Advantages and Disadvantages of Globalization

How many phenomenons have a global impact? If you are to count, they could be counted on your finger tips. Globalization is one of them. So before going to the advantages and disadvantages of globalization, lets us try to grasp this concept first. Simply put, globalization is an ongoing process of integration of regional economies into global network of communication and execution. Let me explain this a bit. Assume that you are a mango farmer in India and you grow very good quality mangoes over there. Obviously, your fruit is highly appreciated in India, but you also know that you shall get a better value in US. So the network of communication and execution that allows you to sell your fruit in US is basically, the phenomenon of globalization. (At least the Indian farmer is happy about advantages of globalization in India, he is earning a quick buck.) The advantages and disadvantages of globalization in India and other developing countries are very profound. Globalization: Advantages and Disadvantages

Advantages and Disadvantages of Global Marketing There has to be operational differences between various companies in different countries. What I mean to say is, a car manufacturer of UK will manufacture a car with a different operation than a car manufacturer in Italy (for example Jaguar and Ferrari). Both are trying to take advantage of the operational difference that they have between them. And both companies are trying to sell a car in America for a greater value. So if you want your product to have an appeal on a global scale, then obviously, marketing on a global scale is required. Advantages of Global Marketing Lower Marketing Costs: If you are to consider lump-some cost then, yes, it is high, but the same cost even goes even higher if the company has to market a product differently in every country that it is selling. Global Scope: Scope of this kind of marketing is so large that it becomes a unique experience. Brand image Consistency: Global marketing allows you to have a consistent image in every region that you choose to market. Quick and Efficient Use of Ideas: A global entity is able to use a marketing idea and mould it into a strategy to implement on a global scale. Uniformity in Marketing Practices: A global entity can keep some degree of uniformity in marketing through out the world.

Disadvantages of Global Marketing Inconsistency in Consumer Needs: American consumer will be different from the South African. Global marketing should be able to address that. Consumer Response Inconsistency: Consumer in one country may react differently than a consumer in another country. Country Specific Brand and Product: A Japanese might like a product to have a traditional touch, where as an American might like to add a retro modern look to it. In this case, a global strategy is difficult to device. The Laws of the Land Have to be Considered: Original company policies may be according to the laws of home countries. The overseas laws may be conflicting in these policies. Infrastructural Differences: Infrastructure may be hampering the process in one country and accelerating in another. Global strategy cannot be consistent in such a scenario.

Advantages and Disadvantages of Globalization in Developing Countries Overall globalization has been a big boon for the developing countries, but there are a few who say that it has been a curse. Let us take a look at both these aspects of globalization. The Advantages GDP Increase: If the statistics are any indication, GDP of the developing countries have increased twice as much as before. Percapita Income Increase: The wealth has had a trickling effect on the poor. The average income has increased to thrice as much. Unemployment is Reduced: This fact is quite evident when you look at countries like India and China. Education has Increased: Globalization has been a catalyst to the jobs that require higher skill set. This demand allowed people to gain higher education. Competition on Even Platform: The companies all around the world are competing on a single global platform. This allows better options to consumers.

The Disadvantages Uneven Distribution of Wealth: Wealth is still concentrated in the hands of a few individuals and a common man in a developing country is yet to see any major benefits of globalization. Income Gap Between Developed and Developing Countries: Wealth of developed countries continues to grow twice as much as the developing world. Different Wage Standards for Developing Countries: A technology worker may get more value for his work in a developed country than a worker in a developing country. Reversal of Globalization: In future, factors such as war may demand the reversal of the globalization (as evident in inter world war years), current process of globalization may just be impossible to reverse. You can also like to read more on pros and cons of globalization.

Culture and globalization have really become interwoven aspects in modern lives, but one must remember the negative effects of globalization as well. I hope the above comparison of advantages and

disadvantages of globalization are satisfactory to the reader.

What are the advantages and disadvantages of globalization in small scale industries in india?
ADVANTAGES 1. Intergration of markets: Markets are interlinked- European Union 2. Cheaper Products for Consumer: Trainers are Cheap 3. Leads to Outsourcing in some cases which can lead to job loses: Moving call centers to India. 4. Lowering of international Bariers: Now European Union can Trade with ASEAN and NAFTA. 5. Providing jobs in LEDC's and help develop economy (less Economically Developed Countries) 6. Helps prevent market Saturation in a specific market: stops there being too much competitors in one place e.g too much call centres in Uk, so move to india 7. Standardisation of product: the same products can be seen in some many places - e.g coke

and McDonalds DISADVANTAGES 1. Intense Competition 2. Widening of Gap between rich and poor countries 3. Harder for Smaller businesses to establish themselves 4. Exploitation of workers: Paying the workers in LEDC's a fraction of what would be paid in to workers in MEDCs. 5. Income generated in Host country is not always spent in the same country - money earned from supplying cheap call centres in india will not be spent in india but maybe in Uk or US.

What are the advantages and disadvantages of globalization?

Globalization has various aspects which affect the world in several different ways such as:

Industrial - emergence of worldwide production markets and broader access to a range of foreign products for consumers and companies. Particularly movement of material and goods between and within national boundaries. Financial - emergence of worldwide financial markets and better access to external financing for borrowers. As these worldwide structures grew more quickly than any transnational regulatory regime, the instability of the global financial infrastructure dramatically increased, as evidenced by the financial crises of late 2008. Economic - realization of a global common market, based on the freedom of exchange of goods and capital. The interconnectedness of these markets, however meant that an economic collapse in any one given country could not be contained. Political - some use "globalization" to mean the creation of a world government which regulates the relationships among governments and guarantees the rights arising from social and economic globalization. Politically, the United States has enjoyed a position of power among the world powers; in part because of its strong and wealthy economy. With the influence of globalization and with the help of The United States' own economy, the People's Republic of China has experienced some tremendous growth within the past decade. If China continues to

grow at the rate projected by the trends, then it is very likely that in the next twenty years, there will be a major reallocation of power among the world leaders. China will have enough wealth, industry, and technology to rival the United States for the position of leading world power. Informational - increase in information flows between geographically remote locations. Arguably this is a technological change with the advent of fibre optic communications, satellites, and increased availability of telephone and Internet. Language - the most popular language is English. o About 35% of the world's mail, telexes, and cables are in English. o Approximately 40% of the world's radio programs are in English. o About 50% of all Internet traffic uses English. Competition - Survival in the new global business market calls for improved productivity and increased competition. Due to the market becoming worldwide, companies in various industries have to upgrade their products and use technology skillfully in order to face increased competition. Ecological - the advent of global environmental challenges that might be solved with international cooperation, such as climate change, cross-boundary water and air pollution, over-fishing of the ocean, and the spread of invasive species. Since many factories are built in developing countries with less environmental regulation, globalism and free trade may increase pollution. On the other hand, economic development historically required a "dirty" industrial stage, and it is argued that developing countries should not, via regulation, be prohibited from increasing their standard of living. Cultural - growth of cross-cultural contacts; advent of new categories of consciousness and identities which embodies cultural diffusion, the desire to increase one's standard of living and enjoy foreign products and ideas, adopt new technology and practices, and participate in a "world culture". Some bemoan the

resulting consumerism and loss of languages. Also see Transformation of culture. o Spreading of multiculturalism, and better individual access to cultural diversity (e.g. through the export of Hollywood and Bollywood movies). Some consider such "imported" culture a danger, since it may supplant the local culture, causing reduction in diversity or even assimilation. Others consider multiculturalism to promote peace and understanding between peoples. o Greater international travel and tourism. WHO estimates that up to 500,000 people are on planes at any time. o Greater immigration, including illegal immigration o Spread of local consumer products (e.g. food) to other countries (often adapted to their culture). o Worldwide fads and pop culture such as Pokmon, Sudoku, Numa Numa, Origami, Idol series, YouTube, Orkut, Facebook, and MySpace. Accessible to those who have Internet or Television, leaving out a substantial segment of the Earth's population. o Worldwide sporting events such as FIFA World Cup and the Olympic Games. o Incorporation of multinational corporations in to new media. As the sponsors of the All-Blacks rugby team, Adidas had created a parallel website with a downloadable interactive rugby game for its fans to play and compete. Social - development of the system of non-governmental organisations as main agents of global public policy, including humanitarian aid and developmental efforts. Technical o Development of a global telecommunications infrastructure and greater transborder data flow, using such technologies as the Internet, communication satellites, submarine fiber optic cable, and wireless telephones o Increase in the number of standards applied globally; e.g. copyright laws, patents and world trade agreements. Legal/Ethical

The creation of the international criminal court and international justice movements. Crime importation and raising awareness of global crimefighting efforts and cooperation. The emergence of Global administrative law.

Globalization, crisis and financial engineering in India.

Abstract The last three decades have witnessed a phenomenal growth in innovations in financial markets. This is of interest to all financial intermediaries including commercial and corporative banks, insurance companies and other financial institutions. Globalization, Liberalization and Privatization have added both the risk and rewards to these innovations. This paper investigates various new financial innovations in the field of banking, insurance, capital market and mutual funds in the last one year in India. We have also tried to figure out the salient features, advantages and disadvantages of the various financially engineered products and processes. The paper also tries to discuss the way ahead for India in the field of financial innovations. Keywords: Crisis, Innovation, Banking, Insurance, Capital Market, Mutual Funds Jel: G01, G21 I. INTRODUCTION With the daily newspapers carrying advertisements featuring new securities, India as a country is witnessing revolutionary changes in financial instruments and processes. The following passage from Miller (1986) is typical "... the word revolution is entirely appropriate for describing the changes in financial institutions and instruments that have occurred in the past twenty years". Financial engineering has been most comprehensively defined by Finnerty (1988) as design, development and implementation of innovative financial instruments and processes, and formulation of solutions to the problems in finance. Innovative financial solutions may include new financial instruments (such as payment card, reverse mortgage product, arbitrage fund, Jeevan Aastha, Micro Insurance and many more) or new processes such as (Mobile payment service, DMA facility, ABSA process, NOW trading gateway, etc.). The paper endeavors to track the growth of new financial instruments, new forms of mutual funds, new types of life insurance products, new form of residential mortgages and new risk management instruments introduced in India. II. GLOBALIZATION, FINANCIAL ENGINEERING AND THE CRISIS Innovative financial products which were mismanaged by the bankers and customers are often criticized and held responsible for the Global financial crisis (2008). It should however be noted that financial engineering is a profession which is to be governed by the conduct of professionals. The passion to succeed and greed to earn supernormal profits marred the foresight of the professionals form estimating the risks associated with financially innovated products. To service the bonds backed by sub prime mortgages, the banks started using the income stream of their prime/default free mortgages. This laid the foundation for financial crisis. Hence, there was collapse of many big players including Freddie Mac, Fannie Mae, AIG, Lehman Brothers and Merrill Lynch. Hence the crisis can be linked to the bad performance of a large number of top executives in the financial engineering profession and not to the profession of financial engineering itself. The solution to the current global financial crisis

will be there only by using the financial innovations intelligently and by incorporating the objective of social welfare in mind. For example, for solving liquidity problem that arose in September 2008 the US Federal Reserve extended financially innovated currency swap arrangements to other central banks to the tune of $180 billion to fund the extra liquidity operations. III. PLAN OF THE PAPER The paper has been divided into X sections. Section I introduces the reader to the concept of financial engineering. Section II discusses the relationship between the globalization, financial engineering and the current financial crisis. Section III gives the plan of the paper. Section IV discusses the existing literature in India and abroad. Section V throws light on financial engineering in India. Section VI presents the recent financial innovations in the Indian banking sector. Section VII gives the new financially engineered products in the insurance sector. Section VIII discusses the innovations in the Indian capital market in the recent past. Section IX presents the innovation in the mutual fund industry and Section X concludes the paper. IV. LITERATURE REVIEW To counter inflation Modigliani and Lessard (1975) discussed CPI linked home mortgage instrument, Blinder (1976) discussed instruments that can hedge inflation risk related to commodities and finally Merton (1992) suggested indexing retirement annuities to aggregate per capita consumption. Merton's suggestion is based on the lifetime household optimizing behaviour model. The product is only conceivable for Indian markets if there is partnership between the government and the private sector to make this type of product possible. Dufey and Giddy (1981) in their theory of innovation in international market found that innovations in international market arise usually when the financial institutions are able to fulfill one of the four functions: (a) Liquid and standardized instruments for payments in individual currencies; (b) Mechanism for conducting monitory exchange between currencies; (c) Institutions and market for channeling savings internationally; and (d) As a mechanism for allocating, diversifying and compensating for risk. Silber (1983) identified the exogenous cause for financial innovations in US for a period from 1970-82. He found that inflation (level of interest rates, general price level and tax effects), volatility of interest rates, technology, legislative initiatives and internationalization are the factors responsible for financial innovations. He found that out of all exogenous forces, technology and legislative initiatives are the most important forces. In India also the two factors are responsible for majority of financial innovations. Silber through his empirical research concluded that financial innovations improved the ability to bear risk, lower transaction cost and circumvent outmoded regulations. It was established by him that financial innovations tend to yield economic benefits which are equal in welfare sense to the improvements in physical technology, as both contribute in increasing the standard of living. Finnerty (1988) identified 11 factors contributing to the growth of financial engineering. The factors include tax advantage, reduced transaction cost, reduced agency cost, risk reallocation, increased liquidity, regulatory and legislative factors, level and volatility in prices and interest rates, accounting benefits and technological developments. Finnerty has also analyzed how each of the factor contributes to the growth of the selected debt innovations, selected preferred stock innovations, selected convertible debt / preferred stock innovations and selected common equity innovations. Bodie (1990) found that pension funds have contributed significantly in the development of new debt and equity securities and derivative instruments. A pension plan generally tends to offer annuities providing a guaranteed flow of return. The sponsor to provide for the flow return must undertake immunization strategy to hedge their liabilities. The use of immunization and contingent immunization strategy has led to emergence of market for zero coupon bonds, Guaranteed Investment Contracts (GICs), Collateralized Mortgage Obligations (CMOs), options and futures. Verghese (1990) concluded that the Indian financial system consists of gaps and deficiencies which need to be filled in. India can not afford rapid proliferation of financial products. The systemic risk arising from regulated financial innovations is significant and hence can't be ignored. Financial innovation provides opportunities for hedging risk and reducing individual

transaction cost but at the same time exposes economic units to additional costs and risk by creating new risk and sometimes resulting in ballooning of transactions. Merton (1992) saw financial innovations performing six very important functions including moving funds across time and space, pooling of funds, managing risk, extracting information to support decision making, addressing moral hazard and asymmetric information problem and facilitating sale or purchase of goods and services through a payment system. Frame and White (2004) surveyed and summarized existing empirical literature on financial innovations. They found that regulations tend to spur a series of financial innovations. There exists a positive relation between adoption and diffusion of new technologies and institution size. There also exists a positive relationship between individual's education and income and use of the new financial technology by consumers. Financial innovators tend to gain by first mover advantages and are compensated well for their efforts. Financial innovations tend to generate welfare effects normally. V. FINANCIAL ENGINEERING AND INDIA India as an emerging nation is seeing a spate of innovations in the area of financial engineering. These financial innovations are a result of number of Government regulations, tax policies, globalization, liberalization, privatization, integration with the international financial market and increasing risk in the domestic financial market. Alternative financial institutions including nationalized banks, commercial paper houses, insurance companies and investment banks play a significant role in creation, development and dissemination of new financially engineered products in the society. The following section discusses the recent innovations in Indian banking sector. VI. FINANCIAL ENGINEERING IN THE BANKING SECTOR Financial engineering in the banking sector tries to ensure that the banking becomes competitive and performance oriented. The recent innovations in the Indian banking sector have been discussed below: 6.1. Rollover Overdraft In 2008 the brokers developed a perfectly legal process by which they remain afloat without having to pay. In this circuitous transaction a broker avails the overdraft facility from bank A with a provision that it has to be repaid in 5 days. Normally on day 4 the broker will issue a cheque to bank A from his account with bank B. During current liquidity crisis the broker may have insufficient funds in that account. To overcome this problem of insufficient funds the brokers have innovated a new financial process whereby the broker, bank A and bank B come together to overcome the liquidity crisis. The process is applicable only for high value cheques and if RTGS facility is offered by bank A and bank B. On day 4 being a high value cheque it is cleared on the same day by bank A which accept the cheque and agrees to cancel the outstanding overdraft amount even before the cheque has been encashed. As soon as the outstanding overdraft is cancelled, bank A issues another overdraft to the broker for the same amount. The fund is then transferred to the broker's account with bank B using RTGS. This ensures that funds are there in the account of the broker with bank B at the time when bank A presents the brokers cheque for clearing. This is similar to evolving a new financial instrument/ process of having a rollover overdraft. 6.2. Electronic Fund Transfer RTGS/NEFT facility enables customers to transfer fund from one bank to the other within a very short time. It has the advantage of making a customer closer to his own funds. There exists three mode of electronic payment: Real Time Gross Settlement (RTGS), National Electronic Fund Transfer (NEFT) System and Electronic Clearing Service (ECS). NEFT is available for transaction below 1 lakh while RTGS is available for transaction over 1 Lakh. 6.3. Prefunded Cheque

India is a country of large number of festivals involving exchange of gifts. Financial engineering has been innovatively combined with Indian culture of frequently giving gifts using prefunded cheques. Under this facility one can gift the prefunded cheques to any of his/her relatives or friends who can encash it. One of the advantages is that it can be gifted to anyone and is less expensive than a banker's cheque or a demand draft. It also provides safety as the sponsor of the gift does not require carrying cash for giving the gift. They have an upper limit inscribed on them and can be used as gift cheques, travelers cheques or as a normal cheque. In India, it is being used primarily during the festivity of Rakhi, Bhai Dooj and Dusshera. 6.4. Cheque Truncation System (CTS) Banks have extended the CTS facility of same date clearing to cheques of even smallest denominations. Currently this facility is only available to high value cheques. It will replace the current Magnetic Inc Character Recognition (MICR) technology which requires physical movements of cheques. It will add huge value to the customers as it saves 1-2 days in getting collections through banking channels. Currently it is being tried on a pilot basis. However, there remain issues in up scaling the volumes on account of lack of standards for physical instruments, account number, positioning of various fields on the physical instrument and the uniform size and background of the instruments. 6.5. Biometric ATMs for National Rural Employment Guarantee Act (NREGA) Financial engineering and Biometric technology have been combined very innovatively to implement disbursement under the NREGA (2005). To reduce corruption, the rural people under NREGP can get their thumb impression registered at the biometric ATM and can subsequently withdraw money using the thumb impression. It will greatly benefit large number of illiterate and simple Indian rural citizens. Hence, in India, financial and technological innovations are being used to achieve the objective of social welfare. Apart from this, general biometric ATMs provide secure and convenient transactions and have the benefits of security pin as well. 6.6. Mobile Payment Service by Banks In 2008 banks have been permitted by RBI to provide mobile payment services, which enable customers to transfer up to Rs. 25,000 per transaction. Mini statements, checking of account history, alerts on accounts activity, passing of set thresholds, monitoring the term deposit, access to card statement, mutual funds/equity statement, insurance policy/ pension plan management and many other account information services provide the flexibility of anywhere, anytime banking and reduce transaction cost. 6.7. Fixed Deposit (FD) Products 6.7.a. New Deposit cure Investment Product A fixed deposit scheme with envisages investment of interest earned on term deposit in an equity mutual fund by a way of systematic investment plan. This has an advantage of giving safety on the principal invested in this fixed deposit and a possibility to earn additional return on interest earnings. 6.7b. Gold Deposit In this deposit one can ensure safety of idle gold and earn interest on it. Certain banks (like SBI) are accepting gold in any form with restriction of minimum gross quantity and thereby issuing interest bearing certificates against deposits. The certificates have fixed maturity period and premature payment is permitted only after certain lock in period. The product has an inbuilt option of redemption of principal in pure gold or equivalent cash. Certain banks also club in nomination, transfer and loan facilities in the certificates. The income on this certificate is exempt from Income tax, Wealth tax and Capital Gains tax. This product has been designed for individuals, temples and trusts. 6.8. Dual Facility on Single Card

There already exists credit card which offers a line of credit to the user with a condition that the credit amount will be paid back within a specified time period. On the other hand there exists Debit cum ATM card which allows an individual to use funds available in his bank account. Banks have innovated the dual facility on single card option whereby the user will have debit as well as credit facility in a single card. The card will reduce the cost, improve efficiency and free the user from the requirement of carrying multiple cards. The disadvantage arises in the operational working of such card. A user of such card can make the most often used mode as his default option and intimate the bank when he wants to exercise the other option. If this is not handled properly it can result in a lot of confusion and default expenses. 6.9. Reverse Mortgage Product The reverse mortgage scheme available in India enables monthly payment against the mortgage of the home, so long as one continues to live at home. There is no repayment obligation on the owner, as the loan will become due only on the death of the owner or the last surviving spouse. This loan product does not have any income criteria to be met. The legal heirs will have the right to repay the loan. In case the legal heirs do not repay the loan the bank will sell the property and set off the outstanding loan amount. The surplus will be given to the legal heirs. The banks do tend to put certain condition as to the minimum and maximum amount of loan, tenure of the loan, interest rate and the age at which one can avail of reverse mortgage scheme. VII. INNOVATIONS IN THE INSURANCE SECTOR The pace of financially engineered innovations in the insurance industry continues to pick up even in the light of lagged overall growth. There is a sense of urgency for innovations in the insurance sector. The insurance industry at this stage also has an appetite for change. Rightly created and implemented innovation strategies can help insurance companies emerge stronger during the current global financial crisis. The following paragraphs discuss the innovations in this sector. 7.1. Jeevan Aastha In the light of current global financial crisis Life Insurance Corporation of India (LIC) launched a hybrid product called "Jeevan Aastha" which combines features of Fixed Deposits/Debt, equity and life insurance product. Jeevan Aastha is a closed ended single premium product which offers guaranteed benefits to the customer on maturity and death whichever is earlier. The product offers a simple interest of 10% per annum for a ten year period and a simple interest of 9% per annum for policies with a five year term. The product also offers risk coverage equal to the basic sum assured plus guaranteed addition in the first year of the policy. If the policy holder dies after the first year then double the maturity sum assured and guaranteed addition will be payable. However, in the scenario of death during the last year of the policy, twice the maturity sum assured along with guaranteed addition and loyalty addition would be payable to the nominee. The minimum risk coverage that can be availed is Rs. 1.5 lakh. No upper limit has been fixed. The product has been bundled with income tax benefits under section 80C and section 10(10D) making this product attractive for Indian middle class. However the maturity amount will be tax free. The product has also incorporated the feature of pledging the policy for undertaking a loan. A loan can be undertaken against the policy after completing one policy year. The surrender value in no case is less than 90% of the single premium paid. The surrender value will be calculated as the discounted value of the maturity sum assured and accrued guaranteed addition. To provide flexibility, the policy also provides "Cooling off Period" whereby one can also return the policy within 15 days if one is not satisfied with the terms and conditions of the policy. 7.2. Market Linked Pension Product It enables policy holder to increase premiums with the rising income. This will enable the policy holder to accumulate larger wealth and beat eroding factors like inflation. Being a market linked pension product it provides performance over the long term and ensures good living standard after retirement. It has an inbuilt risk in case the market plummets in the long run. 7.3. Insurance Linked Education Loan

The Indian Banks' Association has engineered a model education loan product which provides for a higher quantum of loan. In this product the insurance premium will be a part of the expenses for the loan. The product will come with a provision of top up loan for students for further studies up to Rs. 4,00,000 of the loan amount. A cap or rate of interest which will not exceed benchmark prime lending rate (BPLR) has been fixed. For loans above Rs. 4,00,000 the rate of interest will not be more than 100 basis point over the BPLR. In this product life insurance policies and mutual funds units will be treated as permissible securities for the loan. Now banks can offer multiple loans to a single family after the introduction of this product. The product will although increase the cost of the loan but at the same time enhances the security for the bank. The life insurance policy will enable banks to recover the amount of loan in the eventuality of death of the student availing the education loan. Moreover, the same life insurance policy has become permissible as security for the loan. This product now enables students to avail education loan even if their family does not own real assets like Land and Building. 7.4. Customized Insurance Policies Insurance Regulatory and Development Authority (IRDA) has permitted customization of non life insurance policies. For example, in motor insurance policy now one can have facilities like a temporary replacement of car in case it breaks down or complete reimbursement of damages, even if vehicle is over five years old. The insured will have to pay extra premium for such customization. This regulatory change will give rise to large number of financially engineered innovative non life insurance products. 7.5. Insurance Policies with Terrorism Cover In the light of terror attacks in Mumbai, Delhi and other metropolitan cities Optima insurance launched a free insurance policy which provides a cover of rupees one lakh in the event of death in terrorist attack. There is no premium charged for subscribing to this policy. However registration with the company is a must for availing the compensation in event of death. It is a non commercial program and is using financial innovation for fulfilling responsibilities of corporate India towards society. 7.6. Insurance Cover on Lost Credit Cards Plus Extended Protection Plan is a unique product which provides credit card customers lost card insurance for the period prior to reporting the loss. The insurance policy will cover reimbursement of up to Rs 50,000 per occurrence on any of fraudulent transaction occurred on the lost card up to 12 hours prior to the customer reporting the loss to the bank. Payment and debit card or credit card can be registered for this cover. It also offers ATM assaults and robbery insurance, lost wallet protection and purchase protection. The purpose of this policy is to encourage the confidence of the people who use debit or credit card. With increasing crime rate, this product reduces the risk of the policy holder. 7.7. Insurance for Poor The Universal Health Insurance Scheme (UHIS) shows the utilization of financial engineering by Indian Government for providing hospitalization cover for 10 lakh people from families below the poverty line. It will also provide medical care in rural India. The annual premium under the UHIS is Rs. 300 for an individual, Rs. 450 for a family of five and Rs. 600 for a family of seven. One can get insurance for maturity benefits and preexisting disease up to the age of 70 years. 7.8. Micro Insurance Products These are financially innovated insurance product in the area of health, personnel accident cover, crop insurance and insurance for equipment for low income groups like farmers and craftsmen in the unorganized rural sector. By paying a premium of Rs 200 to Rs. 500 one can get coverage of Rs 5,000 to 50,000. Indian government has launched Aam Aadmi Bima Yojana and Rashtriya Swasthya Bima Yojana as micro insurance products. 7.9. Micro Insurance for Women

Life Insurance Corporation (LIC), Punjab National Bank (PNB) and Govt. of India have used financial innovation to provide life and permanent disability cover for credit linked women Self Help Groups (SHGs) linked to PNB. This life insurance scheme will have an annual premium of Rs 200 of which 50% will be paid by the insured and the rest will come from the social security fund of the Central Government. This product will benefit approximately 30 lakh SHGs. LIC and PNB will benefit with the increase in the number of people insured. VIII. INNOVATIONS IN CAPITAL MARKET With the increased volatility in the capital market, there is a need of new financial innovations in this sector to hedge risk and increase returns. The recent financial innovations in the area of capital market in India are discussed below: 8.1. Currency Futures August 2008 saw the launch of currency derivatives at National Stock Exchange. A currency future is a futures contract where the underlying is a specific foreign currency and amount. Profits and losses depend on the relative movements of the two currencies. This enables the market participants to hedge their risk in the currency market. 8.2. Direct Market Access (DMA) Facility DMA facility has enabled broker to offer their client direct access to the trading system of the exchange through the broker infrastructure without manual intervention of the broker. It offers a direct control of the client over orders, reduced time lag in execution of client orders, reduced errors caused by manual order entry, greater transparency, enhanced liquidity, lower cost for large orders and gainful use of speedily executed arbitrage strategies. The disadvantage of DMA is that several severe conformity provisions under the Securities Contract (regulations) Act 1956 have been laid down for the broker. The brokers are also expected to adhere to the stringent model agreement developed by the exchanges. 8.3. Applications Supported by Block Amount (ASBA) Process ASBA is an application for subscribing to an issue which contains an authorization to block the application money in the applicant's bank account. This facility has been introduced for resident retail individual investors. It has an advantage the applicant's does not lose interest for the period the money remains blocked. It has saved the banks from first transferring the money form the bank to the company and back to individual applicant's account. Hence, the ASBA process has increased the operational efficiency and reduced the transaction costs. The disadvantage of this process is that the applicant will not have the option to revise the bid. In other words it provides only a single option as to the number and price of the shares to bid for. It can be undertaken only at self certified Syndicate Banks. This makes the availability of ASBA facility limited to only selected banks. 8.4. NOW Trading Gateway Now one can access NSE cash, NSE future and option, NSE currency derivative and NCDEX commodity derivatives using the NOW terminal. It helps increasing and managing users and their roles, multi segment front-end for trading, real time access to live market data and online reports, creation of multiple hierarchy and products. It provides real time pre-trade and rule based risk management. It is advantageous as it ensures a secure and reliable trading gateway. It has lower cost and greater operational efficiency. In terms of security features it uses 128 bit SSL encrypted secure transaction and comprehensive audit trail. 8.5. Long Term Option Contract (LTOC) To mitigate risk Security and Exchange Board of India (SEBI) permitted use of LTOC on S&P CNX Nifty for trading in Future and Option segments from January 2008 onwards. The advantage of LTOC introduction on Nifty is that all the existing risk management measures used for index option contract such as initial margins, short option minimum change position limit and including the right of clearing corporation to close out positions can apply to LTOC on S&P CNX Nifty also.

8.6. India VIX-The Volatility Index India VIX is a volatility based index based on Nifty 50 option prices. The purpose of the index is to capture the implied volatility embedded in option prices. It shows the amount by which the underlying index is expected to fluctuate in the near future. It is based on the order book of the underlying index options. The disadvantage is that no tradable product exist which is based on India VIX. 8.7. Creation of Stock Exchange for Small and Medium Enterprises (SMEs) SME have been playing a very significant role in the development process of Indian economy. They contribute around 20% to the GDP and generate an employment for 25 million people. Moreover, SMEs are not able to access funds from angel investors, venture capitalists and private equity players. The purpose of such an exchange would be to provide better focused and cost effective service to the SME sector. Security and Exchange Board of India (SEBI) is already deliberating on the issue. 8.8. National Spot Exchange Limited (NSEL) The cost of intermediation in the commodity futures market is high there by reducing the marketing efficiency and gains made by a farmer. The NSEL helps in reduction of costs and enables farmers to realize better price for their produce. It is advantageous as in future market trades happen for big volumes, in tons, whereas in spot market the trading happens for 1 quintal trading lot for one farmer. Moreover, farmer does not need pan card number, ration card and other formalities, which are necessary in future trading. In future market the delivery is not guaranteed but in the spot market, the contracts are designed with compulsory delivery on T+1 and T+3 basis. However, forward contract, future contract and options will not be available on National Spot Exchange. The spot exchange for agricultural commodities is expected to offer better price discovery and correct the aberrations that exist in Local Mandi's and sometimes in future market. This is the first spot exchange for agriculture commodities in the world. 8.9. Short selling in Government Securities To enhance liquidity in G-Sec market it was permitted to undertake the cover leg of short sell transaction even outside the Negotiated Dealing System-Order Matching (NDS-OM) Platform. Earlier the sell leg as well as the cover leg of the transaction was to be executed only on NDS-OM Platform. It means that transaction to cover short position can be undertaken either on NDS-OM platform or on the telephone market or via purchases in primary issuance market. The disadvantage that the sell leg of the short sell transaction would have to be undertaken on NDS-OM Platform would however continue. 8.10. Extension of Circuit Breaker to Index based Market Circuit breakers are normally applied to individual scripts to suspend trading in case they show excessive volatility. The same concept has been financially engineered for the exchange in case of the index movement either way at 10%, 15% and 20% with respect to some base level. The advantage of Index based market wide circuit breaker is that it provides stability to the index and enhances investor's protection. IX. FINANCIAL INNOVATIONS IN MUTUAL FUND SECTOR With sharp fall in the stock market in 2008 the mutual fund industry has tried to use financial innovations as the basis for fighting the current market turmoil. For example, J. M. Financial launched a multi strategy fund which is an open ended equity oriented fund which will be flexible to adopt a host of strategies depending upon fund manager's view of market. The following paragraphs discuss innovations in mutual fund sector. 9.1. Arbitrage Fund

Even with crashing equity markets, Arbitrage Funds have been able to generate positive returns. They are equity and derivative funds providing an ideal way of realizing reasonable returns from equities with risk hedged by derivatives. The Arbitrage Fund tries to capitalize on the stock price differences between the spot market (cash segment) and the derivative market (F & O segment). The fund tries to generate returns by availing the arbitrage opportunities that arise in case there are mispricing between the spot and derivative market. The returns can be generated irrespective of the overall market movement. The stock prices in the spot and the derivative market tend to coincide on the settlement day of the derivative segment. Hence the fund manager can reverse his position by buying a contract in the future market and selling off his equity holding in the spot market. The main concern is how efficiently the assets are balanced between the spot and the derivative market. Empirically they have shown better results then debt or income funds. They provide good returns during volatile periods. 9.2. Collective Investment Vehicle Various art funds can now be floated in the market after obtaining approval from SEBI. In this people can pool-in funds to fund the purchase of the art and sell it later at a premium. The return would then be divided amongst the investors. This product may be suitable for High Net worth Individuals (HNIs) and institutional investors but not for the retail investors. This product raises art as a credible asset class. Art has a very low correlation with equity markets making it ideal for a large portfolio. Till date not even a single entity has registered with SEBI as collective investment vehicle. 9.3. Commodity based Mutual Funds With situation turning from bad to worse to gruesome in the equity market; the mutual funds have innovatively tried to reap the benefits of the commodity bull run. In India in 2008 many commodity based funds like Mirae Asset Global Commodity Stock Fund, ING Optimix Global Commodities Fund and the AIG World Gold Fund and many others were launched. In India, we however, do not have funds which combine equities, commodities and bonds within one fund. This type of mutual funds gives an advantage of reduced risk and high returns to an investor. It also gives a choice to an investor to look for mutual funds which invest in varied asset classes within India. The major disadvantage is the nascent stage of commodity market in India and the lack of investor knowledge in the area of commodities. Singh, Agarwal and Harilal (2008) have shown the innovative way in which equities, commodities and bonds in Indian stock market can be combined for creating efficient funds. 9.4. Mutual Funds and Derivative Strategy To beat the market in current global financial crises financial engineers have innovated an equity linked fixed maturity plan mutual fund which involves taking position with minimal market risk. The fund buys one stock (or its derivative) and sells another (or its derivative). This is done by identifying the trend i.e. benefiting one company and at the same time detrimental to another. For example JP Morgan Alpha fund uses this strategy. 9.5. Shariah Complied Securitized Market Financing Merrill Lynch (London) and Bemo Securities (Beirut) made a sale of $166 million debt like certificates for natural gas producer East Cameron Gas (Houston). It was the first Shariah complied securitized market financing of US assets. It was structured in such a manner that the Islamic investors effectively get a fixed rate of return while considering themselves owner of the underlying assets. This was in conformity with Islamic rule which prohibits the earning of interest. The instrument was considered to yield only the returns which were lawful. Shariah is the Islamic law based on teaching of Koran. The rule prohibits involvement in alcohol, gambling, human cloning, conventional banks and some forms of entertainment. In India we have the S&P CNX Nifty Shariah. Across the globe there exist S&P 500 Shariah, S&P Europe 350 Shariah, S&P Japan 500 Shariah and FTSE Shariah Japan 100. The index continues to eliminate such companies which get involved in any of the activities not permitted by Shariah rules. Using financially engineering, the world has been able to increase the flow of investments across continents keeping into account the religious sentiments of the investors. 9.6. Fund of Funds

To achieve maximum diversification, the mutual fund industry innovated a very noble way for achieving it. The Asset Management Company (AMC) develops a mutual fund which derives its value from a pool of mutual funds which are under the management of the same company. By this, maximum diversification is achieved and risk is reduced to minimum. 9.7. ULIP Variants The idea of providing an insurance cover along with mutual funds was started by DSP Merrill Lynch in 2005. Nowadays in Indian Mutual fund sector many variants of ULIPs have been financially engineered. They combine features of mutual funds, pension funds and insurance policies. ULIP variants offer a range of products appealing to different types of customers. However, this tends to increase complexity and makes it difficult for an investor to make decision. X. CONCLUSION The current research has made a noble attempt to discuss the application of financial engineering in the banking, insurance, capital market and mutual fund sector in India. Internationalization leads to a spurt of financial innovations in India and the world. The harm that has been caused by securitized instruments backed by subprime mortgages has been widely discussed in existing literature. The current paper discusses the adaptation and innovation shown by the banking, insurance, capital market and mutual fund sector to overcome the international financial liquidity crisis of 2008. The review of literature discusses the factors that have contributed to the growth of financial engineering and the lessons India can learn from international experience. While discussing the innovations in the banking sector the paper has discussed 10 innovations in this sector (see figure 1). The banking innovations aim at making customers closer to their funds, reduce cost, improve efficiency and provide safety (see table 1). The paper has presented 9 innovations in the Indian insurance sector (see figure 1). In the insurance sector, new innovative products provide the features of guaranteed return, safety against inflation, social security, reimbursement of medical and hospitalization expenses (see table 2). The paper discusses 10 products and processes in the Indian capital market (see figure 1). The capital market innovations have the feature of investor protection, transparency, enhanced liquidity, reduced cost and mitigation of risk (see table 3). For the mutual fund industry 7 innovations have been discussed (see figure 1). The mutual fund innovations have the feature of diversification, risk reduction and superior return in the volatile market (see table 4). The existing innovative financially engineered products lack the protection against inflation. In India, there is a great need of innovations especially for senior citizens, poor people, women, rural people as well as a large middle class. There remains scope for development of insurance exchanges, credit reinsurance market, carbon market, property future, weather derivatives, freight derivatives and inflation derivatives. As long as human ingenuity challenges its present for a better tomorrow, there will always exist the scope for financial engineers and financial innovations [FIGURE 1 OMITTED] Acknowledgement The authors gratefully acknowledge the technical support of Indian Institute of Finance. We would like to convey our special thanks Prof. J. D. Agarwal (IIF Delhi); Prof. Manju Agarwal (MLNC, DU); Prof. Madhu Vij (FMS, DU); Prof. Aman Agarwal (IIF Delhi); Ms. Yamini Agarwal (IIF Delhi); Prof. K. K. Aggarwal (OR Dep't., DU); Prof. Deepak Bansal (IIF Delhi); Prof. Pushpender Singh Raghav (IIF Delhi) and Dr. Amba Jindal (IIF, Delhi) for their review comments on this paper. The views and reviews presented in the paper are views and opinions of the authors, based on our research and experience and do not depict institutional or countries views or of the institutions the authors are associated with. All errors and omissions are our own

Impact of Globalisation on Developing Countries and India

Impact of Globalisation on Developing Countries and India

by Chandrasekaran Balakrishnan

Chandrasekaran Balakrishnan for The 2004 Moffatt Prize in Economics Introduction: Globalisation is the new buzzword that has come to dominate the world since the nineties of the last century with the end of the cold war and the break-up of the former Soviet Union and the global trend towards the rolling ball. The frontiers of the state with increased reliance on the market economy and renewed faith in the private capital and resources, a process of structural adjustment spurred by the studies and influences of the World Bank and other International organisations have started in many of the developing countries. Also Globalisation has brought in new opportunities to developing countries. Greater access to developed country markets and technology transfer hold out promise improved productivity and higher living standard. But globalisation has also thrown up new challenges like growing inequality across and within nations, volatility in financial market and environmental deteriorations. Another negative aspect of globalisation is that a great majority of developing countries remain removed from the process. Till the nineties 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 Though the precise definition of globalisation is still unavailable a few definitions worth viewing, Stephen Gill: defines globalisation as the reduction of transaction cost of transborder movements of capital and goods thus of factors of production and goods. Guy Brainbant: says that the process of globalisation not only includes opening up of world trade, development of advanced means of communication, internationalisation of financial markets, growing importance of MNC's, population migrations and more generally increased mobility of persons, goods, capital, data and ideas but also infections, diseases and pollution

Impact on India: India opened up the economy in the early nineties following a major crisis that led by a foreign exchange crunch that dragged the economy close to defaulting on loans. The response was a slew of Domestic and external sector policy measures partly prompted by the immediate needs and partly by the demand of the multilateral organisations. The new policy regime radically pushed forward in favour of amore open and market oriented economy. Major measures initiated as a part of the liberalisation and globalisation strategy in the early nineties included scrapping of the industrial licensing regime, reduction in the number of areas reserved for the public sector, amendment of the monopolies and the restrictive trade practices act, start of the privatisation programme, reduction in tariff rates and change over to market determined exchange rates. Over the years there has been a steady liberalisation of the current account transactions, more and more sectors opened up for foreign direct investments and portfolio investments facilitating entry of foreign investors in telecom, roads, ports, airports, insurance and other major sectors.

The Indian tariff rates reduced sharply over the decade from a weighted average of 72.5% in 1991-92 to 24.6 in 1996-97.Though tariff rates went up slowly in the late nineties it touched 35.1% in 2001-02. India is committed to reduced tariff rates. Peak tariff rates are to be reduced to be reduced to the minimum with a peak rate of 20%, in another 2 years most non-tariff barriers have been dismantled by march 2002, including almost all quantitative restrictions. India is Global: The liberalisation of the domestic economy and the increasing integration of India with the global economy have helped step up GDP growth rates, which picked up from 5.6% in 199091 to a peak level of 77.8% in 1996-97. Growth rates have slowed down since the country has still bee able to achieve 5-6% growth rate in three of the last six years. Though growth rates has slumped to the lowest level 4.3% in 2002-03 mainly because of the worst droughts in two decades the growth rates are expected to go up close to 70% in 2003-04. A Global comparison shows that India is now the fastest growing just after China. This is major improvement given that India is growth rate in the 1970's was very low at 3% and GDP growth in countries like Brazil, Indonesia, Korea, and Mexico was more than twice that of India. Though India's average annual growth rate almost doubled in the eighties to 5.9% it was still lower than the growth rate in China, Korea and Indonesia. The pick up in GDP growth has helped improve India's global position. Consequently India's position in the global economy has improved from the 8th position in 1991 to 4th place in 2001. When GDP is calculated on a purchasing power parity basis. Globalisation and Poverty: Globalisation in the form of increased integration though trade and investment is an important reason why much progress has been made in reducing poverty and global inequality over recent decades. But it is not the only reason for this often unrecognised progress, good national polices , sound institutions and domestic political stability also matter. Despite this progress, poverty remains one of the most serious international challenges we face up to 1.2 billion of the developing world 4.8 billion people still live in extreme poverty. But the proportion of the world population living in poverty has been steadily declining and since 1980 the absolute number of poor people has stopped rising and appears to have fallen in recent years despite strong population growth in poor countries. If the proportion living in poverty had not fallen since 1987 alone a further 215million people would be living in extreme poverty today. India has to concentrate on five important areas or things to follow to achieve this goal. The areas like technological entrepreneurship, new business openings for small and medium enterprises, importance of quality management, new prospects in rural areas and privatisation of financial institutions. The manufacturing of technology and management of technology are two different significant areas in the country. There will be new prospects in rural India. The growth of Indian economy very much depends upon rural participation in the global race. After implementing the new economic policy the role of villages got its own significance because of its unique outlook and branding

methods. For example food processing and packaging are the one of the area where new entrepreneurs can enter into a big way. It may be organised in a collective way with the help of co-operatives to meet the global demand. Understanding the current status of globalisation is necessary for setting course for future. For all nations to reap the full benefits of globalisation it is essential to create a level playing field. President Bush's recent proposal to eliminate all tariffs on all manufactured goods by 2015 will do it. In fact it may exacerbate the prevalent inequalities. According to this proposal, tariffs of 5% or less on all manufactured goods will be eliminated by 2005 and higher than 5% will be lowered to 8%. Starting 2010 the 8% tariffs will be lowered each year until they are eliminated by 2015. GDP Growth rate: The Indian economy is passing through a difficult phase caused by several unfavourable domestic and external developments; Domestic output and Demand conditions were adversely affected by poor performance in agriculture in the past two years. The global economy experienced an overall deceleration and recorded an output growth of 2.4% during the past year growth in real GDP in 2001-02 was 5.4% as per the Economic Survey in 200001. The performance in the first quarter of the financial year is5.8% and second quarter is 6.1%. Export and Import: India's Export and Import in the year 2001-02 was to the extent of 32,572 and 38,362 million respectively. Many Indian companies have started becoming respectable players in the International scene. Agriculture exports account for about 13 to 18% of total annual of annual export of the country. In 2000-01 Agricultural products valued at more than US $ 6million were exported from the country 23% of which was contributed by the marine products alone. Marine products in recent years have emerged as the single largest contributor to the total agricultural export from the country accounting for over one fifth of the total agricultural exports. Cereals (mostly basmati rice and non-basmati rice), oil seeds, tea and coffee are the other prominent products each of which accounts fro nearly 5 to 10% of the countries total agricultural exports. Where does Indian stand in terms of Global Integration? India clearly lags in globalisation. Number of countries have a clear lead among them China, large part of east and far east Asia and eastern Europe. Lets look at a few indicators how much we lag.
Consequences: The implications of globalisation for a national economy are many. Globalisation has intensified interdependence and competition between economies in the world market. This is reflected in Interdependence in regard to trading in goods and services and in movement of capital. As a result domestic economic developments are not determined entirely by domestic policies and

market conditions. Rather, they are influenced by both domestic and international policies and economic conditions. It is thus clear that a globalising economy, while formulating and evaluating its domestic policy cannot afford to ignore the possible actions and reactions of policies and developments in the rest of the world. This constrained the policy option available to the government which implies loss of policy autonomy to some extent, in decision-making at the national level.

Disadvantages of Globalisation
The most important disadvantage of globalization is the increasing number of the loafer. After the industrial revolution, industry gravitated some particular countries. Because of that, these countries became a power in industry. However production decreased and so unemployment was raised in the other countries. Another reason of the unemployment rise is that the need of less manpower. As stated at Wikipedia, many workers found themselves suddenly unemployed, as could no longer compete with machines which only required relatively limited work to produce more product than a single worker. Another major damage of globalization is that some cultures are getting lost. The cultures of the countries that have more economic power are more dominant than others. Because, wealthy countries produce many things that can affect cultures, for example, clothes, movies and technologic products. According to Ikerd, while the global community is increasing, more and more people have became ignorant about social, ethical and moral values which are various in defining groups. (2002) Therefore, globalization damages small cultures which are in risk of being extinct. Big disadvantages. The final significant effect of globalization is the difficulty of competition. With globalization, trade between the countries has been started to remove limits. This situation of enterprises has prepared the ground to be in constant competition with not only national competitors but also international competitors. Therefore, business requires being in a more rigorous and challenging competitive atmosphere to maintain continuity and development. Rising of monopole companies and trough among production costs are the main effects of this hard competition in business. As pointed in Global Policy Forum, undeveloped countries choose to use foreign capital for their improvement however it disposes the equality and stability instead. In conclusion, unemployment, social degeneration and difficulty of competition are the killer disadvantages on people life that based on globalization. In my opinion, people must be aware of this exploitation. Globalization is a one-way tale.