Economic and Financial Terminology Part 3

Globalization – Opening up of the Indian Economy – Balance of Payments, Export-Import Policy

1. Balance of payments(BoP) is the net value of imports and exports of all three items i.e., visible, invisible and capital transfers. A balance sheet of an economy showing its total external transactions with the world-calculated on the principles of accounting-is an annual concept.

2. Current Account

Current account of Balance of Payments consist of all transactions relating to goods, services and income. It is functionally classified into merchandise and invisibles.

Current account deficit is the situation where payments on the current account out of the payments into the country. In current account surplus, there is a net inward payment into the country on the current payment.

3. Capital Account

Capital account is that account which records all such transactions between residents of a country ad rest of the world, which causes a change in the asset or liability status residents of a country or its government. Investments (FDI and FII) and borrowings (ECB) are part of the capital account.

4. Components of Capital Account

Following are the principle forms of capital account transactions

Foreign Investment  It has two sub-components which are as follows

(i) Foreign Direct Investment (FDI) referring to the purchase of assets in the rest of the world, which allows control over that assets.

(ii) Portfolio Investment referring to purchase of an asset in the rest of the asset. Portfolio investment into India also consists of Foreign Institutional Investment (FII). e.g., purchase of some shares of a company by TATA in the rest of the world.

Loans It has two sub-components which are as follows.

(i) Commercial Borrowings referring to borrowing by a country (including government and the private sector), from the international money market. This involves market rate of interest without considerations of any concession.

(ii) Borrowings as External Assistance referring to borrow by a country with considerations of assistance. It involves lower rate of interest compared to that prevailing in the open market.

Banking Capital Transactions referring to transactions of external financial assets and liabilities of commercial banks and cooperative banks operating as authorized dealers in foreign exchange. These transactions include NRI deposits.

Reserve Account

The official reserve account records the change in stocks of reserve assets (also known as foreign exchange reserves) at the country’ s monetary authority.

Net Errors and Omissions

This is the last component of the balance of payments and principally exists to correct any possible efforts made n accounting for the three other accounts. They are often referred to as balancing items.

— All capital transactions causing flow of foreign exchange into the country are recorded as positive items in the capital account of BoP. E.g., Loans from rest of the world, foreign direct investment or portfolio investment by the non-residents I our country.

— All capital transactions causing flow of foreign exchange out of the country are recorded as negative items in the capital account of BoP.

— While FDI and portfolio investments are non-debt creating capital transactions, borrowings are debt-creating capital transactions.

5. The objectives for maintaining foreign exchange reserves

a) Maintaining confidence in monetary and exchange rate policies

b) Enhancing capacity to intervene in foreign exchange markets

c) Limiting external vulnerability by maintaining foreign currency liquidity to absorb shocks during times of crisis

6. India’s FE reserves as on 27 May 2016 aggregated to $ 360.19 billion (Current Assets 336.22 bn, Gold 20.05 bn, SDR 1.49bn and Reserves with IMF 2.43 bn)

7. BoP Trends

India had faced pressure on Balance of Payments (BoP), since planning period due to either internal or external factors.

– upto 1976 India had heavy deficit in BOP and extremely tight payment  position mainly due to the impact of three wars (leading to sudden heavy expenditure and import of defense equipments) several droughts and the first oil shock in 1973, and it had to resort to severe import controls and foreign exchange regulation etc.

– Period II (1976-77 to 1979-80) was relatively a golden period as it had a small current account surplus of 0.6% of the GDP and also possessed foreign exchange reserves equivalent to about seven months imports.

– Period III (1980-81 to 1990-91)- broadly corresponds to the period of 6th and 7th plans and was marked by severe BoP difficulties

  • The reasons for severe difficulties – widening trade deficits, gradual decline in net receipts from invisibles and reductions in flows of concessional assistance to India principally from the World Bank group, the third oil shock during 1990-91
  • During 1990s, domestic political developments affected confidence abroad in Indian economy etc.
  • International rating agencies downgraded India.
  • Substantial outflow of deposits held by NRIs.
  • Reserves declined to a low of 0.9 billion in January 1991

 – Period IV (1991-92 onwards)

The fiscal deficit of the centre and the states soared to over 11 percent in 1991 and total public debt as a proportion of GNP doubled reaching the level of 60%. These were key factors leading to BOP crisis of 1991 and India was on the verge of defaulting on its external commitments.

  • The reforms of 1990’s have facilitated India to move away from closed economy framework towards a more open and liberal economy.
  • Foreign exchange reserves were built to very comfortable positions and the difficulties of BoP came under control and the reasons for the same are as follows
  • — Trade balance has always been in deficit since imports have always exceeded exports
  • — When current account deficits are larger than capital account surpluses, foreign exchanges reserves are also used to cover these deficits.

8. Reasons for Deficit in India’s Balance of Payments( BoP)

The important reasons  for deficit in India’s BoP position can be cited as follows

Irreversible Trade Deficit

Our imperative imports of oil and coal and India’s passion for gold.

Rise in Imports

The reasons for rapid rise in imports have been building industrial base (in the early stages, increase in export related imports (gems, jewellery, capital goods) increase in imports of industrial raw materials, rise in the price and imports of petroleum, Oil and Lubricants (POL) products etc.

Devaluation and Depreciation of the Rupee

The devaluation and depreciation of the rupee have also led to an increase in the price of imports. Exports have become cheaper, the low price and income elasticities of demand for exports have resulted in slow increase in exports.

9. Slow Rise in Export Earnings

Exports earnings rose, however , they were not sufficient enough to meet the rising imports. Thus, rise in exports has neither been substantial  nor continuous. The growth in exports has not been sufficient enough to finance the rising imports.

10. Debt Service

The Balance of Payments (BoP) problem has also aggravated due to the rising obligation of amortising payments in 2011-12, debt service ratio was 6% with the ever increasing imports and slow pace of exports, the most effective solutions for India’s Balance of Payments (BoP) problem is cost reduction and competitiveness in global market.

11. Appreciation

The recent appreciation of the rupee has made exports costlier and imports cheaper. This may also add to the Balance of Payments (BoP).

12. Foreign Capital

Foreign capital inflow to the country can be either in the form of concessional assistance or non-concessional flow.

Non- Concessional flows include mainly External Commercial Borrowings (ECBs), loans on market terms, NRI deposits and foreign investment. Foreign investment can be categorized into Foreign Direct Investment (FDI) and Foreign Institutional Investment (FII)

13. Foreign Direct Investment (FDI)

  • Foreign Direct Investment (FDI) in India is the major monetary source for economic development in India. Foreign companies invest in India to take benefits of cheaper wages and changing business environment of India.
  • Economic liberalization started in India in wake of the 1991 economic crisis and since then FDI has steadily increased in India. According to the Financial Times, in 2015 India overtook China and the US as the top destination for the Foreign Direct Investment.
  • The Government of India has amended FDI policy to increase FDI inflow. In 2014, the government increased foreign investment upper limit from 26% to 49% in insurance sector.
  • It also launched Make in India initiative in September 2014 under which FDI policy for 25 sectors was liberalized further. As of April 2015, FDI inflow in India increased by 48% since the launch of “Make in India” initiative. India was ranking 15th in the world in 2013 in terms of FDI inflow, it rose up to 9th position in 2014while in 2015 India became top destination for foreign direct investment.
  • It refers to direct investment in the production capacities of a country by someone from outside the country.
  • Such an investment can be in the form of setting up a new plant or through purchase of shares of a company, where the shareholding gives the foreign entity control over the business of the company.
  • A foreign company can set-up its business in India in two ways, by setting up a company under the Companies Act or by setting up an unincorporated entity like liaison office, project office or branch office.

Approval Mechanism under FDI policy

There are two routes for FDI to enter in India

Automatic Route

In most sectors, FDI is permitted on the automatic route. FDI in such sectors does not require any prior approval and only requires notification of RBI. Government Approval Route

Limited activities require prior government approval.

Proposals of FDI are considered by FIPB (Foreign Investment Promotion Board) now functioning under the Department of Economic Affairs and decisions are conveyed in most cases within 6 to 8 weeks of receipt of complete application.

14. Foreign Institutional Investment (FII)

  • A foreign institutional investor is an entity which is registered in a country outside of the country in which it is investing.
  • In India, it is used to refer to companies which invest in the country’s financial market.
  • In 2013, India accepted the internationally, laid down definition of FII to remove the ambiguity between FII and FDI. Now, when an investor has a stake of less than 10% in a company, it will be treated as FII and where an investor has s stake of more than 10%, it will be treated as FDI.
  • Some of the entities eligible to be treated as FII in India are, pension funds, mutual funds, banks, investment trusts, sovereign wealth fund, Foreign Central Bank etc.
  • FIIs can invest in securities in the primary and secondary markets dated government securities, commercial paper, derivatives, units of schemes floated by domestic mutual funds (including UTI), Indian depository receipts and security receipts.

15. FDI vs FII

FDI flows are preferred over FII inflows for the following reasons

–FDI is considered to be long-term and stable investment whereas FII is considered as hot money i.e., it can move out quickly during adverse circumstances leading to instability and volatility in the exchange rate and the stock market.

— Since, FDI represents ownership, it leads to the inflow of better technology management practices etc while FII is generally only interested in a short term gains.

— Yet, FII’s have also been influencing the incorporation of better technology and management in the companies where they hold shares.

16. Participatory Notes (P-notes)

  • These are financial instruments used by investors or hedge funds that are not registered with the Securities and Exchange Board of India to invest in India Securities.
  • Indian-based brokerages buy India-based securities and then issue participatory notes to foreign investors. Any dividends or capital gains collected from the underlying securities go back to the investors.

17. Qualified Foreign Investor (QFI)

QFI is a person who fulfills the following criteria.

— Resident in country or group which is a member of Financial Action Task

Force (FATF)

— Resident in a country that is signatory to 10SCO’s MoU or a signatory of a bilateral MoU with SEBI.

— Such person should not be resident in India or registered with SEBI as an FII or a sub-account of FII.

— QFI are distinct from FIIs and non-resident Indians. They are allowed to invest directly into mutual funds and stocks of Indian companies.

— It was felt that foreign investors had been kept at bay owing to concerns relating to money laundering and due diligence by the government regulators. For this reason, the new scheme of QFI was started to ensure more foreign capital inflows, reduce market volatility and deepen the markets.

18. Global Depository Receipts (GDRs)

These are equity instruments issued in international markets like London,

Luxemburg etc. /Indian Companies use GDRs to raise capital from abroad.

GDRs are designated in dollars, euros etc.

19. American Depository Receipts (ADRs)

These are the equity instruments issued to American retail and institutional investors. They are listed in New York, either on Nasdaq or New York Stock Exchange.

20. Indian Depository Receipts(IDRs)

These are similar to ADR/ GDR. They are used by non-Indian  companies in the Indian stock markets for issuing equity to Indian investors.

21. Foreign Exchange

  • Foreign Exchange reserves are an important component of the BoP and an essential element in the analysis of an economy external position.
  • India’s foreign exchange reserves comprise Foreign Currency Assets (FCAs) gold, Special Drawing Rights (SDRs) and Reserve Tranche Position (RTP) in the international Monetary Fund (IMF).

22. Exchange Rate

Exchange rate is the rate , at which Indian rupees will be exchanges vis-à

-vis other international currencies, say US dollar, in the foreign exchange market.

– The rupee was historically linked to the British pound sterling till 1946. After independence, India had o fix and maintain the external value of the rupee in terms of gold or the US dollar as required under IMF rules. Therefore, India Fixed the value of rupee at Rs. 3.30 per US dollar. This was the official rate of exchange and RBI would buy and sell foreign currencies at the rate.

23. NEER and REER

The Nominal Effective Exchange Rate (NEER) and Real Effective

Exchange Rate (REER) indices are used as indicators of external competitiveness of the country over a period of time.

  • NEER is the weighted average of bilateral nominal exchange rates of the home currency in terms of foreign currencies,

REER is weighted average of nominal exchange rates, adjusted for home and foreign country relative price differentials.

  • Nominal rupee depreciation, while having some adverse effects such as greater imported inflation, is also useful over time in offsetting higher domestic inflation and ensuring Indian exports remain competitive.
  • REER captures movements in cross currency exchange rates as well as inflation differential between India and its major trading partner and reflects the degree of external competitiveness of Indian products.
  • The RBI has been constructing 6 currency (US dollar, euro for euro zone, pound sterling, Japanese Yen, Chinese Renminbi and Hong Kong dollar) and 36 currency indices of NEER and REER.

24. Present Exchange Rate Policy

  • India has transited from fixed exchange rate policy to a market determined exchange rate. It is broadly a floating rate regime with the central bank intervening only for reducing excess volatility, preventing the emergence of destabilizing speculative activities, maintaining adequate reserves and developing in orderly foreign exchange market.
  • At present, the exchange rate policy is guided by the broad principles of careful monitoring and management of exchange rates with flexibility, while allowing te underlying demand and supply conditions to determine exchange rate movements over a period in an orderly manner.

25. Policy Option with RBI to manage Exchange Rate

  • Using Policy Rates RBI can use policy rates (repo, CRR, SLR etc) to manage the exchange rate. By lowering interest rates, supply of rupee’s increased in the market leading to the depreciation of the currency. Increasing interest rates on the other hand, takes out rupee from the system leading to shortage of rupee supply and thus, appreciation of the rupee.
  • Using Forex Reserves RBI can sell forex reserves and buy Indian rupees leading to demand for rupee. Based on weekly forex reserves data, RBI seems to be selling forex reserves selectively to support rupee. Its intervention has been limited as liquidity in money markets has remained tight and further intervention only tightens liquidity further.
  • Easing Capital Controls Capital controls could be eased to allow more capital inflows. “resisting currency depreciation is best done by increasing the supply of foreign currency by expanding market participation”. This in essence, has been RBI’s response to deprecating rupee.

26. FEMA (Foreign Exchange Management Act) replaced FERA, (Foreign Exchange Regulation Act)  which was in place since 1974 by amendment to FERA in 1993

  • Done to relax the controls on foreign exchanges in India, as a result of economic liberalization.
  • FEMA served to make transactions for external trade (exports and imports) easier. Involving current account for external trade no longer required RBI’s permission.

27. Main Features of FEMA.

  • Activities such as payments made to any person outside India or receipts from them, along with the deals in foreign security is restricted. It is FEMA that gives the Central Government the power to impose the restrictions.
  • Restrictions are imposed on people living in India, who carry out transactions in foreign exchange, foreign security or who own or hold immoveable properties abroad.
  • Without general or specific permission of the Reserve Bank of India, FEMA restricts the transactions involving foreign exchange or foreign security and payments from outside the country to India the transactions should be by an authorized person.
  • Deals in foreign exchange under the current account by an authorized person can be restricted by the Central Government, based on public interest.
  • Although, selling or drawing of Foreign exchange is done through an authorized person, the RBI is empowered to a number of restrictions.
  • People living in India will be permitted to carry out transactions in foreign exchange, foreign currency or to own or hold immovable property aboard, if the currency, security or property was owned or acquired, when he/she was living outside India or when it was inherited to him/her by someone living outside India.
  • Exporters are needed to furnish their export details to RBI. To ensure that the transactions are carried out properly, RBI may ask the exporters to comply to its necessary requirements.

28. Convertibility of Rupee

Convertibility of a currency is the ease, with which it can be converted into any other foreign currency. Current account Convertibility refers to freedom in respect of exports and imports, which has already been achieved to a large extent in India. Capital Account Convertibility refers to freedom in respect of investment and borrowing within India (by outsiders) and outside India (by those inside India).

  Capital Account Convertibility in India

  • Capital Account Convertibility (CAC) for Indian economy refers to the abolition of all limitations with respect to the movement of capital from India to different countries across the globe.
  • It is associated with changes of ownership in foreign/domestic financial assets and liabilities and embodies the creation and liquidation of claims on or by the rest of the world.
  • Presently rupee is not fully convertible on Capital Account and is regulated through policies of FDI, FII and QII

29. India’s External Debt

  • India’s external debt has increased over time and India is one of the highly indebted countries of the world in terms of total debt outstanding
  • Gross external debt is defined, at a point of time, as not contingent liabilities that require payments of principle and interest by the debtor at same points in the future and that are owed to non-residents by residents of an economy.
  • India’s external debt stock at end December, 2015 stood at 480.2 billion, recording an increase of US$ 4.9 billion (1.0 per cent) over the level at end-March 2015. The rise in external debt during the period was due to long-term external debt particularly commercial borrowings and NRI deposits.
  • Long-term debt at end-December 2015 was US$ 398.6 billion, Short-term debt witnessed a decline of 4.6 per cent and stood at US$ 81.6 billion at end-December 2015.
  • The ratio of short-term external debt to foreign exchange reserves stood at 23.3 per cent at end-December 2015 lower than 26.7 per cent at end-March 2015.
  • The ratio of concessional debt to total external debt was 8.7 per cent at end-December 2015 (8.8 per cent at end-March 2015).

Concepts of External Debt

Sovereign (Government) and Non-Sovereign (Non- Government) Debt

  • Sovereign debt includes

— External debt outstanding on account of loans received Government of India, under the external assistance programme and civilians component of rupee debt.

— Other Government debt comprising borrowings from the defence debt component of rupee debt as well as foreign currency defence debt.

— FII in Government Securities. Non- Sovereign includes the remaining components of external debt. All other debt is non-sovereign debt.

External Commercial Borrowings (ECBs)

  • The definitions of commercial borrowing includes loans from commercial banks other commercial financial institutions, money raised through issue of securitised Bonds (IDBs) and Resurgent India Bonds (RIBs), Floating Rate Notes (FRN) etc.
  • It also includes borrowings through buyers’ credit and supplier credit mechanism of the concerned countries International Finance Corporation, Washington (IFC(W)), Nordic Investment Bank and private sector borrowings from Asian Development Bank (ADB).
  • During good times, domestic borrowers could enjoy triple benefits of

— Lower interest rates,

— Longer maturity and

— Capital gains due to domestic currency appreciation. This would happen, when the local currency is appreciating due to surge in capital flows and the debt service liability is falling in domestic currency items. The opposite would happen, when the domestic currency is depreciating due to reversal of capital flows during crisis situations, as happened during the 2008, global crisis.

  • A sharp depreciation in local currency would mean corresponding increase in debt service liability, as more domestic currency would be require to buy the same amount of foreign exchange for debt service payments.
  • This would lead to erosion in profit margin and have market-to-market implications for the corporate. There would also be debt overhang problem, as the volume of debt would rise in local currency terms.
  • Together, these could create corporate distress, especially because the rupee tends to depreciate precisely, when the Indian economy is also under stress and corporate revenues and margin are under pressure.

Decisions on ECB norms Relaxation at a Glance

  • Automatic approval limit increased to $ 750 million from $ 500 million.
  • $ 30 billion overall ceiling can be increased later, if needed.
  • Refinancing of rupee loans allowed through ECB.
  • ECB can be raised in Chinese currency Renminbi.
  • Refinance of buyer’s / supplier’s credit permitted thorough ECB.
  • Interest during construction under ECB permitted.
  • Allowed availing of ECB denominated in rupee.
  • High net worth individuals can invest in infra debt fund.
  • Inclusion of infra finance companies as eligible issuers for FII’s debt limit.
  • Tax exemption on interest on with holding tax to be taken up with revenue debt.

NRI Deposits

Non- Resident Indian (NRI), deposits are of three types

(i) Non-Resident (External) Rupee Account, was introduced in 1970. Any NRI can open an NRE account held in these deposits (SB, CA, FD and RD) together with the interest accrued can be repatriated.

(ii) Foreign Currency Non-Resident (Banks) Deposits (FCNR-B) was introduced with effect from 15th May, 1993. These are term deposits maintained only in pound sterling, US dollar, Japanese yen, euro, Canadian dollar and Australian dollar. The minimum maturity period of these deposits was raised from 6 months to 1 year effective October, 1999. From 26th July, 2005, banks have been allowed to accept FCNR (B) deposits up to a maximum maturity period of 5 years against the earlier maximum limit of 3 years. Banks can pay LIBOR/SWAP + 200 basis points for deposits upto 3 years and LIBOR/SWAP + 300 basis points for deposits of 3 to 5 years.

(iii) Non-Resident Ordinary Rupee(NRO) Account Any person, resident outside India may open and maintain NRO account with an authorized dealer or in authorized bank for the purpose of putting through bonafide transactions denominated in Indian rupee. NRO Accounts may be opened/maintained in the form of current saving, recurring or fixed deposits. NRI/ Persons of Indian Origin (PIO) may remit an amount not exceeding USD 1 million per financial year, out of the balances held in NRO Accounts.

(iv) Resident Foreign Currency Account.  This is for returning Indians who are permitted to retain their earnings abroad.

30. India’s Foreign Trade

  • Foreign trade plays a significant role in the economy of each country. Foreign Trade helps a country to utilize its natural resources and to technical know-how.
  • A country can industrialise itself by importing necessary capital, machines and raw materials from more advanced and industrialized nations. By proper control of foreign trade, employment, output, prices industrialized and economic development of the country can be influenced favourably.

Trade Composition

Export Composition

  • Noticeable compositional changes have taken place in India’s export basket between 2000-02 and 2013-2014 with the share of petroleum, crude and products increasing by nearly five times o 20.1% , catapulted by its 33.5% growth (CAGR). While there has been a small fall in share of primary products, there was a 15.1% point fall in share of manufactured goods.
  • Among the four major items under manufactured goods, the shares of gems and jewellery and textiles (including RMG) fell, with the fall in the latter to 9.7% being more than half. Two major manufactured goods items, engineering goods and chemicals and related products, gained in shares, due to their nearly 20% CAGR. The fall in export shares of manufactured goods between 2000-01 and 2013-14, is mainly on account of the fall in export shares of these items to a major destination like the USA.
  • Among these items, the shares of exports of textiles and gems and jewellery to the US fell while those of chemicals and related items and engineering goods increased.
  • In the case of the EU, the shares of textiles, engineering goods and chemicals and related products increased while those of gems and jewellery and leather declined. In the case of China, the shares of textiles and engineering goods increased and that of chemicals and related products decreased. Thus, not only has there been a composition change, there has also been a directional change in India’s exports.
  • The recent sectoral performance of exports shows while many sectors were in the negative growth zone in 2012-13, in 2013-14, except gems and jewellery and electronic goods all the first 2 months of 2014-15 (IP), there was further improvement in the products (14.0%) , marine products (40.1%) and textiles (13.2%).

Import Composition

  • Import growth decelerated sharply from 32.3% in 2011-12 to 0.3% in 2012-13 and fell to a negative – 8.3% in 2013-14, owing to fall in non-oil imports by 12.8%. Among the major items of import, the value of petroleum, oil and Lubricants (POL), which constituted 36.7% of total imports in 2013-14 grew marginally by 0.7%.
  • The other major item of imports is gold, the import of which delined from 1078 tonnes in 2011-12 to 1037 tonnes in 2012-13 and further to 664 tonnes in 2013-14, on the back of several measures taken by 40.1% to US $ 33.4 billion in 2013-14. Capital goods is the other major import category.

31. Export Promotion

  • The main Thrust of India’s Foreign Trade Policy has been to promote exportable goods and produce importable goods in the country to meet the domestic demand for foreign goods. A brief account of these major policy thrust are as follows

— Export promotion refers to policies and measures of the government designed to encourage exports with a view to improving forex reserves and correcting the BoP deficit. The significance of export promotion (as a strategy to combat BoP deficit), has come into greater focus after imports have been liberalized in accordance with the emerging trend towards globalization.

— The government is trying to encourage exports through various kinds of cash incentives, subsidies as well as concessions.

32. General Agreement on Tariffs and Trade

  • The General Agreement on tariffs and Trade (GATT) was a multilateral agreement regulations international trade. According to its preamble, its purpose was the “substantial reduction of tariffs and other trade barriers and the elimination of preferences, on a reciprocal and mutually advantageous basis”.
  • It was negotiated during the United Nations Conference on Trade and Employment and was the outcome of the failure of negotiating governments to create the International Trade Organisation (ITO).
  • GATT was signed in 1947 and lasted until 1994, when it was replaced by the World Trade Organisation in 1995. The original GATT text (GATT 1947) is still in effect under the WTO framework, subject to the modifications of GATT 1994.

33. GATT and the World Trade Organisation (Uruguay Round)

  • In 1993, The GATT was updated (GATT 1994) to include new obligations upon its signatories. One of the most significant changes was the creation of the World Trade Organisation(WTO).
  • The 75 existing GATT members and the European Communities became the founding members of the WTO on 1st January, 1995.
  • The other GATT members rejoined the WTO in the following 2 years (the last being Congo in 1997). Since the founding of the WTO, 21 new non-GATT members have rejoined and 29 are currently negotiating membership.
  • There are a total of 157 member countries in the WTO, with Russia and Vanuatu being new members as of 2012 of the original GAT members, Syria and the SFR Yugoslavia have not rejoined the WTO.

34. FOREIGN TRADE POLICY: 2015 – 2020s

India is aiming to nearly double its annual exports to $900 billion by 2020 with the government’s signature ‘Make in India’ scheme serving as focal point of a new trade policy, which seeks to create jobs and aid economic revival.

– the government wanted to increase India’s share of global exports from the current 2% annually to 3.5% by 2020. India’s exports currently stand at $466 billion.

– There would be no conditionality attached to any scrips issued under MEIS and SEIS and the goods imported against these scrips are fully transferable.

– For grant of rewards under MEIS, the countries have been categorised into three Groups, whereas the rates of rewards under MEIS range from 2% to 5%. Under SEIS the selected Services would be rewarded at the rates of 3% and 5%.

– The MEIS has replaced five existing schemes: Focus Products Scheme, Market-linked Focus Products Scheme, Focus Market Scheme, Agriculture Infrastructure Incentive Scrips and Vishesh Krishi Grameen Udyog Yojana (VKGUY).

– SEIS has replaced the existing Served From India Scheme (SFIS). The rates of rewards under MEIS will now range from 2 per cent to 5 per cent, from the 2-7 per cent range earlier. On the other hand, under SEIS these will be from 3 per cent to 5 per cent, from the 5-10 per cent range earlier.

35. India’s Exports (Services and Merchandise) Targets:

2013-14: $466 billion

2019-20: $900 billion (projected)

FTP Objectives

Increase in India’s share in world exports from 2% to 3.5%, by 2020

— The policy is also aligned with ‘Making in India’, ‘Digital India’ and ‘Skill India’ initiatives

—  India to be made a significant participant in world trade by 2020

Merchandise exports from India to promote specific services for specific Markets gn Trade Policy

FTP would reduce export obligations by 25% and give boost to domestic manufacturing

FTP 2015-20 introduces two new schemes,

  • “Merchandise Exports from India Scheme (MEIS)” and “Services Exports from India Scheme (SEIS)”.
  • ‘Services Exports from India Scheme’ (SEIS) is for increasing exports of notified services.
  • These schemes (MEIS and SEIS) replace multiple schemes earlier in place, each with different conditions for eligibility and usage.
  • Incentives (MEIS & SEIS) to be available for SEZs also.e-Commerce of handicrafts, handlooms, books etc., eligible for benefits of MEIS.
  • Agricultural and village industry products to be supported across the globe at rates of 3% and 5% under MEIS.
  • Higher level of support to be provided to processed and packaged agricultural and food items under MEIS.
  • Industrial products to be supported in major markets at rates ranging from 2% to 3%.
  • Served From India Scheme (SFIS) will be replaced with Service Export from India Scheme (SEIS).
  • Branding campaigns planned to promote exports in certain sectors
  • SEIS shall apply to ‘Service Providers located in India’ instead of ‘Indian Service Providers’.
  • Business services, hotel and restaurants to get rewards scrips under SEIS at 3% and other specified services at 5%
  • Duty credit scripts to be freely transferable and usable for payment of customs duty, excise duty and service tax.
  • Debits against scripts would be eligible for CENVAT credit or drawback also.
  • Nomenclature of Export House, Star Export House, Trading House, Premier Trading House certificate changed to 1,2,3,4,5 Star Export House.
  • The criteria for export performance for recognition of status holder have been changed from Rupees to US dollar earnings.
  • Manufacturers who are also status holders will be enabled to self-certify their manufactured goods as originating from India.
  • Reduced Export Obligation (EO) (75%) for domestic procurement under EPCG scheme
  • Online procedure to upload digitally signed document by Chartered Accountant/Company Secretary/Cost Accountant to be developed
  • Inter-ministerial consultations to be held online for issue of various licences.
  • No need to repeatedly submit physical copies of documents available on Exporter Importer Profile.
  • Validity period of SCOMET export authorisation extended from present 12 months to 4 months.
  • Export obligation period for export items related to defence, military store, aerospace and nuclear energy to be 24 months instead of 18 months
  • Calicut Airport, Kerala and Arakonam ICDS, Tamil Nadu notified as registered ports for import and export.
  • Vishakhapatnam and Bhimavarm added as Towns of Export Excellence.
  • Certificate from independent chartered engineer for redemption of EPCG authorisation no longer required.

– In order to give a boost to exports from SEZs, government has now decided to extend benefits of both the reward schemes (MEIS and SEIS) to units located in SEZs. It is hoped that this measure will give a new impetus to development and growth of SEZs in the country.

– Considering the strategic significance of small and medium scale enterprise in the manufacturing sector and in employment generation, ‘MSME clusters’ 108 have been identified for focused interventions to boost exports. Accordingly, ‘NiryatBandhu Scheme’ has been galvanised and repositioned to achieve the objectives of ‘Skill India’. Outreach activities will be organised in a structured way at these clusters with the help of EPCs and other willing “Industry Partners” and “Knowledge Partners”.

-In an effort to push the domestic content requirement, measures have been adopted to encourage procurement of capital goods from indigenous manufacturers under the EPCG scheme by reducing specific export obligation to 75 per cent of the normal export obligation.

– The Agreement on Subsidies and the Countervailing Measures of the WTO envisages the envisages the eventual phasing out of export subsidies. In the case of India, some sectors may be affected and require rationalisation of support over a period of time.

Model Objective Questions

1. Which of the following measures was/were taken in the New Economic policy in 1991 to liberalize and globalize the Indian economy?

a) Devaluation

b) Disinvestment

c) Allowing FDI

d) NRI Scheme

e) All of the above

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e) All of the above 

2. Which of the following is/are the key parameters of globalization?

a) Reduction of trade barriers

b) Creation of an environment in which free flow of capital can take place among nation-states

c) Creation of an environment in which free movement of labour can take place

d) Only a and b

e) All of the above

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e) All of the above 

3. India has made significant progress in financial liberalisation since the institution of financial sector reforms in 1992 and this has been recognised internationally. This has been possible because

A) India has chosen to proceed cautiously and in a gradual manner

B) India has been calibrating the pace of capital account liberalisation with underlying macroeconomic developments

C) Of the state of readiness of the domestic financial system

Select the correct answer using the codes given below:

a) Both A and B

b) Only B

c) Both B and C

d) Only A

e) All of the above

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a) Both A and B

4. It has been noted that developing countries typically run Current Account Deficit (CAD) in their early stages of development. Why?

a) They lack capital

b) They want to supplement their domestic saving

c) They want to achieve higher level of investment and growth

d) Only b and c

e) All of the above

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e) All of the above

4. Which of the following is/are the proximate causes for the global financial crisis that reached flash point in October 2008 with the collapse of Lehman Brothers?

a) The loose monetary policies adopted by reserve currency issuing advanced economies

b) The mercantilist policies adopted by export-led economies

c) Weak regulation of financial markets and intermediaries

d) Only a and b

e) All of the above

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e) All of the above

5. Which of the following is/are the stated objectives of the International Monetary Fund (IMF)?

a) To promote international economic cooperation

b) To promote international trade

c) To promote employment

d) To promote exchange-rate stability

e) All of the above

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e) All of the above 

6. Which of the following institutions of the World Bank group is also known as the soft window of the World Bank?


b) IDA

c) IFC



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b) IDA

7. Which of the following statements is/are correct regarding Special Drawing Rights (SDR)?

A) These are supplementary foreign exchange reserve assets defined and maintained by the World Bank

B) It consists of the six global currencies

C) The weights assigned to each currency in the SDR basket are adjusted to take into account their current prominence in terms of international trade and national foreign exchange reserves

Select the correct answer using the codes given below

a) Only A

b) Both A and B

c) Only C

d) Both A and B

e) All of the above

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e) All of the above