Globalization and fiscal policy have impacted India's economy in several ways since the 1990s. Liberalization in the 1990s lowered trade barriers and accelerated globalization. Direct taxes increased 100% from 1990-1991 to 2000-2001 while indirect taxes decreased 31%. Government expenditures on defense decreased 13.33% from 2000-2001 to 2005-2006, while interest payments increased 24.13% in that period. Subsidies decreased 41.2%. India's exports of commercial services have grown significantly, with the services export growth rate reaching 36.9% in 2006-2007. Globalization has benefited India's GDP and foreign exchange reserves but negatively impacted the agricultural sector.

1. By : Patel Sonukumar Bharatbhai
sonupatel48@gmail.com

2. What is Globalization?
Globalization is a process of interaction and
integration among the people, companies and
government of different nations.
A process driven by international trade and
investment – aided by information technology.

3. India towards Globalization
Till 90s the process of globalisation of the Indian
economy was constrained by the barriers to trade and
investment.
Liberalisation of trade, investment and financial flows
initiated in the nineties has progressively lowered the
barriers to competition and hastened the pace of
globalisation.

4. Challenges Of Globalization
Heterogeneous Workplace
2. Foreign Assignments
3. Virtual teams
4. Handling Cross Cultural Differences and Cultural
Conflicts
1.

5. What do you mean by
Fiscal Policy?
Fiscal policy deals with the taxation and expenditure
decisions of the government.
 Monetary policy, deals with the supply of money in
the economy and the rate of interest.
These are the main policy approaches used by
economic managers to steer the broad aspects of the
economy.

6. In most modern economies, the government deals
with fiscal policy while the central bank is
responsible for monetary policy.
Fiscal policy is composed of several parts
 These include,
1.
2.
3.
4.
Tax policy,
Expenditure policy,
Investment or disinvestment strategies
Debt or surplus management.

7. Fiscal and Monetary Policy
Fiscal policy also feeds into economic trends and
influences monetary policy.
 When the government receives more than it spends,
it has a surplus.
 If the government spends more than it receives it
runs a deficit.
 To meet the additional expenditures, it needs to
borrow from domestic or foreign sources, draw upon
its foreign exchange reserves or print an equivalent
amount of money.

8. Effects
1.
2.
3.
4.
5.
On a broad generalization, excessive printing of
money leads to inflation.
If the government borrows too much from abroad it
leads to a debt crisis.
If it draws down on its foreign exchange reserves, a
balance of payments crisis may arise.
Excessive domestic borrowing by the government
may lead to higher real interest rates
the domestic private sector being unable to access
funds resulting in the “crowding out‟ of private
investment.

9. Challenges for Government
So the challenge then for most developing country
governments is to meet infrastructure and social
needs while managing the government’s finances in a
way that the deficit or the accumulating debt burden
is not too great.

10. Globalization and Fiscal Policy

11. 1990 – 1991 ( Liberalization )

12. 2000 – 2001 ( Globalization )

13. 2005 - 2006

14. Conclusion (from 1991 and 2001)
Direct tax laid by the government gets increased by
100%
Calculation -> (26 – 13)/13 = 100%
Indirect tax decreased by 31%
Calculation -> ( 45 – 65 ) / 65 = 31%
Non – Tax Income increased by 32%
Calculation -> ( 29 – 22 ) / 22 = 32%

15. Government expenditures

16. 1990 - 1991

17. 2000 - 2001

18. 2005 - 2006

19. Conclusion
Expenditures due to defense has decreased by 13.33%
Calculation -> (13 – 15)/15 = 13.33%
Interest payment by government has increased by
24.13%
Calculation -> (36 – 29)/29 = 24.13%
Subsidies provided by the government decreased by
41.2%
Calculation -> (10 – 17)/17 = 41.2%

20. Indian exports of services

21. India’s -Export of Commercial Services
India has become one of the top five exporters of
services amongst developing countries.
India’s exports of services are mainly to the European
countries and the US.
India’s export services growth rate was 33.3% in 2005-06,
36.9% in 2006-07, 25.9% in 2007-08 and 16.3 in 2008-09.
(Recession)
India has been deemed as a major exporter of services in
the world with a market share of 2.72% in 2008 as against
0.6% in 1995.

22. The Bright Side of Globalization
The rate of growth of the Gross Domestic Product of India
has been on the increase from 5.6 per cent during 1980-90 to
7% in the 1993-2001 period.
The foreign exchange reserves (as at the end of the financial
year) were $ 39 billion (2000-01), $ 107 billion (2003-04), $
145 billion (2005-06) and $ 180 billion (in February 2007).
As per the Forbes list for 2007, the number of billionaires of
India has risen to 40 (from 36 last year) more than those of
Japan (24), China (17), France (14) and Italy (14) this year.

23. The Dark Side of Globalization
The foremost casualty being the agriculture sector.
Globalisation has lowered the per capita income of the
farmers and increased the rural indebtedness.
The agricultural growth of 3.2 percent observed from 1980
to 1997 decelerated to 2 percent subsequently.
With more than half the population directly depending on
this sector, low agricultural growth has serious implications
for the inclusiveness of growth.

24. Impact of Globalization
1.
2.
3.
4.
5.
6.
7.
Government Purchases has increased
Poverty has been reduced,
Employment has increased,
Begging by India for economic aid has stopped,
Long-term inflation rate has gone down,
Scarcity of goods have disappeared,
The quality of products available have improved
substantially

25. Thank You

26. What do mean by
Aggregate Demand?
Aggregate demand refers to the demand of goods and
services i.e. is the willingness of firms, households,
government, customer to buy goods and services.

27. HOW FISCAL POLICY INFLUENCES
AGGREGATE DEMAND
Fiscal policy refers to the government’s choices
regarding the overall level of government purchases or
taxes.
Fiscal policy influences saving, investment, and
growth in the long run.
In the short run, fiscal policy primarily affects the
aggregate demand.

28. Changes in Government Purchases
When policymakers change the money supply or
taxes, the effect on aggregate demand is indirect—
through the spending decisions of firms or
households.
When the government alters its own purchases of
goods or services, it shifts the aggregate-demand
curve directly.

29. Changes in Government Purchases
There are two macroeconomic effects from the
change in government purchases:
The multiplier effect
The crowding-out effect

30. The Multiplier Effect
Government purchases are said to have a multiplier
effect on aggregate demand.
Each dollar spent by the government can raise the
aggregate demand for goods and services by more than
a dollar.
The multiplier effect refers to the additional shifts in
aggregate demand that result when expansionary fiscal
policy increases income and thereby increases
consumer spending.

31. Price
Level
2. . . . but the multiplier
effect can amplify the
shift in aggregate
demand.
$20 billion
AD3
AD2
Aggregate demand, AD1
0
1. An increase in government purchases
of $20 billion initially increases aggregate
demand by $20 billion . . .
Quantity of
Output
Copyright © 2004 South-Western

32. A Formula for the Spending Multiplier
The formula for the multiplier is:
Multiplier = 1/(1 - MPC)
An important number in this formula is the marginal
propensity to consume (MPC).
It is the fraction of extra income that a household
consumes rather than saves.

33. A Formula for the Spending Multiplier
If the MPC is 3/4, then the multiplier will be:
Multiplier = 1/(1 - 3/4) = 4
In this case, a $20 billion increase in government
spending generates $80 billion of increased demand
for goods and services.

34. The Crowding-Out Effect
Fiscal policy may not affect the economy as strongly
as predicted by the multiplier.
An increase in government purchases causes the
interest rate to rise.
A higher interest rate reduces investment spending.
This reduction in demand that results when a fiscal
expansion raises the interest rate is called the
crowding-out effect.
The crowding-out effect tends to dampen the effects
of fiscal policy on aggregate demand.

35. (a) The Money Market
Interest
Rate
Price
Level
Money
supply
2. . . . the increase in
spending increases
money demand . . .
r2
3. . . . which
increases
the
equilibrium
interest
rate . . .
(b) The Shift in Aggregate Demand
$20 billion
4. . . . which in turn
partly offsets the
initial increase in
aggregate demand.
AD2
r
AD3
MD2
Aggregate demand, AD1
Money demand, MD
0
Quantity fixed
by the Fed
Quantity
of Money
0
1. When an increase in government
purchases increases aggregate
demand . . .
Quantity
of Output
Copyright © 2004 South-Western

36. The Crowding-Out Effect
When the government increases its purchases by $20
billion, the aggregate demand for goods and services
could rise by more or less than $20 billion, depending
on whether the multiplier effect or the crowding-out
effect is larger.

37. Changes in Taxes
When the government cuts personal income taxes, it
increases households’ take-home pay.
Households save some of this additional income.
Households also spend some of it on consumer goods.
Increased household spending shifts the aggregate-
demand curve to the right.
The size of the shift in aggregate demand resulting
from a tax change is affected by the multiplier and
crowding-out effects.
It is also determined by the households’ perceptions
about the permanency of the tax change.