Assignment Code: IBO-03/TMA/2022-23

Course Code: IBO-03

Assignment Name: India’s Foreign Trade

Year: 2022-2023

Verification Status: Verified by Professor

Attempt all the questions: 20x5

Q1) What is meant by balance of payments? How is it different from balance of trade? Describe salient features of India’s balance of payments.

Ans) All economic transactions between local and foreign citizens over a predetermined time period, often one year, are referred to as the balance of payments. The policymakers and business groups can benefit much from the examination of the balance of payments. Additionally, it is a crucial tool for preserving the stability of the foreign economy. An effective plan for international business requires a thorough awareness of how dependent it is on the balance of payments.

Balance of Trade and Balance of Payments

The difference between physical imports over a given time frame, such as a year, is referred to as the balance of commerce. Visible items are those that are physically exported and imported, such as goods, gold, silver, and other commodities. If exports and imports over a certain period are exactly equal, the balance will be in balance. A country is considered to have a positive balance of commerce if its exports are more than its imports, which is known as an export surplus. Goods export and import are considered visible trade since they are physically documented at the nation's customs barriers. Payments and receipts for services are examples of intangible goods traded.

Because it comprises both visible and invisible items, the balance of payment is bigger than the balance of trade. A country's balance of payments is a thorough and organised record of all economic transactions between its citizens and the rest of the world. It gives an account of all payments and receipts related to goods exported, services provided, and capital received by citizens and their governments, as well as goods imported, services received, and capital transferred by those citizens and their governments.

Salient Features of India’s Balance of Payments

1. With the exception of 1972–1973 and 1976–1977, India has always had a trade deficit.

2. With the exception of the fourth plan trade imbalance has been increasing from plan to plan.

3. Export growth rates have been inconsistent from plan to plan.

4. Positive net invisible receipts have occurred.

5. In order to close the gap, additional external money had to be raised due to the balance of payments crisis that occurred in 1990–1991 and the first quarter of 1991–1992. In light of the declining worldwide confidence in our economy, the government's task became very challenging. The IMF, the World Bank, and bilateral donors, particularly Japan, were ultimately able to mobilise significant additional financial resources for the government.

6. The fiscal imbalance has a significant impact on the balance of payments strategy in addition to the chances for growth and stability. Correcting fiscal imbalance is also necessary for a strategy to guarantee a healthy balance of payments.

7. Since external assistance has not been used to its full potential, many of the authorised loans are still in the queue. Due to the time gap between pledges and the completion of particular credit arrangements, laborious procedures, and domestic budgetary restrictions on supplying counterpart money, underutilization of aid is mostly caused by these factors.

8. The exports of the nation would undoubtedly suffer as a result of the establishment of several separate entities from the former USSR. India's balance of payments was thus still under pressure.

Q2) Describe briefly the specific initiatives outlined in the year 2005 for promoting foreign trade.

Ans) Some of the initiatives outlined in the year 2005 for promoting foreign trade are as follows:

1. It is proposed to engage the State Governments in providing an enabling environment for boosting international trade, by setting up an Inter State Trade Council.

2. Department of Commerce proposes to abolish cess on export of all agricultural and plantation commodities levied under various Commodity Board Acts.

3. To promote capacity expansion and quality up-gradation in the SSI sector, import of capital goods at 5% Customs duty shall now be allowed subject to a fulfilment of an export obligation equivalent to 6 times the duty saved on capital goods imported under the EPCG Scheme over a period of 8 years.

4. With a view to accelerate exports under the Scheme and to incentivise fast track companies, firms making 75 % or more of the exports under the EPCG Scheme (including average level of exports) in half or less than half the original export obligation period, shall be freed from the balance export obligation.

5. To enable the Service providers to upgrade the infrastructure in their associate companies, the goods imported under the ‘Served from India’ Scheme shall be transferable within the Group companies and managed hotels subject to Actual User condition.

6. Benefits under ‘Vishesh Krishi Upaj Yojana’ shall also be extended to exports of poultry and dairy products in addition to export of flowers, fruits, vegetables, minor forest produce and their value added products.

7. Entitlement for Duty Free imports of Gems and Jewellery samples have been enhanced to Rs. 3 lakhs in a financial year or 0.25% of the average of the last three years exports turnover or gems and jewellery items, whichever is lower.

8. Supply of gold of 0.995 and above purity shall also be allowed for release by nominated agencies for export purposes.

9. Duty free import of specified specialized inputs/chemicals and flavouring oils as per a defined list shall be allowed to the extent of 1% of FOB value of preceding financial years export. Use of these special ingredients for seafood processing will enable us to achieve a higher value addition and enter new export markets.

10. To encourage the existing mechanized vessels and deep sea trawlers to adopt modern technology for scientific exploitation of our marine resources in an eco-friendly manner and boost marine sector exports, it is proposed to allow import of monofilament long line system for tuna fishing at a concessional rate of duty.

11. The present system of disposal of waste of perishable commodities like seafood after inspection by a customs official is very cumbersome and leads to development of unhygienic conditions. To overcome this, a self-removal procedure for clearance of waste shall be applicable, subject to prescribed wastage norms.

12. The scope of Advance Licence for Annual requirement has been extended to all categories of exporters having past export performance. The earlier limit of obtaining Advance Licence for Annual requirement has also been enhanced to 300% of FOB/FOR value of exports made in the previous year from 200%.

13. Duty free spares up to 5% of the value of Capital Goods imported for excavation purposes in the Granite sector will be allowed to be removed to the quarries.

14. The de-bonding procedure for EOUs has been simplified. A self-assessment procedure along with time bound disposal of applications of such exiting EOUs will be put in place.

15. The Target Plus Scheme aimed at rewarding incremental exports would continue in the year 2005-06 with such modifications as will be notified, separately for preventing misuse, if any.

16. Quantum of Bank Guarantee in respect of “Other Manufacturer Exporters” category is being reduced from 25% to 15%. Units in Agri Export Zones (AEZs) shall also be eligible to submit a Bank Guarantee of 15%. In addition, only a 15% Bank Guarantee shall be required for ‘established service providers’ who have free foreign exchange earnings of Rs.50 lakhs or more during the preceding financial year and have a clean track record.

Q3) Analyze briefly how India’s trade has developed with European Union (EU) during the last decade. What are the likely implications of the expansion of EU on the Indian exports?

Ans) The European Union does not trade extensively with India. Less than 1.5% of EU imports from outside the EU have come from trade with India during the 1990s. However, it can be reasonably stated that India's proportion of imports from outside the EU has been less than 2%. Even after excluding imports from ACP nations, India is still a small contributor to the EU.

Machinery and its components, unworked precious and semiprecious stones, iron and steel and its products, optical, measuring, controlling, and other scientific equipment, organic chemicals, and aircraft and their components are the principal exports of the EU to India. Clothing, diamonds, cotton, cotton yarn and fabrics, leather, woollen and silk carpets, coffee, tea, spices, leather goods, footwear, maritime products, boilers, machinery and components, edible nuts, organic chemicals, man-made fibres, and rags are the principal imports from India that the Union buys.

General Implications

It is anticipated that as the Union continues to integrate, citizens' standards of life would rise. This would result in higher demand for commodities, particularly consumer goods, in industries where domestic production in the Union is absent or insufficient, as well as for customised products where the consumer's preference is crucial. Evidence from the past indicates that extra-EU imports alone have climbed by about 29 times from ECU 24 billion in 1958 to ECU 709 billion in 1998, despite the fact that intra-EU imports have grown from 33% of all EU imports in 1958 to more than 60% in 1998. Third countries should anticipate a large increase in demand for some of their products if this trend in extra-EU imports persists. While a more prosperous Europe may result in a further decrease of protection levels.

Acceptance of a product in the European Union countries depends on the integration of several separate markets into a single, united market with a uniform policy, uniform set of rules and procedures, and no restrictions on the movement of products, services, capital, and people within the area. A product may open up prospects previously restricted to the markets of some member nations once it has been legally imported into a member country on the basis of a certificate granted at the first point of importation. Negatively, this would also imply that a product would be unable to enter any other member country after being denied at the first point of importation.

Integration of many markets into a sizable unified market may also result in sizable orders for certain goods. The ability of Indian trade and industry to appropriately realign its production, management, and marketing methods will be a major factor in how much India can benefit from the increase in order size. There is evidence that the corporate community has responded to this challenge by implementing mergers and acquisitions both inside and outside of Europe. Large "European" orders for standardised, homogenous functional goods are likely to be placed. These orders can be fulfilled if supply inelasticity issues are resolved, and management and marketing strategies are appropriately realigned. Both the Indian government and Indian businesses are making these calls for action at the organisational and policy levels.

Q4) Write short note on the following:

a) India’s Export of Services

Ans) Over the past 20 years, India's exports have been significantly fuelled by the services sector. The nation is now one of those with the quickest rates of growth in the world market for services. This industry has generated a lot of jobs, contributed significantly to exports, and attracted a lot of international investment. The services industry in India encompasses a broad range of activities including trade, lodging, and dining, transportation, storage, and communication, financing, insurance, real estate, commercial services, community, social, and personal services, as well as services related to construction.

Conventional Services

1. Tourism and Travel: Travel and tourism in India are expected to expand rapidly. According to estimates, India will be able to increase visitor arrivals at a rate of more than 12% annually.

2. Construction and Engineering Services: In this industry, India has a comparative edge. It is built on the accessibility of reasonably priced skilled and semi-skilled labour, technical expertise tailored to the conditions typically encountered in other developing countries, and strong social and ethnic ties.

3. Export of Labour from India: India is a country with limited capital. It might not have the ability to export capital. India is not among the nations with sophisticated technology, not even in this area. India might export intermediate technology that some developing nations require.

Non-Conventional Service

1. Super Speciality Hospitals and Related Services: India's super speciality hospitals and well-equipped diagnostic facilities are able to offer top-notch medical care at a price that is roughly one-tenth that of comparable services in affluent nations.

2. Standardisation and Quality Assurance Services: The demand for quality system certificates that adhere to ISO excellent standards has increased as a result of the global movement for quality management systems at the enterprise level as a requirement for enhancing competitiveness in international trade.

3. Maintenance Services: The term "maintenance and repairs" typically refers to the process of keeping fixed assets in optimal functioning condition. Any industry, whether it is in manufacturing or services, transportation by road or by air, need extensive maintenance to function properly. India offers maintenance services for all of these industries.

b) India: SAARC Trade Prospects

Ans) There are a number of sectors and regions where individual member countries have a lot of room to advance industrial development through regional collaboration. Due to a number of causes, the region's trade restrictions have been particularly significant in keeping this potential from being fully realised. These restrictions have been found in several investigations.

These consist of:

1. Trade restrictions, such as tariffs and non-tariff barriers.

2. Trade disparities

3. Insufficient transportation system.

4. Poor banking and communication services.

5. Resource limitations.

6. Inadequate trade and transit infrastructure.

7. Lack of knowledge, relationships in business and trade.

8. Methods for commercial paperwork are not standardised.

The main barrier to economic progress in the SAARC region is the lack of adequate physical infrastructure, including electricity supply, telecommunications, and transportation. Without expanding infrastructural facilities, it would be extremely impossible to increase trade and investment opportunities among the member nations. A major factor in raising the level of regional economic cooperation could be the development of infrastructure facilities in the member nations. High levels of tariffs and a variety of non-tariff barriers, such as quantitative limitations and discriminatory practises, have a significant impact on trade ties among the SAARC members. The high levels of tariffs and other non-tariff obstacles, including quantitative restrictions and discriminatory practises, which are now in place are one of the key causes of the low intra-SAARC trade and the significant negative trade imbalance of member nations with India.

Q5) Briefly comment on the following statements:

(a) The world economic scenario has undergone rapid changes particularly during the last one decade.

Ans) Particularly over the past ten years, there have been significant changes to the global economic environment. Economic reforms sweeping through some emerging nations and East European nations are forcing nations all around the world to embrace globalization-related policies. India took the brave step of introducing economic reforms in June 1991, but it has been unable to provide the intended outcomes in the areas of foreign direct investment and international commerce. Our expertise must transition from low-value addition products, or what is known as traditional export products, to high-value addition products. Priority needs to be given to resolving the issues that our exporters are having with regard to a bad reputation for quality, high costs, infrastructure bottlenecks and uncertainties, procedural complications, and institutional rigidities. If India wishes to be a major role on the world stage, second generation economic reforms must be implemented right away.

(b) Foreign investment has the advantage that it does not create any liability for the receiving country.

Ans) Capital is transferred from one nation to another through foreign investment, giving the foreign investors significant ownership holdings in domestic businesses and assets. Foreign investment means that foreigners have an ownership holding significant enough to allow them to influence corporate strategy or an active involvement in management as part of their investment. Globalization is a contemporary trend, with international corporations investing across numerous nations. Direct and indirect foreign investments can be categorised in different ways. A corporation makes physical investments and acquisitions in a foreign country known as foreign direct investments. Typically, this involves opening plants there and purchasing factories, buildings, machines, and other equipment. These investments are far more popular because they are often long-term investments and support the economy of the host nation.

(c) International trade in textiles and clothing has been characterized by a long history of managed trade.

Ans) All global industries are being impacted by the spread of globalisation. There was no way the global textile sector could have lagged behind. Due to globalisation, the textile sector has shrunk globally. Trade and outsourcing have become essential components of the textile sector. Currently, 5.7% of all exports worldwide are made up of clothing and apparel. By 2020, it is anticipated that the global market for garments and apparel will reach $1 trillion USD. When it comes to the commerce of textiles, the world is getting smaller. In the present era, it is simple to locate clothing and textiles unique to a certain location anywhere in the world.

The majority of developing nations export textiles. Due to the abundance of natural resources and the inexpensive and skilled labour, they find it simple to create textiles. In actuality, the country's economy benefits greatly from the textile industry. Through the export of textiles and textile goods, they can make a significant amount of foreign currency. The import and export of textiles and textile goods, as well as some trade within the nation, make up the global textile trade. Government policies have a big impact on the textile industry. Good trade relations between two nations are only possible if their political systems mesh well.

(d) Knowledge is increasingly becoming the engine that will fuel many of the most rapidly growing service industries.

Ans) The knowledge economy is centred on the crucial role that human capital plays in the economy of the twenty-first century. The developed world's economy is changing as a result of the quickening pace of knowledge advancement as well as an increasing reliance on automation, big data analytics, and computerization. This shift places a greater emphasis on intellectual capital and skill development while decreasing reliance on the production process. A higher proportion of highly trained workers, whose professions demand specialised knowledge or abilities, characterise the knowledge economy. The modern economy is made up more of service industries and jobs that demand thinking and data analysis than it was in the past when it was heavily dependent on unskilled labour jobs and consisted mostly of producing physical things.