De-Globalization and Road Ahead for India’s Defence Manufacturing
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Issue Net Edition | Date : 25 May , 2023

Trade is an engine of growth and has been a major factor in impacting GDP handsomely, in both developed and developing economies since the 1970s. From a measly share of 8% in global output in the 1970s, trade accounts for nearly 20% of world GDP which is around 66 trillion dollars. Apart from the USA, EU countries and Japan, China is a major player in international trade. It has become a global manufacturing hub after embracing market economics since the 1980s.  

From a buoyant trading relationship, USA and China are now witnessing a trade war since 2018. This has made globalization a troubled terrain. The pandemic has further accentuated protectionism and fuelled hyper-nationalism amongst nations, bringing to memory the spectre of protectionism that Corn Law in Britain had set in, hurting consumers and benefiting rich farmers.

David Ricardo in his theory of comparative advantage (1817) provided the economic justification for free trade as an engine of global growth. The Corn Law was repealed in 1846. The Heckscher-Ohlin theory also brought out the factor advantage theory to underlie how capital-rich countries will benefit from specializing and trading in capital-rich products.

Historical Overview of Globalization

Globalization has a hoary past. Keynes called the period (1871-1914), the golden age of globalisation. To quote him- “The inhabitant in London could order by telephone sipping his morning tea in bed, various products of the whole earth and reasonably expect their early delivery upon his doorstep. He could secure forthwith cheap and comfortable means of transit to any country without a passport. He could dispatch his servant to a bank for such supply of gold as might seem convenient. Most importantly he regarded this state of affairs as normal and certain, except in the direction of further improvement”.

Thereafter the world witnessed three decades of uncertainty; two world wars, hyperinflation in Germany, and the contagious Great Depression of the 1930s intervened. After World War II the major powers of the world deliberated in Bretton Woods and constituted two major institutions: IMF and World Bank. IMF to promote exchange rate stability and World Bankto provide medium-term loans to war-devastated economies of Europe. GATT was constituted in 1948 and WTO thereafter in 1995harped on the removal of tariff barriers. Protection of Intellectual Property Rights (IPRs) from illegal copying has also become a thrust area under Trade Related Intellectual Property Rights  (TRIPS).

For Milton Friedman, globalization has helped in producing a product anywhere, using resources from anywhere based on cost consideration, with the freedom to sell anywhere. Thomas Friedman in his book “The World is Flat” brings out the power of the internet to flatten the Earth and access to knowledge.

Its Impact and Contrasting Perspectives

On the flip side, globalization has also TNCs (Trans National Corporation) to exploit cheap labor and tax environmental laws in LDCs(Less Developed Countries). In a seminal article, the Noble Laureate Krugman has brought out how the legal architecture of developing the economy and the inept nature of multilateral agencies like ILO(International Labour Organization) and WTO, seriously impede national sovereignty and accentuate the exploitation of labour and degrade the environment further.

On the other hand, Prof. Jagdish Bhagwati in his book “In Defence of Globalisation” (2004) has brought out how globalization has ushered in competition, improved the quality of products, and brought down the cost of goods and services. He also brings out how the flow of technology through technology transfer, the inflow of FDI, and entrepreneurial skill has improved wages in less developing countries and reduced poverty.

The Washington Consensus, a term coined by Prof Williamson in 1989, has been a watershed moment in global financial architecture, advocating fiscal discipline, tax reforms, market forces determining the interest rate and exchange rate, privatisation of PSUs and protection of property rights. The disintegration of the USSR by 1990 and the fall of the Berlin Wall in 1989 convinced Francis Fukuyama to write in the widely acclaimed book ‘End of History’ in which liberal democracy and a free-market economy are now the endpoints of history for all countries.

Such a robust faith in the invincibility of market forces has been challenged by economists like Joseph Stiglitz who observed in the context of the US financial crisis in 2007-09 that “The invisible hand of market forces (Adam Smith) helps the unscrupulous few.” He wrote, “modern alchemist tries to transform risky subprime mortgages into AAA rated product”.

The US financial crisis was a result of poor regulation, inept rating agencies, and the emergence of dodgy financial instruments like Collateralised Debt Obligation (CDOs). Dani Roderick, another prominent economist is of the view that global interconnectedness has increased uncertainty, risk, and instability. The crisis in Thailand in 1997 due to the unusual flow of FII (hot money) created a crisis.

Empirical Evidence of Financial Integration

Several research studies have shown that it is onerous to establish a strong and causal relationship between financial integration and growth. These studies have further shown that the quality of governance is extremely important in affecting financial integration. As per the studies of OECD countries, it is seen that globalization has helped their economies largely because of the quality of human capital and robust institutional independence. These studies have also shown how FDI flow promotes economic growth while the effect of capital flows through FII has been less strong.

In a perceptive study, Buch, Dopkeand Pierdzioch (2002) have brought out how there is no consistent and positive relationship between financial openness and volume of output. The following table would bring out the details.

Table 1:  Financial Openness and Change in GDP (1980-2000)

Country % Change in per capita GDP Financial Integration



South Korea






South Africa






Source: Financial Openness and Business Cycle Volatility

It would be seen from the above that both India nor China have not gone for full convertibility of their currency but have harvested huge gains in their per capita GDP. South Korea has been a success story of financial integration. However, countries like South Africa and Peru, despite financial openness, have achieved negative GDP growth. Therefore, financial openness is neither a necessary nor sufficient condition for promoting economic growth.

Hausmaan (1996) has brought out how there is a significant positive association between the volatility of capital flows and output volatility. In the following equation, Hausmaan has brought out the relationship between financial development and variables like globalization, human capital, natural resources etc.

Fdit=βo+β1 Yit+β2 Kit+β3 HCit+β4 NRit+β5 Git+ µit, where µ is error term, β1,β2,β3,β4,β5 are coefficients of Income, Globalization, Human Capital& Natural Resources.

He has further found out that OECD countries have generally benefitted hugely due to their quality of human capital, natural resources, and globalization. This has not been the case with developing economies like India because of low factor productivity.

Experience of India after Globalization

The economic liberalization of 1990 in India transformed the country’s policy focus from import substitution to export promotion. As a result, commerce has become more open, which has doubled GDP growth from the Hindu Rate of 3.5% (1950–89) to roughly 7% since 2000. Special Economic Zones have boosted exports, and official support for IT has established them as mascots of India’s economic growth story.

The impact of Economic globalization is brought out by Prof Nitin Desai as per the following table.

Table 2: Comparative Sectoral Profile Before and after Globalisation

Parameters 1977 2017
Agriculture as % of GDP



The industry as % of GDP



Services as % of GDP



Export &import as % of GDP



FDI & FII Inflow as % of GDP



Public Sector Investment as % GDP



Private Sector Investment



Average GDP Growth



Source: Macroeconomics: Then and Now by Nitin Desai: The Business Standard

It would thus be seen that export and import as a share of GDP has increased significantly to around 41% and the FDI and FII inflow has also tripled due to liberal FDI policy. The private sector investment has significantly increased and public sector investment has remained stagnant. The average GDP growth has also doubled. The role of the state is now envisaged as creating an enabling environment for the private sector to flourish rather than continue with non-performing or poorly performing public sector enterprises. Government control has given way to regulation and Liberalization, Privatisation & Globalization (LPG) has become new buzzwords of public policy

The FDI policy has also been significantly liberalized over the years as the following table would reveal.

Table 3: FDI Inflow in Different Sectors



Petroleum & Natural Gas


Broadcasting Content


Print Media




Source: Department of Industrial Policy & Promotion (DIPP)

It would be seen from the above, that most of the sectors can receive FDI more than 50% and through automatic route. Even sectors like defense manufacturing now allow 74% FDI participation. The sectors which have hugely benefitted through the liberal FDI are the service sector (17.6%), computer (9.5%), telecom (8%), and trading (8%). From around 20 billion dollars in 1990 the FDI inflow, today stands at around 63 billion dollars (2019), with IT services contributing nearly 50% of the export earnings.

The FIPB (Foreign Investment Promotion Board) has been scrapped; thereby lessening government control significantly. It can therefore be concluded that the policy of Liberalisation, Privatisation, and Globalisation (LPG) has helped India in better global integration and the service sector has become the major mascot of high economic growth, contributing nearly 60% of the country’s GDP. However, the FDI inflow into defense manufacturing continues to be tepid

India’s Tilt towards Protectionism

The government of India since 2014 has been pursuing the policy of free market economics, despite changes in the ideological construct of the BJP party from BJP. Since 2015 ‘Make in India’ has become a major thrust area for bolstering the manufacturing footprint of India which has remained stagnant after economic liberalization. However, with the outbreak of Covid-19, the government of India has made a number of policy announcements revving up India’s self-reliance quotient through various Atmanirbhar initiatives. This includes increasing tariffs on several products and abdicating global tender for many of the purchases in the defence manufacturing sector.

Economists like Arvind Panagariya believe that India is putting its clock back on trade openness by resorting to protectionism and violating the philosophy of WTO in which India is a signatory. It is quite likely that such protectionism would help in the continuation of the inefficiency of domestic industries, and poor quality of products affecting the interests of consumers.


In a perceptive analysis, Prof. Nitin Desai believes that the SWAN model would be the right way forward for India’s policymakers.

Figure -1: Swan Model

Source: Macroeconomics: Then and Now by Nitin Desai

The above model would show that the thrust of India should be more flexible in exchange rate management, and the rupee needs devaluation as it seems to be overvalued by around 12% as per the assessment made by Prof. Gemini Bhagwati of NCAER.

Concluding Thoughts

In a perceptive essay, the Economist in its 175thyear has observed that liberal democracy is at a crossroads as it is sub-serving the interest of the elite and fostering crony capitalism and neglecting the poor by not giving proper outlets to them to have quality education, health care, and nutrition to improve their capability. Institutions like WTO, World Bank, and IMF are sub-serving the interest of global finance capital and not of needy developing economies. Jeffrey Sachs writes how IMF conditionality “is tightening the belt of those who do not own a belt”.

The omnipotence of market forces, infallibility of the Washington Consensus, and glissando of globalization are being seriously challenged. However, globalization is an irreversible process and the present retreat will be temporary. The overwhelming opinion seems to be that we must not lose sight of the huge benefit that a free flow of people trade and capital has brought in over the decade. The experience of the developed countries has shown that the quality of human capital, governance, and proper and timely regulatory intervention are the most critical factors for the success of globalization.

 In defense manufacturing, instead of encouraging protection, India must encourage Joint Ventures with reputed OEMs as in the case of Brahmos missile and Joint Design and Development programs with well-known global design houses. There is no merit in reinventing the wheel or being autarkic and inward-looking.

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The views expressed are of the author and do not necessarily represent the opinions or policies of the Indian Defence Review.

About the Author

Prof (Dr) SN Misra

was previously Joint Secretary (Aerospace), Ministry of Defence, Government of India.

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