties. India's democracy is a known and stable factor, which has taken deep roots over nearly half a century. Importantly, India has no fundamental conflict between its political and economic systems. Its political institutions have fostered an open society with strong collective and individual rights and an environment supportive of free economic enterprise.
India's time tested institutions offer foreign investors a transparent environment that guarantees the security of their long-term investments. These include a free and vibrant press, a judiciary, which can and does overrule the government, a sophisticated legal and accounting system and a user-friendly intellectual infrastructure. India's dynamic and highly competitive private sector has long been the backbone of its economic activity. It accounts for over 75% of its Gross Domestic Product and offers considerable scope for joint ventures and collaborations.
Today, India is one of the most exciting emerging markets in the world. Skilled managerial and technical manpower that match the best available in the world and a middle class whose size exceeds the population of the USA or the European Union, provide India with a distinct cutting edge in global competition.
According to the report of Goldman Sachs, India would be the 3rd most important economic power in next 50 years after America and China. Its projection is that GDP of America would be 45 trillion dollars, China’s 35 trillion dollars and India’s 28 trillion dollars, whereas Japan’s will be about 7 trillion dollars. It was further estimated that by 2020 the US would be short of 17 million working age people, China 10 million, Japan 9 million, and Russia 6 million, whereas India will have a surplus of 47 million.