Money and Credit & Globalisation and the Indian Economy

Ans. Interest rate

Collateral

Documentation requirement

Mode of repayment together comprise terms of credit

Ans. Barter system refers to the system of exchange of goods and services. It is the system by which one commodity is exchanged for another without the use of money. Before money was introduced, people practised barter system.

Ans. Investment is buying of an asset in the form of a factor, a machine, land and building, etc. (physical assets) or shares (monetary assets) for the purpose of making or sharing profits of the enterprises concerned.

Common investments are – buying land, factories, machines for faster production, buying small local companies to expand production, cheap labour, skilled engineers, IT personal, etc.

Ans. One cannot refuse a payment made in rupees in India because it is accepted as a medium of exchange. The currency is authorized by the government of the country.

Ans. Double coincidence of wants means that when someone wants to exchange his goods with another person, the latter must also be willing to exchange his goods with the first person. It can only work when both the persons are ready to exchange each other’s goods.

Ans. A Multinational Corporation (MNC) is a company that owns or controls production in more than one nation. The goods and services are produced globally. The production process is divided into small parts and spread out across the globe.

Ans. FDI is the investment of foreign capital in the economic and productive activities of a country by foreign companies or MNCs with the aim of expanding capacity and production to earn profits.

Ans. The Indian government after independence had put barrier to foreign trade and investment.

• This was done to protect the producers within the country from foreign competition.
• To protect the Indian economy from foreign infiltration in industries affecting the economic growth of the country as planned.

Ans. Tax on imports is known as a trade barrier because it increases the price of imported commodities. It is called a barrier because some restriction has been set up.

Ans. Special Economic Zones of SEZs are industrial zones set up by the government having word class facilities such as electricity, water, roads, transport, storage, recreational and educational facilities. Companies who set up production units in SEZs are exempted from taxes for an initial period of five years.

Ans. Modern forms of money currency in India include paper notes and coins which are known as rupees and paisa.

• It is accepted as a medium of exchange because the currency is authorized by the Government of India.
• In India, the Reserve bank of India issues currency notes on behalf of the Central Government of India.
• The law legalizes the use of rupee as a medium of payment that cannot be refused in settling transaction in India.
• No individual in India can legally refuse a payment made in rupees.

Therefore, the rupee is widely accepted as a medium of exchange.

Ans. Moneylenders are the most dominant amongst sources of credit for rural households. They constitute an informal source of credit. They charge a very high rate of interest on loans as they do not require any collateral. They are the most convenient source of credit in the rural areas.

Other sources of rural credit:

• Cooperative Societies are another major source of rural credit. They are a source of formal sector credit. Members of a Cooperative pool their resources for helping one another, e.g., Farmers’ Cooperative, Weavers’ Cooperation, etc. They offer cheap credit in rural areas for their members. Once these loans are repaid, another round of loans is offered.
• Agricultural traders, relatives and friends are other informal sources of rural credit. Some farmers borrow from agricultural traders who supply the farm inputs (such as seeds, fertilizers, pesticides, etc) on credit at the beginning of the cropping season and repay the loans after the harvest.
• Commercial banks also give loans to rural households. However, not many rural households borrow from banks as they require proper documentation and collateral.

Ans. The credit activities of the informal sector should be discouraged because:

(i) 85% of loans taken by the poor households in the urban areas are from informal sources. There is no organisation that supervises the credit activities of lenders in the informal sector.

(ii) Informal lenders charge very high interest. They try to charge more and more interest on their loans as there are no boundaries and restrictions.

(iii) Higher cost of borrowing means a larger part of the earnings of the borrowers is used to repay the loan.

(iv) In certain cases, the high interest rate for borrowing can mean that the amount to be repaid is greater than the income of borrower. This could lead to increasing debt and debt trap, therefore the credit activities of the informal sector should be discouraged.

Ans. Cheap and affordable loans help people to grow crops, do business, setup small scale industries or trade in goods.

This promotes:

(i) Self-reliance and financial security and independence of people.

(ii) Protection of the relatively poor against corrupt moneylenders.

(iii) Eradication of poverty in general.

(iv) All this indirectly helps in the country’s development.

Ans. (i) Banks help people to save their money and keep their money in safe custody of the bank. Banks accept deposits from the public and also help people to earn interest on their deposits.

(ii) People can withdraw the money deposited with the bank at the time of their need. As the money can be withdrawn on demand, these are called demand deposits.

(iii) Banks also grant loans to people for a variety of purposes. In times of need individuals, business houses and industries can borrow money from the banks.

Ans. If Government of India puts heavy tax on import of Chinese toys

• The cost of Chinese toys will increase.
• Less Chinese toys would come in the Indian market.
• Indian buyers would have lesser choice in the market and toys will become more expensive.
• For Indian toy makers this would provide an opportunity to expand business as there will be less competition in the market.

Ans. MNCs set up offices and factories for production in regions where they can get cheap labour and other resources. Example, Countries like China, Bangladesh and India. They also provide with the advantage of cheap manufacturing locations.

MNCs also need close-by markets for their manufacturing goods. Mexico and Eastern Europe are useful for their closeness to the markets in the US and Europe.

Besides these, MNCs also require skilled engineers and IT personal and a large number of English speaking people who are able to provide customer care services (India possibly tops in this area)

All these factors help MNCs in saving costs of production by 50-60%

Ans. When local companies enter into a joint venture with MNCs:

• First, the MNCs provide money for additional investments for faster production.
• Second, MNCs bring with them the latest technology for enhancing and improving the production.
• Some Indian companies have gained from successful collaboration with foreign companies. Globalization has enabled some companies to emerge as multinationals.
• Parakh Foods was a small company which has been bought over by a large American Company – Cargill Foods. Parakh Foods had built a large marketing network in various parts of India as a well-reputed brand. Parakh Foods had four oil refineries whose control has now shifted to Cargill. Cargill is now the largest manufacturer of edible oil in India making five million pouches daily.

Ans. Information and communication technology has helped globalisation in the following ways:

• Rapid Improvement in technology has contributed greatly towards globalisation. Advanced technology in transport systems has helped in the delivery of goods faster across long distances at lower costs.
• Development in information and communication technology has also helped a great deal. Telecommunication facilities – telegraph, telephone, mobile phones, fax are used to contact one another quickly around the world, access information instantly and communicate from remote areas.
• This is possible due to satellite communication devices. Teleconferences help in saving frequent long trips across the globe.
• Information technology has also played an important role in spreading out production of services across countries. Orders are placed through internet, designing is done on computers, even payment of money from one bank to another can be done through e-banking through internet. Internet also allows us to send instant electronic mail (e-mail) and talk (voice-mail) across the world at negligible cost.

Ans. Globalisation has led to integration of markets across countries. The Indian markets are now flooded with a wide ranging choice of goods. Import from other countries has led to an expanding choice of goods beyond what is domestically produced –

• We have a wide variety of goods and services before us in the market.
• The latest models of digital cameras, mobile phones and televisions made by leading manufacturers of the world like Sony, Samsung etc. are available in the market.
• Every season, new models of automobiles can be seen on Indian roads. Today Indians are buying cars produced by nearly all the top companies in the world.

Ans. The basic objective of ‘Self Help Groups’ is to organize rural poor, particularly women belonging to one neighbourhood into small Self Help Groups (15-20 members). These members save regularly and the amount varies from Rs 25-100 or more depending upon their ability to save.

The four advantages of ‘Self Help Groups’ are as follow:

• The members can take small loans from the group itself to meet their needs. The group charges interest on these loans which is still less than what moneylenders charge.
• After a year or two, if the group is regular in savings, it becomes eligible for availing loan from the bank which is sanctioned in the name of the group to create self-employment opportunities. All important decisions regarding loan, purpose, amount of interest, non-payment of loan are taken by the group members.
• For instance, small loans are provided to the members for releasing mortgaged land, meeting working capital needs, for acquiring assets like sewing machines, handlooms, cattle etc.
• Since non-repayment of loans is dealt with seriously by group members, therefore banks are willing to lend to the poor women when organized in SHGs, even though they have no collateral as such, Thus, the SHGs help women to become financially self-reliant.
• The regular meeting of the group provide a platform to discuss and act on a variety of social issues such as health, nutrition, domestic violence etc.

Ans. Credit means loans. It refers to an agreement in which the lender supplies the borrower with money, goods or services in return for the promise of future repayment.

• Cheap and affordable credit is crucial for the country’s growth and economic development. Credit is in great demand for various kinds of economic activities – big or small investments, to set up business, buying cars, houses, etc.
• In rural areas credit helps in the development of agricultural by providing funds to farmers to buy seeds, fertilizers, expensive pesticides.
• Manufacturers need credit for buying raw material or to meet ongoing expenditure of production. Credit helps in the purchase of plant, machinery, equipment, etc.
• Some people may need to borrow for illness, marriages etc.

Thus, cheap and affordable credit is crucial for the country’s growth and economic development.

Ans. Benefit of deposits to the depositors:

• Bank accepts the deposits and pays interest to the depositor
• Banks help people save their money keep their money in safe custody of the bank.
• People can withdraw the money as and when they require.
• Banks also grant loans to people for a variety of purposes. In times of need, individuals, business houses and industries can borrow money from the banks.

Ans. The formal sector loans can be made beneficial to poor farmers and workers in following ways:

• The process of providing loans should be made easier and accessible to them.
• Large number of banks and cooperation should be opened in the rural areas.
• Banks and cooperatives should expand their facility of providing loans so as to decrease dependence on informal sector.
• Special focus should be paid on poor and small farmers along with small scale industries.
• Loan processing should be simple, faster and timely.

Ans. Banks and cooperatives should extend their lending activities in rural areas because:

• Rural poor and farmers have to borrow money from moneylenders at a very high rate of interest. Therefore, the cost to the borrowing is very high.
• A large part of the earnings of borrower is used to repay the loans. Hence, they have less income.
• Sometimes, a higher rate of lending means that the amount to be repaid is more than the earnings of the borrower.
• To save the people from the clutches and exploitation by the moneylenders, it is necessary for the banks and co-operatives to extend their lending activities.
• It would lead to higher incomes and improve the condition of the rural poor.
• People can also start a business or set up a small scale industry.

Ans. The government can play a major role in making fair globalization possible:

Fair globalization would create opportunities for all, and also ensure that the benefits of globalization are shared better. Government policies must protect the interests not only of the rich and the powerful, but also of all the people in the country.

• Government should ensure that labour laws are implemented and workers’ rights are protected.
• Government should support small producers to improve their performance till the time they become strong enough to compete with foreign competition.
• If necessary, government should use trade and investment barriers.
• It can negotiate with WTO for fairer rules.
• It can also align with other developing countries with similar interests to fight against the domination of developed countries in the WTO.

Ans. Globalisation means integrating the economy of the country with the world economy.

• Under this process, goods and services along with capital, resources and technology can move freely from one nation to another.
• It has increased the movement of people between countries, People usually move from one country to another in search of better income, better jobs or better education. Earlier the movement of people between countries was less due to various restrictions.
• Rapid Improvement in technology has been one major factor that has stimulated the globalization process. For instance, advancement in transportation technology has made much faster delivery of goods across long distances possible at lower costs.
• Developments in information and communication technology (IT in short) has brought a revolution in telecommunications. It has made e-banking, e-commerce, e-learning, e-mail and e-governance a reality.
• Globalization has resulted in greater competition among producers and has been of advantage to consumers, particularly the well-off section. Rich people now enjoy improved quality and lower prices for several products.

Ans. WTO (World Trade Organization): WTO believes that there should not be any barriers between trade of different countries. Trade between countries should be free.

Aims of WTO:

• To liberalize international trade
• To establish rules regarding international trade.

Two shortcomings of WTO:

• Though WTO is supposed to allow free trade for all, in practice, it is seen that the developed countries having unfairly retained trade barriers and continued to provide protection to their producers. For example, farmers in the US receive huge sums of money from the government and as a result can sell the farm products at abnormally low prices in other countries, adversely affecting farmers in those countries.
• On the other hand, WTO rules have forced the developing countries to remove trade barriers.

Ans. “Advancement of international trade of a country is an index to its economic prosperity”.

• As no country is self-sufficient in all resources, it cannot survive without international trade.
• If the balance of international trade is favourable, a country will be able to earn more foreign exchange.
• International trade encourages a country to develop secondary and tertiary sectors for exporting goods which can fetch more foreign exchange.
• A country’s economic prosperity can be gauged by the health of its international trade.
• A country can earn large amounts of foreign exchange through international trade.

Ans. A multinational Corporation (MNC) is a company that owns or controls production in more than one nation. The good and services are produced globally. The production process is divided into small parts and spread out across the globe.

Tata Motors (automobiles), Infosys (IT), Ranbaxy (medicines), Asian Paints (paints), Sundaram Fasterner (nuts and bolts), etc. are some of the Indian companies which are spreading their operations worldwide as MNCs.

Small producers compete or perish. MNCs have posed major challenges for a large number of small producers and workers. The small manufacturers have been hit hard due to competition. Several of the units have shut down rendering many workers jobless. Batteries, taps, tyres, dairy-products, vegetable oil are some of the industries that are badly affected due to stiff competition from MNCs.

Uncertain employment. In order to maximize the profit MNCs look for a location with minimum labour costs. Faced with competition, most employers these days prefer to employ workers on temporary these days prefer to employ workers on temporary basis so that they do not have to pay workers for the whole year. This has changed the lives of workers and their jobs are no longer secure.

The Condition of employment. Workers also have to put in very long working hours and work night shifts on a regular basis during the peak season. Wages are low and workers are forced to work overtime to make both ends meet. The workers are denied their fair share of benefits and no longer get protection that they enjoyed earlier. For example, the Indian garment export industry often deny their workers their fair share of benefits.