Assignment Code: MCO-15/TMA/2023

Course Code: MCO-015

Assignment Name: India’s Foreign Trade and Investment

Year: 2023

Verification Status: Verified by Professor

Attempt all the questions:

Q1) (a) Explain in brief the government policy towards foreign capital.

Ans) Government policy towards foreign capital refers to the regulations, laws, and guidelines that govern the entry, operations, and exit of foreign investors in a country. The policy may differ from country to country, depending on factors such as the level of economic development, political stability, and strategic priorities.

The government policy towards foreign capital can be broadly categorized into two types: liberal and restrictive. Liberal policies are those that promote foreign investment by removing or reducing barriers to entry, such as tariffs, quotas, and regulations. Restrictive policies, on the other hand, are those that limit or discourage foreign investment by imposing barriers to entry, such as higher taxes, ownership restrictions, and regulations.

Many developing countries have adopted liberal policies towards foreign capital in recent years, as they seek to attract foreign investment to boost economic growth and development. These policies often involve offering incentives such as tax breaks, subsidies, and streamlined regulatory processes to foreign investors. In some cases, developing countries have even gone as far as creating special economic zones or investment zones, which offer even greater incentives to foreign investors.

Developed countries, on the other hand, tend to have more restrictive policies towards foreign capital, as they seek to protect domestic industries and maintain control over strategic assets. Developed countries may impose restrictions on foreign ownership of certain industries, limit the repatriation of profits, and subject foreign investors to stricter regulatory oversight.

Overall, the government policy towards foreign capital can have a significant impact on the flow and direction of investment, as well as the economic and social outcomes of investment. It is important for governments to carefully balance the benefits and risks of foreign investment and adopt policies that promote sustainable and equitable economic growth.

Q1) (b) Discuss the factors influencing the growth of the world trade.

Ans) The factors have contributed to this growth, including:

1. Technological Advancements: The development of transportation and communication technologies has made it easier for countries to trade with each other. The internet, for example, has enabled businesses to market their products globally and conduct transactions online, reducing the costs of international trade.

2. Trade Liberalization: The reduction of trade barriers, such as tariffs and quotas, has encouraged trade among countries. The creation of trade agreements, such as the North American Free Trade Agreement and the European Union (EU), has facilitated the movement of goods and services across borders, promoting economic integration and boosting trade.

3. Globalization: The rise of multinational corporations and the expansion of supply chains across borders have increased the flow of goods and services across countries. Companies can take advantage of lower labour costs, access new markets, and benefit from economies of scale.

4. Economic Development: As countries develop and become more prosperous, they tend to trade more. Rising incomes and a growing middle class in emerging economies, such as China and India, have created new markets for goods and services.

5. Political Stability: A stable political environment and a predictable regulatory framework are essential for encouraging international trade. Countries with stable governments and reliable legal systems are more attractive to foreign investors and are likely to have stronger trade relationships with other countries.

The growth of world trade has been influenced by a combination of technological advancements, trade liberalization, globalization, economic development, and political stability. These factors are likely to continue shaping the future of international trade, as countries seek to take advantage of new opportunities and deepen their economic relationships with other nations.

Q2) (a) Briefly explain the reforms undertaken by government for the growth of textile and garment industry in India.

Ans) The textile and garment industry is one of the largest and oldest industries in India. It is a significant contributor to the country's economy, providing employment to millions of people and accounting for a significant portion of the country's exports. Over the years, the Indian government has implemented various reforms to boost the growth of this sector, some of which are: 

1. The Technology Upgradation Fund Scheme (TUFS): The TUFS was introduced in 1999 to provide financial assistance to textile and garment manufacturers to upgrade their technology and improve their competitiveness. Under this scheme, manufacturers can avail of loans at a subsidized rate of interest to invest in new machinery and equipment.

2. The Integrated Textile Parks (ITP) Scheme: The ITP scheme was launched in 2005 to provide infrastructure support to textile manufacturers. The government provides financial assistance to set up textile parks that have facilities such as common effluent treatment plants, testing labs, and training centers.

3. The Goods and Services Tax (GST): The introduction of the GST in 2017 simplified the tax structure for the textile and garment industry. The GST replaced a complex system of taxes and levies, making it easier for manufacturers to comply with regulations and reducing the cost of doing business.

4. The Production Linked Incentive (PLI) Scheme: The PLI scheme was announced in 2020 to incentivize the production of certain goods in India, including textiles and garments. Under this scheme, manufacturers can receive financial incentives for meeting specific production targets, thereby promoting domestic manufacturing and reducing dependence on imports.

5. The National Handloom Development Program (NHDP): The NHDP was launched in 2007 to promote the development of the handloom sector in India. The government provides financial assistance to weavers to upgrade their skills, improve their infrastructure, and access new markets.

The Indian government has implemented several reforms to promote the growth of the textile and garment industry. These reforms have focused on providing financial assistance, improving infrastructure, simplifying regulations, and promoting domestic manufacturing. These efforts are likely to continue in the future, as the government seeks to create a more competitive and resilient textile and garment industry in India.

Q2) (b) Discuss the major challenges and opportunities of India’s trade prospects with USA.

Ans) India's trade relationship with the United States of America (USA) has been significant in recent years, with the two countries being the largest democracies in the world. There are several opportunities and challenges that India faces in its trade prospects with the USA.

One of the significant opportunities that India has is its large population, which provides a vast consumer base for US products. India is also a rapidly growing economy, and its rising middle class offers enormous potential for US businesses to expand their market share. Moreover, India's vast labour force and low labour costs make it an attractive destination for US businesses looking to outsource their operations.

However, several challenges exist in the trade relationship between the two countries. One of the major challenges is the trade imbalance, where India exports significantly less to the USA than it imports. This imbalance is a significant concern for the Indian government and businesses, and efforts are being made to bridge this gap by increasing exports to the USA.

Another significant challenge is the trade policies of both countries. The USA has been critical of India's trade policies, citing restrictions on foreign investment and import tariffs. India, on the other hand, has accused the USA of protectionist measures, such as imposing high tariffs on steel and aluminium imports.

Furthermore, India's Intellectual Property Rights (IPR) regime has also been a source of concern for the USA. The USA has raised objections over India's compulsory licensing provisions and patent laws, which it considers to be too lenient.

Q3) Comment on the following statements:

(a) An open foreign trade policy and an open external sector have created more problems for domestic economy than it has solved.

Ans) An open foreign trade policy and a liberalized external sector have both advantages and disadvantages for domestic economies. While such policies can provide benefits such as access to new markets, technology, and investment, they can also lead to several challenges. One of the primary challenges that an open foreign trade policy can pose is the issue of trade imbalances. An increased dependence on foreign trade can lead to a higher demand for imported goods, resulting in a trade deficit. This can have adverse effects on domestic industries, particularly if they face stiff competition from cheaper imported goods.

Moreover, an open external sector can also increase the volatility of the domestic economy. A sudden withdrawal of foreign investment or a sharp decline in exports can lead to economic shocks, which can be challenging to manage. This can result in economic instability, including inflation, currency fluctuations, and even recession. Furthermore, an open external sector can also lead to the domination of foreign firms in domestic markets. This can result in the crowding out of local businesses, leading to the concentration of wealth in the hands of foreign entities.

(b) Service sector do not have any importance in India’s exports.

Ans) It is not entirely accurate to say that the service sector does not have any importance in India's exports. The service sector has become a significant contributor to India's overall GDP in recent years, accounting for approximately 55% of India's economy. Although the service sector's contribution to India's exports may not be as prominent as the manufacturing or agricultural sectors, it still plays a crucial role in the country's overall trade.

In fact, the service sector has been a significant contributor to India's balance of payments, as sectors such as Information Technology, Business Process Outsourcing, and other knowledge-based services have seen a significant increase in demand from other countries. India has emerged as a leading provider of IT and BPO services, and these services have played a vital role in increasing India's exports.

Moreover, the service sector has also contributed to India's tourism industry, with foreign tourists contributing significantly to the country's economy. India's cultural and historical heritage has made it an attractive destination for tourists worldwide, and the country has been able to capitalize on this by providing various services to cater to their needs.

(c) The Government of India is not committed towards promoting exports and has declared the gems & jewellery sector as a less important area for export promotion.

Ans) It would not be accurate to say that the Government of India is not committed towards promoting exports, as the government has taken several initiatives to promote and facilitate exports from the country. However, it is true that the government has declared the gems and jewellery sector as a less important area for export promotion.

This decision was taken in response to the rising concerns over issues such as fraudulent practices, money laundering, and the inflow of unaccounted funds into the country through the gems and jewellery sector. The government's decision to declare this sector as less important for export promotion is an attempt to address these issues and promote transparency and accountability in the sector.

However, it is important to note that this does not mean that the government is not committed to promoting exports from other sectors. The government has taken several steps to facilitate exports from various sectors, such as simplifying export procedures, providing financial assistance and incentives to exporters, and promoting foreign trade agreements with other countries.

Moreover, the government has also launched various initiatives such as the 'Make in India' program to encourage domestic manufacturing and promote exports from the country. In conclusion, while the government may have declared the gems and jewellery sector as less important for export promotion, it is committed to promoting exports from other sectors and has taken several steps to facilitate and encourage exports from the country.

(d) India-SAARC trade relations are same as India-ASEAN trade relation.

Ans) India's trade relations with SAARC and ASEAN are different from each other, with varying levels of trade and economic cooperation. In terms of economic cooperation, India's trade relations with ASEAN countries are more extensive than with SAARC countries. India is a member of the ASEAN-India Free Trade Area, which aims to promote trade and investment between the two regions. The two sides have also signed agreements to enhance economic cooperation in various sectors, such as agriculture, energy, and tourism.

In contrast, India's trade relations with SAARC countries have been impacted by several factors, including political tensions and security issues. Despite the establishment of the South Asian Free Trade Area, intra-regional trade among SAARC countries remains limited, and India's trade with its neighbouring countries in the region is relatively low. Moreover, India's trade relations with ASEAN countries are also impacted by the country's 'Act East' policy, which aims to enhance economic and strategic ties with Southeast Asia. This policy has resulted in a significant increase in India's trade and investment with ASEAN countries in recent years.

Q4) Difference between the following:

(a) Current account and Capital account of Balance of Payments

Ans) The balance of payments is a record of all transactions between a country and the rest of the world over a given period. It consists of two primary accounts, the current account, and the capital account. The current account records all transactions between a country and the rest of the world in goods, services, and income. It includes exports and imports of goods and services, income from investments, and transfers such as remittances. The current account reflects a country's net income from its economic activities with the rest of the world, including trade in goods and services, investment income, and transfers.

The capital account records all transactions between a country and the rest of the world in capital, such as foreign investment, loans, and transfers of financial assets. It includes transactions related to investment in fixed assets, purchases and sales of financial assets, and other capital transfers. The capital account reflects changes in a country's foreign ownership of assets, including changes in the level of foreign investment in the country, and the level of domestic investment in foreign countries.

(b) WTO and GATT

Ans) The General Agreement on Tariffs and Trade (GATT) and the World Trade Organization (WTO) are both international organizations that focus on promoting free trade and removing barriers to trade between countries. However, there are some key differences between the two.

1. Scope: GATT was primarily focused on reducing tariffs on trade in goods between member countries, while the WTO's mandate is much broader, covering trade in goods, services, and intellectual property.

2. Legal Status: GATT was a multilateral agreement among member countries, while the WTO is a permanent organization with a legal framework that governs international trade.

3. Dispute Settlement: GATT had limited provisions for dispute settlement, and disputes were generally resolved through negotiations and consultations between member countries. In contrast, the WTO has a formal and binding dispute settlement mechanism that allows member countries to resolve disputes in a structured and transparent manner.

4. Membership: GATT had a more limited membership, with only a few dozen countries initially signing on. The WTO has a much larger membership, with over 160 member countries.

5. Decision-Making: Under GATT, decision-making was based on consensus among member countries. In the WTO, decisions are made by majority vote, with each member country having one vote.

(c) Balance of Trade and Balance of Payments

Ans) The balance of trade and the balance of payments are both important indicators of a country's economic performance in international trade, but they differ in their scope and the types of transactions they measure.

The balance of trade refers to the difference between a country's exports and imports of goods over a particular period. It is the most basic measure of a country's international trade performance and is calculated by subtracting the value of imports from the value of exports. A positive balance of trade (export surplus) occurs when a country's exports exceed its imports, while a negative balance of trade (import surplus) occurs when imports exceed exports.

On the other hand, the balance of payments is a broader measure that includes not only trade in goods but also trade in services, investment income, and unilateral transfers. It is a record of all transactions between a country and the rest of the world over a particular period, and it is divided into two main components: the current account and the capital account.

The current account measures a country's net income from its economic activities with the rest of the world, including trade in goods and services, investment income, and transfers. The capital account measures changes in foreign ownership of assets, such as foreign investment, loans, and transfers of financial assets.

(d) Saving gap and Technological & Management gap

Ans) The saving gap and technological and management gap are two different concepts that relate to the economic development of a country. The saving gap refers to the difference between the domestic savings rate and the investment rate required to achieve a targeted level of economic growth. It is the difference between the amount of money that a country saves and the amount it needs to invest to achieve a certain level of economic growth. When the investment rate is higher than the savings rate, there is a saving gap, which can lead to a shortage of funds for investment and slow economic growth.

On the other hand, the technological and management gap refers to the difference between a country's technological and managerial capabilities and those of developed countries. It is the gap in knowledge, skills, and practices in areas such as technology, management, and innovation that limit a country's ability to improve productivity and competitiveness. The technological and management gap is often seen as a major obstacle to economic development, as it limits a country's ability to adopt advanced technologies, improve productivity, and compete in global markets.

Q5) Write short notes on the following:

(a) Start Up India

Ans) Start Up India is an initiative launched by the Indian government in January 2016 to promote entrepreneurship and innovation in the country. The program aims to create a conducive environment for start-ups to grow and thrive by providing them with access to funding, mentoring, and networking opportunities. Under the Start Up India program, eligible start-ups can apply for tax benefits, including a three-year income tax exemption and exemption from capital gains tax on the sale of their assets. The program also offers a credit guarantee fund to help start-ups access loans and credit from financial institutions.

The initiative also includes several measures to facilitate ease of doing business, including simplification of the registration process and relaxation of labour laws for start-ups with fewer than 50 employees. The program also aims to promote entrepreneurship in rural areas and among women and marginalized communities. Since its launch, the Start Up India program has helped to foster a vibrant start-up ecosystem in the country, with thousands of start-ups registered and millions of dollars in funding provided to support their growth. The program has also encouraged the development of new technologies and business models, generated employment, and contributed to the country's economic growth.

(b) SAARC

Ans) SAARC, or the South Asian Association for Regional Cooperation, is an intergovernmental organization established in 1985 to promote regional cooperation and economic development among the member countries of South Asia. The member countries of SAARC include Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka.

The main objectives of SAARC are to promote economic, social, and cultural cooperation among its member countries, improve the standard of living of the people in the region, accelerate economic growth, and strengthen relations among the member states. To achieve these objectives, SAARC has established various mechanisms and platforms for cooperation, including the SAARC Summit, Council of Ministers, and Technical Committees on various sectors such as agriculture, energy, and tourism.

Despite its potential, SAARC has faced various challenges over the years, including political tensions and security issues among the member countries, limited progress in economic integration, and slow implementation of agreements and programs. However, the organization continues to play a vital role in promoting regional cooperation and has made progress in areas such as trade facilitation, energy cooperation, and cultural exchanges.

(c) Special Economic Zones (SEZs)

Ans) Special Economic Zones (SEZs) are designated geographical areas that offer special economic policies and incentives to promote foreign investment, exports, and economic growth. SEZs aim to create an environment that is conducive to business by providing a range of facilities and benefits such as tax exemptions, streamlined regulatory procedures, and access to world-class infrastructure.

In India, SEZs were introduced in 2005 as part of the government's policy to attract foreign investment and boost exports. The SEZ policy provides a range of incentives to developers and units located in SEZs, including income tax exemptions, duty-free import of capital goods and raw materials, and exemption from state taxes and levies.

SEZs have been successful in attracting foreign investment and boosting exports in several countries. In India, SEZs have contributed significantly to exports and employment generation in sectors such as IT/ITES, manufacturing, and pharmaceuticals. However, there have been concerns about the social and environmental impact of SEZs, as well as issues related to land acquisition and displacement of local communities.

To address these concerns, the government has taken several measures to ensure the sustainable development of SEZs, such as setting up an SEZ Monitoring Committee to oversee compliance with environmental and social safeguards and introducing a social impact assessment before approving new SEZs.

(d) National Policy on Electronics 2019

Ans) The National Policy on Electronics (NPE) 2019 is a policy document released by the Government of India with the objective of promoting the electronics industry in the country. The policy aims to make India a global hub for electronics manufacturing and to increase the value of electronics production in the country to USD 400 billion by 2025.

The NPE 2019 outlines several key strategies to achieve this objective, including providing support for electronics design and manufacturing, creating a favourable business environment for investors, promoting research and development in the electronics sector, and developing a skilled workforce for the industry.

The policy also includes various incentives and schemes for electronics manufacturers, such as the production-linked incentive scheme, which provides financial incentives for manufacturers who produce certain categories of electronic products in the country. Other initiatives include the Electronics Manufacturing Clusters scheme, which provides infrastructure support to electronics manufacturing units, and the Modified Special Incentive Package Scheme (M-SIPS), which provides financial incentives for setting up new manufacturing units.

The NPE 2019 is expected to boost electronics manufacturing in the country and attract investment from domestic and international companies. The policy is also expected to create new employment opportunities and contribute to the country's economic growth.