TRADE POLICY (BALANCE OF PAYMENT, FOREIGN POLICY(FDI & FPI ))

      Later 7 other EPZ (Export Promotion Zones) were established.

(ii) Export Promotion Industrial Park (EPIP) were established.

 (iv)In the economic reforms of 1991, India adopted globalization and adopted EOG.

-> Since the year 2000, SEZ (Special Economic Zone) were established for this.

• This concept was taken from China.

• In the year 2005, SEZ-Act was passed and it was given statutory recognition.

Objectives of SEZ :-

① Exports will get encouragement.

② Domestic and foreign investment will be attracted.

③ Jobs will be generated.

④ Infrastructure could be developed.

⑤ Economic activities will increase which will lead to growth in GDP.

Q. What is SEZ?

It is a special geographical area which is considered a foreign territory from the point of view of economic activities and they are provided special facilities -

(i) World class infrastructure is provided here.

(ii) Full exemption is given in indirect taxes.

(iii) Full exemption in direct taxes for the first five years and 50% exemption is given for the next five years.

(iv) Exemption is given in environment and labor related rules.

(v) Government provides land at affordable rates.

Obligations of SEZ :-

(i) 100% export should be done from SEZ.

(ii) If the item is sold in the domestic market then import duty will be imposed on them.

(iii) 50 hectare land is required for single product SEZ and 500 hectare land is required for multi-product                  SEZ.

• Minimum limit of land has not been determined for Bio-technology and Information Technology.

(iv) It is mandatory to establish SEZ on 25% part of the total land.

(v) SEZ should be self-reliant for energy requirements.

Criticisms of SEZ :-

(i) Land was acquired from farmers at low prices.

(ii) Arrangement for rehabilitation of displaced persons was not done.

(iii) Problem of food security can arise due to acquisition of irrigated land.

(iv) Government suffered loss in tax income.

(v) Rules related to laborers were not followed which was opposed by Labor Union.

(vi) Most of the times SEZ was established on only 25% part.

Que.  India did not get expected success in SEZ because -

① In China, SEZ were established near ports but in India SEZ were established in interior areas.

② Infrastructure outside SEZ was not strong.

③ Size of SEZ in India is small compared to China.

④ MAT was imposed on SEZ by tax officials due to which uncertainty arose in tax rules.

⑤ Economic recession came in the world in 2007-08.

⑥ India's SEZ policy was challenged in WTO.

• Recently USA has challenged India's SEZ policy.

-> In the year 2016-17, 30% of India's total exports was from SEZ.
-> Merchandise Export from India Scheme [MEIS] and Services Export from India Scheme [SEIS] has                    been started in which tax exemption is given on export of goods and services. 

•  Approx 8000 (items) products have been included in MEIS.

-> Tax exemption is given through Duty Credit Scrips which can be used to pay tax in future.

-> Export Promotion Capital Goods Scheme :- Under this scheme exemption is given on import of such                    capital goods which encourage export in future.

• That minimum value which is mandatory to export is called export obligation.

->If export obligation is 100%, then it is mandatory to export 6 times of the exemption.
      Currently export obligation has been reduced to 75%.

-> AGRO ECONOMIC ZONE

• These were established in 2001 for the export of agricultural products.

• First AEZ was established for Pineapple in Darjeeling.

• Later 46 other AEZ were established.

• Facilities like SEZ are given to them.

                                              Foreign Trade Policy [ 2015 - 20 ] 

-> This policy was issued by the Ministry of Commerce.
-> Objective has been kept to increase export to 900 Billion $ by 2020.
-> India's share in world export will be increased to 3.5%.

-> MEIS and SEIS schemes have been started to increase exports.

-> Under MEIS, more benefit will be given to those products which have high quantity of domestic material.

-> Duty Credit Scrip can be used to pay other indirect taxes also.

-> Under EPCG scheme, export obligation has been reduced to 75%.

-> State governments will also be taken along in export promotion mission.

->This policy has been made according to Make in India, Skill India and Digital India etc.

# Foreign Investment:

• Foreign investment is of two types :-

  ① FDI (Foreign Direct Investment)

  ② FPI (Foreign portfolio Investment)

① FDI :-

• This investment is made in a real business and the share of foreign investment is more than 10%.

• Management rights are given in proportion.

• FDI is of two types :-

  (i) Green Field FDI - In this, investment is made in a new business.

  • e.g. Hutch starting a telecom company.

  • e.g. amazon.com

  (ii) Brown Field FDI - When foreign investment is made in an established business.

  • e.g. Vodafone's investment.

  • e.g. Walmart's investment in Flipkart.

• There are two routes for foreign investment in India -

  (a) Automatic Route - Under this, no prior permission is required for foreign investment.                                             ->RBI has to be informed within 45 days of investment.                                                                                                                                       -> It is also called Bombay Route.                                                                                                                                                                                                   ->Currently more than 90% FDI comes through this route.

(b) Approval Route - Prior permission is required before FDI.

• This permission is granted by the Cabinet Committee on Economic Affairs.

• Earlier this permission was given by Foreign Investment Promotion Board (FIPB).

• Currently this board has been abolished.

• It is also called Delhi Route.

Benefits of FDI -

(i) Investment increases in the economy which leads to increase in employment and production.

(ii) Foreign currency is received which increases foreign exchange reserves and balance of payment crisis             does not arise.

(iii) Foreign investment increases competition in the domestic market which leads to increase in the quality          of goods and services.

(iv) Foreign investor brings technology, management and marketing skills with him.

(v) Government's tax revenue increases.

(vi) Import substitution policy can be adopted through foreign investment, meaning production of imports           is possible in the domestic market itself.  These products can also be exported.

(vii)Management of exchange rate becomes easy.

Apprehensions regarding FDI in India -

(i) Foreign companies take a large amount of profit out of India.

(ii) Can influence government policies.

(iii) Domestic industries are unable to compete with these companies.

(iv) These companies promote western culture.

(v) Tax Avoidance is done by these companies.

(vi) Most investment by foreign investors is done in consumer goods.

Reasons for not having expected FDI in India -

(i) The quality of human resources in India is not good because there is a lack of skills.

(ii) Infrastructure is not strong.

(iii) Policies towards FDI change according to political ideologies.

(iv) Administrative processes in India are extremely complex and Ease of Doing Business is extremely low.

Note-

• Ease of Doing Business Index -> World Bank
• In 2015 -> 142/190
• In 2018 -> 77/190

• 10 Parameter-

  ① Starting business
                                           ② Getting Construction Permit
                                           ③ Getting electricity connection
                                           ④ Registering property
                                           ⑤ Paying Taxes
                                           ⑥ Trade across border
                                           ⑦ Getting Credit
                                           ⑧ Protecting Minority Shareholders interest
                                           ⑨ Enforcing contract
                                           ⑩ Resolving Insolvency

• New Zealand - 1st Rank

(v) Foreign investors also face problems due to corruption.

(vi) Local opposition.

(vii) Exchange rate does not remain stable due to which the profit of foreign investors is affected.

(viii) Labor related rules, environment related rules in India are extremely strict.

(ix) Tax system is extremely strict and tax rate is also high.

(x) Government has imposed ban on some sectors and maximum limit has been determined for some                          sectors.

(xi) Foreign investors do not find good domestic partners.

Efforts made to increase FDI -

(i) Infrastructure is being strengthened.

(ii) Programs like Skill India have been run to improve the quality of human resources.

(iii) MAKE IN INDIA program was started to attract investment.

(iv) Globalization was adopted after LPG(Liberalization, Privatization, Globalization)  reforms.

(v) FDI more than 10% was kept in automatic route.            

(vi) FIPB was abolished.

(vii) Foreign Exchange Regulation Act (FERA) - 1973 was replaced by Foreign Exchange Management Act (FEMA) - 1999 for the operation of foreign exchange.

Difference between FERA and FEMA -

FERA(Foreign exchange Regulation Act)	FEMA(Foreign Exchange ManagmentAct)
① Criminal case is registered.	① Civil Case is registered.
② Provision of direct arrest.	② No provision of arrest.
③ 5 times penalty.	③ Financial penalty [3 times].
④ Burden of proving crime is not on investigation agency.	④ Investigation agency will have to prove the crime.

(viii) Increase was made in the maximum limit of FDI by the government.

• e.g. In Insurance sector increased from 26% to 49%.

• e.g. 51% in Retail Sector.

• e.g. 100% in Defense sector.

• e.g. 100% in Food Processing.

② FPI:-

• Foreign Portfolio Investment

• This investment is done in the share market.

• Investment limit is less than 10% and management rights are not given in proportion to the shareholding.

• FII (Foreign Institutional Investor)

  • When an institution invests in the share market.

• QFI (Qualified Foreign Investor)

  • When a specific individual invests in the share market.

    

Benefits of FPI -

(i) Foreign currency is received from this which increases foreign exchange reserves and helps in the management of exchange rate.

(ii) This develops the capital market and domestic companies receive more capital.

(iii) The scope of FPI is extremely limited, so apprehensions of FDI do not apply here.

Challenges of FPI -

(i) Its nature is temporary. They come into any market quickly and leave quickly too, that's why they are called Hot Money.

Difference between FDI and FPI -

FDI(Foreign Direct Investment)	FPI(Foreign Portfolio Investment)
① It is long term.	① It is short term.
② Investment is made in real business.	② They invest in share market.
③ They bring technology, management and marketing skills.	③ They do not do so.
④ They directly create employment.	④ They do not directly create employment.
⑤ More than 10%.	⑤ Less than 10%.