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ASSIGNMENT REFERENCE MATERIAL (2020-21)

I.B.O.-03

India’s Foreign Trade

Q-1 Explain the concept of balance of payments. What are the main items in the balance
of payments? Describe briefly India’s current and capital accounts.

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Ans. Balance of Payments (BOP) sheet is an accounting record of all monetary transactions
between a country and the rest of the world. These transactions include payments for the
country’s exports and imports of goods, services and financial capital, as well as financial

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transfers. The BOP summarizes international transactions for a specific period, usually a year
and is prepared in a single currency, typically the domestic currency for the country
concerned. Sources of funds for a nation, such as exports or the receipts of loans and
investments, are recorded as positive or surplus items. Uses of funds, such as for imports or
to invest in foreign countries, are recorded as a negative or deficit item.

a .
While the overall BOP sheet will always balance when all types of payments are included,
imbalances are possible on individual elements of the BOP, such as the current account. This
can result in surplus countries accumulating hoards of wealth, while deficit nations become
b
increasingly indebted.

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The main items in the balance of payments:-
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a
Current Account: The Balance of Payment on current account record the current position of
b

the country in the transfer of goods, services, and merchandise as well as invisible items,
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donations, unilateral transfers, etc. Current Account is like an income and expenditure
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account, Surplus or deficit in current account is transferred to capital account which is like a
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balance sheet and thus balances itself in historic sense.

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Capital Account: The Balance of Payments on capital account shows the country’s financial
position in the international scenario, the extant of accumulated foreign exchange reserves,
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foreign assets and liabilities and the impact of current transactions on international financial
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positions. The changes in foreign exchange reserves arising out of current account
transactions are included in the capital account in order to find out the exact foreign exchange
reserve. The capital account provides relief to deteriorating Balance of Payment positions. Its
favourable effect depends upon the availability of net capital transfers, i.e. gross inflow of
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capital minus Payment by way of amortization. In short, capital account reflects changes in
foreign assets and liabilities of the country and affects its creditor/debtor position.

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Q-2 Discuss various export promotion measures adopted by the Government of India.

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Ans. A number of measures have been taken by the Government of India to improve export
performance of the country.

From the starting of the second five year plan, the foreign exchange problem began to assume

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serious proportions and the Government began to realize the need for vigorous export
a
promotion. It was very clear that concerted effort should be made for the promotion of
tradition items. It was also realized that unless positive steps were taken to build up a number
of merchant houses, concentrating almost exclusively on exports and capable of undertaking
b
trade on a sustained basis, it would be impossible to compete successfully against the highly

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experienced and resourceful trading houses of other countries. The importance of promoting
merchant houses was further underlined by the need for providing channels for the export of
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a
products of small scale sector.

The validity period of Export Houses/Trading Houses/Star Trading House certificates is for
b
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three years ending 31 March of the licensing year provided the criteria are met.
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Export Processing Zones:- Export Processing Zones (EPZs) have emerged as effective
instruments to boost exports of manufactured products, especially in developing countries.
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The Zones set up as enclaves separated from the domestic traffic area by physical barriers,
are intended to provide an internationally competitive both quality/wise and pricewise in the
international market.
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Kandla Free Trade Zone:- Kandla Free Trade Zone (KAFTAZ), the first EPZ of the country,
was set up in 1965 with the objectives of earning foreign exchange besides industrialization
of the backward area of Kutch. It was also intended to assist in better utilization of the
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facilities available at the Kandla Port. During 1992-93, the zone’s exports were of the order
of Rs 167.21 crores.

Santacruz Electronics Export Processing Zone: The Santacruz Electronics Export

Processing Zone (SEEPZ) set up in 1974, was initially meant exclusively for export of
electronic items but, subsequently, a gem and jewellery complex for export and production of
gem and jewellery was set up in the zone in 1988.

Noida Export Processing Zone: The Noida Export Processing Zone (NEPZ) became

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operational in 1986. The first phase of the zone comprising an area of 89 acres is fully
developed and, in view of the encouraging entrepreneurial response evoked by the zone,
development of phase II is underway.

Madras Export Processing Zone: The Madras Export Processing Zone (MEPZ) was set up
in 1984 at Tambaram near Chennai. Development of an area of 98 acres was taken up in the
first phase and work for the provision of various infrastructural facilities thereon is
competing. The zone continues to receive a good response from entrepreneurs, an additional
163 acres of land has been acquired and is being developed.

Falta Export Processing Zone: The Falta Export Processing Zone (FEPZ) was set up in 1984

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in an area of 280 acres of land, about 50kms, south of Calcutta. Essential infrastructural
facilities like land development, roads, power and water supply, SDF building and
warehouses have been completed. The zone became functional in 1986.

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Cochin Export Processing Zone: The Cochin Export Processing Zone (CEPZ) was set up in
1984. Construction activities for the development of infrastructure were started in 1985 and
the zone became operational in 1986. Work on a multi-storied factory building for housing
electronics industries is nearing completion. Work on construction of a garment complex is in
progress.

a .
Visakhapatnam Export Processing Zone: The decision to set up the Visakhapatnam Export
Processing Zone (VEPZ) was taken in March1989. An area of 360 acres of land has been
acquired for the purpose. The basic infrastructural development, covering an area of about
b
163 acres, has been completed and the zone became operational in April 1993. A few

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industrial proposals for setting up units in the zone have already been approved and export
from the zone will commence when the units become functional.
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a
Q-3 Describe Government’s measures for enhancing agricultural exports. How various
b

infrastructural facilities have been strengthened?

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Ans:- Government's Measures to Enhance Agriculture Exports: Government of India’s is

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providing financial assistance to eligible exporters for establishment of various facilities for
export of agricultural products. These include:
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(i) Purchase of specialized transport units for meat, horticulture and floriculture
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sectors;
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(ii) Establishment of pre-cooling facilities;

(iii) Setting up of mechanized post-harvest handling facilities and sheds for

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grading, sorting, quality control and packaging;

(iv) Establishing vapour heat treatment/fumigation/screening machines for exports;

and

(v) Establishing cold stores at airports/seaports for export purposes.

Financial assistance is also provided in respect of the following:

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(i) Preparation of product literatures, publicity material, films, etc.

(ii) Participation in International Fairs/Exhibitions;

(iii) Supply of product samples for test marketing and

(iv) Brand publicity through advertisements.

The growth of India’s agriculture sector during the 50 years of independence remains
impressive at 2.7 per cent per annum. Agricultural sector is the mainstay of the rural Indian
economy around, which the socio-economic privileges and deprivations revolve, and any

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change in its structure is expected to have a corresponding impact on the existing pattern of
social equality. About two-third of this production growth is aided by gains in crop
productivity. The need based strategies adopted since independence and intensified after mid-
sixties primarily focused on feeding the growing population and making the country self

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reliant in food production.

Some of the measures needed to strengthen agricultural export activity include the
development of infrastructure and creation of conductive export-import procedures.

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India has one of the longest coast lines in the world and Indian ports need to be developed
a
comparable with ports of Singapore and Hong Kong to handle the goods efficiently and
effectively and to offer handling charges at very comparative rates, Indian ports have to
handle larger tonnage than what is being done currently. The daily loading capacity at the
b
Indian ports hovers around 2,500 to 3,500 tonnes which is 10 per cent of what ports of

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developed Asian countries handle. Lack of proper loading facilities, scarcity of modern
warehousing capacity near ports, shortage of railway wagons for ferrying goods are adversely
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a
affecting competitiveness of India’s exports. For example, rice and de-oiled cake exporters
complain that they do not get railway wagons to carry their goods to the ports. In the case of
b

fruits and vegetables, lack of storage capacity is adversely affecting the utilization of fruits
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and vegetables and their exports. The Cold Storage ACT is known to be working as a
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deterrent to the holding of stocks. Estimates are that more than Rs. 5,000 crores worth of
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fruits and vegetables get wasted each year due to lack of storage and transportation facilities.
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The measures to be initiated by the Government include the following:

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(i) Abolish all export controls and regulations like canalization.

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(ii) Trade policy for the farm sector should be open, free and outward looking
with complete freedom to the farmer to dispose off his produce without any Government
restrictions on quantity, prices, etc. (cotton exports from the country are controlled by quotas
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monitored by the Textile Commissioner. Exports are permitted to be undertaken by

designated, agencies only).

(iii) Investments, both public and private into infrastructure, need to be encouraged
to boost agro exports. Exports of fruits and vegetables could be increased manifold if
refrigeration facilities are created at all points storage at the farm level, during transportation
and also at airports.

(iv) Jettison the present policy which prescribes that only those farm products

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should be exported in which the country has a surplus.

Q-4 Define services. Identify various important services being exported by India.
Discuss advantages and disadvantages also in this sector.

Ans:-

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ba
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b a
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The discussion of competitive advantages and disadvantages of exporting services from India
have been identified while discussing various components of the services sector, their exports
as well as their export potential. It is difficult to state general advantages and disadvantages

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of such a wide variety of services. The competitive advantages are:40
a
Q-5 Write short notes on the following:
b
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(a) India and World Trade
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Ans:- Despite the fact that India is far better placed than a number of countries in the world
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in terms of a large domestic market, a broad-based industrial infrastructure, a large pool of

training manpower, impressive entrepreneurial and managerial skills, abundant supply of
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cheap labour, and adequate natural resources, etc. It could not play the role of a global
marketer because of its inward-looking economic management policies pursued for decades.
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At a time when world trade expanded fast, India missed its export opportunities because of its
excessive emphasis on import substitution, sheltered markets and a controlled economy. The
situation did not change until 1991 when the Government took bold decision to integrate the
Indian economy with the world economy by following a policy of liberalization. Faced with a
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precarious foreign exchange situation, adverse Balance of Payments and huge external debt,
the Government of India adopted a comprehensive programme of macro-economic
stabilization and structural adjustments beginning from June 1991. The programme included
far-reaching trade, fiscal, monetary and industrial policy measures with a major thrust on
improvement of competitive efficiency of Indian industries by utilizing foreign investment
and technology to a much greater degree than in the past.

Basically, the objective of reform measures was to dismantle controls on industry, external
trade and foreign investments and to establish a climate of trust between the government and

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business industry. The focus of the new policy is more on free play of market forces instead
of State control in determining the country’s future economic growth and development.
Further, for the first time, the government has come out in favour of outward-oriented trade
and industrial policies where exports assume prime importance.

(b) Special Economic Zone (SEZ)

Ans. The Government of India (GOI) has formulated a policy for setting up Special
Economic Zones (SEZ) in India. SEZs are proposed to be specially delineated duty free
enclaves for the purpose of trade, operations, duty and tariffs. These zones are self-contained
and integrated having their own infrastructure and support services.

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SEZ’s are located in the states of Andhra Pradesh, Chandigarh, Gujarat, Haryana, Karnataka,
Kerala, Maharashtra, Orissa, Rajasthan, Tamil Nadu, Uttar Pradesh and West Bengal in India.

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Currently, India has more than 1022 units in operations in over 9 functional SEZs, each an
average size of 200 acres (0.81 km). 8 Export Processing Zones (EPZs) have been converted
into SEZs.

These are fully functional. All these SEZs are in various parts of the country in the private

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and joint sectors by the State Government. But this process of planning and development is
a
under question, as the states in which the SEZs have been approved are facing intense
protests, from the farming community, accusing the government of forcibly snatching fertile
land from them, at heavily discounted prices as against the prevailing prices in the
b
commercial real estate industry. Also some reputed companies like Bajaj and others have

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commented against this policy and have suggested using barren and wasteland for setting up
of SEZs.
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a
(c) India – CIS Trade Relations
b
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Ans:- India had enjoyed, since the first half of the 1950s, excellent economic and trade
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relations with the former USSR, till the beginning of the 1990s. Trade between the two
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countries was conducted under trade and payment agreements concluded from time to time.
The agreements provided for balanced trade and bilateral clearing arrangements and the
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accounts were maintained in non-convertible Indian Rupees. Under such an arrangement not
only did India-USSR trade grow substantially, but precious foreign exchange was conserved
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on both sides and each country was able to find market difficult to sell items in the other
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country. The disintegration of the Soviet Union meant end to the system of managed trade
and exposure to competitive environment. After reaching a peak during 1990, India-USSR
trade dropped dramatically in the next year.
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After the collapse of the Soviet Union and the emergence of the CIS countries, trade relations
between India and the countries were reworked. Agreements/Protocols on trade and
economic co-operation have been signed between India and most of the CIS countries. These
agreements provide for trade in freely convertible currency, counter trade, barter trade or any
other internationally recognized form of business co-operation and the prescribed clearing
mechanism provided for the same.

(d) Foreign Trade of Japan

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Ans:- From the late 1950s until the mid-1980s Japan was heavily dependent on imported raw
materials for processing into manufactured goods, which were partly destined for export
markets, mostly in Western countries. But in recent years markets in other Asian countries
have been expanding rapidly. The shipment of machinery and parts to Japanese production
plants in neighbouring countries with lower wage costs and the subsequent shipment of
finished goods back to Japan have substantially boosted trade flows with Asia. Partly because
of various agreements on voluntary export restraints and Japanese measures to raise market
shares of imported goods, the large bilateral trade surplus with the USA fell from its peak of
$66 bn in 1994 to $48 bn in 1996, although is has trended upwards again in 1997. One
important reason for the narrowing of the trade surplus is the depreciation of yen which has
depressed the dollar-value of Japanese exports. However, the structure of Japanese imports

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has changed since the mid-1980s-with manufactures taking an ever increasing share,
currently around 60%. The details of foreign trade of Japan are given in Table (1).

Table: Foreign of Trade of Japan

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Year Exports Imports Trade Balance
1990 286,948 234,799 52,149
1991 314,525 236,737 77,788
1992 339,650 233,021 106,629

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1993 360,911 240,670 120,241
1994
1995
1996
a
395,600
443,046
413,069
b 274,742
335,930
350,848
120,858
107,116
62,221
1997 423,697 340,902 82,795

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1998 374,000 251,700 122,300
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b a
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