MP3-IE-19-05

TOPICS

International Trade Trade Policy Balance 0f Payments (BoP) Foreign Capital Impact of Globalization on Indian EconomyInternational Monetary Fund (IMF) World Trade Organization (WTO) World Bank Group Deglobalization

INDIANECONOMY

PART-5

ContentsI1. nternational Trade 05-10

What is Foreign Trade? 1. ......................................................................... 5Features of International Trade 2. .......................................................... 5Advantages of Foreign Trade 3. ............................................................... 6Disadvantages of Foreign Trade 4. .......................................................... 6Analysis of Foreign Trade of a Country 5. .............................................. 7Foreign Trade of India 6. .......................................................................... 8Foreign Trade of India in 2017-18 7. ........................................................ 8

Trade Policy 12. 1-18

Aspects of Trade Policy 1. ....................................................................... 11Trade Policy Instruments and their Effects 2. ..................................... 11Highlights of The Foreign Trade Policy 2015-2020 3. ........................... 13Critical Appraisal of the New Trade Policy 4. ....................................... 16

Balance 0f Payments3. (BOP) 19-22

Current and Capital Account 1. ............................................................. 20Distinction between Concept of Balance of Trade 2. ............................. and Balance of Payments ................................................................... 22

Foreign Capital 24. 3-31

Introduction 1. ......................................................................................... 23Arvind Mayaram Committee on rationalizing the FDI/FII Defi nition2. 26Why Do Companies Invest Overseas? 3. .............................................. 26Concerns About Shifting Production Due to Foreign Investment 4. 26Why has Foreign Investment Increased so 5. ......................................... Dramatically in Recent Decades ........................................................ 27Efforts to Increase International Investment 6. ................................. 28FDI in India 7. ........................................................................................... 29

Impact of 5. Globalization on Indian Economy 32-39

Historical Development 1. ...................................................................... 32Financial Flows 2. .................................................................................... 33Concerns and Fears 3. ............................................................................. 34

India’s Stance 4. ...................................................................................... 35Demands on the Trading System 5. ...................................................... 37Actions by India 6. ................................................................................... 38

International Monetary Fund (IMF) 46. 0-45

Historical Development 1. ...................................................................... 40Functions of IMF 2. .................................................................................. 41How is the IMF Financed? 3. .................................................................. 41International Liquidity 4. ....................................................................... 41Special Drawing Rights (SDR) 5. ............................................................ 42Reasons for SDR Creation 6. ................................................................... 42IMF QUOTA 7. ........................................................................................... 43Recent Reforms 8. ................................................................................... 44Decision-making in the IMF 9. ............................................................... 45

World Trade Organization (WTO) 47. 6-71

Main provisions of WTO 1. ...................................................................... 47General Principles 2. ............................................................................... 48Trade-Related Investment Measures (TRIMS) 3. ................................. 49Legal Framework 4. ................................................................................. 50Impact on Indian Agriculture 5. ............................................................ 52Implications of the Agreement 6. ......................................................... 56Doha Round in Detail 7. .......................................................................... 58Success 8. .................................................................................................. 65Critique/Failures 9. ................................................................................. 67Conclusion 10. ............................................................................................ 71

World Ban8. k Group 72-76

World Bank & India 1. ............................................................................. 73AIIB and NDB 2. ....................................................................................... 74

Deglobalization 79. 7-91

Deglobalization#1: Protection - Economic Deglobalisation 1. .......... 79Deglobalization#2: Brexit 2. ................................................................... 82Deglobalization#3: Refugees in Europe 3. ........................................... 87Deglobalization#4: Decline of Multilateralism 4. ................................ 89Conclusion 5. ............................................................................................ 91

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CHAPTER 1

What is Foreign Trade? Generally no country is self-suffi cient. It has to depend upon other countries for importing the goods which are either non-available with it or are available in insuffi cient quantities. Similarly, it can export goods, which are in excess quantity with it and are in high demand outside.Foreign Trade means trade between the two or more countries. Foreign Trade involves different currencies of different countries and is regulated by laws, rules and regulations of the concerned countries. Thus, Foreign Trade is more complex.Foreign Trade is in principle not different from domestic trade as the motivation and the behaviour of parties involved in a trade do not change fundamentally regardless of whether trade is across a border or not. The main difference is that Foreign Trade is typically more costly than domestic trade.The reason is that a border typically imposes additional costs such as tariffs, time costs due to border delays and costs associated with country differences such as language, the legal system or culture. Foreign Trade consists of ‘export trade’ and ‘import trade’. Export involves sale of goods and services to other countries. Import consists of purchases from other countries.International or Foreign trade is recognized as the most signifi cant determinants of economic development of a country, all over the world. The foreign trade of a country consists of inward (import) and outward (export) movement of goods and services, which results into outfl ow and infl ow of foreign exchange. Thus it is also called EXIM Trade.

Features of International Trade The following are the distinguishing features of international trade:

Immobility of Factors: The degree of immobility of factors like labour and capital is generally greater between countries than within a country. Immigration laws, citizenship, qualifi cations, etc. often restrict the international mobility of labour. International capital fl ows are prohibited or severely limited by different governments. Consequently, the economic signifi cance of such mobility of factors tends to equality within but not between countries. Heterogeneous Markets: In the international economy, world markets lack homogeneity on account of differences in climate, language, preferences, habit, customs, weights and measures, etc. The behaviour of international buyers in each case would, therefore, be different.Different National Groups: International trade takes place between differently cohered groups. The socio-economic environment differs greatly among different nations.Different Political Units: International trade is a phenomenon which occurs amongst different political units.

INTERNATIONALTRADE

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Different National Policies and Government Intervention: Economic and political policies differ from one country to another. Policies pertaining to trade, commerce, export and import, taxation, etc., also differ widely among countries though they are more or less uniform within the country. Tariff policy, import quota system, subsidies and other controls adopted by governments interfere with the course of normal trade between one country and another.Different Currencies: Another notable feature of international trade is that it involves the use of different types of currencies. So, each country has its own policy in regard to exchange rates and foreign exchange.

Advantages of Foreign Trade A Competitive Edge: Trading your products internationally can give you an advantage over competition. If the domestic market is already fl ooded with similar products, then overseas markets may just be the answer to better profi tability. This holds especially true for products that aren’t widely available overseas. As the international market for your good gets bigger, sales increase, giving you an advantage over others in your industry.Economies of Scale in Production: Companies engaging in international trade experience improved effi ciency brought on by the presence of economies of scale in production. This can bring about signifi cant trade gains due to the reallocation of resources that can raise productive effi ciency. Simply put, more output can be created at lower costs bringing about major savings.New Markets: International trade can give you the opportunity to understand the varied market trends that can affect your business. It is common business saying that 95% of a company’s prospective market is situated out of the country. And it just won’t be wise to forego such a huge potential for business, leads, profi ts and thus business growth.So, the function of international trade is to capitalize on profi table opportunities for owners, which is the single most signifi cant directive for corporations and many other businesses.Insulation from Seasonal Domestic Sales: For business concerns that offer season specifi c services or products, expanding operations to overseas is a perfectly viable way of staying busy and making money all year around. And staying in business all year round is a great way of outmanoeuvring competitors. International trade can introduce a company to whole new foreign markets.Improved Return on Investments: Spreading your risk in foreign markets and companies means that your organization won’t only be subjected to the tribulations of the U.S economy. This diversifi cation can shield their businesses from the investment risk of putting all their eggs in one basket. Similarly, international traders are also ideally poised to take advantage of the higher than usual potential for growth of some foreign economies. It is important to do your research right to fi nd the right emerging markets for your kind of business. Of course, it is also important to balance these advantages against the likelihood for high costs and abrupt changes that are the special risks of investing internationally.Gains of Specialisation: Each trading country gains when the total output increases as a result of division of labour and specialisation. These gains are in the form of more aggregate production, larger number of varieties and greater diversity of qualities of goods that become available for consumption in each country as a result of international trade.

Disadvantages of Foreign Trade Economic Dependence: Too much dependence on imports may undermine the economy of a country. Developed countries may economically exploit the underdeveloped countries which have to depend for their economic development on the former. There may be colonisation of weak nations.Restricted growth of Home Industries: Foreign trade may discourage the growth of domestic industries. Unrestricted imports and foreign competition might pose a threat to the survival of infant and upcoming industries in the country. Dumping policy of developed nations may cause harm to underdeveloped nations.Misuse of Natural Resources: Excessive exports may cause quick depletion of natural resources of a country. Foreign trade may promote lopsided development if only those goods which have comparative cost advantage are produced in a country.Political Exploitation: Foreign trade may create economic dependence which may threaten political independence. For example, the Britishers came to India as traders and ultimately ruled the country for centuries.

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Import of Harmful Goods: Import of luxury goods, spurious drugs, etc., may cause harm to the well-being of people. Exports of essential commodities may result in shortage of these goods at home and people suffer due to infl ation.Rivalry Among Nations: Intense competition for exports may lead to rivalry among nations. It may hamper international cooperation. Foreign trade creates rivalry amongst nations due to competition in foreign markets. Unhealthy competition may lead to confl ict of interest and eventually to wars between nations.Invasion of Culture: Foreign trade may lead to invasion of a country’s culture. Young citizens of poor nations get accustomed to foreign consumption pattern and lifestyles.Dumping: Dumping tactics resorted to by advanced countries may harm the development of poor countries.

Analysis of Foreign Trade of a Country A country’s analysis of foreign trade can be made in terms of its three main profi les:

Volume of Trade It relates to the size of international transactions. Since a large number of commodities enter in international transaction, the volume of trade can be measured only in terms of money value. The trends in the value of trade over time help to identify the basic forces that may be operating at different periods in the economy.However, mere absolute changes in the value of trade are not a satisfactory guide. Hence, it is necessary to fi nd the changes in the value of trade by relating them to two variables, viz.

Share of exports/imports in GDP, and Share of exports/imports in world trade.

The share of exports/imports in GDP indicates the degree of outward-orientation or openness of an economy in regard to its trade. This, in a broad way also refl ects the nature of trade strategies adopted in the country. The ratio of exports to GDP could also be interpreted to refl ect the average supply capability of the economy in terms of its exports.It can therefore be called as average propensity to export. A similar ratio between imports and GDP gives the average propensity to import. However, the relative share of exports in output under an effi cient allocation of resources will be less in bigger economies than in smaller economies.The share of exports in the world trade indicates the importance of the country as a nation in the world economy. It refl ects the market thrust that the country is able to realise in the presence of the various competitors in the world market. Changes in this ratio, thus, indicate the shift in the position of the comparative advantage of the country.Further, changes in the exports may be compared to the changes in the value of imports. It is the relationship between two variables, which is known as the terms of trade (TT), i.e. the terms at which exports exchange for imports. Terms of trade can be defi ned in respect of (i) net barter terms of trade, (ii) gross barter terms of trade, and (iii) income terms of trade.

Composition of Trade It is indicative of the structure and level of development of an economy. For instance, most of the developing countries depend for their export earnings on a few primary commodities (PCs). These countries export raw materials of agricultural origin and import manufactured industrial products, thus, denying themselves the benefi ts of value added.As an economy develops, its trade gets diversifi ed. It no more remains dependent on a few primary commodities for its export as it begins to export more of manufactured industrial goods importing industrial raw materials, capital equipment and technical know-how.Manufactured exports create greater value addition than the PCs as they go through more stages of processing. The manufacturing sector has greater linkages with the rest of the economy and hence, the downstream effects on exports from these sectors are likely to be greater than primary exports.The commodities entering the trade could also be classifi ed by various other criteria such as value added per unit of output, productivity of labour, capital intensity in production, the strength of backward and forward linkages, etc.

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The shifts in the commodity composition of trade in these categories would bring out the nature of structural changes concerning income generation, employment effect and overall industrialization through linkage effects, etc.

Directions of Trade The direction of the trade is indicative of the structure and level of economic development. As a country develops and its trade gets diversifi ed, it has to seek new outlets for its exports. Its horizon of choice in terms of imports also gets widened. The country begins to trade with an increasingly large number of countries.

Foreign Trade of India Foreign trade in India includes all imports and exports to and from India. At the level of Central Government it is administered by the Ministry of Commerce and Industry. There are records throughout history of India’s trade with foreign countries. Prior to the 1991 economic liberalisation, India was a closed economy due to the average tariffs exceeding 200 percent and the extensive quantitative restrictions on imports. Foreign investment was strictly restricted to only allow Indian ownership of businesses. Since the liberalisation, India’s economy has improved mainly due to increased foreign trade. For providing, regulating and creating necessary environment for its orderly growth, several Acts have been put in place. The foreign trade of India is governed by the Foreign Trade (Development & Regulation) Act, 1992 and the rules and orders issued under it. Payments for import and export transactions are governed by Foreign Exchange Management Act, 1999. Customs Act, 1962 governs the physical movement of goods and services through various modes of transportation.To make India a quality producer and exporter of goods and services, apart from projecting such image, an important Act - Exports (Quality control & inspection) Act, 1963 has been in vogue. Developmental pace of foreign trade is dependent on the Export-Import Policy adopted by the country too. Even the EXIM Policy 2002-2007 lays its stress to simplify procedures, sharply, to further reduce transaction costs.

Foreign Trade of India in 2017-18

Trade performance

Volume of Trade Merchandise Trade

India’s global trade increased by 16.32 per cent to USD 767.9 billion in 2017-18 as agains in 2016- 17, the trade stood at USD 660.2 billion.

Table B: Trade Data for period 2007-08 to 2017-18(P) (Values in US$ Million )

S. No Year Exports % Growth Imports %

GrowthTrade

Balance

1 2007-2008 163132 29.05 251654 35.49 -88522

2 2008-2009 185295 13-59 303696 20.68 -118401

3 2009-2010 178751 -3.53 288373 -5.05 -109621

4 2010-2011 249816 39.76 369769 28.23 -119954

5 2011-2012 305964 22.48 489319 32.33 -183356

6 2012-2013 300401 -1.82 490737 0.29 -190336

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7 2013-2014 314405 4.66 450200 -8.26 -135794

8 2014-2015 310338 -1.29 448033 -0.48 -137695

9 2015-2016 262290 -15.48 381007 -14.96 -118717

10 2016-2017 275852 5.17 384356 0.88 -108504

Exports (including re-exports) Exports during 2017-18 are at US $ 302.84 Billion registering a growth of 9.78 per cent in dollar terms vis-à-vis 2016-17.

Imports Cumulative value of imports for the period April-March 2017-18 was US $ 459.67 Billion (Rs. 2962897.70 crore) as against US $ 384.36 Billion (Rs. 2577665.59 crore) registering a positive growth of 19.59 per cent in Dollar terms and 14.94 per cent in Rupee terms over the same period last year.

India’s foreign Trade for April -March 2017-18

Merchandise (P) Services* (P)Merchandise + Services (P)

Values in USD billions

%Growth Values in USD billions

%Growth Values in USD billions

Exports 302.84 9.78 175.31 17.63 478.15

Import 459.67 19.59 105.65 19.74 565.32

Trade Balance –156.83 44.54 69.66 14.56 –87.17

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Composition Non-petroleum and Non Gems & Jewellery exports in March 2018 were valued at US $ 22.42 Billion as against US $ 21.44 Billion in March 2017, an increase of 4.60%. Non-petroleum and Non Gems and Jewellery exports during April-March 2017-18 were valued at US $ 222.45 Billion as compared to US $ 200.89 Billion for the corresponding period in 2016-17, an increase of 10.73%.

Direction of Trade During the period 2017-18 (Apr-Oct) (P), the share of Asia comprising of East Asia, ASEAN, West Asia, Other West Asia, North East Asia and South Asia accounted for 49.39 per cent of India’s total exports. The share of America and Europe in India’s exports stood at 21.09 per cent and 19.24 per cent respectively of which EU countries (27) comprises 17.07 per cent. During the period, USA (16.06 per cent) has been the most important country of export destination followed by UAE (10.14 per cent), Hong Kong (5.22 per cent), China people’s REPUBLIC (3.98 per cent) and Singapore (3.72 per cent).Asia accounted for 60.49 per cent of India’s total import during the period 2017-18 (Apr-Oct) (P), followed by Europe (14.78 per cent) and America (11.81 per cent). Among individual countries the share of China (16.86 per cent) stood highest followed by USA (5.47 per cent), UAE (5.01 per cent), Saudi Arabia (4.65 per cent) and Switzerland (4.38 per cent).

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