INDIAN ECONOMY AND INDIAN FINANCIAL SYSTEM

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MODULE A: INDIAN ECONOMIC ARCHITECTURE

Unit - 8: FORIEGN TRADE POLICY, FOREIGN INVESTMENT AND ECONOMIC

DEVELOPMENT

Foreign Trade policy (FTP) Structural Changes During 1990s

● In 1991, India had a highly protected economy with high tariffs and taxes, and in this
no foreign investment was allowed, along with quantitative restrictions. Also In 1991,
the Indian government implemented a liberalised international trade strategy to make
the domestic market more competitive in international markets.

● Trade liberalisation measures implemented marked a significant departure from past

protectionist policies in 1991.

● The current trade policy reforms are aimed at addressing concerns about the Indian
economy's globalisation, strengthening industry competitiveness, and improving the
adverse balance of payments situation.

FOREIGN TRADE POLICY IN 2015-2020

The FTP 201520 included two new schemes: The 'Merchandise Exports India Scheme
(MEIS)' it is for exporting defined products to designated destinations, and the 'Services
Exports India Scheme (SEIS)' it is for promoting exports of designated services.

● FTP 201520 simplified and merged five different reward schemes for merchandise
exports into a single scheme it is called (MEIS).

● SFIS is replaced with SEIS, which applied to service providers located in India
instead of just Indian service providers.

● Scrips issued under MEIS and SEIS were fully transferable.

● Incentives were to be given to export commodities with strong domestic content and
value addition.

● The policy is provided special privileges to recognized business leaders and aimed to
boost the Make in India campaign.

● The FTP 201520 aimed to increase exports of goods and services, generate
employment, and increase value addition in the country.

● The policy aimed to enable India to respond to the challenges of the external
environment and keep pace with rapidly evolving international trading.
 ● EPCG scheme export obligation reduced to 75% for indigenous capital goods
procurement

● Boost to exports of defence and hitech items

● Ecommerce exports of specified products under INR 25,000 eligible for (MEIS).

● Focus on encouraging manufacturing and exports under 100%

EOU/EHTP/STPI/BTP Schemes.

● Focus on trade facilitation and enhancing ease of doing business

FDIs, FIIs AND RECENT TRENDS

● Foreign direct investment (FDI) is an investment made in a country by a foreign

investor, often a company, to control the ownership of an entity.

● FDI is a key engine of economic growth, assisting in maintaining high growth rates,
enhancing productivity, and generating employment.

FDI Inflows.
● The Indian government has been implementing a series of changes to liberalise and
simplify FDI policy to optimise the ease of doing business and increase FDI inflows.

● FDI enters the domestic economy through two channels:-

○The RBI's automatic route
○The government route

● FDI is permitted through the automatic route without prior approval from the
government or RBI in all activities/sectors specified in the consolidated FDI Policy.

● The Indian firm that receives FDI through the automatic route must follow the terms
of the FDI policy, including reporting the FDI and issuing shares to the RBI.

● Proposals for foreign investment through the government route are reviewed by the
relevant administrative ministry/department.

● Foreign investment in activities not covered by the automatic route requires prior
government permission.

Types of FDI
There are three types of FDI
○ Greenfield FDI
○ Brownfield FDI
○ Joint Venture

Greenfield FDI:
It is a sort of investment in which a parent corporation establishes a subsidiary in the
destination country.
It builds operations from the scratch. McDonald's, Hyundai India, Pepsi India are examples
of greenfield FDIS.

Brownfield FDI:
It is an investment in which a multinational corporation buys stock in an established firm in
the host country. For example, Daiichi Sankyo of Japan acquired Ranbaxy India.

Joint Venture:
Based on an agreement, a foreign company and a local company join up to share
investment, technology, profits, (e.g. Tata Motors.)

FDI Prohibited Sectors:

FDI in India is prohibited and not allowed to function in the following sectors:
● Gambling and Betting
● Lottery business (including government/ private lottery, online lotteries etc)
● Activities /sectors which are not open to private sector investment (eg, atomic energy
/railways)
● Business of chit fund
● Nidhi company
● Trading in transferable Development Rights (TDRs)
● Real Estate Business
● Manufacturing of tobacco, cigars, cheroots, cigarillos, cigarettes and other tobacco
substitutes

Foreign Institutional Investment (FII):

It is refers to short-term capital invested in stocks or hedge funds.

● FIls are generally volatile, and capital flight is possible in case of economic slump,
political turmoil, or herd behaviour.

● Foreign institutional investors are companies based outside India that offer
investment proposals in India.

● The portfolio investment program allows Fils, NRIs, and PIOS to invest in India's
primary and secondary capital markets. Fils/NRIs can acquire shares/debentures in
Indian companies through Indian stock exchanges.

● They are registered as Fils with SEBI and play an essential part in a country's capital
market performance.

● In FY 2021-22, net FPIs were negative $11.97 billion, compared to a net inflow of
$36.14 billion in the previous year.

● India has attracted FIIs/FPIs due to its well-developed primary and secondary
markets.
{Economic Development}
{Economic Growth}

Economic Development- It refers to a sustained improvement in a society's material

well-being.
● Economic development includes social, cultural, political, and economic changes that
contribute to material progress.

● Economic development involves changes in available resources, capital formation

rates, population size and composition, technology, skills and efficiency, and
organisational and institutional architecture.

● Economic development aims to guarantee more equitable income distribution, more

employment, and poverty reduction.

● Economic development is a wider concept than economic growth.

Economic Growth- It is defined as the process by which an economy's actual national and
per capita income grows over time.

Economic growth includes qualitative changes such as social attitudes and behaviours, in
addition to quantitative growth in output or national income.

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Jaiib Exam Notes By Ahsan Malik